I recently concluded the prosecution of a commission claim—by foreclosing a broker lien, of course—and in the process sadly discovered that there is no end to ridiculous counterclaims and defenses. Here are the facts:

My client took an exclusive sale and lease listing for a stand-alone restaurant property. The owner/operator was losing money on his outdated concept and sought his broker’s help to either lease the restaurant to a new operator ,or better, sell the entire property. A fully enforceable exclusive listing agreement was executed, with the listing price for sale set based on the broker’s estimated market value for the property plus a few extra dollars, and of course, owner consent. It was clear that what that owner wanted was to close a losing business and stop the bleeding.

My client, with the help of a cooperating broker, was successful in finding a new operator for the restaurant, who executed a 10-year lease with an option to purchase the property at certain increasing price points during the first five years of the lease term. The lease was executed, the old restaurant closed, the new one opened successfully, and my client invoiced for his commission. The client professed great surprise at the amount of the fee, offered a partial payment with promised future installment payments if and as the new tenant succeeded and continued to pay rent. My client wisely declined the offer of a deferred and contingent commission, and sought my help. A broker lien and demand letter swiftly followed.

The lien got the client’s attention, but negotiations with his three attorneys—yes, the client kept changing counsel—did not lead to any success. The lien was foreclosed, and title showed that two mortgages burdened the property. Both lenders were named as defendants.

Now the amazing part: in response to the complaint, the landlord defendant claimed that my client breached a duty to him in allowing a lease with option sale prices which would not cover the mortgage balances IF the tenant exercised its option to purchase the property¹. In other words, the listing broker was alleged to have breached a duty of care in not making sure that the option price would satisfy the existing debt!

I don’t know how many of my readers perform a title search on a property to be listed for sale, or even inquire on the amount of existing mortgage debt. When an owner seeks to sell a property, the sale price will likely be determined by factors such as property condition, location, market conditions, and of course, what a willing buyer will pay. The fact that a property may be “under water²” may or may not deter the owner from selling. In our case, the owner wanted to stop the bleeding on a losing restaurant, so we took the property to the market. The amount of debt—increasing perhaps due to delinquency and/or late charges—doesn’t raise the value of the property. It might even have the opposite effect, i.e. a motivated seller.

Today’s issues are:

1. Is it a listing broker’s duty to determine the mortgage balance(s) before setting a listing price?
2. Is it good practice, nonetheless, to inquire, just to make sure that a sale can be closed? OR
3. Is it simply an owner’s (and owner’s counsel’s) duty to understand the reality of the existing debt and weigh that factor when setting a list price, selling the property, or giving an option to purchase?

I never found a case where a broker incurred liability for failure to consider and advise on mortgage balance. However, I am pretty sure that a listing broker wants to avoid the embarrassment of being unable to deliver a property that he or she lists. Even with no duty to inquire, a wise broker might want to look at existing debt at the outset, to avoid what was, in this case, a specious defense that delayed collection of the fee.

In our case, the judge allowed the specious defense to stand, but fortunately, the owner realized his days were numbered, saw a judgment (with increasing attorney fees) looming ahead, and settled the claim. The owner paid about $25,000 more than the original commission, but my broker clients didn’t recover all of their fees, because they wanted to settle.

So, today’s takeaway could be this: as far fetched as it might be to check on mortgage balances at the outset of a sale listing, knowing whether the property value is exceeded by its debt just might save some pain at the outset of a listing, and will surely avoid problems at closing.

1. To date, the option has not been exercised.
2. Where debt exceeds property value.