Purchasers Don't Always Purchase The Leasing Commissions

Summer 2008Cole Schotz Docket

A subsequent owner of real property is not automatically liable for broker commissions under brokerage or lease agreements executed by the prior owner.  According to a recent New Jersey Appellate Division decision, Pagano Company v. 48 South Franklin Turnpike, LLC (decided March 3, 2008), an express agreement by the purchaser of the property (and assignee of the lease) to pay commissions pursuant to a broker agreement is necessary to obligate that purchaser to pay such commissions.

In the Pagano case, the prior owner had entered into an exclusive leasing agreement with the broker.  Under that agreement, the prior owner gave the broker the exclusive right to procure tenants and negotiate leases for the property.  In exchange, the broker was to receive a percentage commission on each lease, including any renewals and extensions.

When the property was sold, the purchaser (now subsequent owner) accepted an assignment of the leases affecting the property and thereby agreed to assume all of the landlord’s obligations under those leases.  There was no mention of the prior owner’s exclusive leasing agreement with the broker in that assignment document, nor was there any separate document delivered at the closing which would constitute an assignment of the broker agreement to the purchaser.  Although the broker agreement contained a provision that the agreement was binding upon the heirs, successors and assigns of the parties to the agreement, the Court referenced VRG Corp. v. GKN Realty Corp., 135 N.J. 539 (1994) in noting that the purchaser would have had to affirmatively assume that agreement (or the obligations thereunder) in order to be liable to the broker for any commissions. 

The broker argued that two specific provisions in the leases obligated the subsequent owner to pay the commissions.  The first provision was that the lease was binding on the “heirs, successors, legal representatives and assigns” of parties to the lease, and the second provided that the landlord represented to the tenant that it dealt exclusively with the broker, agreed to satisfy its obligations to the broker for commissions, and would, therefore, indemnify the tenant with respect to any claims made by the broker for such commissions.  The court rejected that argument, reasoning that those provisions in the lease were an agreement between the tenant and the landlord.  The broker was not a party to that agreement. In addition, both the representation that the landlord dealt exclusively with the broker and the agreement to indemnify the tenant were deemed a representation and warranty to the tenant, not an affirmative assumption of any obligation to the broker.

The court pointed out that the leases also stated that any obligation to the broker was determined by a separate commission agreement.  Therefore, the broker’s right to any commissions would arise out of that separate broker agreement and not the lease.  Because there was no assignment of that broker agreement to the purchaser and because there was no agreement or other promise made by the subsequent owner at the time it purchased the property to pay the broker any commission, the subsequent owner was not responsible for the commissions.

If the lease had included a provision whereby the landlord promised to pay the commission to the broker and clearly stated the amount of the commission to be paid so that it could be considered an agreement to pay within the lease, or if the broker agreement was included in the assignment document delivered at closing,  the subsequent owner would have been responsible for the commission.

In May, 2008, the New Jersey Supreme Court granted certification to consider the Pagano case, so the decision of the Appellate Division may not be final.



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