Purchaser Required to Pay Broker Commission Acquired Through Assignment
FACTS: In February 1997, plaintiff Pagano Company (Pagano), a licensed real estate broker, entered into an agreement with HeritageIIIOfficeCenter (Heritage), concerning commercial property that Heritage owned. That agreement gave Pagano the exclusive right to procure tenants to lease space to in the property, and to negotiate the tenants’ leases (including options, extensions, and renewals) on behalf of Heritage. Pursuant to the agreement, Pagano would be paid five percent of the total lease price. A schedule of lease commissions accompanied the brokerage agreement, which stated that it would be binding upon Heritage’s heirs, successors, and assigns.
In June 2004, 48 South Franklin Turnpike, LLC (Franklin) entered into a contract with Heritage to purchase the property. The contract included a “Due Diligence and Investigation” provision granting Franklin the right to inspect the books and records relating to the property, including any leases in effect. Franklin reviewed the lease agreements, but did not ask to review other documents. The closing was held on September 20, 2004. As part of the transaction, Heritage assigned to Franklin all of the leases for the existing tenancies at the property, and Franklin agreed to assume and perform Heritage’s obligations under those leases.
When Franklin purchased the property, three tenants still occupied the space through lease agreements and extensions procured and negotiated by Pagano. The lease agreements stated, in part, that the provisions would apply to and bind the lessor and lessee and their respective successors and assigns. The agreements also stated that if the building was sold, the lessor would be released from its obligations under the lease, and the purchaser of the property would assume and agree to carry out the lessor’s obligations. Furthermore, each lease contained a paragraph explaining the lessor’s liability for commissions owed to Pagano. That paragraph referred to a separate commission agreement between Pagano and the lessor, and stated that the lessor agreed to satisfy its obligations to Pagano for commissions and would indemnify and hold the lessee harmless for claims by Pagano.
After acquiring title to the property, Franklin never paid commissions to Pagano for the rents received under the leases. Pagano filed suit against Franklin to recover the outstanding commissions due for the rents paid by the tenants from September 20, 2004, to the date each vacated its leased premises.
The trial court determined that VRG Corp. v. GKN Realty Corp., 135 N.J. 539 (1994), governed the disposition of this case. In VRG, the Supreme Court held that in order to incur liability for real estate broker commissions by virtue of a general assignment of leases from a seller to a buyer, the purchaser must have affirmatively assumed the seller’s obligation to pay the commissions. Applying the VRG ruling to this case, the trial court concluded that the leases, the assignment of the leases, the purchase agreement, and the deed, when read and considered together, established that Franklin affirmatively assumed the obligation to pay Pagano’s commissions. In particular, the court found it persuasive that each lease specifically set forth the exclusive brokerage arrangement involving Pagano, referenced the separate commission agreement, and contained the lessor’s agreement to satisfy the obligation. The trial court entered judgment for Pagano.
In an unpublished decision, the Appellate Division reversed, concluding that Franklin never contractually agreed to pay Pagano’s commission. The panel agreed that VRG controlled the disposition of the case, but it interpreted the affirmative assumption rule to require an express agreement by the purchaser to assume the commission obligation, separate from, and in addition to, accepting the general assignment of the leases. The Supreme Court granted Pagano’s petition for certification: 195 N.J. 522 (2008).
CONCLUSIONS: In this dispute arising from the purchase of commercial property by 48 South Franklin Turnpike, LLC (Franklin), the facts, circumstances, and record, taken as a whole, demonstrated that Franklin affirmatively assumed the seller’s obligation to pay real estate broker commissions that were due under leases it acquired through a general assignment.
1. Under the rule set forth in VRG, Franklin was liable for the commissions only if it affirmatively assumed the obligation. Among the ways identified in VRG for an affirmative assumption to occur is by a specific assignment of the broker’s commission agreement or by reference either in the general assignment agreement or in the lease itself. The Court in VRG found that the record was insufficient to support the broker’s allegation that the assignee assumed responsibility for the commission obligation. First, neither the leases nor the assignment of the leases in VRG included or referred to the commission obligation between the assignor and the broker. Second, the assignor and assignee purposely and explicitly amended the assignment contract to maintain the former’s liability for that obligation. The assignee prevailed in VRG not merely because it never expressly assumed the commission obligation, but because the assignment and the leases themselves were silent regarding that obligation and because the record revealed a contrary intention by the parties.
2. Here, Franklin affirmatively assumed the obligation to pay Pagano’s commissions. Heritage specifically assigned to Franklin all of the leases and other agreements of whatever form affecting all or any part of the property. Under the leases, the term “Lessor” applies not only to Heritage, but also to any successors such as Franklin. Further, unlike VRG, where neither the leases nor the assignment of the leases referred to the obligation to pay commissions, each assigned lease in this case contained information detailing Pagano’s role in the leasing of the premises and referring to the Lessor’s liability for commissions. The Court disagreed with the Appellate Division panel’s determination that the language in the leases relating to the broker’s commissions imposed only a duty on the Lessor to indemnify and hold harmless the tenants for claims by the broker. Instead, language in the leases specifically recognized that the Lessor is fully responsible to the broker.
3. Franklin, a sophisticated purchaser of commercial property, had a fair opportunity to request access to the agreement with Pagano, or at least to register any concerns caused by the promises reflected in the leases before agreeing to the assignment. Unlike the broker in VRG, who could not show that the assignee ever accepted responsibility for the assignor’s preexisting obligation to pay commissions, Pagano had carried that burden with proof that, after a due diligence period yielding no objections, Franklin accepted a general assignment of leases that specifically referred to the commission obligation between Pagano and the “Lessor.” In short, this record bespeaks an affirmative assumption.
The judgment of the Appellate Division was reversed and the judgment of the Law Division was reinstated.
To see the New Jersey Supreme Court’s complete ruling, go to: http://www.judiciary.state.nj.us/opinions/supreme/A-9-08%20Pagano%20v%2048%20South%20Franklin%20Turnpike.pdf