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Pagano Company v. 48 South Franklin Turnpike

March 9, 2009

PAGANO COMPANY, PLAINTIFF-APPELLANT,
v.
48 SOUTH FRANKLIN TURNPIKE, LLC, DEFENDANT-RESPONDENT.



On certification to the Superior Court, Appellate Division.

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

LONG, J., writing for a majority of the Court.

The Court considers whether a purchaser of commercial property is liable for real estate broker commissions due under the leases it acquired under a general assignment from the seller.

In February 1997, plaintiff Pagano Company (Pagano), a licensed real estate broker, entered into an agreement with Heritage III Office Center (Heritage), concerning commercial property that Heritage owned. That agreement gave Pagano the exclusive right to procure tenants to lease space in the property and to negotiate on behalf of Heritage the tenants' leases, including options, extensions, and renewals. Pursuant to the agreement, Pagano would be paid five percent of the total lease price. A schedule of lease commissions accompanied the brokerage agreement, which stated that it would be binding upon Heritage's heirs, successors and assigns.

In June 2004, 48 South Franklin Turnpike, LLC (Franklin) entered into a contract with Heritage to purchase the property. The contract included a "Due Diligence and Investigation" provision granting Franklin the right to inspect books and records relating to the property, including any leases in effect. Franklin reviewed the lease agreements but did not ask to review other documents. The closing was held on September 20, 2004. As part of the transaction, Heritage assigned to Franklin all of the leases for the existing tenancies at the property, and Franklin agreed to assume and perform Heritage's obligations under those leases.

When Franklin purchased the property, three tenants still occupied the space through lease agreements and extensions procured and negotiated by Pagano. The lease agreements stated, in part, that the provisions would apply to and bind the Lessor and Lessee and their respective successors and assigns. The agreements also stated that if the building was sold, the Lessor would be released from its obligations under the lease and the purchaser of the property would assume and agree to carry out the Lessor's obligations. Furthermore, each lease contained a paragraph explaining the Lessor's liability for commissions owed to Pagano. That paragraph referred to a separate commission agreement between Pagano and the Lessor, and stated that the Lessor agreed to satisfy its obligations to Pagano for commissions and would indemnify and hold the Lessee harmless for claims by Pagano.

After acquiring title to the property, Franklin never paid commissions to Pagano for the rents received under the leases. Pagano filed suit against Franklin to recover the outstanding commissions due for the rents paid by the tenants from September 20, 2004, to the date each vacated its leased premises.

The trial court determined that VRG Corp. v. GKN Realty Corp., 135 N.J. 539 (1994), governed the disposition of this case. In VRG, the Supreme Court held that in order to incur liability for real estate broker commissions by virtue of a general assignment of leases from a seller to a buyer, the purchaser must have affirmatively assumed the seller's obligation to pay the commissions. Applying the VRG ruling to this case, the trial court concluded that the leases, the assignment of the leases, the purchase agreement, and the deed, when read and considered together, established that Franklin affirmatively assumed the obligation to pay Pagano's commissions. In particular, the court found it persuasive that each lease specifically set forth the exclusive brokerage arrangement involving Pagano, referenced the separate commission agreement, and contained the Lessor's agreement to satisfy the obligation. The trial court entered judgment for Pagano.

In an unpublished decision, the Appellate Division reversed, concluding that Franklin never contractually agreed to pay Pagano's commission. The panel agreed that VRG controlled the disposition of the case, but it interpreted the affirmative assumption rule to require an express agreement by the purchaser to assume the commission obligation, separate from, and in addition to, accepting the general assignment of the leases.

The Supreme Court granted Pagano's petition for certification. 195 N.J. 522 (2008).

HELD: In this dispute arising from the purchase of commercial property by 48 South Franklin Turnpike, LLC (Franklin), the facts, circumstances, and record, taken as a whole, demonstrate that Franklin affirmatively assumed the seller's obligation to pay real estate broker commissions that were due under leases it acquired through a general assignment.

1. Under the rule set forth in VRG, Franklin is liable for the commissions only if it affirmatively assumed the obligation. Among the ways identified in VRG for an affirmative assumption to occur is by a specific assignment of the broker's commission agreement or by reference either in the general assignment agreement or in the lease itself. The Court in VRG found that the record was insufficient to support the broker's allegation that the assignee assumed responsibility for the commission obligation. First, neither the leases nor the assignment of the leases in VRG included or referred to the commission obligation between the assignor and the broker. Second, the assignor and assignee purposely and explicitly amended the assignment contract to maintain the former's liability for that obligation. The assignee prevailed in VRG not merely because it never expressly assumed the commission obligation, but because the assignment and the leases themselves were silent regarding that obligation and because the record revealed a contrary intention by the parties. (Pp. 9-13).

2. Here, Franklin affirmatively assumed the obligation to pay Pagano's commissions. Heritage specifically assigned to Franklin all of the leases and other agreements of whatever form affecting all or any part of the property. Under the leases, the term "Lessor" applies not only to Heritage, but also to any successors such as Franklin. Further, unlike VRG, where neither the leases nor the assignment of the leases referred to the obligation to pay commissions, each assigned lease in this case contained information detailing Pagano's role in the leasing of the premises and referring to the Lessor's liability for commissions. The Court disagrees with the Appellate Division panel's determination that the language in the leases relating to the broker's commissions imposed only a duty on the Lessor to indemnify and hold harmless the tenants for claims by the broker. Instead, language in the leases specifically recognizes that the Lessor is fully responsible to the broker. (Pp. 13-16).

3. Franklin, a sophisticated purchaser of commercial property, had a fair opportunity to request access to the agreement with Pagano, or at least to register any concerns caused by the promises reflected in the leases before agreeing to the assignment. Unlike the broker in VRG, who could not show that the assignee ever accepted responsibility for the assignor's pre-existing obligation to pay commissions, Pagano has carried that burden with proof that, after a due diligence period yielding no objections, Franklin accepted a general assignment of leases that specifically referred to the commission obligation between Pagano and the "Lessor." In short, this record bespeaks an affirmative assumption. (Pp. 14-16).

The judgment of the Appellate Division is REVERSED and the judgment of the Law Division is REINSTATED.

JUSTICE LaVECCHIA, DISSENTING, joined by CHIEF JUSTICE RABNER, states that an affirmative assumption should be clear and unequivocal to impose liability, and finds insufficient evidence in the documents to hold Franklin liable for the commissions.

JUSTICES ALBIN, WALLACE, RIVERA-SOTO and HOENS join in JUSTICE LONG's opinion. JUSTICE LaVECCHIA filed a separate, dissenting opinion in which CHIEF JUSTICE RABNER joins.

The opinion of the court was delivered by: Justice Long

Argued December 3, 2008

At issue in this appeal is whether a purchaser of commercial property is liable for the real estate broker commissions due under the leases it acquired under a general assignment from the seller. In VRG Corp. v. GKN Realty Corp., 135 N.J. 539, 556 (1994), we held that in order to incur liability by virtue of such an assignment, the purchaser must have "affirmatively assume[d]" the seller's obligation to pay the commissions. A separate express promise by the purchaser to pay broker commissions certainly will satisfy that standard.

But that is not the only way to do so. Rather, determining whether an "affirmative assumption" has taken place requires an analysis of all of the facts and circumstances surrounding the assignment and, in particular, the documentary record. If, taken as a whole, the record signals that the assignee agreed to assume the obligation, he or she will be held to it despite the absence of a separate express promise to do so. Applying that standard, we hold that the purchaser in this case affirmatively assumed the commission agreement between the seller and the broker.

I.

In February 1997, plaintiff Pagano Company ("Pagano"), a licensed real estate broker, entered into an agreement with Heritage III Office Center ("Heritage"), the owner of commercial property located at 48 South Franklin Turnpike in Ramsey.*fn1 That agreement gave Pagano the exclusive right to procure tenants to lease space in the property, and to negotiate those tenants' leases on behalf of Heritage. The agreement also provided that the "Owner agrees to pay PAGANO COMPANY a Real Estate Brokerage commission of five (5%) percent of the total lease price" in connection with any lease entered into pursuant to the brokerage agreement, including any options, extensions, and renewals. The "Schedule of Lease Commissions" accompanying the brokerage agreement addressed the commission obligation in the event of an assignment:

The undersigned Owner hereby acknowledges receipt of a copy of this Schedule and further agrees that it shall be binding upon the heirs, successors and assigns of the undersigned. The term Owner when used herein shall be deemed to mean the owner of the property, a Tenant ...


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