When is a broker entitled to a commission

When is a broker entitled to a commission?
The first department has just ruled

The Appellate Division, First Department, issued a decision on Tuesday, May 20, 2014, which adopted a standard that there must be a “direct and proximate link” between the broker and the eventual transaction in order for the broker to be eligible for a commission. The First Department had been inconsistent about the required standard, but this decision seems to clarify this issue, at least in New York County and the Bronx.

The Court had to determine whether the real estate broker alleged facts sufficient to establish its entitlement to a commission on the sale of real estate where it expended significant effort in locating an apartment for buyers who abandoned the transaction and purchased another apartment in the same building 18 months later. The Court also took the opportunity to clarify the standard by which a broker may be found to have been the “procuring cause” of a real estate transaction. After having been served with the lawsuit from the attorney representing the real estate brokerage firm, the buyers moved to dismiss the case prior to filing an Answer, believing that the case had no merit. The Court determined that the Complaint sufficiently alleged that the broker was the direct and proximate link between the introduction of the buyers and the seller and the consummation of the transaction, and as such, it allowed the case to continue.

In early 2006, the defendant buyers, Daniel and Jill Dienst, retained SPRE Realty, Ltd. (“the broker”) as their real estate broker to assist them in purchasing a luxury apartment in Manhattan. Although there was no written exclusive buyer agency agreement, the parties had an understanding that the broker would receive a commission after securing a residence that met the buyer’s expectations. In October of 2007, the broker introduced the buyers to a condominium building under construction located at 397 West 12th Street where the buyers were shown layouts and renderings of the building. A deal was negotiated for the buyers to purchase two units in the building, forming a duplex for $11.5 million. In August of 2008, the buyers withdrew from the deal, indicating they had dropped their plans for buying a new home. The broker kept working with the wife buyer, who was looking for commercial space for her art and antique store. In February of 2010, the buyers purchased a different duplex in the building for $6.5 million and paid no commission to the broker.

The broker commenced this action in 2013, alleging breach of implied contract and unjust enrichment. The lower court denied the buyer’s motion to dismiss, noting that the buyers may have returned to the building on a periodic basis during the 18 month period between the abandonment of the first transaction and the buyers’ ultimate purchase, which would evidence a bad-faith termination of the original transaction.

The Court restated what has been the law concerning entitlement to brokerage commissions, “In the absence of an agreement to the contrary, a real estate broker will be deemed to have earned his commission when he or she produces a buyer who is ready, willing, and able to purchase at the terms set by the seller. A broker does not earn a commission merely by calling the property to the attention of the buyer. But this does not mean the broker must have been the dominant force in the conduct of the ensuing negotiation or in the completion of the sale. Rather, the broker must be the procuring cause of the transaction, meaning that there must be a direct and proximate link, as distinguished from one that is indirect and remote between the introduction by the broker and the commission of the transaction.” The Appellate Division acknowledged that all four of the Departments in New York State had applied varying language in elaborating on that standard. The Second, Third,and Fourth Departments have stated that “if a broker does not participate in the negotiations, he or she must at least show that he or she created an amicable atmosphere in which negotiations went forward or that the broker generated a chain of circumstances which proximately led to the sale. The Court of Appeals has not approved the “amicable atmosphere or “amicable frame of mind” language, but it has affirmed without opinion a finding that “a broker was the procuring cause where it generated a chain of circumstances which proximately led to a lease transaction.”

“In order to reduce the confusion that has arisen from the more nebulous terminology heretofore employed by the Departments of the Appellate Division, we reiterate that the direct and proximate link standard…governs determinations of circumstances under which a broker constitutes a procuring cause within the First Department. This standard requires something beyond a broker’s mere creation of an amicable atmosphere or an amicable frame of mind that might have led to the ultimate transaction. At the same time, a broker need not negotiate the transaction’s final terms or be present at the closing.” As a result, the Court found that the Complaint sufficiently stated a cause of action for a real estate brokerage commission, and the case will proceed through its normal fact-finding course to determine if the broker’s actions were the direct and proximate link between the introduction of the buyers to the developer and the purchase of the second duplex which is a question of fact to be decided by the evidence.” The Court also reasoned that even if the broker cannot prove it was the procuring cause of that transaction, “it may be able to prove the buyers terminated their activities in bad faith and as a mere device to escape the payment of the commission.”

SPRE Realty, Ltd. v. Dienst, Appellate Division, First Department, decided May 20, 2014.
Courtesy of Alfred M. Fazio, Esq., Capuder Fazio Giacoia LLP, 90 Broad Street, New York, New York 10004 (212) 509-9595
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