Scott E. Mollen

Real-Estate Brokerage Claim Against Taylor Swift Related Entity Dismissed—Alleged Contract Lacked Definiteness—Key Material Terms—Breach of Contract—Quasi Contract—Procuring Cause—Direct and Proximate Link

A real estate brokerage company (broker) commenced a lawsuit against two of an entertainer's (celebrity) representatives (representatives) in connection with the purchase of a Manhattan townhouse for $18 million. The broker also sued an entity, allegedly affiliated with the celebrity, which purchased the townhouse (purchaser). The broker alleged that the representatives contacted the broker in December 2016 and asked for assistance in purchasing a “particular townhouse.” The broker introduced the representatives to a different townhouse and, allegedly “over the next month or two, took various steps to facilitate a sale of that property.”

The broker claimed that he had made a “detailed showing” of the property; “measured the building with a laser device; introduced defendants to the house's owner; and 'obtained the blue prints' for the house, which he then gave to the defendants.” The broker asserted that after February 2017, he had “received no further substantive contacts from the defendants.”

Approximately eight months later, in October 2017, the purchaser bought the townhouse and paid a commission to a different real estate broker. Thereafter, the plaintiff broker asserted a breach of contract claim against the representatives and an interference with contract claim against the purchaser. The broker sought a 6 percent commission ($1.08 million dollars).

The defendants moved pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss the complaint. The court explained that the broker's claims “depend on the existence of a valid contract” with the celebrity's representatives. The court further stated that “[u]nder New York contract law,… the requirement of definiteness provides that 'if an agreement is not reasonably certain in its material terms, there can be no legally enforceable contract.'” Decisional precedent held that a “mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.” In dealing with compensation, “a term qualifies as insufficiently definite 'where the amount cannot be determined objectively without the need for new expressions by the parties.'”

The court noted that “[c]ompensation may be calculated 'with reference to industry standards or customs,' but in that case 'the plaintiff must establish that the omitted term is fixed and invariable in the industry in question.'”

The court held that the broker's claims failed because there was no “enforceable contract.” Although the broker sought a seven figure commission, it could not cite “any formal agreement with defendants.” The broker's “sole alleged contract with (representatives) was an informal email” from one of defendants' employees to the broker, which stated:

This email is intended for your use with the owners of 153 Franklin. This is to confirm that we (representatives) are working with you solely regarding the viewing and any other needs at 153 Franklin. There will not be any other lines of communication outside of myself. Thank you and please let me know if you need anything further.

The court opined that those words did “not come close to establishing that (representatives) agreed to use (broker) as an exclusive agent for the purchase of 153 Franklin Street, let alone that they agreed to pay a company a seven-figure commission in the event that they purchased the property without regard for whether the company's agent provided any assistance in the transaction. The email says nothing about the purchase of 153 Franklin Street; indeed, the only task that it mentions with specificity is a 'viewing' of the property and, even as to that task, the email is no more than 'a promise to work together.'”

The court further stated that “a contract giving rise to an exclusive right of sale must clearly and expressly provide that a commission is due upon sale by the owner or exclude the owner from independently negotiating a sale.” The court found that the subject email is “far from the sort of 'formal writing' one would expect in connection with an $18 million transaction.”

Additionally, the court stated that “to the extent that the email could reasonably be construed as an agreement with respect to the purchase of 153 Franklin Street, it is nothing more than an unenforceable agreement to agree. The email lacks most, if not all, of the material terms of a real-estate brokerage agreement, including the scope and duration of the relationship and the fee.” Moreover, the email “'contains no methodology, formula, or external measure by which the Court might objectively determine the compensation to be paid.'” The broker had alleged that a 6 percent commission is the “customary real-estate brokerage commission paid on a sale of like high end real property in the subject location.”

However, the court stated that such allegation was “fatal to (the) claim that the email constitutes an enforceable contract, as it is a tacit admission that there is no 'fixed and invariable standard' for calculating commissions; to the contrary, it establishes that the calculation of a commission is dependent on subjective assessments such as neighborhood and whether the property at issue qualifies as 'high end' or not.”

The court also noted that any “quasi-contract claim would fail because it would require proof that (broker) was 'the procuring cause of the sale.'” A broker does not “without more make out a case for commissions simply because he initially called the property to the attention of the ultimate purchaser.” In order to establish a right to commission, “there must be a direct and proximate link, as distinguished from one that is indirect and remote, between the bare introduction and the consummation.” Here, the broker acknowledged that it lacked contact with the defendants after February 2017. The court stated that the broker “plainly was not the 'procuring cause of the sale.'”

Accordingly, the court dismissed the complaint.

Comment: It was publicly reported that the subject decision involved entities that were associated with the singer, Taylor Swift.

Some brokers who were not the procuring cause of a sale, have claimed that they were wrongfully “cut out” of the transaction. Court decisions in these situations usually depend on the specific facts of each case. Had the parties entered into an enforceable agreement? If they had not, could the parties' conduct support a quasi-contract claim because the broker was the “procuring cause” of the transaction.

Sometimes after a purchaser starts to work with a broker who introduced the purchaser to a property, they may lose confidence in their broker's ability to effectively represent them in negotiations and decide to either deal directly with a seller or retain a different broker. Depending on the circumstances, a commission to the fired broker may or may not be owed.

A broker may have sent a prospective purchaser numerous listings of properties for sale and then claimed that he or she “introduced” the purchaser to the property. Absent an agreement to the contrary or a course of conduct that establishes a quasi-contract, a mere introduction to a property is insufficient to support a claim for a brokerage fee.

Nothing prevents a broker from entering into a contract with a purchaser or a seller which provides that a commission is earned once the broker merely introduces the buyer to a particular property. Often, such agreements are conditioned on the purchaser purchasing the property within a certain period of time.

On occasion, a purchaser and a seller will conspire to circumvent a retained broker by excluding the broker from the negotiations. The purchaser or seller may agree to indemnify the other party as to a potential brokerage claim and use that obligation as part of their negotiation as to price or other terms. If the broker then sues, the party responsible for the commission may try to get the broker to take less than the broker is entitled to, in order to avoid litigation costs, the uncertainty of litigation and delays inherent in the litigation process.

Thus, to the extent possible, buyers, sellers and brokers generally benefit when they have clear written agreements with respect to a brokerage fee obligation. Some brokers will say that the problem is that some sellers will say that “I am not signing a brokerage agreement, but if you bring me a buyer and I close with that buyer, I will pay you a commission.” When that happens, the risk of a dispute over a brokerage commission increases.

Douglas Elliman LLC v. Firefly Entm't, Inc., U.S. District Court, S.D.N.Y., Case No. 18-CV-1381, decided Jan. 24, 2019, Furman, J.

Contracts—Alleged Defects—Post Closing Claims Dismissed – Breach of Contract – Implied Covenant of Good Faith and Fair Dealing – General Business Law-Fraudulent Misrepresentations-Concealment of Latent Defects and Fraudulent Inducement – Contract Provided Purchase was “As Is” and Representations Would Not Survive The Closing

The defendants sold a building which they had “gut-renovated.” The purchase/sale contract (contract) specified that the defendants would “fix and /or finish certain work prior to closing.” The contract also provided that the plaintiff purchased the building “as is” and that none of the defendants' representations would survive the closing. Prior to the closing, the plaintiff inspected the building.

Following the closing, the plaintiff allegedly discovered roof leaks and other defects. The plaintiff sued, asserting causes of action for breach of contract, breach of the implied covenant of good and fair dealing (implied covenant), violations of General Business Law (GBL) §§ 349 and 777-a and fraudulent misrepresentations, concealment and inducement. The defendants moved for summary judgment.

The court dismissed the breach of contract claim on the ground that the building was sold “as is.” The court dismissed the implied covenant claim because it was not “a separate cause of action.” The court dismissed the GBL § 349 claim because the transaction was a “one-shot deal” and not “consumer-oriented.” The GBL § 777-a claim was dismissed because the building was not “new.” The fraud claim was dismissed on the grounds that the defendants' representations did not survive the closing and if the defendants' failed to “fix or finish work prior to closing, their promises of future action cannot sustain a fraud claim” and the plaintiff's “sole remedy would have been to refuse to close.”

The court also dismissed claims against all defendants, except one defendant, on the grounds that the other defendants were not in privity with the plaintiff and there was no evidence that would justify piercing the corporate veil. The court further stated that the defendants' “alleged misrepresentations and affirmative concealments,” “appear to be much ado about nothing” and although the building may be a “white elephant,… that is what plaintiff purchased.”

The contract specifically provided that “none of the Seller's covenants, representations, warranties or other obligations…shall survive closing.” Additionally, the purchaser represented that it was “fully aware of physical condition and state of repair of the premises, …based on purchaser's own inspection and investigation thereof,” and that the “purchaser executed the contract “based solely upon such inspection and investigation and not upon information,… statements or representations, written or oral, as to the physical condition, state of repair, use,… or any other matter related to the premises …, given or made by Seller or it representatives, and shall accept the same 'as is' in their present condition…subject to reasonable use wear, tear and natural deterioration….” The purchaser was given the right, at “reasonable times and upon reasonable notice” to inspect the premises before closing. The contract also provided that the “plumbing, heating, electrical and other mechanical systems…will be in working order at the time of closing.”

In dismissing the fraud claims, the court cited a New York Court of Appeals decision which held that “to hold otherwise would be to say that it is impossible for two business persons dealing at arm's length to agree that the buyer is not buying in reliance on any representations of the seller as to a particular fact.” Here, the plaintiff's expert, a licensed contractor had inspected the premises shortly before the closing.

An exception to general fraud rules provides that a seller may have liability where the purchaser could not have discovered alleged defects without destructive testing. The plaintiff's expert claimed that “without tearing down the walls, he could not have learned that certain water pipes were not connected and that the sprinkler system pumps were not working.” However, he had opened certain walls to discover the source of a visible leak.

The plaintiff argued that since the defendants did a “gut” renovation, they must have known about the plumbing condition prior to the closing of the contract. However, the defendants had not performed the work themselves; they had hired contractors and the court cited the “as is” and “no representation” contractual provisions. The court reviewed emails and other evidence and was not convinced that such evidence demonstrated the defendants had engaged in fraudulent conduct.

The court held that a fraud claim based on contract language that all systems would be working at the time of closing, could not succeed “because to read it as sort of perpetual guaranty, rather than just a condition to closing, would, contrary to a basic rule of construction, render the 'as is' clause meaningless.” Although the plaintiff cited latent defects, it “failed to identify any evidence demonstrating that defendants actively misrepresented or affirmatively concealed such defects from plaintiff such that plaintiff was fraudulently induced to proceed with closing.”

Additionally, in order to establish a fraud claim, the plaintiff would have to show “a defect, that the defect was latent, that defendants knew about it, and that they actively misrepresented or affirmatively concealed their condition to plaintiff.” Although the plaintiff sought further discovery, the court stated that the plaintiff would be aware of, and “possess any evidence, of any misrepresentation made to itself.”

The court concluded that the “question on which this case balances is whether sophisticates acting at arm's length can draft and execute a contract for the sale of a building (outsourced to third party contractors) that cannot be challenged by a post-closing fraud claim. The answer should be 'yes' and this contract fits the bill: 'as is'; 'no representations,' which in any event, do not survive closing.” The court noted that the contract could have said, “no matter how nefariously the seller has acted, and no matter what frauds the seller may have committed; the purchaser hereby absolutely and unconditionally waives any complaint or legal action against the seller.”

Apart from whether any purchaser would sign such a contract, the court stated that “courts would probably declare it void as against public policy.” However, the court explained that there is no rule that provides that a “seller cannot insulate itself by the right contract, such as the instant one, and by not materially misrepresenting or actively concealing significant latent defects, as was the case here.” Accordingly, the court granted the defendants' motion for summary judgement dismissing the case.

116 Waverly Place LLC v. Spruce 116 Waverly LLC, Supreme Court, New York Co., Case No. 655930/2017, decided Feb. 7, 2019, Engeron, J.

Scott E. Mollen is a partner at Herrick, Feinstein.