SITUATION

A shopping center tenant hires a broker to find somebody to sublease 5,100 square feet of the space it’s leasing. The listing agreement names the broker as the tenant’s exclusive agent and provides for a 6 percent commission in the event:

• The space is “subleased”; or
• The tenant’s underlying lease with the shopping center is cancelled.

QUESTION

What’s wrong with this listing agreement?

ANSWER

The agreement didn’t ensure the broker’s right to a commission in the event the tenant assigned the property.

EXPLANATION

Sure enough, that’s exactly what happened. The broker began marketing the property after signing the listing agreement. Six months later, the tenant began negotiating with the landlord to “buy out of” the lease. The sides reached an agreement and the tenant assigned the lease back to the landlord. The broker demanded its commission, but the tenant refused to pay since the payment conditions weren’t fulfilled.

The broker cried foul and sued the tenant for violating the listing agreement. But the Michigan court dismissed the case. The listing agreement clearly stated that the commission would be payable if the property was subleased or the underlying lease was cancelled. Neither of these things ever happened. Instead, the tenant assigned the property to the landlord. And since the listing agreement didn’t mention anything about assignment, the broker wasn’t entitled to a commission. “Where provisions of a contract are clear and unambiguous, the contract language is to be construed according to its plain sense meaning,” the court explained [Schostak Bros. & Co. v. Durant Enterprises, Unreported, No. 223925 Genesee Circuit Court LC No. 95-035363-CK, April 19, 2002]. 

Takeaway: Provide for Both Assignments and Subleases

Although you don’t have to be a lawyer to be a broker, you do have to understand a couple of fundamental principles about the law to protect your interests. One of these principles is the difference between a lease assignment and a sublease. Explanation: Although they both transfer a tenant’s interest in leased property, there are significant differences between assignments and subleases:

An assignment is a complete transfer of the tenant’s lease rights resulting in the assignee’s becoming the tenant under the lease with responsibility to pay rent and fulfill all the other tenant duties and entitlement to enjoy all tenant rights. However, the assignor tenant remains liable to the landlord if the assignee tenant defaults, unless the landlord agrees to release it.

A sublease, by contrast, is a new lease agreement between the tenant/sublessor and third-party sublessee for all or part of the premises, with the original lease remaining intact. The tenant remains liable for monthly rent under the original lease, while collecting rent from the subtenant under the sublease, which may be more, less, or the same as the rent due under the main lease.   

Bottom line: Brokers should ensure that the listing agreement provides for commission in the event of either a sublease or assignment of the property. Although the property owner must act in good faith, failure to cover both bases leaves the door open to structuring the deal in a way to avoid having to pay you a commission. The broker in Durant learned this lesson the hard way.

Final note: The assignment of a lease doesn’t necessarily cancel the lease, especially as was the situation in the Durant case, where the assignment agreement specifically stated that the lease remained intact.

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