Many real estate brokers assume that a signed letter of intent or contract between a buyer and seller automatically guarantees them a commission. This could be a costly assumption, because letters of intent and contracts can be interpreted in different ways. Two recent New York cases provide an important reminder that brokerage agreements always should be put in writing and should clearly spell out how and when commissions are earned and paid.
Siding With the Seller
Last year, in Cohen & Company Real Estate, Inc. v. Charles Yassky, et. al., the Cohen brokerage firm sought a commission payment from the owners of the Frostburg Plaza Shopping Center. Cohen argued that the owners retained the firm to procure a buyer for the shopping center and agreed to pay a commission totaling 3 percent of the purchase price. However, the agreement did not specify what was meant by procuring a buyer, nor did it specify when the commission should be paid.
Cohen argued that it was entitled to a commission because it procured a prospective buyer that offered terms and a purchase price acceptable to the owners, as evidenced by a signed letter of intent between the two parties. The owners countered that Cohen was entitled to payment only if and when the shopping center transaction closed. Cohen disputed this assertion, claiming that closing was not a condition of payment.
The Supreme Court of the State of New York, County of New York, analyzed whether Cohen had agreed to act as a finder or a broker in order to determine the scope of services it must fulfill. In New York, broker services ordinarily include bringing the parties to agreement in order to earn a commission.
The letter of intent stated that the owners would pay Cohen a “brokerage commission per separate agreement” and that the firm was the exclusive broker for the parties. In addition, the letter of intent clearly stated that it was not a binding contract, that a contract would be prepared and executed by the parties after agreeing to all the terms and conditions, and that the letter of intent would become null and void if a binding contract was not signed within 30 days. No contract ever was signed between the parties.
The court found Cohen to be a broker, even though there was no indication that Cohen was a party to the letter of intent. By entering into a fee agreement that was vaguely worded -- or perhaps unwritten -- Cohen and the shopping center owners invited the court to decide whether or not Cohen was entitled to a commission. Without other facts, courts often are reluctant to impose payment of commissions in circumstances where sellers have no sales proceeds with which to pay the fee.
If the understanding is that a commission is earned and payable upon procuring a ready, willing, and able buyer offering terms acceptable to the seller, the commission agreement should state so clearly and unambiguously. Otherwise, courts may presume that closing and delivery of the sales price is required for commission payment. Cohen's agreement didn't clearly state when the commission was due, so the court ruled that the brokerage firm was not entitled to a commission.
A Broker-Friendly Decision
The Appellate Division of the Supreme Court of the State of New York heard a similar case last year, but ruled in favor of the broker. In Helmsley-Spear, Inc. v. New York Blood Center, Inc., the court decided whether a commission was owed to the broker that introduced the seller to a buyer that technically wasn't the final purchaser.
When the New York Blood Center wanted to sell its Manhattan building, a Helmsley-Spear broker brought in a prospective buyer that used different investment entities to purchase various properties. At a May 1996 meeting, the seller and buyer reached an agreement on the price and terms of the sale.
That same day, Helmsley-Spear and the blood center signed an agreement authorizing Helmsley-Spear to provide brokerage services in connection with the building. The blood center agreed to pay a commission at closing if Helmsley-Spear identified a buyer for the property.
The following day, the buyer's attorney wrote to the blood center confirming the terms of sale to “our client's investment group,” which was identified as North Moore-Ericsson Owners LLC.
Three weeks later, a contract between the New York Blood Center and 27 North Moore Associates LLC was signed. It contained the terms agreed to in the May meeting. The original buyer that Helmsley-Spear identified was a member and principal of the buying entity. Contract language identified Helmsley-Spear as the sole broker that was entitled to a commission from the seller.
The sale closed in accordance with the contract and the blood center refused to pay a commission, arguing that Helmsley-Spear introduced North Moore-Ericsson Owners as purchaser and therefore was not a procuring cause of the actual sale to 27 North Moore Associates. The lower court concluded there was a factual issue about the identity of the party that the broker presented to the blood center and ruled in favor of the blood center.
The Appellate Division had no such difficulty. It stated, “Where a contract of sale admits the broker's performance of services, the broker is entitled to summary judgment on its claim for commissions.”
The court did not discuss that it was inequitable to deprive Helmsley-Spear of a commission because the buyer that it procured used one entity instead of another to take title. However, a discussion of this issue was not necessary because of the express language of the contract. Having found in the sales contract an acknowledgment that Helmsley-Spear was the procuring cause of the transaction, the court ruled that it deserved a commission.
These cases raise valid issues relating to brokerage and commission agreements. An agreement should specify the duties of the broker or finder in a way that makes it clear when those duties have been fulfilled. For example, is introducing a ready, willing, and able buyer sufficient, or must there be a binding agreement between the parties?
An agreement also should specify when payment is due for the services performed. Is payment contingent on closing or not? What if the failure to close is not the purchaser's fault?
By using care and common sense in the initial preparation of various brokerage agreements and sales contracts, disputes similar to those in the two cases discussed here can be avoided.