Use Precise Draftsmanship to Avoid or Obtain a Brokerage Commission Payment (And Avoid Being Insulted by a Court)

The New Jersey Appellate Division case of Gebroe-Hammer Associates v. Deal Lake Village Gardens, LLC, et. al., 2020 WL 428795, decided on January 28, 2020 addressed the plaintiff’s claim for a real estate brokerage commission for the sale of a property in Asbury Park, New Jersey.  Although the opinion is unpublished, does not constitute precedent and is not binding on any court, it offers useful guidance for the negotiation of exclusive listing agreements and other commission agreements.

In this case, the plaintiff entered into an exclusive listing agreement with the defendant, Deal Lake Village Gardens, LLC to broker a sale of the defendant’s apartment complex.  The agreement included the following provision:  “If a sale or exchange is consummated after the termination of this agreement to or on behalf of a party who was introduced to the property by [plaintiff], [plaintiff] will also be entitled to a full commission.”

The property was sold, but not until after the term of the plaintiff’s exclusive listing expired.  At the trial court level, the plaintiff argued that even though the property was sold after the exclusive listing agreement expired and the defendant had hired a new broker, it had earned a commission because it had introduced a principal of the purchaser to the property while its exclusive listing agreement was in effect.  The trial court rejected the plaintiff’s claim, but its reasoning came under the Appellate Division’s scrutiny.

The trial court analyzed whether the plaintiff was the “effective procuring cause” of the purchase.  The Appellate Division noted that this doctrine “is a tool case law developed to ensure equitable results when a contract does not otherwise expressly specify the conditions precedent to earning a commission.”  The Appellate Division cited precedent indicating that a broker is the effective procuring cause of a transaction if the broker “caused a person to negotiate with defendant and that person purchased the stock and paid the price without a substantial break in the ensuing negotiations”.  First N.H. Corp. v. Van Syckle, 37 N.J. Super. 469, 472 (App. Div. 1955).  However, the Appellate Division held that when a contract “explicitly sets forth the circumstances when the broker is entitled to a commission” a court must first analyze the terms of the contract.  The Appellate Division reasoned that by requiring the broker to be the effective procuring cause of the purchase as a prerequisite to earning a commission, the trial court had improperly imposed additional conditions on the broker for earning a commission.

In turning to an analysis of the exclusive listing agreement, the Appellate Division wryly observed that “the paragraph of the contract pertaining to plaintiff’s entitlement to a commission is hardly a model of precise draftsmanship” and remanded the fact specific question of what the parties to the listing agreement intended by the phrase “[i]f the property is sold or exchanged . . . to or on behalf of a party who was introduced to the property” to the trial court for its adjudication.

When negotiating exclusive listing agreements or other forms of commission agreements, whether on the side of a property owner or broker, any right to a commission after a broker’s agency has expired must be discussed and memorialized in a contract to avoid a similar fate to the parties of this case, which in the case of the defendant, may include the payment of two full commissions (in addition to legal fees) depending upon the disposition of the remanded case at the trial court.

Whether referred to as a “survival clause”, “tail” or otherwise, the parties to an exclusive listing agreement or other commission agreement should address a number of items.  Often a prudent owner will require a broker to deliver a list of prospects the broker is then in negotiations with at the expiration or earlier termination of the agency and set a deadline for the delivery of that list.  The owner may want to limit the number of listed prospects both by placing conditions of the listing of a particular prospect (e.g., that the prospect must have previously submitted a written offer to the owner to buy or lease the subject property) and/or a “cap”.  If the owner intends to contract with a new broker, it is common for the new broker to waive or limit its right to a commission for those prospects listed by the prior broker.  The new broker may be “disincentivized” to put forth her or his best efforts to market the property if there is a good chance that one of the former broker’s listed prospects will be the eventual purchaser or occupant, as applicable.  An additional way to address the competing interests of the former and current brokers is to provide that the brokers split any commission due in connection with the closing of a transaction with a prospect on the former broker’s prospect list.  The owner will also want to insist that the former broker’s right to a commission cease at some defined point after the expiration or earlier termination of the former broker’s agency.

Addressing a broker’s potential rights to a commission after the broker’s agency has concluded in a clear and comprehensive manner will provide the parties with clarity with respect to those rights, and may also save them substantial time and money by avoiding future disputes.