Relating to Real Estate

In Cushman & Wakefield of Maryland, Inc. v. DRV Greentec, LLC, --- Md. ---, No. 42, Sept. Term 2018 (Mar. 4, 2019), the Court of Appeals declined to order that a successor landlord was required to pay a brokerage commission on the tenant’s renewal of a lease because the covenant to pay the commission was a personal obligation and did not run with the land.

MGP Greentec IV, LLC (“MGP”) owned a 120,000 square foot building in Greenbelt and engaged Cushman & Wakefield of Maryland, Inc. (“Cushman”) to find a tenant. NASA engaged Sloan Street Advisors, Inc. (“Sloan”) to find a space for it. The parties got together and signed a lease. The lease specifically provided that the landlord would be liable for the commissions of the landlord’s broker and the tenant’s broker for the initial term and for any renewal term.

The lease stated that it was subordinate to any deed of trust on the property. In consideration for a loan, MGP had granted a deed of trust on the property to Bear Stearns, which deed of trust was ultimately assigned to Bank of America. The deed of trust provided that the lender had no obligation to perform any of the covenants set forth in the lease.

MGP defaulted on the deed of trust and Bank of America foreclosed. Its nominee bought the property at the foreclosure sale and sold it to DRV Greentec, LLC (“DRV”). The offering memorandum for the sale stated that the purchaser of the property would be liable to pay a stated commission of more than $1 million if the tenant renewed.

NASA (the tenant) renewed. Cushman and Sloan demanded their commissions. DRV refused to pay. Cushman and Sloan sued in the Circuit Court for Montgomery County. The circuit court ruled for DRV, and on appeal the Court of Special Appeals affirmed. So did the Court of Appeals.

Senior Judge Wilner, writing for the Court of Appeals, found that the “general rule” is that “in the absence of a covenant that runs with the land, mere acceptance by a successor in title of a lease containing an agreement to pay commissions on a renewal does not bind the successor to pay those commissions.”  The Court noted that an agreement to pay brokerage commissions on a lease renewal is a personal covenant. Such a covenant does not run with the land. Also, an assignment of a lease does not include an obligation of the successor landlord to assume the obligations of the obligor.

The Court pointed out that DRV did not sign the lease, and neither did Bank of America, the foreclosing lender. In fact, Bank of America’s predecessor, MGP, had disavowed any obligation to perform the landlord’s covenants under the lease. Accordingly, DRV had no contractual obligation to perform under the lease.

The Court of Appeals assumed that Cushman and Sloan were third-party beneficiaries of the provision in the lease that stated that the landlord would pay a brokerage commission on a lease renewal. The Court said that this meant that Cushman and Sloan could sue anyone who was liable to pay the commission. But this status did not help the brokers, as it turned out, because the Court held that DRV as the successor landlord was not liable to pay the commission.

Practice Note

Of course a lender cannot disavow all of the obligations of a landlord when it takes a deed of trust on leased property. The lender, if it succeeds to the interest of the landlord by foreclosure or otherwise, is bound to maintain the property as required by the lease, extend quiet enjoyment to the tenants, and perform other obligations that are property-related. These are the covenants that run with the land. However, under the Cushman case, a successor landlord that acquires its interest through a foreclosing lender is not required to respect the “personal obligations” of the original landlord – or those that do not run with the land.

For questions, contact Ed Levin (410) 576-1900.