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Tenant may be liable for failed deal.

Tenants should be aware that under certain circumstances the failure to consummate a lease transaction may result in their liability for a brokerage commission that would have been paid by the landlord had the lease been signed.

Judge Sweet of the United States District Court for the Southern District of New York recently held in Parke-Hayden, Inc. vs. Loews Theatre Management Corp. that: "For the broker to prevail ... it must be shown that the [tenant] employed the broker, that the broker procured a [landlord] who was ready, willing and able to enter the proposed [lease] transaction, and that the failure to complete the transaction was due to the 'fault of the [tenant]."

Accordingly, if a broker can prove that it was representing either the tenant or both the tenant and the landlord, and that it procured a lease for the tenant on acceptable terms, then, absent an agreement with the broker to the contrary, the tenant will be liable for the brokerage commission if the tenant backs out of the deal.

In Parke-Hayden, the tenant (Loews) solicited the aid of the broker to make a lease deal for space in New York City for use by Loews as a movie theater complex. Throughout the lease transaction, Loews consulted with the broker on various business items and requested that the broker convey Loews' position on various business terms to the landlord. However, as evidenced by the proposed lease drafts, it was undisputed that all concerned parties contemplated that the landlord would pay the broker's commission. Notwithstanding that the broker was to receive its commission from the landlord, Judge Sweet held that the landlord's express obligation to pay the brokerage commission did not preclude a finding that the broker was employed by the tenant. Judge Sweet stated that question that the tenant employed the broker to procure a lease on its behalf, by soliciting and accepting the broker's services. The only factor that stopped Judge Sweet from granting the broker's motion for summary judgment against the tenant was the factual dispute as to whether the landlord agreed to all of the tenant's deal terms, thus becoming a "ready, willing and able lessor."

After Parke-Hayden, a tenant should take certain precautions to insure that the failure to consummate a lease transaction, once the landlord and tenant have agreed upon acceptable terms and conditions, will not result in the tenant's liability for the brokerage commission. A tenant should obtain a written agreement from the broker involved in the transaction, stating that (1) the broker shall look only to the prospective landlord for the payment of its commission (if applicable), and (2) the tenant shall have no responsibility for the payment of any commission or other compensation if a lease is not consummated for any reason whatsoever including, without limitation, tenant's default, wilful or otherwise, or tenant's refusal for any reason to complete the transaction.

As a matter of course, in every leasing transaction, the tenant should protect itself from potential liability to the broker involved in the transaction by expressly stating the conditions to the deal and obtaining the above-described written agreement from the broker. Otherwise, a tenant's ability to negotiate a lease document (and various ancillary, but potentially substantive terms and conditions) from a position of strength, once the material terms have been agreed upon, will be severely hampered. This is because the tenant's potential liability for the broker's commission may, as a practical matter, make walking away from the deal prohibitively expensive, thereby undermining the tenant's bargaining power. A tenant can no longer arbitrarily refuse to complete negotiations or to walk away from negotiations on which the material terms have been agreed upon.

This new development in brokerage law should not dissuade tenants from communicating with the landlord through their broker or the landlord's broker. A broker can play an integral role in getting a deal done in a timely fashion. In most instances, the broker is the most objective party involved in the deal. In addition, by utilizing a broker to a substantial degree, the tenant may not need to rely as heavily on its attorney, thereby saving on attorneys fees. Accordingly, by affording themselves with written protection from the broker and/or the landlord, tenants may freely utilize the valuable services of brokers in connection with lease negotiations without fear of liability for the brokerage commission, and without placing themselves in a position of restricted bargaining power when the terms of the lease are negotiated.
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Title Annotation:failure to consummate lease transaction may create liability
Author:Uram, Gerald R.
Publication:Real Estate Weekly
Date:Mar 24, 1993
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