When you buy a commercial property that already has tenants, you usually focus on rent rolls, tenant credit, and operating costs. A New Jersey Supreme Court decision, Pagano Co. v. 48 S. Franklin Tpk., LLC, 198 N.J. 107, 965 A.2d 1172 (2009), highlights another issue that can be easy to miss.

Depending on what the leases say and what you agree to take on as the new owner, you could end up responsible for the seller’s original ongoing obligation to pay real estate broker commissions, even if you never signed the brokerage agreement nor specifically assumed it. This article discusses Pagano and contrasts its holding with New York law, which takes a narrower approach to when a purchaser assumes the seller’s obligation to pay a real estate broker’s commission.

The Core Issue: Did the Buyer Affirmatively Assume the Obligation?

This case shows how a buyer can inherit obligations the seller originally made to a broker. The question is not whether the buyer signed the broker agreement. The real question is whether the buyer “affirmatively assumed” that obligation through the deal documents. This Supreme Court decision could have a serious impact on commercial property buyers who may be unaware of previously existing brokerage agreements.

Pagano Co. v. 48 South Franklin Turnpike, LLC

Pagano Company had an exclusive brokerage agreement with the original property owner, Heritage. Pursuant to that agreement, Pagano earned a commission equal to five percent of the total lease price for each tenant it brought in. The brokerage agreement stated it would bind Heritage’s “heirs, successors and assigns.”

When 48 South Franklin Turnpike LLC bought the building, it received a general assignment of all leases and agreed to perform all of the seller’s obligations under the leases. The leases themselves stated that when the building was sold, the purchaser assumed and agreed to carry out all covenants and obligations of the landlord.

Each lease also included language identifying Pagano as the exclusive broker and stating that a commission would be paid under a separate agreement. However, the buyer never received a copy of that separate agreement.

After the closing, the buyer collected rent but did not pay Pagano’s commissions. Pagano sued. The trial court determined that the purchaser had affirmatively assumed the obligation to pay the broker’s commissions under the assignment, the purchase agreement, and the deed. The Appellate Division reversed, finding that the purchaser had never contractually agreed to pay the commissions.

 New Jersey Supreme Court Finds Affirmative Assumption

The Supreme Court held that the buyer had “affirmatively assumed” the seller’s obligation to pay Pagano. The Court explained that in order to incur liability by virtue of such an assignment, “the purchaser must have affirmatively assumed the seller’s obligation to pay the commissions.” If an analysis of all the facts and circumstances surrounding the assignment show that the assignee agreed to assume the obligation, a separate express promise is not required.

The Court focused on two points in particular: the leases specifically referenced Pagano’s commission rights, and the buyer agreed to assume all landlord obligations under those same leases.

Because the leases connected the landlord’s obligations to broker commissions, the Court concluded the buyer took on that responsibility, even though the buyer had never actually reviewed the separate brokerage agreement referenced in the lease. The Court described the record as showing a proper “affirmative assumption.”

New York Law Differs

However, New York law may produce a different result. New York courts generally hold that a lease covenant requiring payment of a broker’s commission upon renewal does not run with the land. A purchaser therefore is not liable merely because it accepts an assignment of the leases or generally assumes the landlord’s obligations. Instead, New York requires an affirmative assumption of the specific commission obligation. For example, in Gronich & Co. v. Longstreet Assocs. L.P., 140 A.D.3d 595, 595, 35 N.Y.S.3d 312 (1st Dep’t 2016), the court declined to follow Pagano’s broader approach, finding instead that general lease-assumption language and a reference to a separate commission agreement were insufficient.

Key Takeaways

You can assume obligations without signing the original agreement. The Pagano Court said an express promise is not required. The documents just need to show that the buyer assumed landlord obligations and that those obligations include paying the broker.

Due diligence must include all related side agreements. In Pagano, the buyer had the right to request the brokerage agreement but did not. This lack of due diligence was fatal to the buyer. If the lease points to a separate agreement, treat it as required diligence. It may include long term obligations or commissions tied to renewals.

Broad assumption language can pull in more than you expect. Agreeing to perform “all obligations under the leases” can include more than rent and repairs. It can also include legacy commission obligations you may not have reviewed.

Bottom Line

Pagano is an important reminder that when you buy a property with existing tenants, the leases can contain obligations that follow the property after closing. If the documents show that you agreed to assume all landlord obligations and those obligations include paying a broker, a court may hold you responsible.