A. Formation of Contract Between Seller and Broker

1. Contracts in General: Finding a Contract

Once through the transaction

1. agency
2. principal/agent
3. mortgage terms
4. negotiation prices
5. broker's commission

LANE - THE REAL ESTATE DEPARTMENT STORE, INC., v. LAWLET CORP.

28 N.Y.2d 36; 268 N.E.2d 635; 319 N.Y.S.2d 836 (1971)

OPINION: SCILEPPl, J. This is an action to recover real estate brokerage commissions against respondent Success Properties Corporation, owner of a parcel of real property at the time the alleged brokerage contract was made, George L. Lunny, president of Success Properties, and Lawlet Corporation which now owns the property. At the trial, the jury was presented with sharply disputed issues of fact which were resolved by the jury in favor of the appellant broker.

Louis Licht, president of appellant and a licensed real estate salesman, testified that in December, 1966 he was approached by one Gerald Cunningham to find property suitable as a garage for his father-in-law's (Frank Dorrian) taxicab business. In February, 1967, he visited a garage building in New York County and, after asking for the owner, was referred to George Lunny. He met Mr. Lunny and his associate, Mr. Joseph T. McVay and inquired whether the property was for sale. Lunny represented that he was the owner of the property and told Licht that the asking price was $23 a square foot or $830,000. Licht secured a listing of the property from Lunny and it was agreed that brokerage commissions would be the standard rate as set by the Real Estate Board of New York ($19,000). He also informed Lunny that he had a prospective buyer, but that the price might be too high. Subsequently, he conferred with Cunningham who said that he would only offer $750,000. Thereafter, Lunny visited Licht's office and Lunny agreed to reduce his price to $800,000. Cunningham, in turn, agreed to purchase the property at that price; and discussion then ensued as to the mortgage on the property. There was a $548,000 first mortgage and a $115,000 - 8% interest -second mortgage on the parcel. Licht informed Lunny that the interest rate was too high on the second mortgage and said:

"Look, my people will pay six plus one, six percent interest and one percent toward amortization."

Lunny said, "All right, I'll go back to Marshall [second mortgagee], but I may have to reduce the mortgage."

Licht said, "Okay, if it will take some ten or fifteen thousand dollars to reduce the mortgage I can get my people to go along with you." Thereafter, Lunny reported back to Licht that he had seen the second mortgagee and that if the purchaser would come up with $15,000 more cash, it would be given to Marshall and "he [Lunny] would get the interest rate reduced to six percent at an amortization item of one percent". Inasmuch as this was agreeable to the purchaser, Licht considered it a firm agreement.

Lunny gave Licht the name of his attorney, Harold Kieval, and Licht thereafter relayed the terms of the proposed purchase and the commission agreement to the attorney. He also gave Kieval the name of the buyer's attorney and subsequently, a copy of a commission agreement was sent to Licht for execution. This agreement recited, inter alia, that the commission was to be $1 5,000 and that Licht would waive all rights if the deal was not consummated. Upon receipt of the agreement, Licht called Kieval and told him that it was unacceptable as it did not reflect the commission agreement made with Lunny. The matter was to be straightened out at the contract closing. When the time came for the execution of the contract between Lunny and the purchaser (March 27, 1967), it was learned that the property was no longer owned by Lunny or Success Properties. A Mr. Goglio had been given an option to purchase the property and had exercised it. The property is now owned by respondent Lawlet Corporation - Goglio's nominee. It appears that on January 16, 1966 Lunny, who was in financial trouble, borrowed $30,000 from Goglio, consolidated it with an earlier loan and secured both loans with a $85,000 mortgage. The mortgagor was required to deposit taxes and interest monthly with the mortgagee and in the event of a default, a deed would be executed to the mortgagee in lieu of foreclosure. Lunny defaulted on February 1, 1967 and on February 3, surrendered title by deed. Notwithstanding this change of title, Lunny remained in possession and continued to offer it for sale; he testified at the trial that he did so with the permissIon of Lawlet Corp., that is, Goglio.

Cunningham, the prospective purchaser corroborated most of Licht's story. He testified that he had asked Licht to find a suitable parcel and that Licht later told him that one was available for $830,000. Cunningham told him that he wanted the property 'for as nominal an amount as you can" and that he would go as high as $800,000. Subsequently, Licht reported back to him that the latter amount was acceptable to the seller. This conversation gave rise to the counteroffer requesting a reduction on the second mortgage. Licht later told Cunningham that Lunny had indicated that he was able to secure the reduction and that the deal was set. In addition to this testimony, evidence was introduced tending to show that Cunningham was at all times ready, willing and able to meet the terms set by the seller. In addition to Cunningham, Dorrian, the other partner in the taxicab business, gave similar testimony.

Respondents called witnesses who testified that the Cunningham group had been interested in the subject property since November, 1966 and that McVay, Lunny's associate, had been contacted. McVay allegedly reported to the Cunningham's representative that the price would be $830,000 and in December the property was inspected. Present at this inspection were Dorrian and Cunningham. Subsequent discussion ensued, and in January, 1967 the seller offered $800,000 as his price. This was rejected by Cunningham who counteroffered with $650,000 and negotiations broke off.

Subsequent thereto, Lunny's financial condition worsened and the Goglio group took over the property. Respondents contended that it was after this that Cunningham apparently contacted Licht. McVay testified that he and Lunny first met with Licht on March 3, 1967 and said that there had been no discussion as to the terms of the second mortgage, but added that Lunny offered Licht a $15,000 commission. Licht replied that they would talk about it later. McVay did recognize the tentative existence of a deal provided that the commission would be limited to $15,000. Lunny also contradicted Licht on the dates, the amount of the commission and denied that he had represented to Licht that the second mortgage would be modified. He said that "if we agree on everything I will try to get this condition for you. I will go to the principal and I will ask her to give you, to try to work out this mortgage so she can hold it for whatever term you would want." His recollection was that he merely said that he would speak to the second mortgagee. Lunny also claimed to have told Licht that the property was owned by Success Properties, but admitted that he had executed the option agreement, as security, to the Goglio group.

At the conclusion of the trial, these divergent stories were submitted to the jury which, apparently accepting the appellant's version of the transaction, returned a verdict of $19,000 plus interest against the three defendants. On appeal, the Appellate Division reversed the judgment on the law and the facts and dismissed the complaint (see 33A D 2d 924).

Since this was a jury case and the Appellate Division dismissed the complaint as a matter of law, the question before us is whether, considering the evidence in the light most favorable to the plaintiff, it has made out a prima facle case (Sagorsky v. Malyon, 307 N. Y. 584, 586; Stein v. Palisi, 308 N. Y. 293, 294). Turning to that question, it is a well-settled rule in this State that in the absence of an agreement to the contrary, a real estate broker will be deemed to have earned his commission when he produces a buyer who is ready, willing and able to purchase at the terms set by the seller (see, e.g., Hecht v. Meller, 23 NY2d 301; Levy v. Lacey, 22 NY 2d 271; Wagner v. Derecktor, 306 N. Y. 366; O'Hara v. Bronx Consumer Ice Co., 254 N. Y. 210; Colvin v. Post Mtge. & Land Co., 225 N. Y. 510; Reis Co. v. Zimmerli, 224 N. Y. 351; Davidson v. Stocky, 202 N. Y. 423; Smith v. Peyrot, 201 N. Y. 210; Gilder v. Davis, 137 N. Y. 504). Thus, in Hecht (supra) we sustained a broker's claim to a commission notwithstanding the fact that the contract between buyer and seller was unenforceable due to the Uniform Vendor and Purchaser Risk Act (General Obligations Law, ' 5-1311). As the court wrote (Hecht, 23 N Y 2d, supra, at p. 305): "At the juncture that the broker produces an acceptable buyer he has fully performed his part of the agreement with the vendor and his right to commission becomes enforceable. The broker's ultimate right to compensation has never been held to be dependent upon the performance of the realty contract or the receipt by the seller of the selling price unless the brokerage agreement with the vendor specifically so conditioned payment. (See, e.g., Levy v. Lacey, supra, p. 274.) As we stated in Gilder v. Davis (supra, p. 506): 'If from a defect in the title of the vendor, or from a refusal to consummate the contract on the part of the purchaser for any reason, in no way attributable to the broker the sale falls through, nevertheless the broker is entitled to his commissions for the simple reason that he has performed his contract."' (Emphasis supplied.) The parties are, of course, free to provide otherwise by agreement. For example, they can condition the seller's liability on the closing of title or require the broker to supply a buyer to purchase the property at a specified price 'With terms to be arranged." In the former case the broker would not earn a commission if the deal were not consummated (see Levy v. Lacey, 22 N Y 2d, supra, at p. 274) and in the latter situation, there would be no commission if terms were not arranged (see Kaelin v. Warner, 27 NY 2d 352, decided Jan. 13, 1971). It should be observed, however, that even where the broker and seller expressly provide that there shall be no right to a commission unless some condition is fulfilled, and the condition is not performed, the seller will nevertheless be liable if he is responsible for the failure to perform the condition (Levy v. Lacey, 22 N Y 2d, supra, at p. 276, compare with Warnecke v. Countrywide Realty, 29A D 2d 54, affd. 22 N Y 2d 823, mot. for rearg. den. 22 N Y 2d 972).

The Appellate Division appears to have overlooked these rules, and instead, relying on sections 5-703 and 5-1111 of the General Obligations Law, has premised its view on the notion that the sale was conditioned on a modification of the second mortgage. Since the broker had failed to introduce proof of written modification, the court concluded that he did not make out a prima facie case for a brokerage commission. This is untenable. Firstly, the question whether the sale was conditional was one of fact which was implicitly resolved against respondent by the verdict for the appellant; consequently the Appellate Division's statement that the sale was conditional (33A D 2d 924) was an intrusion on the jury's role as trier of the facts. The court also held that Lunny was not personally liable under CPLR 3002 (subd. [b]) because he disclosed to Licht that he was the agent for Success Properties. As to this latter point, suffice it to say that, the question of disclosure was also one of fact, and the Appellate Division's finding on this ground was an unwarranted finding of fact in a jury case (see Cohen and Karger, Powers of the New York Court of Appeals [rev. ed.], ' 135, p. 556; CPLR 5522). Licht said that he was never told by Lunny that Success owned the property. When confronted with a prior inconsistent statement regarding the question of Lunny's disclosure, he was equivocal, saying that if Lunny toe him, then he dealt with Lunny on behalf of the corporation. The issue was for the jury to determine and not the Appellate Division.

Turning to the Appellate Division's reliance on the Statute of Frauds, it is our view that this consideration is beside the point, since sections 5-703 and 5-111 I have no application to the case at bar. Section 5-1111 merely provides that agreements, promises, undertakings or assignments or offers within the Statute of Frauds (see General Obligations Law, '' 5-1103,5-1105, 5-1107, 5-1109 and 5-703, subds. 1 and 2) are void where executed by an agent whose authority is not in writing. Similarly, section 5-703 requires contracts relating to interests in real property to be in writing. These sections apply only where the agreement sought to be enforced is the main agreement that is within the Statute of Frauds and the party sought to be charged is the agent's principal. This was not, however, involved in the instant lawsuit. Appellant is in no way attempting to enforce the contract of sale or to obtain damages for its breach. It does not seek a modification of the second mortgage and does not seek to hold the second mortgagee accountable for any breach of a proposed agreement. The question presented is not whether Cunningham, the buyer, has any rights to the property in question, but whether the broker earned his commission. Since the commission agreement is not within the Statute of Frauds (see General Obligations Law, ' 5-701, subd. 10; 49 Am. Jur., Statute of Frauds, ' 407, p. 713), the fact that neither the agreement nor Lunny's authority was ever reduced to writing does not defeat appellant's claim.

Consequently, all a broker need do to establish a prima facie case is introduce evidence tending to show the existence of a commission agreement and that he has procured a ready, willing and able purchaser at the price and terms of the seller. These are all questions of fact and as such must be resolved by the jury. Appellant met this burden by Licht's testimony that he had dealt with Lunny and that as a result the terms given by Lunny and the amount to be paid were agreed upon. Appellant also produced the purchaser and there is no question but that he was able to meet all of the terms set by Lunny. According to Licht, Lunny said that he would sell the property if Licht supplied a buyer who would purchase at the specified price. In addition, he testified that Lunny agreed that these terms would include a modification of the second mortgage. Licht reasonably secured the acceptance by Cunningham of this offer, and the fact that Lunny was unable to obtain the modification is not relevant to the question as to whether the broker earned his commission (Hecht v. Meller, 23 N Y 2d 301, supra). Whether Lunny was acting for himself, Lawlet, Success Properties or all three, are questions of fact resolved against the respondents by the jury. Thus, the record clearly indicates that a prima facie case was made out.

We are nevertheless powerless to reinstate the judgment of the trial court because the Appellate Division order recited an alternate basis for its reversal, i.e., that it was on the facts. In a jury case, that court lacks the power to reverse on the facts and at the same time dismiss the complaint. It must order a new trial (see Cohen and Karger, Powers of the New York Court of Appeals [rev. ed.] ' 135, p. 556; CPLR 5522). Consequently, since we disagree with the Appellate Division's view of the law, and conclude that a prima facie case was established, a new trial is required (see Powers of the New York Court of Appeals, supra, ' 131, at p. 540; ' 139, at p. 568).

Accordingly, the order appealed from should be reversed and a new trial ordered, with costs to abide the event.

Lane note 1

Does the ordinary brokerage agreement between the Seller/Buyer and the broker affect any interest in land? If not, why not? Would the agreement have to be in writing if it were to include a "power of sale?" "Power of attorney" to enter into a binding contract for sale?

Lane raises the question: whose agent is the broker? Who engaged the broker as the facts of the case unfold? If the broker is a fiduciary, to whom is that obligation owed? What if the broker agrees to act for a "buyer" in locating a parcel of land or residence which meets the buyers specifications? What if the broker already has listings and selects among these to show to his/her client? What if the broker enters the bargaining process and gives advice to either the seller or the buyer? May the broker act for more than one party? If so, under what circumstances and with what disclosures. See In Re Lanza, 65 N.J. 347, 322 A.2d 445 (1974) supra, relative to the constraints on an attorney acting in the land transaction.

Lane further raises the question of the broker's performance. When has the broker performed, and what is the meaning of "ready, willing and able?"

Lane note 2

Under what circumstances would this admonition of the Restatement apply to a broker's contract in New York?

a. Most states generally require a broker to be licensed in order to conduct the business of real estate brokerage. It is estimated that currently in this country there are 700,000 licensed brokers and 400,000 unlicensed brokers operating. Licenses are required to insure real estate brokers have a minimal educational background and allow for membership in professional associations to insure standards are maintained:

98 Misc.2d 295, 413 N.Y.S.2d 808 (1978)

Before DUDLEY, P. J., and RICCOBONO and ASCH, JJ.

PER CURIAM:

Order entered May 5, 1978, insofar as appealed from, reversed with $10 costs.
The oral agreement for a business brokerage commission entered into by plaintiffs' unlicensed representative in connection with the sale of defendant's luncheonette is unenforceable under General Obligations Law 5- 701(10), "unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent . . . . "

As licensed real estate brokers, plaintiffs contend that the exclusion of duly licensed real estate brokers from the requirements of the statute should be extended to include the oral agreement of their representative.

Real estate broker's licensing regulations (Real Property Law Article 12A) were enacted to protect dealers in real estate from unlicensed persons acting as brokers, and to protect the public from inept, inexperienced or dishonest persons who might perpetrate or aid in the perpetration of frauds upon it, and to establish protective or qualifying standards to that end. (See, Dodge v. Richmond, 5 A.D.2d 593, 173 N.Y.S.2d 786; Reiter v. Greenberg, 27 Misc.2d 18, 210 N.Y.S.2d 899, aff'd 18 A.D.2d 1093, 239 N.Y.S.2d 620.)

An employer may not recover in an action brought for a brokerage commission if the employee, acting as broker, is an unlicensed salesperson, otherwise the statute could not be given practical effect, and the obvious purpose of the Legislature would be frustrated (Real Property Law, s 442; Meyers v. Suffin, 203 N.Y.S. 103, 6 N.Y.Jur., Brokers, s 98).

Plaintiffs, being unable to recover commissions for services performed by their unlicensed salesperson, cannot enforce an oral agreement by the same salesperson under the licensed broker's exemption from the Statute of Frauds. The cause of action in quantum meruit must also fail. "The requirement of a writing for compensation of a business broker cannot be avoided by an action in quantum meruit."  Cohon & Co. v. Russell, 23 N.Y.2d 569, 297 N.Y.S.2d 947, 245 N.E.2d 712.

Plaintiffs were required to rebut defendants' prima facie showing that their salesperson was unlicensed with evidentiary facts sufficient to raise a genuine issue to be resolved at a trial. CPLR 3212(b); Five Boro Elec. Contr. Assn. v. City of New York, 37 A.D.2d 807, 324 N.Y.S.2d 830; aff'd 33 N.Y.2d 676, 349 N.Y.S.2d 374, 304 N.E.2d 238. Upon their failure to come forward with such proof, the court should have determined as a matter of law that plaintiffs were barred from recovering a brokerage commission based upon an oral agreement entered into by their unlicensed representative, and from a recovery in quantum meruit.

b.  Broker must be licensed at the time of the transaction:

170 Misc.2d 1002, 652 N.Y.S.2d 919 (1996)

IRA GAMMERMAN, Justice.

Defendants move to dismiss for failure to state a cause of action, asserting that plaintiff's claim is barred by the Statute of Frauds. Plaintiff seeks compensation allegedly agreed to orally by defendants for having facilitated the purchase by defendants of real property in California. No written memorandum of the agreement exists, but plaintiff argues the Statute of Frauds does not apply because of the statute's exception for licensed real estate brokers. I find that the Statute of Frauds does apply, and that, additionally, plaintiff is precluded from asserting his claim by provisions of the Real Property Law.

In May of 1994, plaintiff's president Avram Lebor allegedly informed defendants about the availability of certain California property, and proposed that defendants join with him in a venture for its purchase. Plaintiff claims that defendants turned down the joint venture but orally agreed to compensate plaintiff should its efforts facilitate the purchase by defendants of the property. Plaintiff contends it then provided services to the defendants in aid of a possible purchase offer. Defendants eventually made an offer to the vendor which was rejected. They subsequently purchased the property at public auction for approximately the same amount they had originally offered. Plaintiff acquired a New York real estate broker's license on March 1, 1995; Lebor individually was licensed on January 7, 1996.

All parties reside in New York, and the agreement, if it exists, was made in New York. Two New York statutes apply. One is General Obligations Law section 5-701, the Statute of Frauds, which requires generally that agreements involving real estate be memorialized in writing, but establishes an exception in subdivision (a)(10) for contracts to pay reasonable compensation to duly licensed real estate brokers. The other statute is Real Property Law section 442-d, which provides that no action for compensation may be maintained for services in aid of real estate purchases by any person not a licensed real estate broker or salesperson on the date the alleged cause of action arose.

The threshold issue therefore is whether plaintiff or its president was a licensed real estate broker at such time as would permit an exception under General Obligations Law section 5-701(a)(10) and a claim under Real Property Law section 442-d.

General Obligations Law section 5-701(a)(10) does not specify when during the process of a real estate transaction a broker must be licensed in order to qualify for an exception to the written-agreement requirement, nor does Real Property Law section 442-d define when a cause of action arises. Guidance, however, may be found in Real Property Law section 441, and in a number of decisions. Section 441 requires that applicants for a real estate broker's license pass an examination validating their competence in such subjects as deeds, mortgages, contracts of sale and lease, and the obligations between *1004 principal and agent. Applicants must also attend an approved real estate course of at least ninety hours. The stated intent of the licensing requirements is to protect the public. Clearly the legislature established licensing requirements to assure the public of services competently, skillfully and ethically rendered by real estate brokers, and it follows that the time when a real estate broker must possess a license is when it actually renders these services. In Galbreath-Ruffin Corp. v. 40th and 3rd Corp., 19 N.Y.2d 354, 280 N.Y.S.2d 126, 227 N.E.2d 30 (1967), the court unequivocally stated "[i]t is, of course, the law that commissions cannot be recovered by a real estate broker who is unlicensed while his services were rendered." In Bersani v. Basset, 184 A.D.2d 996, 585 N.Y.S.2d 245 (4th Dept.1992), a broker was licensed when he rendered services but not licensed at the closing. The defendant-seller claimed that the broker's alleged cause of action under Real Property Law section 442-d arose at the date of closing. The appellate court disagreed, holding that generally a broker is entitled to a commission if it was licensed at the time the services were rendered, not at the time of the closing.

Justice Pound held in Bendell v. De Dominicis, 251 N.Y. 305, 167 N.E. 452 (1929), that a broker who was licensed when he was first employed and licensed again when the contract of sale was concluded but was not licensed during the time he sought and found a purchaser was not entitled to a commission. Similarly, Justice Cardozo wrote that a broker who had not renewed his lapsed license until October 26, 1923 "was thus without a license on October 16, 1923, when the purchaser was procured and the cause of action arose," Roman v. Lobe, 243 N.Y. 51, 152 N.E. 461 (1926).

While the cases cited above were decided on the basis of Real Property Law section 442-d or its predecessors, the principles and policy regarding licensure apply with equal force to General Obligations Law section 5-701(a)(10). A broker must be licensed when it renders its services, and it is to that time that a court must look in order to determine whether a broker may evade the requirements of an agreement in writing.

The services allegedly rendered by plaintiff and Lebor consisted of informing defendants about the property in question and of providing materials to assist defendants in preparing an offer. These services were rendered in May, 1994 and fairly soon thereafter; the latest germane correspondence in evidence is dated July 6, 1994. Plaintiff acquired a broker's license on March 1, 1995, and has not shown it was licensed prior to then. Plaintiff was therefore not licensed when it rendered its services, and is precluded from seeking compensation under both Real Property Law section 442-d and General Obligations Law section 5-701.

Plaintiff argues in the alternative that if the Statute of Frauds is found to apply, plaintiff should nonetheless be compensated under a theory of equitable estoppel. It cites Merex A.G. v. Fairchild Weston Systems, Inc., 29 F.3d 821 (2d Cir.1994), cert. denied, 513 U.S. 1084, 115 S.Ct. 737, 130 L.Ed.2d 639 (1995), and Special Event Entertainment v. Rockefeller Ctr., 458 F.Supp. 72 (S.D.N.Y.1978). While these cases hold that a court may at its discretion disregard a mandate of the Statute of Frauds, such disregard must rest on extraordinary and unconscionable injury to plaintiff, injury beyond that which flows naturally from the non-performance of the unenforceable agreement. The circumstances in the instant case do not meet that requirement. Plaintiff's action is therefore dismissed.

2.  Oral or Written Broker Agreements

NOTE 1: As noted in the Lane v. Lawlett case, New York does not require the broker/seller agreement to be in writing under the statute of frauds unless the agreement unless the agreement is for more than a year. If the broker is give a "power of sale" similar to a power of attorney, that, of course must be in writing. This is to be distinguished from the apparent majority rule which requires a broker contract to be in writing to protect the public, create a uniform procedure and prevent fraudulent dealing by the broker/professional. New York is among the minority that look upon the broker agreement as one for personal services and therefore outside the statute of frauds. The rationale for requiring written agreements was discussed by the court in Amato & Stella Associates, Inc. v. Florida North Investments, Ltd., 678 F.Supp 445 (19880.)