Daily Development for
Tuesday, August 4, 1997
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BROKERS; COMMISSION; CONDITIONS: Provision in commission agreement stating that commission was earned on signing of agreement will not be enforced when other provisions in agreement, along with parties' relationship, reveal that broker knew he would receive commission only if other party obtained financing.

Schenck v. HJI Associates, 685 A.2d 481 (N.J. Super. 1996).

This case is unusual because it involves a million dollar commercial leasing broker's commission, not a home sale. Normally, provisions in listing agreements of this sort are enforced as written, and the listing agreement stated clearly that the commission was payable when the lease was signed.

The court stressed the fact that the broker was fully aware that the defendant landlords were hopelessly under water on their mortgage, that foreclosure had commenced, and that the lease would not be carried out unless the landlords could refinance their defaulted existing debt and get financing for necessary construction to accomodate the new lessee. (Ultimately, the landlords could not get the construction financing, the mortgagee foreclosed, and the lease never took effect.)

The broker's knowledge of these facts (which he admitted), coupled with language in the lease reflecting an understanding that the commission might be paid in installments over time, led the court to conclude that the parties didn't really mean it when they said in their agreement that the commission was payable on signing. From here, the court jumped to the conclusion that the parties in fact intended that the commission was contingent upon refinancing.

The broker argued that his knowledge of the landlord's impecunious circumstances was what drove him to provide in the commission agreement, which was a negotiated document drafted by lawyers, that his commission was payable upon signing.

The court, tracking the findings of an "umpire," concluded that the contract, read as a whole, reflected an understanding that the commission was payable only if refinancing was obtained. Note, however, that the court did not state that the commission was payable only if the rents were paid or if the lease went through.

Comment: This simple appearing case in fact presents a very difficult issue. What role should the court play when parties in the commercial arena agree to contract terms that the court concludes that they probably didn't mean?

Other language in the lease did indicate that the parties intended that the commission be payable over time, and out of construction draws. And there was language indicating that the landlord had made clear to the broker that, absent financing, it could not perform its contract responsibilities: "Owner represents that it has the financial capability to complete the underlying lease transaction and make payments on this commission, said representation to be conditionaly accepted subject to owner obtaining financing." Aside from the fact that the language is embarrassingly clumsy for lawyer drafted language, it does seem to carry the general notion that the parties didn't expect the landlord to pay unless and until financing came available. The editor generally feels that the courts make the best law when they require parties to commercial real estate agreements to live with their contract language. Here, however, there was a genuine issue of fact as to what the language meant. Even though it's a New Jersey court, the editor concurs in the result. Compare: Land O'Sun Realty v. REWJB Gas Inv., 685 So. 2d 870 (Fla. App. 1997), DD for 7/30/97 (Where instrument provides that one clause will apply "notwithstanding any conflicting or inconsistent provisions . . . including specifically paragraph 3," but provision appears in paragraph 4 and is totally repugnant to paragraph 3, court will treat parties' intent as ambiguous and will admit parole evidence to permit jury to ascertain meaning of agreement.) (The editor does not concur with the Land O'Sun court although a number of DIRT readers did.) 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 Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

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