Does The Broker Get Paid? Efficient Producing Cause And The Facts

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Last week, we set the background for understanding what it means for a broker to be the “efficient producing cause” behind a lease or sale. The background was in the form of a story from a 2012 unpublished New Jersey court decision. The long version can be seen by clicking: HERE. For those who missed last week’s blog posting, here is a precis.

An individual property owner and a real estate broker executed a commission agreement. Then the owner transferred the property to a newly formed limited liability company. A drugstore lease, requiring the owner to construct the store, was signed. The drug store’s parent company guaranteed the lease. Construction (likely “non-construction”) took years. The tenant hung on. To get the project moving, the property was transferred to a joint venture, with the new 75% owner taking over operational responsibility. Under the joint venture agreement, the new entity agreed to be responsible under the original brokerage agreement. Two days after the joint venture agreement was signed, the owner terminated the brokerage agreement. More than two years after that, the original drug store lease was terminated and a new lease was signed. The new lease was between the joint venture and the original tenant’s successor by merger. Again, the drug store parent company signed a guaranty. All of the documents signed by each of the original and new drug store were signed by the same person who signed the guaranties. The business terms of the new lease differed in rent amount and lease term from the original lease. The store opened.

Oh, yes, the joint ventured did not pay a commission to the broker for the “new” lease that had been signed with a “different” tenant 30 months after the original (and only) commission agreement had been terminated. For those who are asking, the commission agreement, by its terms, “continue[d] 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.”

So, is the new owner (the joint venture), or anyone, responsible for paying a commission for a lease signed 30 months after the commission agreement was terminated when the agreement applied for only one year after termination? In answering that question, consider whether “what is fair” is the same as “what is required.”

[If there was an obligation to pay a commission, that obligation was tied to the store opening, not merely to signing a lease.]

The broker sued the individual who had signed the agreement when he was the property’s owner; it sued the entity he formed, the one that signed the original lease; and, it sued the joint venture, the one that terminated the original lease and signed a “new” lease. The broker claimed a right to be paid explicitly by the terms of the agreement as well as under the theories of “unjust enrichment,” “quasi-contract,” “quantum meruit,” and fraud.

[A digression… ] Unjust enrichment is a legal principle based not on the existence of a contract, but based on what is just and equitable. One on-line dictionary explains it this way: “[‘Unjust Enrichment’ is a] general equitable principle that no person should be allowed to profit at another’s expense without making restitution for the reasonable value of any property, services, or other benefits that have been unfairly received and retained.]

The same online source explains “quasi-contract” as follows: “A quasi contract is a contract that exists by order of a court, not by agreement of the parties. Courts create quasi contracts to avoid the unjust enrichment of a party in a dispute over payment for a good or service. In some cases a party who has suffered a loss in a business relationship may not be able to recover for the loss without evidence of a contract or some legally recognized agreement. To avoid this unjust result, courts create a fictitious agreement where no legally enforceable agreement exists.”

Lastly, our go-to source for today’s definitions, tells us that: “In the law of contracts, [‘quantum meruit’ is] a doctrine by which the law infers a promise to pay a reasonable amount for labor and materials furnished, even in the absence of a specific legally enforceable agreement between the parties.

Basically, the broker was seeking to cover its bases if the joint venture was able to defeat a direct contractual obligation on the “technicality” that the actual lease under which the drug store chain opened its store was executed well after the “survival” period of the brokerage agreement.

The individual who had signed the actual commission agreement raised his own equitable defense. He didn’t dispute that, in effect, the same drug store chain wound up as a tenant at the property, albeit by way of a different lease. Instead, he asked: “How can [he] be responsible when he no longer own[ed] the property, and when he had no involvement in the negotiation of the new lease?”

The court had an answer. It said that it didn’t matter that this individual didn’t sign the “new” lease and wasn’t going to collect the rent under this lease. What mattered was that he signed the listing agreement and the original lease was signed while that agreement was in effect. So, if the “new” lease was, in effect, a continuation of the original lease, he would be personally liable for paying the broker under the commission agreement. Even though the joint venture agreed to pay any commission that might be payable, he couldn’t shed his own direct responsibility to the broker by finding someone else to take it over for him. The only way he could have gotten “off the hook” would have been by getting the broker to agree to look only to the joint venture. There was no evidence that this ever happened and no evidence the broker agreed to look only to the entity that had signed the original lease. So, the only “out” for the individual was if the “new” lease was, if fact, not a continuation of the original lease. More about that later.

What about the “equitable” claims of quasi-contract or quantum meruit, useful if the individual turned out not to be liable pursuant to the commission agreement? Here, the court rejected those theories. In doing so, it told us that:

quasi-contractual recovery [is] warranted based on the equitable principle “that a person shall not be allowed to enrich himself unjustly at the expense of another.” … Courts have applied this principle and have allowed quasi-contractual recovery for services rendered “when a party confers a benefit with a reasonable expectation of payment.” … This type of recovery, which is known as quantum meruit, entitles the performing party to recoup the reasonable value of services rendered.

The court held that the broker could not recover against the original owner on the basis of quasi-contract or quantum meruit because, in this situation, “there was a binding agreement, under which [the broker] provided services and those services brought about the lease between the original landlord and the original tenant. It went on to write:

[The broker] may have had a reasonable expectation of payment for the commission, but their expectations were defined and limited by the terms of the listing agreement. Suffice it to say, if [the broker is] not entitled to payment under the listing agreement, they are not entitled to recover against [the individual who signed the commission agreement] on the basis of quasi-contract or quantum meruit.

The broker also failed to convince the court that it should recover under the theory of unjust enrichment. Here is how the court explained that failure:

[The broker] further maintain[ed] that the trial court erred by finding they could not recover against [this individual] on the basis of unjust enrichment. [The broker argued] that, while [the individual who signed the commission agreement] did not receive any rental payments under the [] leases, he received substantial payments for his interest in the property and the joint venture.

[The broker] therefore claim[ed] that [the individual had] been unjustly enriched by their efforts with regard to the [drug store] leases and they can recover a portion of the monies [the individual] received for his interest in the property and the joint venture. We are convinced, however, that plaintiffs failed to present sufficient evidence to support their claim against [the individual] for unjust enrichment.

[The broker has] produced no evidence establishing that the monies [the individual] received for his interest in the property and the joint venture were attributable in part to their efforts regarding the [original] lease. Indeed, [the individual] might have received the same amount, regardless of whether the property was leased to [the drug store]. In short, [the broker] did not present sufficient evidence to raise a genuine issue as to whether [the individual] was unjustly enriched by the services they provided to him.

So, if the “new” was a continuation of the original lease, and not a genuine “new” lease, the individual who had signed the long-expired commission agreement would be personally liable to the broker, but that obligation would only arise under the signed agreement.

That gets us to the crux of today’s blog posting. One result of our inimitable and mildly frustrating style of writing is that some readers no longer remember what that was. So, we’ll restate it: “efficient producing cause.” What is that? It’s an important rule because, to prevail on a commission claim, the broker must have been one. To be one, a broker must show that “its efforts caused the owner to negotiate with a potential tenant (or buyer), who was produced by the broker.” It must also show that the tenant (or buyer) “was ready, willing and able to perform, and that the transaction was thereafter ‘consummated without a substantial break in the ensuing negotiations.’” [The underlining is ours.]

An earlier New Jersey court decision explains a little more about what it takes to be the “efficient producing cause.” “[It]. . . involves more than just mere introductions, . . . mere contacts, mere telephone calls.” That earlier court went on to hold against a broker who basically said: “I can’t deny that I received phone calls occasionally, but . . . there was no real further involvement, no attempt to negotiate terms, no attempt to negotiate agreements, no further inspections.”

Here, as to these two drug store leases, there was no dispute that the broker had undertaken all of the qualifying efforts to produce a ready, willing, and able tenant as to the original lease. The question was whether the “new” lease was a continuation of the original lease or, even if it was not, whether the long break beyond the one year post-termination survival clause in the commission agreement was or was not a “substantial break.”

Readers will need to come to their own conclusion because the 2012 court decision, an appellate decision, tossed the factual determination back to a trial court. As readers try to reach their own conclusions, keep in mind the following facts (alluded to way, way above). Both leases were with related entities. The “new” tenant was described in the termination agreement for the original lease was identified as a “successor by merger” to the original tenant. Both leases were guaranteed by the same parent company. Both tenants shared the same address with the parent company. Both leases and both guaranties were signed by the same individual. Both leases used the same construction specifications. The broker was identified in the original lease and the joint venture not only agreed to assume existing commission obligations, but also knew the terms of the original lease.

On the other side of the question is the following. The original tenant had the right to terminate the lease when the building’s contracted-for delivery date came and went. The broker had no involvement in “keeping” the tenant at the project. “New” lease or “very big amendment,” is also the question.

So, the question posed to readers is basically as follows: “Was the broker the ‘efficient producing cause’ behind the ‘new’ lease or did some other factor intervene to cut off the broker’s claim, such as the original tenant’s right to terminate the original lease?”

And to close a loose end, the entity that signed the original lease was held to be as exposed to liability as would be its individual owner (the one who signed the commission agreement) because it assumed its owner’s obligation when accepting a lease that recited that the landlord would pay the commission.

Obviously, there are arguments on both sides of the both the issue, and each depend on how one weighs the facts. We don’t know the outcome because, almost certainly, the parties settled the dispute. But, as you roll the facts and the issue over in your mind, think about how much you are influenced by “what is fair?” or “what is the law?”

For those compelled to read the actual court decision, that compulsion can be satisfied by clicking: HERE.”

 

 

 

 

 

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Comments

  1. RLGunn Associates LLC says:

    “On the other side of the question is the following. The original tenant had the right to terminate the lease when the building’s contracted-for delivery date came and went. The broker had no involvement in “keeping” the tenant at the project. “New” lease or “very big amendment,” is also the question.”

    I have found that it is the brokers who have the MOST interest in keeping the deal/lease alive. The deal makers and the attorney on occasion are not the best option. Making the deal is more important than breaking deals. Precisely because brokers run the risk of getting paid nothing if the deal falls through they are more motivated. The developer/landlord has the opportunity for “another deal” but the broker is in the most tenuous position. Attorney is relatively disinterested if they do the legal work whenever a deal is consummated. In some instances where a deal is falling apart, i have used the brokers to be the “mediators” in alternative structures. In some instances, landlord and tenant renegotiate. Brokers will agree to “commissionectomies” to keep the deal alive.

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