In Cushman & Wakefield of Maryland, Inc., et al. v. DRV Greentec, LLC, the Court of Appeals of Maryland determined that commercial real estate brokers who had successfully leased property could not enforce an obligation of the Original Owner/Landlord to pay renewal commissions against the New Owner, following a foreclosure sale. New Owner (who purchased from the foreclosing Lender) was therefore not liable to pay such commissions. The Court determined that the renewal commissions owed under the prior lease were personal obligations of the Original Owner/Landlord, which did not run with the land.
A copy of the opinion is available here.
Original Owner had mortgaged two buildings to Lender, which were secured by a Deed of Trust, and assignment of current and future leases. The Deed of Trust expressly provided that “such assignment to Lender shall not be construed to bind Lender to the performance of any of the covenants, conditions, or provisions contained in any such Lease or otherwise impose any obligation upon Lender.” Op. at 1-2. The assignment of leases included a near identical provision.
Years later, Original Owner hired a broker to market the property for rent, under an agreement which obliged the Original Owner to pay a 3% commission on the aggregate gross rental for the initial term, and upon renewal, a 3% commission on the aggregate gross rental for the renewal term.
Broker secured a tenant for an initial 5½-year term, and the Lease included corresponding obligations binding the Original Owner/Landlord, and its transferees to pay the Brokers’ Fee, and afforded tenant an option to renew for an additional 5-year term. The Lease expressly stated that it was subordinate to any ground lease, mortgage or other security instrument encumbering the Property, now or in the future.
Original Owner defaulted on the mortgage loan, and the Property was sold at foreclosure sale to the Lender. Lender then marketed the Property for sale, expressly noting that the Tenant had a 5-year lease with a renewal option that obliged “LL” to pay brokers’ fees.
New Owner purchased the Property, and as part of the sale, Lender entered into a written assignment of the Lease with New Owner, who agreed to perform “all of the covenants, agreements and obligations under the Lease and Contracts binding on Assignor or the Real Property, . . .” Op. at 4.
When Tenant exercised its option to renew the Lease, Brokers demanded real estate commissions for such renewal term.
The trial court granted summary judgment in favor of New Owner, the intermediate appellate court affirmed, and the Court of Appeals granted certiorari.
The Court of Appeals agreed that New Owner was not liable for the commissions. Even assuming Brokers were third-party beneficiaries of the Lease, “in the absence of a covenant that runs with the land, mere acceptance by a successor in title of a lease containing an agreement to pay commissions on a renewal does not bind the successor to pay those commissions.” Op. at 8.
The Court further explained that “an agreement to pay brokerage commissions on a renewal of a lease is a personal covenant that does not run with the land, ‘that the mere assignment of a contract does not carry with it any obligation by the assignee to assume the assignor’s obligation thereunder’ [and in] ‘the absence of an agreement by the assignee to assume the assignor’s obligation, the assignee has no contractual obligation to perform.’” Op. 8-9 (internal citations omitted). “That is the case even when the assignee takes the property ‘subject to the lease.’” Op. at 9.
“Personal covenants [for the payment of commissions], ‘being purely for the benefit of one having no interest in the land, will not be enforced against successive owners of real property as a covenant running with the land’ because ‘[t]o burden lands with [such] personal covenants would be to hamper and impede real estate transactions to the detriment of owners, purchasers and agents.’” Op. at 9. (citations omitted).
The Court rejected Broker’s claim that New owner assumed the obligation to pay commissions, noting that the exact language of the assignment from Lender to New Owner provided that New Owner agreed to assume the covenants, agreements and obligations “binding on the assignor”. Op. at 9 (Emphasis in Original). Notably, neither New Owner nor Lender signed the Lease, and original loan documents expressly negated an assumption of obligations under the Lease. Op. at 9-10 (observing that the loan documents provided that they “shall not be construed to bind Lender to the performance of the covenants, conditions or provisions contained in any such Lease or otherwise impose any obligation upon Lender.”). Thus, the judgment in favor of the New Owner was affirmed.