Crossland Inv. Co., Inc., v. Rhodes: Lease Termination Ends Broker's Right to Lease Commission

A federal court in Florida has considered whether a commercial broker was entitled to collect commissions when property owner bought out tenant and entered into a new lease with sublessee.

Eulalia Boone ("Owner") owned 18 acres of land near Tallahassee, Florida. The Owner entered into a three-way agreement with Crossland Investment Company, Inc. ("Brokerage"), a commercial real estate brokerage firm, and Scotty's, Inc. ("Tenant"), a retail chain.

The basic agreement was that the Tenant would lease the entire parcel, use four acres for its store, and sublease the remaining 14 acres. The Tenant would pay a below market rent to the Owner, and any amounts collected over the base rent amount by the Tenant would be split between the Owner and the Brokerage. The agreement between the parties involved three separate contracts: first, there was a lease ("Lease") between the Owner and the Tenant; a "Consulting and Listing Agreement" ("Consulting Agreement") between the Brokerage and the Tenant, which designated the Brokerage as the exclusive leasing agent for the remaining 14 acres of the property and stated that the Brokerage would receive half of whatever amounts were collected over the Tenant's rent; and an "Escrow Agreement" ("Escrow Agreement"), under which the Brokerage firm would receive rental payments from the Tenant and distribute the funds to the Owner in exchange for a small administrative fee. The initial lease was for 26 years, with the Tenant holding four renewal options for five year terms. The Lease began in 1980, and so potentially would last through 2046, if all lease renewals occurred.

In 1999, the Tenant closed its store on the Owner's property. However, the Tenant entered into an agreement with Staples the Office Superstore East, Inc. ("Subtenant") to take over its lease as a subtenant. Such an arrangement required the approval of the Landlord. The Subtenant had agreed to pay the Tenant twice the rent, and the Tenant planned to withhold the difference in the two rent amounts. The Landlord objected to this arrangement, resulting in the Landlord forming a corporation which purchased the Tenant's lease and then entered into a sublease with the Subtenant for the reminder of the lease term at the higher rental rate, or through December 31, 2006. The Landlord then entered into a separate lease with the Subtenant, beginning in 2007.

The Brokerage continued receiving payments from the Lease, which included splitting the higher rent paid by the Subtenant. However, since the Lease would not be renewed, the Brokerage's payments would end in 2006. The Brokerage filed a lawsuit against the Owner, alleging that the expectation of the parties had been that the agreements would continue until 2046 and that the Owner had acted in bad faith by substituting the Lease with a new lease between it and the Subtenant. Both parties filed motions seeking judgment in their favor.

The United States District Court for the Northern District of Florida ruled in favor of the Owner and entered judgment in her favor. The court first reviewed Florida law on lease extensions. The law in Florida is that a broker is only entitled to a commission for a lease extension if the lease is, in fact, extended. Lease terminations or modifications do not qualify for extension commissions. The court found that courts have repeatedly stated that it was the broker who entered into these agreements and the broker had the opportunity to protect its interest in the lease if it wanted to preserve its commission in the event of a lease modification or termination. Since the Broker had failed to include such provisions, the court ruled that the Brokerage was not entitled to a commission in this case.

The court then turned to the breach of contract allegations made by the Brokerage. The court rejected this allegation on a number of grounds. First, the Owner had no contractual duty to pay the Brokerage anything, as all of the Brokerage's payments were made by the Tenant/Subtenant through the Consulting Agreement. To get around that obstacle, the Brokerage had argued that the Owner had made a separate oral agreement with the Brokerage to pay its commission. The court rejected this argument as well, finding that even if such an agreement exists, it expires in 2006. The court also rejected the "lack of good faith" argument made by the Brokerage. The court found that the Brokerage was continuing to receive payments and would through 2006 and this does not entitle the Brokerage to additional payments, demonstrating that the Owner was acting in good faith. Thus, the breach of contract allegations were dismissed by the court.

Finally, the court considered the "tortious interference" allegations. The Brokerage alleged that the corporation created by the Owner to buy out the Tenant had "tortiously" interfered with the Brokerage's right to receive commissions after 2006. They rejected this argument because the Brokerage had no contractual right to these payments. The court also rejected this argument because it is impossible to tortiously interfere with your own contract, as the Owner had created this corporation. Therefore, the court entered judgment in favor of the Owner.

Crossland Inv. Co., Inc., v. Rhodes, 274 F.Supp.2d 1302 (N.D. Fla. 2003).