Are You Entitled to Commissions on Renewals that Occur After a Client Sells the Property?

SITUATION

The owner of commercial property comprised of two buildings with an adjoining lobby hires a brokerage firm to find a tenant for the space. The broker lines up a tenant. The lease runs five years and requires the “Owner” to pay the broker’s commission for the initial lease and any renewal term. The tenant signs the lease and the owner pays the broker a commission on the initial lease term.

Things then take an unexpected turn. Business is bad and the owner defaults on its mortgage. The lender buys the property at the foreclosure sale and then sells it to DRV, which assumes the lease. The mortgage and lease assignment agreement also specify that DRV, as mortgagee and assignee, isn’t liable for the performance of any covenants or provisions contained in the lease.

Meanwhile, the tenant renews the lease at the end of the initial five-year term. The broker then demands that DRV pay a commission.  

QUESTION

Is DRV legally obligated to pay the broker a renewal commission?  

A.            No, because the duty to pay a commission was personal to the original owner.  

B.            No, because DRV isn’t the owner’s legal successor.

C.            Yes, because the broker is a third-party beneficiary of the owner’s lease promise to pay the renewal commission.

D.            Yes, because the duty to pay a renewal commission runs with the land.

ANSWER

A. DRV isn’t on the hook because the promise to pay commission upon renewal was personal to the original owner.

EXPLANATION

This scenario, which is based on an actual case from Maryland, illustrates the legal difficulties of enforcing commission agreements made by clients who then sell the property. The problem is that the promise to pay a commission upon the sale or renewal of property is considered a personal “covenant” or obligation that doesn’t run with the land. Result: If commission-triggering transactions occur after the client sells the property, brokers can’t compel the subsequent owner to cough up the commission money.

That’s the lesson that the broker learned in the Maryland case. The subsequent owner, DRV in our scenario, wasn’t a party to the original brokerage agreement and never promised to be bound by it. And while it assumed the lease, it didn’t assume the original owner’s personal covenant to pay the commission. “Mere acceptance by a successor in title of a lease containing an agreement to pay commissions on a renewal does not bind the successor to pay those commissions,” the court explained [Cushman & Wakefield of Maryland, Inc. v. DRV Greentec, LLC, 463 Md. 1, 203 A.3d 835, 2019 Md. LEXIS 119].

WHY WRONG ANSWERS ARE WRONG

B is wrong because a corporation that acquires another corporation’s asset generally is not liable for the predecessor’s debts and liabilities. This so-called successor liability rule wouldn’t have applied had DRV contractually assumed the original owner’s contractual obligation to the broker; instead, it did precisely the opposite by including express language in the mortgage and assignment agreement indicating that it wasn’t assuming the original owner’s lease covenants.

C is wrong even though the broker, in fact, might have been a third-party beneficiary of the original owner’s lease promise to pay a renewal commission. But being a third-party beneficiary just meant that the broker could sue those who were actually bound by the promise. And, as we explained above, DRV wasn’t bound by the covenant.

D is wrong because a covenant to pay commissions upon renewal of a lease binds only the person that provides the covenant and doesn’t run with the land. This is true even when the assignee takes the property “subject to the lease.”

TAKEAWAY

A client’s promise to pay you a commission upon the sale or renewal of leased property is a personal covenant that doesn’t apply to subsequent owners. And there’s a good reason for that. Enforcing personal covenants against subsequent owners would encumber the land and potentially chill real estate transactions involving it. Bottom Line: Brokers seeking commissions on transactions completed after their client sells the property have two basic options:

1. Sue the client for the commission, assuming the client is financially soluble and the brokerage agreement provides that the covenant to pay continues after the land is sold; and
2. Try to get the subsequent owner to contractually assume the client’s covenant to pay the commission.