Procuring Cause and Leasing

Co-Author: Oliver E. Frascona, Esq.

I have a lease listing. A potential tenant initially contacted me through another broker. Now the potential tenant wants to work with me directly. How can I avoid a procuring cause dispute with the broker who initially brought me the tenant?

Some brokers invest substantial time with owners, buyers, and tenants without obtaining written compensation agreements. When obtained, many agreements do not address all of the issues which would be resolved by a more formal listing or buyer/tenant broker’s agreement. Commercial brokers are more likely to practice outside of an organized multiple listing service than their residential colleagues, adding further uncertainty to broker-to-broker compensation issues.

These sources of ambiguity require brokers and owners to understand Colorado’s procuring cause law. The Colorado Court of Appeals recent decision in Winston Financial Group, Inc. v. Fults Management, Inc., 872 P.2d 1365 (Colo. App. 1994) provides practical guidance to owners and brokers.

In Winston, a real estate broker (the “Leasing Broker”) initiated a relationship with a potential tenant (“Tenant”). The Leasing Broker showed Tenant the defendant owner’s property. Shortly thereafter, Tenant commenced direct negotiations with the owner. The landlord’s leasing agent commented that the Leasing Broker had already introduced Tenant to the property. However, Tenant denied that the showing broker was its agent. The Leasing Broker had no written compensation agreement or “right to lease” agreement with Tenant. Tenant and the owner, through landlord’s agent, entered into rental negotiations without the Leasing Broker and without informing the Leasing Broker of the negotiations. The Leasing Broker made numerous attempts to contact Tenant to inquire about its search for office space.

Based on evidence that the owner and Leasing Agent “… discussed that [owner] paid cooperating brokers a 6% commission and that they were both familiar with the commercial leasing business” the court found that the landlord had agreed to pay a procuring cause broker a 6% commission.

In determining whether the Leasing Broker was a procuring cause, the court stated: “Whether the broker is the procuring cause rests upon whether the broker set in motion a chain of events which, without break in continuity, resulted in a sale, or lease.” The court held that when a landlord and tenant intentionally exclude a broker from negotiations, they cannot defend themselves on the basis that the broker was not the procuring cause. Based upon the broker’s identification and initial showing of the property, and the subsequent exclusion of the broker from the negotiations, the court found the selling broker to be a procuring cause.

Winston sends two clear messages to owners and listing brokers: (1) Verbal agreements to pay a commission are enforceable; and (2) the tenant’s choice to work without a broker (or with another broker) does not prevent the showing broker from being a procuring cause. The first point is consistent with Colorado’s subsequently enacted real estate brokerage relationships statute which does not require written compensation agreements between brokers (transaction-brokers) and owners. Listing brokers and owners should be careful about verbal promises of compensation made to tenant broker’s.

Owners and listing brokers should be wary of the second point when considering reductions in leasing rates or listing commissions based on their belief that no cooperating commission will need to be paid to a leasing agent. Anticipating that a listing broker need not pay a commission to a cooperating broker, the listing broker may reduce its commission to the owner, and the owner may consent to more favorable terms for the tenant. The owner may later discover that there is another leasing broker entitled to a commission for procuring the buyer.

Listing brokers and owners should be especially cautious when the leasing broker working with the tenant at lease execution is different than the initial showing brokers. After paying a commission to one leasing broker, the listing broker or the owner may find itself owing a cooperating commission to the initial selling broker who was the true procuring cause.

To some extent, these concerns can be avoided by tenant representations and indemnifications in the lease that the tenant has not worked with any other broker in finding the space. If the landlord gives tenant rent concessions, they can be revocable upon a broker prevailing in a procuring cause claim.

The precedential value of Winston is undermined somewhat, as it was decided based on law predating the enactment of Senate Bill 223. Though the significance of the following statement is not clear, the court held that “absent a written agreement to the contrary, the listing of a property in a multiple listing service is an offer of sub-agency, cooperation, and presumable compensation to tenant brokers.” Though this premise has been superseded by C.R.S. 12-61-803(2), which makes a broker a transaction-broker unless there is an express agreement to the contrary, the analysis of the case’s brokerage relationship should have little effect on its procuring cause conclusion.

All other things being equal, it is best for brokers to resolve uncertainty. Wherever possible, written commission agreements should be obtained from whomever the broker expects to be paid by. However, absent these agreements, the Winston case offers assistance to brokers procuring tenants without formal written compensation agreements and to brokers working independently of a multiple listing service.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN