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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:
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:
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 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:
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:
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
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