by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)
If you are a realtor and you enter into an exclusive agreement to find tenants for your client's property, but then your client enters into a rent-free lease with a tenant, do you still get a commission? The answer, at least according to the Appellate Division in Century 21-Main Street Realty, Inc. v. St. Cecelia's Church, is no.
In Century 21, plaintiff entered into an exclusive listing agreement with defendant, a church, under which plaintiff would list an "inactive school building," which the church owned, for either sale or lease. Under the agreement, plaintiff was entitled to a commission equal to 6% of the sales price, if the property was sold, or one month of rent, if the property was leased. During the term of the agreement, the church entered into a lease with the local school board, which allowed the board to use the building "rent free" for the first 26 months. It also contained two, six-month "hold over terms." If the board continued to occupy the building during either or both of these terms, it would have to pay the church $900,000 per term. The lease also required the board to repave the parking lot, and allowed, but did not require, the board to make any repairs or renovations to the building that it saw fit, at the board's expense.
Two months after the church signed the lease, plaintiff demanded a commission based on the "asserted costs" of the repairs the board intended to make to the building. It asserted that it was entitled to a commission equal to "two month's rent due based on rental, repair evaluation." Apparently, plaintiff assumed the repairs would costs $1.5 million, divided that amount by the 26-month term of the lease to come up with the per-month cost of the repairs, and then claimed that it was entitled to two month's payment as its commission. The church refused to pay any commission and plaintiff sued.
The church moved to dismiss the complaint, and its motion was granted. The trial court held that "the commission was based on rent – 'something that you pay once a month.'" The value of the capital improvements that the board intended to make the property were not rent, therefore plaintiff was not entitled to any commission. The trial court noted that the parties could have based the commission on something other than rent, but did not, so plaintiff was not entitled to a commission. Plaintiff appealed.
The Appellate Division sided with the church. It noted that rent is a "fixed sum, or property amounting to a fixed sum, to be paid at stated times for use of property." It observed, however, that rent is not "essential to a lease" – in some cases, "from favor, or valuable consideration, [a] tenant may have a lease without any render" — and that rent may be payable "in kind, such as in the form of crops raised from the leased land." But, improvements are generally not rent unless agreed upon by the parties in the lease. Specifically, the Appellate Division noted, "[r]ent does not include payments, uncertain both as to amount and time, made for the cost of improvements."
In Century 21, the church and the board did not "adopt any special definition of rent," so the Appellate Division was bound by these "commonly understood notions of rent." The lease between the church and the board did not provide for the payment of cash rent during the initial terms, or for the payment of rent in kind. It also did not require the board to make any improvements or repairs, much less specify the cost of any such repairs or when they had to be finished. Accordingly, the lease did not provide for the payment of rent, therefore, plaintiff's claim for a commission, which, under the terms of the agreement between plaintiff and the church, was based on rent paid by a tenant, failed. Finally, the court held that it was "of no moment" that the board may have enhanced the value of the building by making repairs. Under the lease, enhancement of value was not rent, and was therefore not a basis for calculating plaintiff's commission.