DIRT Development for Friday, August 21, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD/TENANT; PURCHASE OPTIONS; RIGHTS OF REFUSAL: Where a right of first refusal in a lease does not guarantee the landlord-seller a particular net recovery and does not require a tenant to pay the brokers' commission, a tenant is only required to match the gross sales price in the third-party offer and the landlord is obligated to pay whatever brokerage commissions are set out in the lease.

St. George's Dragons, L.P. v. Newport Real Estate Group, L.L.C., 407 N.J. Super. 464, 971 A.2d 1087 (App. Div. 2009); June 3, 2009

A landlord and tenant signed a lease with a right of first refusal. The right of first refusal required the landlord to notify the tenant if it received a bona fide third party offer to purchase the property, at which time its tenant was afforded thirty days from the receipt of the offer to elect to buy the property for the purchase price listed in the offer. The landlord received an offer and forwarded it to the tenant. The tenant sent notice exercising its option.

The landlord then sent a letter to the tenant confirming that the tenant had agreed to match the net sales price to be received by the landlord from the third-party offer. The tenant did not agree with the calculation. The discrepancy was based on the difference between the commission structure contained in the lease and the third-party contract. The lease contained a provision that afforded the leasing broker a commission if the tenant purchased the property, and provided for sharing the commission with a cooperating broker. The contract with the third party, however, provided for a reduced commission and would not have shared the commission with another broker.

The landlord argued that in order for the tenant to match the third-party offer, the landlord had to receive the same net proceeds from the tenant as it would have received from a third party. Since the third party contract contained a lower commission, and thus a higher net for the landlord, the landlord argued that the tenant was required to pay a higher overall price so that the landlord received the same net proceeds under either deal.

The tenant argued that it was only required to match the gross sales price contained in the offer, and not the net sales price. It argued that pursuant to its lease it was not obligated to pay a commission to the brokers if it bought the building and that such a clause had been eliminated from the final draft of the lease at the tenant's insistence. Therefore, it was the landlord that was obligated to pay any commissions and the tenant's only obligation was to match the gross sales price contained in the third-party offer.

The lower court agreed with the tenant. It found that the tenant had properly exercised the right of first refusal and matched the gross purchase price contained in the third-party offer. It found that the landlord's supplemental letter regarding the net sales price had no bearing on the enforceability and effectiveness of the right of first refusal. The lower court also found that the landlord was obligated, pursuant to the lease, to pay commissions to the brokers as provided for in the lease.

On further appeal, the Appellate Division affirmed, finding that the right of first refusal provision in the lease and the contract did not guarantee the landlord-seller a particular net recovery and did not require the tenant to pay the brokers' commission. The tenant was only required to pay the purchase price in the offer, and the landlord was obligated to pay the brokers' commission set out in the lease.

The Court noted that the third-party offer could have been structured to require that the landlord receive a certain net sale proceeds, however, the contract would have to contain clear and unambiguous language to that effect. In addition, the right of first refusal provision in the lease needed to expressly state that the tenant, in exercising its right of first refusal, could be obligated to pay a price higher than the gross purchase price set forth in the offer. Since neither the contract nor the lease contained those provisions, the tenant, in exercising its right of first refusal, was only obligated to match the gross sales price in the third-party contract. Further, neither the contract nor the lease required the purchaser to pay the brokers' commissions so the landlord, as seller, was required to pay the commissions, which in this case was the higher commission set forth in the lease, as opposed to the commission required by the third-party contract.

Reporter's Comment 1: What can be said? Here's another opportunity lost for clear and precise drafting. An early draft of the lease called for the tenant-buyer to pay the brokerage commission. When it was removed in negotiation, no provision requiring the seller to pay the commission replaced it. In New Jersey, prevailing practice is that landlords and sellers pay the brokerage commission.

Reporter's Comment 2: Did the landlord or its attorney look at the lease before accepting the bona fide offer? Even if the lease had not contemplated this situation, the offer could have been crafted to compensate.

Reporter's Comment 3: How about the brokerage agreement for the lease? Was it negotiated or just signed as presented? Perhaps this case suggests that lease brokerage commission agreements that call for a commission at all if the tenant exercises a purchase option should contemplate paying the commission set forth in the bona fide offer.

Reporter's Comment 4: Though not important for the right of first refusal principles explicated by this decision, it should be noted that the sale to the tenant fell apart (before specific performance was ordered) because of a fight between competing brokers over splitting the commission.

Reporter's Comment 5: For those that wonder, the landlord did argue that its tenant had to pay the commission to the broker who had handled the lease in the first place even though the lease did not say so. Its argument was that the tenant was obligated to buy the property on the same terms and conditions as the offer. The offer was in the form of a purchase contract wherein the leasing broker was not named at all and the buyer agreed to indemnify the seller against claims by brokers, with whom the buyer dealt, if those brokers were not named in the contract. The landlord claimed that when its tenant stepped into the shoes of the offerer, it had to honor that agreement by indemnifying the landlord for the leasing broker's claim because the leasing broker had not been named in the proposed contract. Aside from brushing this aside on grounds of ambiguity, the court said that if this was intended by the landlord to be a "poison pill" for the tenant, following that path would be a bre

ach of the covenant of good faith and fair dealing, a vibrant covenant in New Jersey.

The Reporter for this item was Ira Meislik of New Jersey.

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