With the real estate sale and rental season well underway, and the brokerage community ecstatic to entertain any semblance of business after the drought that has plagued the industry for the past several years, it is an opportune moment to reiterate the premise that an enforceable brokerage commission contract must contain all material terms to avoid dismissal of a duly earned commission premised upon a Court’s characterization of the commission agreement as an unenforceable “agreement to agree”.
The underlying principle that governs a document’s characterization as an unenforceable agreement to agree stems from the absence of manifested mutual assent to the essential terms of a purported contract.
In order to create a binding contract, there must be a meeting of the minds as to the essentials of the agreement. There can be no legally enforceable contract unless the written agreement is reasonably certain or specific in its material terms. … While not all terms of a contract need be fixed with absolute certainty, a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable. … In determining whether a contract is reasonably certain in its material terms, and therefore sufficiently definite as to be enforceable, a court must apply a standard that is necessarily flexible, varying with the subject of the agreement, its complexity, the purpose for which the contract was made, the circumstances under which it was made, and the relation of the parties. … Generally, compensation and manifestation of intent are deemed “material” terms. Additional terms are “material” when the parties consider them to be, such as the procurement of signatures [internal citations omitted].
In two decisions this Spring rendered by the Second Department and the Suffolk County Supreme Court’s Commercial Division, Zere Real Estate Services learned twice, the hard way, that a broker’s inability to document to the Court that “mutual assent” to the terms of an agreement exists renders a putative real estate commission agreement unenforceable.
First, in Zere Real Estate Services Inc. v. Adamag Realty Corp., the commercial real estate agency sought to recover a brokerage commission incident to the sale of a commercial property. At trial on the claim before Justice Mayer, the plaintiff testified that the commission for a completed sale would be “no more than 5%” and that the plaintiff understood the agreement to mean that the defendant had agreed to pay a 5% commission. The defendant testified at trial that he understood that if a deal was completed, the parties would negotiate a commission rate of no more than 5% depending on the particulars of the sale actually consummated. Apparently, it was not in dispute that the commission “agreement” was nonexclusive and that there was no agreed upon duration to the purported “agreement”. After summations, the jury ruled that the parties did not enter into an express brokerage agreement. The Second Department, in affirming, ruled that the jury’s finding was not against the weight of the evidence since a fair interpretation of the evidence supported the conclusion that the parties merely reached an agreement to agree.
The following month, Zere Real Estate’s breach of contract cause of action was dismissed on summary judgment in an action pending in the Commercial Division. In Zere Real Estate Services, Inc. v. Parr, plaintiff moved for summary judgment on its brokerage commission claim sounding in breach of contract. Specifically, plaintiff claimed that it was entitled to a commission if defendant, or any of its affiliates, entered into a formal agreement with Touro Law School to function as Touro’s general contractor or construction manager in connection with the Law School’s construction of a new school in Central Islip. According to the Court, although the writing specified that a fee would be negotiated at a later date, plaintiff argued that in a subsequent recorded telephone conversation, defendant agreed that plaintiff’s fee would amount to 6% of the construction cost; the defendant, of course, denied that characterization.
In denying the plaintiff’s motion for summary judgment and granting the defendants’ cross motion for summary judgment dismissing the breach of contract cause of action, Justice Pines relied upon black letter law that absent a clear mutual assent to all terms of a purported agreement between two parties, the same will constitute an unenforceable agreement to agree. At bar, although it is well settled that a Court may impute a missing price term if it is readily ascertainable by reference to outside sources such as custom or trade usage, the Court ruled that the plaintiff failed to demonstrate that there existed a standard for the claimed broker’s fee premised upon the project’s cost of construction. Indeed, Second Department precedent is clear:
It is well settled that an agreement to agree, in which material terms are left for future negotiations, is unenforceable unless a methodology for determining the material terms can be found within the four corners of the agreement or the agreement refers to an objective extrinsic event, condition, or standard by which the material terms may be determined (see, Cobble Hill Nursing Home v. Henry & Warren Corp., 74 N.Y.2d 475, 548 N.Y.S.2d 920, 548 N.E.2d 203, cert. denied 498 U.S. 816, 111 S.Ct. 58, 112 L.Ed.2d 33; see also, Martin Delicatessen v. Schumacher, 52 N.Y.2d 105, 109, 436 N.Y.S.2d 247, 417 N.E.2d 541). Further, where an agreement contains open terms, calls for future approval, and expressly anticipates future preparation and execution of contract documents, there is a strong presumption against finding a binding and enforceable obligation (see, Teachers Ins. & Annuity Assn. of Am. v. Tribune Co., 670 F.Supp. 491, 499).
Although all is not lost, the brokerage commission claim has been rendered exponentially more difficult to pursue successfully. As reiterated in the Comments which follow Pattern Jury Instruction 4:31, where the existence of a brokerage contract is in dispute, the broker may proceed on the theories of breach of contract and quantum meruit. See Breslin Realty Development Corp. v 112 Leaseholds, LLCand Curtis Properties Corp. v Greif Companies. Indeed, in the Zere Real Estate matter pending before Justice Pines, the Court permitted the plaintiff to proceed with its equitable claims despite the dismissal of the cause of action premised upon breach of an express contract. So although the claim is still viable, the plaintiff has been reduced to proceeding through the discovery process in its effort to establish liability and damages, from square one, instead of relying upon a single document which could have founded a successful summary judgment motion. Diligence in the drafting and execution of the commission agreement prior to the initiation of service by the broker avoids protracted litigation on the scope and value of services rendered by a broker.