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Pagano Company v. 48 South Franklin Turnpike, LLC

198 N.J. 107, 965 A.2d 1172 (2009)

BROKERS; COMMISSIONS: — To incur liability to pay leasing commissions following its purchase of leased property, a buyer must have affirmatively assumed its seller’s obligation to pay the commissions and whether that is the case can be satisfied by finding a separate promise or if the entire record, taken as a whole, signals that the buyer agreed to assume the obligation despite the absence of a separate promise to do so.

The New Jersey Supreme Court states the issue succinctly: Is “a purchaser of commercial property [] liable for the real estate broker commissions due under the leases it acquire[s] [by way of] a general assignment from the seller”? In a 1994 opinion from that same court, VRG Corp. v. GKN Realty Corp., 135 N.J. 539 (1994), it was held that to incur such liability, a purchaser must have “affirmatively assume[d]” its seller’s obligation to pay the commissions. That could be satisfied by a separate promise or by discerning such from the entire record. “If, taken as a whole, the record signals that the assignee agreed to assume the obligation, he or she will be held to it despite the absence of a separate promise to do so.”

Here, the seller had executed an exclusive leasing agreement with a broker. Under it, the broker was entitled to a commission on account of a new lease and for its renewals, extensions, and options as well. The brokerage agreement recited that it would be binding on the owner’s heirs, successors, and assigns.

The broker procured at least three leases and received its commission in connection with their signing. Then, the owner contracted to sell the property. The contract provided for a due diligence inspection of the property and of property-related documents such as the leases and lease correspondence. The buyer had a specific right to request copies of documents it felt were needed to adequately complete its due diligence requirements. The buyer reviewed the leases and made no further requests for documents.

Each lease was made applicable to the landlord’s assigns, and expressly set forth that an assignee would be bound by the terms of the lease and would be assumed to have agreed to carry out all of the landlord’s obligations under the lease. No one argued the effectiveness of that provision. Each lease also had a provision dealing with the broker and its commission. After identifying the broker and excluding others who might claim a commission, it said, “by separate commission agreement and letter of understanding said broker shall be paid a commission by Lessor. … Lessor agrees to fully satisfy its obligations to said broker for commissions and covenants and agrees to save Lessee harmless with respect to claims of said broker for said commissions.”

There was no evidence that the buyer ever saw or actually knew about the contents of the brokerage commission agreement. There was no expressed assumption of the brokerage agreement by the buyer. What there was, however, was a provision in the assignment of leases, not about the brokerage agreement, but saying: “Assignee assumes and agrees to perform all of Assignor’s obligations under the Leases.”

The broker persuaded the lower court that, taken as a whole, the record demonstrated the buyer had affirmatively assumed the obligation to pay renewal commissions (which later became due). The buyer persuaded the intermediate appellate court that the landlord’s brokerage obligation under the lease only ran to the tenant and not to the broker. The intermediate appellate court couldn’t find anything in the record where the buyer promised either its seller or the broker that it would pay the commission. It read the lease as imposing only an obligation to indemnify the tenant for the commission, but because the tenant was never called upon to pay the commission, there was no claim for indemnification. The broker appealed.

The Supreme Court looked at its holding in VRG Corp. and never waivered from the underlying principal. But here, it saw the factual situation differently. VRG Corp. involved a set of facts where neither the leases nor the assignment of leases referred to or included the commission obligation between the seller and the broker. Second, the assignor and assignee there purposely and explicitly amended their agreement to see that the assignor retained the obligation. Thus, the assignment and the leases were silent and the parties manifested an intention contrary to that of having the buyer be responsible for paying the broker. The Court, relying on the principal that the obligation to pay a brokerage commission is “personal,” could not find an “affirmative assumption” of that obligation by the buyer in VRG Corp.

Here, the Court saw the situation differently. It said that an “express promise” is not the only way to find an “affirmative assumption.” The Court acknowledged “it would be ‘[] grossly onerous and unfair’ to hold that in all contracts ‘a buyer impliedly agrees with the broker that he will pay the commission if the broker cannot legally collect it from the seller.’” In this case, however, the leases detailed the broker’s role in procuring the tenancies. They disclosed the seller’s liability, as landlord, to pay the broker, even if the details of that obligation (such as extending to lease renewals) was not spelled out.

Even though the intermediate appellate court had looked at the very same lease provision, it was the Supreme Court’s conclusion that the intermediate court focused only on the indemnification feature and not on the clause’s overall implication. Basically, it concluded that the buyer, knowing from the assignment of leases that it was assuming the obligations of the landlord under those leases, had an obligation to inquire into the commission agreement referred to in the lease’s brokerage provision, but never did so. Under the contract of sale, it had the right to request the brokerage agreement, notice of which was revealed by the leases themselves. It could not reasonably believe that what it didn’t know couldn’t harm it. In essence, the Supreme Court found that when the buyer took an assignment of leases making it responsible for the landlord’s obligations under those leases, it would be liable for all of those obligations it could have reasonably discovered by reading the leases and asking about documents or obligations referred to in those leases.

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