Daily Development for Thursday, June 21, 2001

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Note two reports about two different, but similar, Georgia cases, both involving the same leasing broker. The broker got doubly creamed!!

LANDLORD/TENANT; ASSIGNMENT AND SUBLEASES; ASSUMPTION; BROKERAGE COMMISSIONS: A covenant in the lease that landlord will pay "any broker's commissions owed to [named brokers]" does not establish any lease obligation of the landlord, since it does not support the obligation to pay any specific commission. Rather, the obligation is a personal obligation of the landlord that is not part of the lease, although it appears in the lease, and consequently does not bind a subsequent landlord that has expressly assumed the "obligations and liabilities" of the Landlord.

Brannen/Goddard Company v. PNC Realty Holding Corp. of Ga., 519 S.E.2d 35 (Ga. App. 1999).

This case was later appealed to the Georgia Supreme Court and affirmed on other grounds, but the holding strikes the editor as so remarkable that it deserves some comment.

In connection with a commercial lease, landlord entered into a brokerage agreement with broker in 1987 that recognized broker as the procuring agent of that lease and that provided for the payment of commissions during the term of that lease, during any extensions or renewals of that lease, and during any new lease with the same tenant.

Landlord entered into a new lease agreement with the same tenant in 1992 that provided that landlord would pay any broker's commissions due to [named brokers]. Landlord later defaulted on a loan and, in settlement thereof, conveyed the leased premises and assigned the 1992 lease to its lender. In connection with such assignment, lender assumed landlords obligations under the 1992 lease, but not any obligations relating to or rising out of events or occurrences on or before the effective date of such assignment. The court held that lender did not thereby assume any obligation to pay lease commissions to broker.

Interestingly, the court did not analyze whether future lease commissions should be considered as "obligations relating to events or occurrences before the effective date," although arguably this was the case.

Instead, the court asserted that, although the lease provided that landlord was obligated to pay lease commissions due to broker, the lease did not establish that any commissions were due. Those obligations were created by a separate agreement between the original landlord and brokers, and that agreement was not part of the lease and not assumed by the assignee.

Comment 1: OK, we know the next question: did the assignor landlord owe a commission when the tenant later renewed, even though the assignor at that time was no longer the landlord? The court doesn't say, but one could certainly make an argument that the presence of the tenant, and the tenant's likelihood to renew, created additional value for the assignor/landlord at the time it assigned the lease. Consequently, the assignor should pay the broker for such value under the terms of the agreement, which were that the commission was paid only when the tenant in fact renewed. Assignor had already received the value of this potential renewal, but became liable to pay for such value only when the renewal actually occurred.

Comment 2: Many courts will address only the narrowest points in a case to keep the precedential significance to a minimum. Here, the Georgia Court of Appeals, in the editor's view, undertook the broader and more difficult issue of the meaning of the provision in the lease obligating the landlord to pay commissions, rather than focussing on the exception in the assumption agreement itself. Gutsy play. In the end, the editor agrees with the conclusion and approach.

BROKERS; LEASING BROKERS; RENEWAL: Where landlord agrees to pay commission on "all lease extensions and expansions" by tenant in same building, and tenant, during the term of this lease (the "old lease"), moves into different space in that building, and, upon termination of the old lease, ceases to lease the original space, the broker is not entitled to a commission on the new lease.

Brannen/Goddard Company v. Sheffield, Inc., 524 S.E.2d 534 (Ga.1999).

In connection with a commercial lease, landlord entered into a letter agreement with broker in 1985 in which landlord agreed to pay commissions on rent paid during the lease term and on "all lease extensions and expansions" by the tenant in the same building. The term of the lease expired in 1992. In 1990, the tenant entered into another lease with landlord for different space in the same building.

Landlord later assigned to Assignee, and Assignee assumed the obligations on the commission agreements. Landlord, and later Assignee, made commission payments to the broker through the expiration of the initial lease term, based upon the terms of that lease, which had been modified several times.

Broker asserted that it also was due commissions with respect to the new lease because it constituted a renewal of the initial lease. The court held that the new lease did not constitute a renewal of the initial lease because (a) its terms were "drastically different" from the terms of the initial lease, (b) the term of the initial lease had not expired when the new lease was executed. Hence, the new lease was neither an extension nor expansion, but rather a novation of the initial lease. Landlord's only obligation to broker was to pay lease commissions through the expiration of the initial lease term.

The court noted that the original lease had provided specifically for an extension of that lease, and that the parties had not carried out that extension. Georgia authority provided that a new lease on different terms and conditions was neither and extension or renewal of an existing lease.

Comment 1: Granted that the new lease was neither an extension nor renewal of the old lease. Was it an "expansion." The court apparently concludes that it was not, although it involved more space. But it really doesn't say why. It appears to be influenced by the fact that the new lease was for lower rent and was negotiated specially by a new brokerage agency. Should these factors have mattered? Other cases the editor has seen have viewed similar language as intended to reward the broker for bringing in the opportunities that the tenant represents, and expansions into new space on different terms would be commissionable, whether or not the landlord chooses to use the broker's services in negotiating such expansions. Here, of course, the parties were not so much "expanding” as "replacing," but is that too fine a distinction in light of the probable intent of the parties.

Clearly the court is adopting a "procuring cause" requirement in interpreting the commission language. The lesson, of course, is that brokers who really don't want to have such a requirement limit their rights had better be pretty darn explicit. Courts are loathe to award brokers commissions when it doesn't appear that their efforts really created the wealth. Note here that the new lease was drastically different than the old one, and in fact was for a lower rent.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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