Perpetual confusion over commercial commissions

A frequent question in leasing brokerage is that of a broker’s right to commissions upon the renewal, extension, or renegotiation of a commercial lease.

The issue arose recently for a local broker attempting to collect overdue commissions from a lease renewal by a banking tenant. The lessor-landlord had stopped payments to the broker after the original term ended. When pressed for further commissions, the lessor’s attorney sent the broker a letter claiming that no contract can be “in perpetuity” and that contracts and lease commission agreements are not valid under Pennsylvania law without a termination date. Is this correct?

Now we all know brokers who have retired on a fat “pension” of commercial lease commissions. It may be standard industry practice but we still must ask whether lease brokers actually have such rights. To understand the issues, let’s break down the claims of the lessor’s attorney.

First, he states that no contract can be “in perpetuity.” This phrase is one of those flourishes that some people pepper into conversation but, as used here, it confuses distinct principles of property law and contracts. You may have heard lawyers speak about violating the Rule Against Perpetuities. The Rule has a notorious reputation for confusing legal minds—and for appearing regularly on bar exams. But here, the Rule is no bar to provisions regarding commission fees, because it applies only to interests in real property—and commission agreements are contractual in nature.

It was established by the Pennsylvania Supreme Court, in Caplan v. City of Pittsburgh (1953), that the Rule Against Perpetuities only concerns rights of property, and does not affect contracts that do not create rights of property. The Court also ruled almost a century ago, in Barton v. Thaw (1914) that perpetuities are unvested future property rights.

They are called perpetuities, not because they grant perpetual rights but because they unlawfully postpone the grant of property rights—usually when conveyed by will—which can create a perpetual suspense of clear title. This is not the case here, where the broker is attempting to enforce contractual rights which already vested upon execution of the lease.

Secondly, the attorney claims that contracts and commission agreements are not valid without a termination date. Again, this is incorrect. The agreement was bargained for and negotiated by the broker and lessor, and was documented in a mutually-signed writing which states, in bold type, during the term of this lease and any renewals, a leasing commission shall be paid annually in advance at a commission rate of six percent to the named broker. Simply put, the broker and lessor agreed to an ongoing obligation defined by the plain language above.  In Rosenblum v. Lurie (1973), for example, the Supreme Court emphasized that when deciding such matters, courts look to the mutual intent of the landlord and the broker as expressed in the terms of the lease.

The successful procurement of a tenant does not alone give a broker the right to commissions on lease renewals—only where the lease contains an express contractual provision to that effect. Brokers generally expend no extra effort to secure a lease renewal and, thus, should not be rewarded automatically when a tenant decides to stay. A savvy broker, however, can multiply the value of his original work by inserting a provision into the lease as to renewal commissions. This provides the broker with contractual protection upon the renewal or re-leasing of the premises which may not otherwise be afforded by the listing agreement.

The point is that renewal commissions are not earned because the terms of a subsequent lease match the terms of the original lease but because the lessor had agreed to compensate the broker for producing a tenant of value with the potential to stay beyond the original term.