Whether a commercial real estate transaction is for the purchase of real property, or the lease of a premises, a broker is likely involved.  Brokers help match willing buyers and sellers, and willing tenants and landlords.  Many commercial landlords or sellers deal solely with brokers.  Counsel to these parties must be mindful that several pitfalls exist when their clients’ transactions involve brokers.  Unsuspecting parties may find themselves in litigation when the broker asserts a claim for payment of a commission earned on the sale or lease.  Therefore, it is important for counsel to address whether a party has procured a broker’s services, at what point the broker earns his or her commission, and what happens if a broker previously unknown to a party asserts a claim for a commission.  This is best accomplished by express agreements with brokers setting forth the nature of their services, and at what point they earn their commissions.

In New York, broker agreements may be express or implied.  Absent an express agreement, the broker’s agreement “may be established by facts showing a conscious appropriation of the labors of the broker.”[1]  Owners have been liable for commissions when the broker shows “the owner accepted and benefitted from the broker’s services.”[2]  As New York courts have repeatedly shown, brokers are not expected to work for free.  If a party accepts the results of a broker’s services, he or she will be liable for the commission.[3]  Suppose a broker visits a landlord and casually offers to find a tenant for a space.  The landlord says nothing, but interviews each potential tenant the broker identifies.  The landlord eventually leases the space to one of these tenants.  It is likely a New York court would find the landlord liable for the broker’s commission since an implied agreement existed between the landlord and broker, and the landlord accepted the broker’s services.

Besides setting forth the relationship with the broker, express brokering agreements should also include at what point the broker earns his commission.  Without expressly stating this point, a landlord or seller may be liable for a broker’s commission even if the buyer or tenant ultimately fails to purchase the property or lease the space.  This is because New York law considers the act of producing the aforementioned buyer or tenant, who is ready, willing, and able to execute the agreement, sufficient for triggering the broker’s right to a commission.[4]   Assume a broker identifies several buyers for a commercial property, and presents each to the seller.  The seller negotiates with one of these candidates, and eventually executes a purchase agreement.  The contract is later found to be unenforceable under state law.  “At the juncture that the broker produces an acceptable buyer he has fully performed his part of the agreement…and his right to commission becomes enforceable.  The broker’s commission has never been held to be dependent upon the performance of the realty contract or the receipt by the seller of the selling price unless the brokerage agreement with the [broker] specifically so conditioned payment.”[5]

Ideally, the landlord or seller should avoid accepting services from a broker unless the parties execute an express agreement acknowledging the existence of this relationship and the nature of the broker’s services.  Does the broker have an exclusive or non-exclusive listing agreement?  How long after the listing agreement terminates is the landlord or seller liable to the broker for commissions generated from transactions involving parties referred by the broker?  The express brokering contract should also clearly state at what point the broker earns his commission.  Is it sufficient that the broker provides a ready, willing, and able tenant or buyer?  Or, does the landlord or seller wish to condition the broker earning his condition on consummation of the lease or sale?  Finally, the brokering agreement should identify the party responsible for paying the broker’s commission.  Potential tenants or buyers, in their respective agreements with landlords or sellers, will want to clearly identify whether a broker was involved in the transaction, and who is responsible for paying the broker’s commission.  By understanding potential pitfalls associated with broker’s services, parties can effectively mitigate risk of conflict arising over a broker’s commission claims.

[1] Spearin v. New 345 LLC, 2011 NY Slip Op 33879, 12 (N.Y. Sup. Ct. 2011).

[2] Id. at 12-13.

[3] Id. at 13.

[4] Lane-Real Estate Dept. Store, Inc. v. Lawlet Corp., 319 N.Y.S.2d 836, 841 (1971).

[5] Id. (Emphasis Added).