The Law

Assignment of Lease Obligations by Michael Blahy Do brokerage commissions on a renewal of a lease get passed on with the assignment of a lease contract? MGP Greentec IV, LLC (MGP) purchased a 70-year ground lease on Hubble Drive in Greenbelt Maryland in 2005. The property had two buildings joined by a lobby with a total of 120,000 square feet. The property was originally mortgaged with Bear Stearns and assigned multiple times terminating with Bank of America (BOA). MGP assigned the current and future leases to Bear Stearns which included a clause stating: “ [s]uch assignment to Lender shall not be construed to bind Lender to the performance of any of the covenants, conditions, or provisions contained in any such Lease or otherwise impose any obligation upon Lender.” In 2009, a tenant moved out and Cushman & Wakefield of Maryland, Inc. (Cushman) was contracted to find a replacement tenant. The contract required MGP to pay a commission of three percent of the rental for the initial lease term and, three percent of any extensions or renewals of the lease. Sloan Street Advisors, Inc. (Sloan), had a client looking to lease space. A lease was signed with TRAX in July 2010, to start upon completion of leasehold improvements, in October 2010. The lease was for five and a half years, with a tenant’s option of another five years. The lease listed Cushman as the Landlord’s broker and Sloan as the Tenant’s broker. It also specified that: “Landlord agrees to compensate the Real Estate Brokers referenced in Section 1.17 above in accordance with a separate agreement, and agrees to indemnify Tenant against any claims, damages, costs, expenses, attorneys’ fees or liability for compensation or changes which may be incurred by Tenant as a result of any claim of non-payment made by Real Estate Brokers. In no event shall Tenant have any liability for Real Estate Broker commissions. In addition, in the event Tenant exercises its Option to Renew pursuant to Section 32 below, Landlord shall pay Tenant’s Broker a fee ...” In the case of a transfer: “Tenant shall look solely to Landlord’s transferee for the performance of Landlord’s obligations ... [s]ubject to the rights of any lender holding a mortgage or deed of trust encumbering all or part of the Project, Tenant shall look solely to Landlord’s equity interest in the Project ... for the collection of any judgment requiring payment of money by Landlord arising out of Landlord’s failure to perform its obligations under this Lease ...” Shortly after the lease commenced, MGP defaulted on its mortgage. In January 2011, BOA purchased the property at a foreclosure sale. BOA then sold the property to DRV Greentec, LLC (DRV) in March 2012. In the assignment agreement, “DRV assumed and agreed to perform ‘all of the covenants, agreements and obligations under the Lease and Contracts binding on Assignor or the Real Property, Improvements, or Personal Property ...’”. In July 2015, TRAX renewed the lease, and in September Cushman and Sloan billed DRV for their commission. DRV refused to pay, so Cushman and Sloan sued in the Circuit Court claiming DRV was liable, arguing: “the Lease covenant was one that ran with the land” “even if it did not, DRV had expressly assumed the duty to pay the commissions” “the plaintiffs could recover as third-party beneficiaries” “they could recover also under theories of successor liability and quantum meruit for unjust enrichment” The circuit court rejected all the arguments, saying that the agreement to pay commissions is personal, and doesn’t run with the property. Also, successor liability does not apply as DRV is not a “continuation or reincarnation” of MPG, because it just purchased the property, and not all the assets of MPG. Cushman took the case to The Court of Special Appeals which affirmed the Circuit Court’s decision. Cushman further appealed to the Maryland Court of Appeals claiming: “the Court of Special Appeals erred in determining that, in order to be recognized as a third-party beneficiary, they must be a ‘primary party in interest’ ” “when a successor landlord expressly assumes a lease and represents that he/she/it is assuming ‘all’ obligations of that lease with knowledge of the lease provisions benefitting intended third-party beneficiaries, the successor ‘is also assuming obligations of the original Landlord to the intended third-party beneficiaries’ ” Precedent sets that “a person is a third-party beneficiary only where the promise sought to be enforced was intended for that person’s benefit and the parties intended to recognize that person as the primary party in interest with respect to that promise”. Section 2 of Restatement (Second) of Contracts defines: promisee – as the person to whom a promise is addressed beneficiary - as a person other than the promisee who will be benefitted by performance of the promise The lease named Cushman and Sloan as brokers and specified commission due upon renewal, but by placing all the obligation to pay commission on the owner, the tenant is also a beneficiary in the lease. Relying on a 1969 case, Spivak v. Madison-54th Realty Co. Cushman argued “that, notwithstanding that neither DRV, nor BOA, nor BOA’s assignors (or assignees) signed the Lease containing the covenant to pay the brokerage commissions or expressly acknowledged or agreed to be bound by that covenant, they are nonetheless liable because they assumed the Lease with all of its obligations”. In that same case, the judge said “that in the absence of a covenant that runs with the land, mere acceptance by a successor in title of a lease containing an agreement to pay commissions on a renewal does not bind the successor to pay those commissions”. A Texas Court decision further clarified that “[p]ersonal covenants of this type, it said, ‘being purely for the benefit of one having no interest in the land, will not be enforced against successive owners of real property as a covenant running with the land’ because ‘[t]o burden lands with personal covenants would be to hamper and impede real estate transactions to the detriment of owners, purchasers and agents’”. Cushman/Sloan pleaded that “DRV did expressly assume the obligation to pay their commissions by agreeing in the assignment of the lease to perform ‘all of the covenants, agreements, and obligations under the Lease’ ... DRV agreed to assume the covenants, agreements, and obligations ‘binding on the assignor’ ”. The Court of Appeals pointed out that the Deed of Trust and the Assignment purchased by BOA clearly states that “the Assignment ‘shall not be construed to bind Lender to the performance of any of the covenants, conditions or provisions contained in any such Lease or otherwise impose any obligation upon Lender’”. The Court of Appeals summarized “There not only was no clear assumption of the brokerage fee obligation by BOA or its predecessor lenders but instead an express negation of such an assumption. Judgement of Court of Special Appeals Affirmed; Costs to be paid by petitioners”. (Cushman & Wakefield of Maryland, Inc., et al. v. DRV Greentec, LLC (Maryland Court of Appeals, Docket: 42/18)) Decided: March, 2019 Published: March, 2019 Feature Articles If you have an opinion on the retailing or retail real estate industries, take this opportunity to share your thoughts. Articles should run between 400 and 800 words. 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