The Supreme Court of Iowa decided what constitutes a commercial lease renewal that triggers an owner’s obligation to pay a commission to a broker.
Big “H” Realty Partnership (“Owner”) entered into a listing agreement with Amerus Property Brokers (“Broker”) to locate a tenant for an industrial warehouse it owned. The listing agreement provided that if a lease were secured, the Owner would pay the Broker a commission based on “the gross lease (including negotiated renewals, exercised options or extensions by the Tenant) or one month’s rent; whichever is greater, payable when the lease is executed.”
The Broker located a suitable tenant (“Tenant”) for the property, and the Owner and the Tenant entered into a seventeen-month lease with a three-year renewal option. The lease called for the Tenant to be responsible for maintenance of the property. If the Tenant renewed the lease, rent would be fixed annually by taking into account the Consumer Price Index for the prior year.
At the end of the first seventeen months, the Tenant expressed dissatisfaction with certain physical characteristics of the property. The Owner and Tenant entered into negotiations to address the Tenant’s concerns. As a result of the negotiations, the parties agreed to a three-year lease which differed from the original lease in its terms and reduced the rent for the property, in order to allow the Tenant to make certain physical improvements to the property.
When the Broker learned of the Tenant’s continued occupancy, it sent a bill for its commission to the Owner. The Owner claimed that this was not a renewal but a new lease, and it refused to pay the Broker a commission. The Broker brought suit against the Owner for its commission. The trial court ruled in the Broker’s favor, finding that the second lease fell into the “negotiated renewal” clause in the listing agreement. Since the parties, property, and costs remained the same, the trial court found this was not a new lease. The Owner filed an appeal.
On appeal, the Owner argued that the second lease was not a “renewal” within the terms of the listing agreement because the terms of the second lease were not the same as the renewal terms contained in the original lease. Since the terms were not the same, the Owner argued that this was an entirely new lease and thus the Broker was not entitled to receive a commission.
The Broker argued that a renewal occurs when another lease is entered into by the original parties brought together by the broker. The only time a lease between the same parties will not be considered a renewal is when a substantial change occurs in the relationship of the parties.
The Supreme Court of Iowa agreed with the Broker’s argument and affirmed the trial court decision. A broker is entitled to receive a commission for the entire term of a lease whenever the broker’s services culminates in a lease. The court found that denying a broker a commission simply because the renewal did not conform to the exact terms of the initial lease would give property owners an easy way to circumvent commission obligations. The second lease involved the same parties, the same property, and substantially the same rent as the original lease, and so the second lease constituted a renewal. Since the Broker brought the Owner and the Tenant together, the Owner was responsible for the bargain it made in the listing agreement. Therefore, the Broker was entitled to receive a commission from the Owner.
Amerus Property Brokers v. Hicklin, 585 N.W.2d 245 (Iowa 1998).