Hero Hero

SIOR Report Article

Return to SIOR Report Articles

The Commission That (Almost) Got Away

By: James Hochman

One of my clients recently encountered a situation, the likes of which I had not seen before, that had me scratching my head for a solution. Here are the facts and here is how we approached the collection. Perhaps there was a better way to secure the fee than what he had to work with.

Our broker (let’s call him “Joe”), works for a commercial brokerage firm which I have represented for several years. In the course of my working with that firm, we developed form commission agreements for various situations, including exclusive listing agreements (sale, lease, sale and lease, and sublease); buyer and tenant representation agreements (exclusive and non-exclusive); and what I call single-party commission agreements, for when Joe and his firm represented a prospective buyer or tenant and wanted to get a written agreement with the property owner to confirm commission rate, terms, and amount. Joe had each of these form agreements at his disposal, along with the assistance of his managing broker, the firm’s COO, and yours truly.

Joe, working with his buyer client (but without any form of written representation agreement), obtained a sale commission agreement with the seller for a specific 10-acre parcel owned by that certain property owner. The agreement provided that if Joe’s client purchased all or any part of that parcel, its owner would pay Joe and his firm a commission of X% of the gross sale price at closing. The deal proceeded, and a PSA was ultimately executed, with a long due diligence period for zoning and other pre-closing contingencies. It turned out that the 10-acre parcel was, itself, part of a larger parcel of almost 50 acres owned by that same seller; and during due diligence, Joe’s buyer client decided to purchase the remainder of that larger parcel, in negotiations where Joe was not involved. Joe learned of the second PSA well after its execution, as neither Seller nor Buyer saw fit to let Joe know about the deal. Joe was not happy, in fact, he was incensed, but was warned not to jeopardize his fee on the 10-acre parcel. Nonetheless, Joe felt that because he had introduced this buyer to this seller, he was procuring cause of the second contract, and therefore entitled to a second fee.

Now, these claims are always fact-specific, and often depend on the specific language in what written agreements applied. The one written agreement Joe had was clearly tied to a 10-acre parcel, described with PIN and a sketch attached to the agreement. The agreement was silent about any other property owned by the seller, so this left us with a solid claim for a commission on Deal 1, and a procuring cause/quantum meruit claim for the fee on Deal 2. The deals were to close together, and we sent invoices for both to the title company. The seller refused to pay the second commission, so we threatened to record a broker lien. The title company required the seller to escrow a large percent of the claimed commission, so this brought the seller back to the table, to see if we could work something out. In fact, we did settle the claim—for less than we wanted, and likely for more than the seller wanted to pay, so this tale has a (moderately) happy ending.

Still, could Joe have done something differently in order to have a stronger claim for the full fee on Deal 2? In truth, Joe did well to get a written commission agreement of any kind from this seller. However, Joe’s client moved ahead without him on Deal 2 (clearly no loyalty there). What could Joe and we have done differently? Hindsight tells us that relying on the commission agreement with the seller (albeit a 10-acre parcel specific agreement) wasn’t enough. Joe needed more. He should not have relied on his buyer-client relationship without some form of agreement, such that the buyer would protect Joe (i.e. either a non-circumvent, an obligation to pay the fee, not to sign a PSA before Joe had another commission agreement with the seller). Some of our readers might say “Jim, nice try. Joe just wasn’t procuring cause of Deal 2, his claim was aggressive at best, more likely overreaching.” Others would say that Joe brought the seller and therefore the property to the buyer’s attention, so he deserves a fee.

Now to use 20/20 hindsight, what could Joe and his managing broker have done differently? We might expand that commission agreement for use in the future to include all other property owned by the seller of the subject property. That may or may not be a tough sell. What we should have done though, was mandate representation agreements wherever possible. Whenever a broker works with a prospect, there should be either an exclusive right to represent, or at worst, a non-exclusive right to represent, providing that the prospective buyer client will not sign a lease or PSA unless or until the broker has a written commission agreement. That puts the buyer on the hook for a lost fee if the buyer goes ahead without protecting its broker. Maybe every broker needs to decide if it makes sense to require that sort of protection. It sure would have helped in this last deal, and it would have mattered financially, to the magnitude of several tens of thousands of dollars. Representation agreements come in all shapes and sizes. For example, I like my letter agreement format, and I offer it in exclusive and non-exclusive formats as well. Maybe that was the tool that was missing in this last transaction.


Media Contact
Alexis Fermanis SIOR Director of Communications
James Hochman
James Hochman
Schain Banks Kenny & Schwartz

Jim Hochman is a partner at Schain Banks Kenny & Schwartz law firm and freelance writer. Contact him at jhochman@schainbanks.com.