Terra Venture, Inc., v. JDN Real Estate-Overland Park, L.P.: Brokerage Cannot Collect Extra Fees from Developer

A Kansas federal court has considered a real estate brokerage's claims against a developer whom the brokerage claimed delayed a project through its incompetence, causing the brokerage to miss targets which would have entitled it to receive bonuses.

In 1998, Terra Venture, Inc. ("Terra") entered into a contract to purchase a 100 acre parcel of undeveloped land. Terra was a collection of different companies, including a real estate brokerage. In 1999, Terra assigned its right to purchase the land to JDN Real Estate- Overland Park ("Developer"). As part of the assignment agreement, the parties also entered a fee agreement ("Fee Agreement") under which Terra would receive fees for work it agreed to perform related to the development of the property. Ultimately, a third party purchased the property, but the third party ratified the Fee Agreement and transferred parcels to the Developer for purposes of building a shopping center on the property.

The Fee Agreement set forth a number of payments to Terra. First, Terra would be reimbursed for its preclosing costs, including the extra costs incurred by extending the closing date. Second, Terra was appointed the exclusive selling and leasing representative for the project, entitling Terra to a development fee of $300,000, commissions (which would be negotiated), and an "earnout fee" ("Bonus"). The Bonus would be payable to Terra if the development had reached certain profit levels within 48 months of the closing. The Fee Agreement set forth a formula for calculating the Bonus, and the Bonus was conditional upon certain profit levels being reached within a specific time frame.

Terra earned $250,000 in commissions from the Fee Agreement. However, the Developer had financial difficulties following the closing. The Developer's financial problems delayed the development project, and also caused a high employee turnover on the development project. Because of these delays, the development project took much longer than anticipated, which caused Terra to be unable to earn the Bonus. When the Developer refused to pay Terra the Bonus, Terra filed a lawsuit seeking monetary damages it claimed was lost due to the Developer's delay in developing the property. Both parties filed motions with the trial court seeking judgment in their favor.

The United District Court for the District of Kansas ruled that Terra was not entitled to any additional compensation and so entered judgment in favor of the Developer. Terra advanced a number of different theories in its argument that it was entitled to recover the Bonus. First, Terra argued that the Developer breached its fiduciary duty to Terra by failing to develop the property in a timely manner. In Kansas, a fiduciary relationship can arise in two ways: first, those which are specifically created by the parties, either through contract (like a principal/agent relationship) or through legal proceedings (such as a guardian/ward); and second, those implied in law based on the factual circumstances of the parties’ relationship with each other. Terra argued that it had created a fiduciary relationship in both ways- by entering into a joint venture with the Developer and by a fiduciary relationship implied by law.

The court considered whether the parties were in a joint venture. A joint venture occurs when two or more parties enter into a combination devoted to a specific enterprise seeking profit but do not create an actual partnership or corporation. The test for whether a joint venture exists includes the following factors: joint ownership of the property; sharing of expenses, profits, and losses, as well as a voice in the division of net earnings; joint control over management and direction of the enterprise; intentions of the parties; and the fixing of salaries by joint agreement. The court found that none of these factors favored Terra and so the court ruled that there was no joint venture between the parties. The Developer controlled all aspects of the development and stood to gain or lose money based on the success of the development. Terra was only entitled to the fees it earned pursuant to the Fee Agreement. Thus, the court rejected the joint venture argument.

Next, the court considered whether a fiduciary relationship between the parties was implied by law. Here, Terra argued because the Developer had assumed all of the duties relating to the marketing and development of the property, the Developer was acting on behalf of Terra in its actions and so owed Terra a fiduciary duty. The court found no support for the argument that the Developer had assumed a fiduciary duty, and instead determined that the Developer had control over all aspects of the development so that it could act in its own financial interests. Thus, the court ruled there was no fiduciary duty between the parties.

The court considered whether the Developer had breached its contract with Terra by failing to develop the property in a timely manner. First, the court looked at the Fee Agreement to see if the contract itself imposed any such duty upon the Developer. The court determined that the Fee Agreement allowed Terra to earn the Bonus only if the project was profitable within a certain time frame. However, the Fee Agreement did not give Terra an entitlement to recover the Bonus. Thus, the court ruled that Terra did not have an explicit contractual right to the Bonus.

Terra also argued that the Developer had an implied contractual duty to develop the property based on the implied covenant of good faith and fair dealing. A party making such allegations must be able to point to a term in the contract which the other party failed to abide by the spirit of the contract term. An implied covenant of fair dealing is not used to create a new contractual term. Since nothing in the agreement created an obligation upon the Developer to develop the land within a certain frame, the court rejected this argument as well.

Finally, the court considered Terra's promissory estoppel argument. Terra argued that the Developer had given Terra reason to believe that the Bonus was easily attainable in discussions prior to the execution of the Fee Agreement and so Terra had entered into the agreement with the Developer. In order to recover under this theory, Terra needed to show that: first, the promisor expected the promisee to act in reliance upon its promise; second, the promisee acted as it could reasonably be expected to in reliance upon the promise; and third, a refusal by a court to enforce the promise would result in an injustice to the promisee. The court found that Terra could not recover under this theory because it had failed to identify any damages that it incurred in its reliance upon the Developer's alleged promises. Expectancy damages are not recoverable in Kansas under a promissory estoppel theory; instead, only costs incurred are recoverable. Therefore, the court rejected Terra's promissory estoppel argument as well and so the court entered judgment in favor of the Developer.

Terra Venture, Inc., v. JDN Real Estate-Overland Park, L.P., 340 F. Supp. 2d 1189 (D. Kan. 2004), aff'd, 2006 WL 895236 (10th Cir. Apr. 7, 2006).