Daily Development for Friday, March 29, 2002

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

BROKERS; COMMISSION; CONDEMNATION: Where brokerage agreement is silent on the issue, broker is not entitled to a commission from the condemnation of the property.

In the Matter of New York City School Construction Authority, 733 N.Y.S.2d 86 (A.D. 2 Dept. 2001).

Broker had an "exclusive right to sell" agreement, setting a 15% commission. The was the last of a series of listing agreements. At the time that the last agreement was executed, it was known that the city had designs to acquire the property through condemnation. Broker appeared at a city hearing identifying itself as broker for the owner, and showed the property to several city officials. Seller, however, sent Broker a letter demanding that Broker withdraw from the negotiations and that Seller be permitted to negotiate on its own. Although this was inconsistent with Broker's rights under the listing agreement, Broker withdrew from the negotiations.

Seller proceeded to reject a series of offers from the city, some of them in excess of the listing price, and eventually the city proceeded to condemnation, where Seller was awarded the last offer made by the city - $300,000 over the listing price.

Broker characterized the condemnation as the equivalent of a sale and demanded the commission. Broker noted that the agreement provided that Broker had the sole and exclusive right to sell the property for $1.1 million "or any other price and forms to which [Seller] may consent."

The trial court awarded Broker a commission. On appeal: Held: Reversed, by a split decision - 3 to 2.

The court admitted that there was authority stating that condemnations could be "sales" within the meaning of a listing agreement, and underscored that it was not deciding the question generally, but deciding the intent of the parties only with respect to this agreement. It made much of the fact that the agreement did not contain any provision governing condemnation of the property even though both parties knew at the time they entered into the agreement that a condemnation was being contemplated. Further, it relied on the fact that Broker had drafted the language of the agreement.

The court concluded that, under these circumstances, the parties contemplated no commission upon condemnation.

A strong dissent maintained that a commission should have been paid. It noted that Seller appeared to have manipulated the transaction to avoid a true sale. City was required to negotiate for a sale of the property, and in the course of negotiations in fact offered a price substantially in excess of the listing price, and the price actually awarded by the condemnation.

The only purpose served by the condemnation proceeding was to create an argument that there was no commission payable.

Comment 1: Interestingly, the dissent, but not the majority, cites prior New York authority, which relies in turn on Colorado authority, in which condemnations have been held not to be "sales" within the meaning of a brokerage listing agreement. That authority posits that certain requirements exist to establish that a condemnation is a "sale:" They are:

(1) Has the owner been deprived of the power to negotiate what property should be sold? (2) Has the owner been deprived of the power to negotiate the time when possession should be given? and (3) Has the owner been deprived of the power to negotiate as to the price? The court noted that Seller had extensive negotiations on each of these points, and that condemnation resulted only when Seller elected not to negotiate further.

Comment 2: How significant is it that the parties knew that the city had focused on this property as a candidate for condemnation? It seems that this was a critical point to the majority. In light of the closeness of the vote, it likely was a dispositive consideration. Should it be?

Comment 3: The court also makes something of the fact that broker was the author of the agreement. But commercial listing agreements are rarely presented on a "take it or leave it" basis. The fact that one party begins negotiations with proposed language ought not to mean that it "owns" that language. The editor is very skeptical of the oft-cited rubric that contracts are to be construed against the drafter. This approach appears to assume that the party that does not draft the language is a dumb cipher that has no power to affect that language and therefore bears no responsibility for its ambiguity. In commercial real estate dealings, this is usually inaccurate.

Comment 4: With an exclusive listing, the broker is induced to make significant efforts to market the property because it knows that it is guaranteed a commission if the property sells for any reason. There is no reason to demonstrate that the broker's efforts had anything to do with the sale.

In light of the pendency of the eminent domain proceedings, the editor admits that in this case it's a close call, but the editor sides with the dissent. But trade practice would make all the difference. Any views on that?

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

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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