§ 29A.03 The Leasing Situation: Creation of the Leasehold

• Jurisdiction: United States
• Publication year: 2022

§ 29A.03 The Leasing Situation: Creation of the Leasehold

The main difference between brokering a sale of real estate and brokering the creation of a lease is that the sale situation concludes with the one-time event of the closing, while the lease commences a continuing relationship between landlord and tenant. This continuing relationship may be for a shorter or longer period during which several events may potentially impact on the rights or obligations of the broker and the principal. Often, the leasing broker does not walk away from the execution of the lease with a smile, a handshake, and a check for the full amount of the commission, as he would in the case of a sale. Instead, brokers receive their commission on an "accounts receivable" basis—commissions are payable in the future. If the broker has negotiated well, myriad events can trigger or contribute to the commissions earned in connection with a leasing transaction. These are discussed below.

In connection with a sale, the long-standing rule is that the commission becomes payable when the broker presents the seller with a buyer who is ready, willing, and able to purchase the property, irrespective of whether or not a contract is entered into or the sale actually closes. This rule has become subject to some qualifications and can be (and usually is) amended by agreement. In the leasing situation, under the traditional rule, the commission is earned when the broker presents a prospective tenant who is ready, willing, and able to lease the property on the terms set by the lessor.¹ The requirement of "ability" is generally interpreted as financial ability to pay the rent. However, it could be extended to cover the tenant's ability to perform all of the tenant's other obligations under the lease. More likely in complex cases, "ability" means satisfaction of specified conditions or requirements, such as arrangements for deficit funding.² Without such complexities, under the traditional rule, the commission would be earned irrespective of whether or not a lease was executed.

Some reason that a commission is earned when an agreement is finalized—that is when the lease is entered into by landlord and tenant. However, many issues can arise which will affect the interpretation of when such an event actually occurs. According to this reasoning, the right to the commission is not abrogated by a later termination of the lease due to the tenant's default or the tenant becoming insolvent.³ In fact, at least one court has held that without an explicit condition to its payment, a broker was entitled to his commission despite tenant's failure to pay rent. The court in that case refused to imply that the payment of rent was a condition to the commission payment.⁴

The traditional rule is often changed in the sale context to provide that the commission is not earned until either a contract is signed by both the seller and the buyer, or, with more thorough protection of the seller, until the sale actually closes successfully. Issues can arise if the seller cannot convey good and marketable...