An unusual brokerage agreement leads to fight over commission

Real Estate Weekly, Nov 19, 1997 by Edward L. Schiff

The brokerage agreement provided that the broker's commission would be paid not by the tenants, but by the landlord of the space ultimately rented by them.

A side agreement stated that if the tenants did not accept leases in other buildings, but continued at 1290, the broker would waive any commission from O&Y if it could not negotiate a better deal than originally proposed to the tenants by O&Y.

The broker found an acceptable space at 1500 Broadway and the tenants executed letters of intent to lease the space. The broker then gave these letters of intent to O&Y in order to induce O&Y to negotiate better terms for the lease renewal at 1290. The tenants, however, commenced their own lease negotiations with Olympia and York, during which time they used the letters of intent to negotiate better terms. Then they concluded an acceptable deal with O&Y.

The broker sued the tenants for damages of $402,000, claiming a breach of the brokerage agreement and also claiming damages for "quantum meruit" based upon the reasonable value of the broker's services on behalf of the tenants.

The tenants' defense was that they were under no obligation to pay the brokerage commission since the agreement provided specifically that the broker's compensation would be paid by the landlord only. The tenants also claimed that they were compelled to deal directly with O&Y out of necessity because O&Y had a policy of refusing to deal with brokers. As a result, the tenants claimed that the broker was not the procuring cause of the renewal leases.

Justice Herman Cahn of the Supreme Court of New York County agreed with the tenants that O&Y had refused to negotiate with the broker; that the brokerage agreement did not prohibit the tenants from directly negotiating with O&Y; and that the agreement imposed no obligation for the tenants to pay the broker's commission.

An appeal was taken to the Appellate Division, which reversed Justice Cahn's decision and ruled that a trial was necessary to resolve certain factual issues. The broker contends that it entered into an "exclusive dealing" contract with the tenants, which entitles the broker to a commission upon the signing of the renewal lease even if that lease was procured entirely through the efforts of the tenants.

The broker also claimed that although the agreement provided that the landlord would pay the commission, since the tenants themselves negotiated the lease, by-passing the broker, the tenants should be responsible for the commission.

The tenants insisted that the agreement granted the broker only a "exclusive agency" contract, which reserves the right of the tenants to deal directly with their landlord.

The court observed that this case was unusual since the brokerage agreement provided for commission to be paid not by the tenants who hired the broker, but only by the landlord of the space ultimately obtained for the tenants. The consideration for the broker's services is not the commission to be paid by the tenants, but the right of the broker to receive a fee from the ultimate lessor. Thus, the payment of the fee is clearly conditioned on the broker's right to represent the tenants with O&Y as the agreement provides.

Irrespective of whether there was exclusive dealing contract or an exclusive agency contract, the tenants could not unilaterally prevent the broker from performing its duties by dealing themselves directly with O&Y. When the tenants dealt with O&Y, they defeated any chance for the broker to receive payment of its commission. This result could not have been contemplated by the parties when they signed the brokerage agreement.

The tenants' contention that there was a mere exclusive agency agreement, which allowed the tenants to negotiate themselves with O&Y, would deprive the broker of any benefit whatsoever.

The courts will avoid an interpretation of an agreement that renders it illusory and unenforceable, but prefers to enforce a bargain where the parties have demonstrated an intent to be contractually bound to each other. In this case, the brokerage agreement demonstrates that the parties intended to enter into a valid contract, which was for the broker to find space in other buildings as well as to negotiate a renewal lease on behalf of the tenants with their existing landlord, O&Y.

Further, even if the brokerage agreement was to be disregarded, the outcome would be no different. In the absence of a contract, the broker is entitled to receive a commission in a reasonable amount for bringing together parties. The tenants agreed that the strategy of obtaining the letters of intent for the space at 1500 Broadway was successful in securing concessions from O&Y for the renewal lease. It was through the efforts of the broker that the renewal lease was secured.

Having availed themselves of the benefits of their agreement with the broker, the tenants may not evade the obligation to pay compensation for services rendered by the broker. The law requires that the broker recover for its services in quantum meruit in order to avoid unjust enrichment of the tenants at the broker's expense.