Brokers As Efficient Producing Causes

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It is very common, and Ruminations believes appropriate, for a real estate broker to bargain for a commission to be paid if a property is sold or leased even after its brokerage agreement expires. Basically, most brokerage agreements have some language providing for such payment if the broker had something to do with bringing forth the buyer or tenant. Those provisions have to deal with three major principles

One is “how does one know that the buyer or tenant was introduced to the property by the broker during the term of the agreement?” Another is “what does ‘introduced’ mean in this context?” The last is, “how long after a brokerage agreement expires will this protection for the broker continue?”

As to the “how does one know” question, we think the broker should furnish a list of the prospects introduced to the property. And, “prospects” should include affiliates of whatever person or entity had been introduced. The broker should be preparing its list throughout the term of the brokerage agreement and should deliver the final list at the end of the agreement’s term or within a day or two later. As to what is meant by “affiliate,” we think any normal definition would be fine so long as it captures real affiliates, not just people with the same first name.

Defining “introduced” is a little trickier, but in the view of Ruminations, it should mean that a live person from the prospective buyer or tenant actually set foot on the property in the presence of the broker or a cooperating broker. Just being sent a brochure doesn’t cut it with us. A visit from the broker to the prospect’s own office or a visit by the prospect to the broker’s office doesn’t cut it with us. Yes, we know that some would argue otherwise, but we prefer a bright line test. Did the prospect actually get shown the physicality of the property by a live person? We’d consider another approach if a broker describes a more 21st century business model that evinces at least the same degree of prospect “involvement,” but, to date, none have.

“How long?” The exact duration or protection period is, of course, something that can be bargained for. The underlying principle is that if a prospective buyer or tenant has lost interest in the property, evidenced by it taking no further action concerning the property for a long enough time, then the broker’s introduction efforts have faded away – they have become “old and cold.” When researching the origin of the expression, “old and cold,” we discovered that it isn’t a well-worn one. But, we did see (for the first time to us) that the expression has an antonym” “young and warm.” We also saw a discussion of the expression in a federal taxation context. There, we were reminded of the “continuity-of-interest doctrine.” To be fair, in the taxation context, “continuity-of-interest” means something very different from taking “interest” in a particular property, but when used in such a context, that phrase seems like a pretty good definition.

OK, we’ll yield to the roar of the crowd – six months seems like a decent bright line protection period.

Now, though we like bright line tests, the case we are about to describe illustrates how complex these issues can be.

An individual owned a piece of property on which he intended to develop a shopping center. He entered into an exclusive listing agreement in his own name. The agreement had the following provisions:

3.  DURATION: This agreement will become effective upon acceptance by [owner] and will continue in full force and effect for a period of six (6) months from the date provided herein. After the initial six (6) month term, this agreement will automatically renew and continue on a month to month basis indefinitely thereafter, unless and until either party terminates same by written notice to the other not less than thirty (30) days prior to the intended termination date.

7.  UPON TERMINATION: In the event this agreement is terminated by either party consistent with the requirement of paragraph [3] hereunder, the terms of this [listing] agreement shall continue to apply for one year from the effective date of termination to any and all prospective tenants/purchasers which [broker] introduced to the property during the terms of the agreement and/or any person or entity with whom the owner negotiated during the agreement.

About two weeks later, the individual owner transferred the property to his own limited liability company and only one month after doing so, entered into a lease with a drug store organized as a single location tenant. The tenant’s parent company guaranteed the lease. The lease named the broker and made the landlord responsible for paying the broker.

Under the lease, the landlord was to construct a building for the drug store and if it was not delivered by a given date, the tenant could terminate the lease. The building was not completed on time, but the tenant granted a seven month extension. Still, the building remained unbuilt. The tenant did nothing.

Three and a half years after the lease was signed, with the building still unfinished, the landlord entered into a joint venture agreement with an unrelated corporation. The property was to be deeded to the joint venture and the corporation, with a 75% interest, was to take over development of the project. Critically, the joint venture agreement provided that the joint venture was to be responsible for site development costs as well as, critically, “realtor’s commissions.”

At this point, and just before a new limited liability company was formed for the joint venture, the original, individual property owner properly terminated the brokerage agreement.

A little more than two years later (yes, six years after the drug store lease had been signed), the lease was terminated. At the same time, a new lease was signed, this time between the joint venture and a successor by merger to the original drug store tenant. As with the first lease, the drug store’s parent company was the guarantor. The same person who had signed the original lease signed for the new tenant entity and for the guarantor. All drug store parties shared the same address.

So, here’s the question. With the brokerage agreement and its one year survival period having been rightfully terminated two years earlier and with the original lease with a different tenant having been terminated, was the broker entitled to a commission from the joint venture even though the joint venture was not a party to the brokerage agreement and its joint venture partner wasn’t a signatory either?

We’ll tell you next week. That will allow us to introduce the concept of an “efficient producing cause.”

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Comments

  1. RLGunn Associates LLC says:

    An additional fact question and then a comment. Typically, the broker’s commission is paid in two parts. Part upon execution of the lease and the balance upon occupancy of the space by the tenant. Under this additional fact assumption, the broker should have been paid half or some significant percentage of the commission upon execution of the lease.

    The fact that there are so many shared addresses, signatories, etc. between the original tenants and the subsequent entities, a ruling against the broker would open up many avenues for fraud that I would think a court would want to avoid spilling onto the commercial brokerage world.

    • That would be true if what you describe as typical were the case here. Instead, this is what the brokerage agreement called for: “any commissions due must be paid “in three… equal installments, commencing upon receipt of [the] first month[`]s rent,” with the remaining payments due six and twelve months thereafter.”

      There are many alternatives for how these commissions are to be paid, including those that cut off any not yet due if the lease is terminated before they become due.

  2. RLGunn Associates LLC says:

    Typical isn’t always typical. Personal comment: Broker was taken advantage of on the way in with this limitation on payment and from the facts described to date.I would not be surprised if the developer did not have a reputation for this and the broker was gullible and naive.Legally taken advantage of or just slippery will wait for the next edition/round of this story.

  3. Tim Scott says:

    6 years. The perfect example of why no landlord should ever pay any portion of the commission before occupancy and payment of rent; and a perfect example of why broker prepared agreements are often one-sided and are not reasonable to landlords.

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