Avoid costly litigation with brokers - put in writing.

Owners, buyers, lessors and prospective tenants of commercial property can go a long way in avoiding disputes and costly litigation with real estate brokers by taking a simple precaution - memorialize any agreement or understanding with the broker by putting it in writing.

Because recovery of a brokerage commission is very much dependent on the precise terms of the agreement between the principal and broker, a clear written agreement can avoid a costly legal battle.

The need for carefully memorializing the relationship with a broker stems largely from New York's law governing brokerage commissions. New York's Statute of Frauds requires a signed writing for many commercial transactions, but specifically exempts licensed real estate brokers from its requirements. It is settled that oral brokerage agreements, even exclusive ones, are enforceable. Further, in New York, absent agreement to the contrary, a broker is entitled to a commission if he or she procures a deal with a ready, willing and able prospect - whether or not the deal ever closes or is even reduced to writing.

Some of the areas in the broker-principal relationship that particularly merit documentation include exclusive brokerage arrangements, the time at which the commission is earned, duration of the broker's employment and termination of such employment. Each of these topics is discussed below.

Exclusivity

Exclusive brokerage agreements "cover" or "protect" the broker's right to a commission whether or not the broker is the procuring cause of the lease or sales transaction. Exclusive brokerage arrangements are of two types: exclusive agency and exclusive right to sell or deal.

Generally, in the absence of an agreement to the contrary, for a broker to be entitled to a commission, he or she must have been responsible for bringing together the minds of the parties on all material terms of a lease or sales transaction. Under an exclusive agency arrangement, however, the broker is entitled to compensation whether or not he or she procured the deal and the transaction was consummated through a different broker. However, the principle who hired the exclusive agency broker retains the right to deal with the other party to the transaction directly, without the use of another broker, without becoming liable for a commission.

In an exclusive right to sell or deal arrangement, the broker is entitled to a commission even if the buyer and seller or lessor and lessee consummate a deal between themselves, without the use of any broker.

Principals should be aware of the consequences of exclusivity and of the difference between the two types of exclusive arrangements, and should make sure that any written agreement faithfully reflects the parties' understanding as to whether or not the broker has exclusive rights and the nature of those rights.

When the Commission is Earned

Another issue which merits inclusion in a written agreement is the time at which the broker earns his or her commission. As stated above, a brokerage commission is generally earned when the broker procures a ready, willing and able prospect and there is agreement between the parties with respect to all of the material terms customarily encountered in the transaction. Liability for a commission may be imposed, therefore, even if one of the parties later backs out of the deal, such as where the owner or lessor receives a better offer prior to the execution of a contract. Parties to a brokerage agreement, however, "are free to add whatever conditions they may wish to their agreement," and liability for commissions for unclosed transactions can be avoided by a written provision that a commission will be due and payable only "as, if and when title actually closes" or when the lease is executed.

Brokerage agreements containing this language also sometimes provide for recovery of a commission if title does not close due to the seller's "wilful default." In Graff V. Billet, it was held that a seller who accepted a better deal from a third party did not "default" within the meaning of a brokerage agreement since "no deal between the [original] prospective purchaser and the seller ever materialized in legal, written form." In other words, a "default" in this context is referable to an executed agreement between the parties, not an oral agreement, even if it was intended to be firm and final. Thus, under a clause providing for a commission only upon closing, except upon the seller's wilful default, the seller is free to negotiate with other prospective purchasers without incurring liability for a commission until a formal contract is executed. Liability may be imposed, however, if the seller made a specific commitment in the brokerage agreement to enter into a sales contract with the prospect found by the broker.

Duration of Broker's Employment

The duration of a broker's employment also should be specified in writing. "Where no definite time is fixed the broker has a reasonable time in which to effect [the transaction] ." In Hampton Realty of Bridgehampton, Inc. V. Conklin, for example, the court held that one year was a reasonable term for a written brokerage agreement which was silent on the subject. A principal who is not satisfied with a broker's services under an agreement with no term may not have the freedom to change brokers promptly with confidence that it will not be exposed to liability concerning prospects introduced during the period of the broker's claimed employment. Further, as discussed below, a broker's authority under an agreement with no set term may continue until formally terminated.

Where a stated term of employment is used, the agreement should also specify the consequences where a deal is negotiated or "introduced" by a broker during his or her tenure, but consummated after the expiration of the broker's employment. Otherwise, disputes concerning the broker's entitlement to a commission for a deal "started" earlier are inevitable. In Cushman & Wakefield, Inc. V. 214 East 49th Street Corp., for example, the terms of the brokerage contract entitled the broker to a commission it "at any time after the expiration or termination of this agreement a sale of all or any portion of the Property, upon any terms acceptable to us, shall be made with any purchaser to whom the Property were submitted by [the broker] ... during the term of this agreement." A time limit should be set to cover such situations.

Termination Notices

Where no term of employment is stated, and a reasonable period of time has elapsed, the principal should issue a written notice terminating the broker's authority and employment if the broker's services are no longer desired or required. In such circumstances, the principal can terminate the broker's authority without incurring liability for a commission, provided the termination is done in good faith and was not intended to deprive a broker of a commission, such as where negotiations started by the broker are on the verge of success when the termination notice is issued.

Without a termination notice, disputes could arise concerning a broker's entitlement to a commission claimed to have been earned during the period of the broker's alleged employment. In one ease, the property remained in the broker's hands unsold for two years. While the owner had the right to terminate the broker's employment, the jury found he had not, and the broker was held to have been justified in continuing his efforts and entitled to a commission for ultimately finding a ready, willing and able purchaser. In that case, the purchaser eventually bought the property through another broker, who also presumably was entitled to a commission.

Where the broker's employment is properly and timely terminated, the principal bears no liability for a commission even if the sale or lease is ultimately consummated with a prospect introduced by the broker. As long as the termination is in good faith and not done to deprive the broker of a commission he or she was on the verge of earning, there is no liability even if the broker "planted the very seeds from which [the principal] reaps the harvest."

Caveat 

Before entering into a written brokerage agreement, consideration should be given to New York's Lien Law [section] 2(4), which authorizes certain brokers who rendered brokerage services to file a mechanic's lien against the property. In order to do so, however, three conditions must be met. First, there must be a written contract between the broker and the owner/lessor. Second, the deal must involve commercial property that is being leased, not sold. Third, the term of the lease must be for more than three years. The Lien Law expressly provides that any agreement purporting to waive the right to file or enforce a mechanic's lien is void and unenforceable as against public policy.

In summary, principals should make sure that agreements with brokers are clearly stated in writing. Documenting the terms of a broker's employment will greatly minimize unwanted and costly litigation.

(Daniel M. Kolko is a Senior Associate with Phillips Nizer Benjamin Krim & Ballon LLP in New York City, where he represents clients in commercial and real estate litigation. He is a graduate of Albany Law School and former Confidential Law Clerk to the Judges of the New York State Court of Appeals.)