It would be unfair (and likely bad faith) for a property owner to terminate a brokerage agreement prior to entering into a sales agreement or lease just to avoid paying a real estate commission. Yet, if a property owner is dissatisfied with the services of the broker, the owner should be able to terminate the contract and list the property with another broker or sell or lease the property on its own.
There have been a number of formulations used in brokerage contracts to come to a fair resolution of these competing interests. One is the subject of a recent opinion of the Court of Common Pleas of Allegheny County, Pennsylvania, in Pittsburgh Commercial Real Estate, Inc. v. Baum Boulevard Investors, LP, No. GD13-3233 (February 17, 2015).
In that case, the brokerage agreement provided that the broker, Pittsburgh Commercial Real Estate (PCRE), would be entitled to a commission if the owner entered into a lease within 180 days after expiration or termination of the brokerage agreement “with any tenant to whom the Premises were submitted” by the broker during the agreement term. The agreement also required PCRE to deliver to the owner, within 30 days following the expiration or termination of the agreement, a list of the prospects to whom or which the property had been submitted by the broker. The point of this provision was to allow PCRE to benefit fairly from its work performed during the contract term without tying the owner to PCRE indefinitely. This provision or one similar to it is common in commercial real estate brokerage agreements used in the Greater Pittsburgh market.
Within 180 days after the expiration of the brokerage contract, the owner’s assignee entered into a new brokerage agreement with another broker, and, still within the 180 day period, entered into a lease for the property, as a result of which the assignee now owed the second broker a commission.
PCRE sued the Owner for the payment of a commission.
There were two primary issues in the case:
- (i) PCRE submitted their prospect list more than 30 days after expiration. Did the failure of PCRE to deliver the prospect list in time preclude PCRE from being entitled to a commission?
- (ii) was the property “submitted” by PCRE to the tenant during the term of the brokerage agreement?
Under Pennsylvania law, an event like the 30 day prospect list is not a condition precedentunless the contract expressly provides that it is a condition precedent. The original brokerage agreement did not expressly state that delivering the list within 30 days was a condition precedent to the broker’s entitlement to a commission. The Court ruled that failure to deliver the list of prospects within the 30 day period did not preclude PCRE from receiving a commission.
With regard to the second issue, the brokerage contract did not define the conduct that would constitute “submitting” the property. The Court went to the dictionary, which defined “submitting” as “to commit (something) to the consideration or judgment of another”. The Court then described the numerous communications between PCRE and the tenant and concluded that those communications were sufficient to constitute “submitting”.
The owner argued that PCRE had not “submitted” the property to the tenant because PCRE had never actually shown the property to the tenant. The Court held that actually showing the property was not a necessary element to establish that the property had been submitted to the tenant.
Therefore, the owner’s assignee was required to pay two commissions on the same lease, one to PCRE and one to the second broker.
This case illustrates the need for careful and precise drafting of the language in a brokerage contract concerning the payment of commissions. With better language, the litigation in this matter might have been avoided entirely and a lot of money saved by the Owner on lease commissions.