Buyer Beware?

On March 9, 2009, the New Jersey Supreme Court decided the case of Pagano Company v. 48 South Franklin Turnpike, LLC. At issue was “whether a purchaser of commercial property is liable for the real estate broker commissions due under the leases it acquired under a general assignment from the seller.” The decision provides useful guidance for the sellers, purchasers and brokers of commercial property.

The plaintiff, Pagano Company (Pagano), entered into an agreement with Heritage III Office Center (Heritage), pursuant to which commissions were payable to Pagano for each lease it procured, including renewals of such leases. Heritage subsequently entered into a contract to sell the property to 48 South Franklin Turnpike, LLC (Franklin). The contract included a fairly typical due diligence provision granting Franklin the right to inspect the books and records of the property. According to the Court’s decision, Franklin reviewed the leases pertaining to the property, but did not review or request a copy of the commission agreement between Heritage and Pagano. At the closing for the sale of the property, Heritage assigned to Franklin, and Franklin agreed to assume, all of Heritage’s obligations under the leases. The parties did not execute any specific assignment of the commission agreement.

At the time of the closing, three tenants procured by Pagano continued to occupy the property. Each pertinent lease expressly bound Heritage and its successors and assigns and contained a specific reference to Heritage’s commission obligations to Pagano. After acquiring title, Franklin refused to pay Pagano commissions that came due thereafter under the terms of the commission agreement.

In order to hold Franklin liable for the commissions, the Court required proof that Franklin had “affirmatively assumed” the obligation. In the absence of an express written assumption of the commission agreement by Franklin, the Court stated that the determination of whether an affirmative assumption had occurred required an analysis of the facts and circumstances surrounding the general assignment of leases and, in particular, the “documentary record” of the sale transaction. The Court reasoned that “[i]f, 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 express promise to do so.”

In reversing an earlier New Jersey Appellate Division ruling, the Court held that Franklin had affirmatively assumed the obligation to pay the on-going commissions based on Franklin’s assumption of Heritage’s obligations under the leases, the fact that the leases were expressly binding upon successors and assigns of Heritage, and the clear reference in each lease to the obligation to pay a commission to Pagano pursuant to the terms of a separate agreement. The Court also emphasized that Franklin is a “sophisticated purchaser” that had a sufficient opportunity to request access to the commission agreement, but failed to do so.

Sellers, purchasers and brokers of commercial property should take guidance from this decision. 

For sellers, the Court made it clear that commission obligations are “personal” and do not “run with the land.” Therefore, if a seller’s intention is to transfer its commission obligations to a purchaser, it is imperative that it obtain an explicit written assumption of such obligations from the purchaser at the closing. 

For purchasers, a purchase agreement must contain appropriate seller representations concerning the presence or absence of commission agreements. Purchasers cannot take “a head in sand approach” to its due diligence investigation. If any reference is made to a broker and/or commission agreement, further investigation is necessary. The obligation to pay future commissions should be clearly addressed in a written agreement executed by both parties.

For brokers, a commission agreement should bind the owner, its successors and assigns. It should also obligate the owner to reference the existence (and preferably, the terms) of the owner’s commission obligations in any lease which gives rise to a payment obligation and require the lease to expressly state that the successors and assigns of the owner are similarly bound. Brokers should pursue the inclusion of “due on sale” clauses in commission agreements. Lastly, consideration should be given to recording any commission agreement in the land records of the County in which the subject property is located, although land owners generally object to giving brokers such a right.