The obligation to pay a broker’s commission can seem to be self-evident. If the deal “closes”, then the commission is due. However, this common understanding can lead to unintended financial consequences as shown by the recent case of RC Royal Development and Realty Corp. v. Standard Pacific Corp. In that case, RC Royal Development and Realty Corp. entered into an agency agreement with Standard Pacific whereby Standard Pacific agreed to pay RC a commission in connection with the purchase of property for a condominium development. Standard Pacific did enter into a purchase contract whereby, subject to feasibility review, it agreed to purchase an apartment project for development for $116 million. Because of the downturn in the condominium market, Standard Pacific elected to terminate the contract. Notwithstanding Standard Pacific’s election not to proceed with the transaction, RC maintained it was entitled to a commission under the terms of the agency agreement.
The agency agreement stated that RC’s commission would be due when Standard Pacific purchased the property, which was defined as the acquisition of “any direct or indirect
beneficial interest in the Property.” Additionally, the agency agreement stated that the fee would be paid “through escrow at closing.” The court found in favor of RC, holding that (A) under California law, Standard Pacific acquired a “beneficial interest” in the property when it signed the contract (regardless of the fact that it never obtained “legal” title to the property through the recording of a deed on actual closing), and (B) the language that the fee is to be paid “through escrow at closing” related only to the timing of the payment and was not a condition to payment. Obviously, the imprecise drafting of the agency agreement was costly for Standard Pacific.
Commission agreements for sales or acquisitions should expressly state that payment is in fact “conditioned” on the recordation of the grant deed and, if applicable, the expiration of any rights to rescind the transfer.
The case is an excellent example of the need to precisely distinguish between covenants and conditions, in particular in commission agreements. This applies to commission agreements both for sales and acquisitions and for leases. One simply cannot be too careful when drafting the conditions to one’s obligation to make payments. Commission agreements for sales or acquisitions should expressly state that payment is in fact “conditioned” on the recordation of the grant deed and, if applicable, the expiration of any rights to rescind the transfer. Conditions for payment of leasing commissions can be more involved. In addition to the mutual execution of the lease, the payment of the commission also needs to be conditioned on the expiration or waiver of any rights of the tenant to rescind the lease (such as, for example, the landlord’s failure to deliver tenant improvements on time or the landlord’s failure to deliver a non-disturbance and attornment agreement from its lender). Leasing commission are also often due on a tenant’s exercise of an extension option, which creates its own “conditions.” At the time the option is exercised, the broker on the commission agreement might or might not still be the exclusive agent for that property or for that tenant.
Accordingly, some conditions to payment of a commission for an extension would include:
- the tenant timely exercising the option (rather than re-negotiating the terms of the extension);
- the existence of no other competing claims to a commission through the tenant; and
- the expiration or waiver of any right to rescind the exercise of the extension option (for example, if the tenant has the right to rescind based on the final determination of a “fair rental value” appraisal).
In summary, precise definitions of the conditions to payment of commissions or finder fees can often be overlooked. Doing so can prove to be costly.