​A recent New York court decision provides a lesson in why having a well-drafted contract is so important. The case involved a mortgage broker who lost out on a commission and legal fees when the property owner found its own financing. Both parties spent money to litigate the issue, which could have been avoided had the parties entered into a clear agreement.

In Angelic Real Estate, LLC V. Aurora Properties LLC, the plaintiff was a licensed real estate broker specializing in obtaining financing for commercial properties. The plaintiff entered into an agreement with the defendant, which provided that for a term of 120 days, pursuant to which the plaintiff was to exclusively obtain debt financing for multiple office buildings located in Tennessee. There were various exclusions set forth in the agreement, including that the plaintiff would not receive a fee if the defendant procured financing from one of three lenders with whom the defendant had previously dealt.

The defendant, during the 120-day period, obtained a $16,750,000.00 loan from Mountain Commerce Bank, which was one of the three banks identified as being excluded from the agreement. However, the agreement also stated that for this exclusion to apply, a term sheet must be signed by June 30, 2020. That was not the case.

The defendant closed the financing after June 30th and failed to pay the plaintiff a fee. The plaintiff thereafter commenced this action in Supreme Court, Nassau County on the grounds of breach of contract and thereafter moved for summary judgment. The defendant cross-moved, claiming that since the plaintiff was not the procuring cause of the financing, the plaintiff was not entitled to a fee in connection with the loan. The lower court granted the defendant summary judgment and the plaintiff appealed.

The New York Appellate Division Second Department noted that in a typical broker transaction, the broker has to be the procuring cause of either the financing or, in a real estate transaction, the sale or lease. However, where the broker is granted an exclusive right to sell in an agreement, the broker would be entitled to its fee no matter who the procurer was. The Court found that in this situation, the language in the agreement did not unequivocally establish the broker’s exclusive right to sell or that the parties intended to prohibit the defendant from procuring its own financing. The agreement did not clearly and expressly indicate that a fee was owed to the plaintiff even where the defendant was the procuring cause of the financing, Thus, the defendant had the right to obtain financing without fear of being required to pay a fee to the plaintiff and the plaintiff was only entitled to a fee in connection with financing that it procured on the defendant’s behalf.

The Court treated the mortgage broker like a real estate broker who has an exclusive agency rather than an exclusive right to sell. The difference between the two is that in an exclusive agency, the broker gets paid unless the owner procures its own financing, whereas in the exclusive right to sell, the broker gets a fee if any financing is procured.

The Court reasoned that the long-standing tradition in New York of upholding an owner’s inherent right to sell its own property requires that an agreement to contravene such right must be unequivocal, and this agreement was not.

The lesson here is that an agreement must clearly set forth the intention of the parties so that there is no room for interpretation or chance of litigation.

If you have any questions regarding an agreement that you are planning to enter into, please contact one of our attorneys.