Cushman & Wakefield v. DRV Greentec

463 Md. 1

• Court: Court of Appeals of Maryland
• Decided: March 4, 2019
• Docket: 42/18
• Status: Published

Opinion

Cushman & Wakefield of Maryland, Inc., et al. v. DRV Greentec, LLC, No. 42, September Term (2018) Petitioners, commercial real estate brokers, procured a tenant for the subject property. The lease was for five years with a renewal option for an additional five years. The lease required the owner to pay the brokers’ commissions for the initial lease and for any renewal term. The property was mortgaged. The mortgage and accompanying assignment of lease contained a clause making clear that the mortgagee/assignee was not liable for the performance of any of the covenants or provisions of any lease. Shortly after the lease took effect, the owner defaulted on the mortgage and the property was sold at foreclosure sale. The lender was the successful bidder and eventually sold the property to respondent subject to the lease. When the tenant later renewed the lease, petitioners demanded that respondent pay the commissions due on the renewal and, when respondent declined, sued respondent, claiming that petitioners had a right to recover from respondent as third-party beneficiaries and because respondent, as a successor to the former owner, had accepted all the covenants of the original lease. The Circuit Court entered judgment for respondent, and the Court of Special Appeals affirmed. Both held that the covenant to pay commissions was a personal one that did not run with the land and, as neither respondent nor its assignors ever signed the lease, respondent was not liable on that personal covenant.

The Court of Appeals AFFIRMED, holding that even if petitioners qualified as third-party beneficiaries, that only gave them the right to sue whomever was liable. Agreeing with the lower courts that the covenant was a personal one that did not run with the land, however, the Court held that (1) because respondent was not a party to the lease (2) its assignors also were not parties, and, (3) in the assignment of the lease the assignors had expressly rejected any obligations of the lease, respondent was not liable. Circuit Court for Montgomery County IN THE COURT OF APPEALS Case No. 419686V Argued: January 7, 2019 OF MARYLAND

No. 42

September Term, 2018

CUSHMAN & WAKEFIELD OF MARYLAND, INC., ET AL.

v.

DRV GREENTEC, LLC

Barbera, C.J. Greene McDonald Watts Hotten Getty Wilner, Alan M. (Senior Judge, Specially Assigned)

Opinion by Wilner, J.

Filed: March 4, 2019

Pursuant to Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic.

2019-08-20 09:57-04:00

Suzanne C. Johnson, Clerk Petitioners, Cushman & Wakefield of Maryland, Inc. (Cushman) and Sloan Street

Advisors, Inc. (Sloan) sued DRV Greentec, LLC (DRV) in the Circuit Court for

Montgomery County to collect real estate brokerage commissions allegedly due after the

tenant of the property exercised its option to renew a lease that Cushman and Sloan had

procured for a prior owner. Finding no liability on the part of DRV, the court granted

summary judgment in its favor, and, in an unreported Opinion, the Court of Special

Appeals affirmed that judgment. We granted certiorari to determine whether the two lower

courts were correct. We shall conclude that those courts were correct and affirm the Court

of Special Appeals’ judgment.

BACKGROUND

The property in question is located at 7700 Hubble Drive in Greenbelt, Maryland.

It consists of two buildings, with an adjoining lobby, comprising 120,000 square feet. The

property was purchased by MGP Greentec IV, LLC (MGP) in 2005 and mortgaged initially

to Bear Stearns but, through assignments ultimately to Bank of America (BOA). 1 As part

of the security for the loan, MGP assigned to the lender all current and future leases. The

assignment clause in § 3.7 of the Deed of Trust provided that “[s]uch assignment to Lender

shall not be construed to bind Lender to the performance of any of the covenants,

1 The conveyance to MGP was in the form of a 70-year ground lease. The parties regarded the ground lease as the “property” and MGP as the “owner,” and we shall do likewise. conditions, or provisions contained in any such Lease or otherwise impose any obligation

upon Lender.”

Supplementing that clause in the Deed of Trust was a separate Assignment of Leases

and Rents, § 4.1 of which confirmed that the Assignment “shall not be construed to bind

Lender to the performance of any of the covenants, conditions or provisions contained in

any Lease or Lease Guaranty or otherwise impose any obligation upon Lender.”

In 2009, the then-current tenant vacated the property, and MGP began searching for

a replacement. To that end, it entered into a contract with Cushman, a commercial leasing

agent, to find a new tenant. The agreement obligated “Owner,” identified in the Agreement

as MGP, to pay a commission equal to three percent of the aggregate gross rental for the

initial lease term and, if that term was renewed or extended, an additional commission

equal to three percent of the aggregate gross rental for the renewal term.

Contemporaneously, the National Aeronautics and Space Administration (NASA)

was looking for office space for its Joint Polar Satellite System and employed Sloan to

assist it in that endeavor. NASA and Sloan decided to use a government contractor, TRAX

International Corporation (TRAX), to act as the entity to lease and manage the space.

Cushman and Sloan collaborated in their efforts, which led to a Deed of Lease for the

Hubble Drive property being signed on July 15, 2010. MGP was the landlord and TRAX

was the tenant. The lease term was to commence when the leasehold improvements were

complete, which was anticipated to be October 1, 2010, and to run for “approximately” 66

2 months. Subject to certain conditions, § 32 of the Lease gave TRAX an option to renew for

one additional five-year term.

Section 1.17 recognized Cushman as the Landlord’s broker and Sloan as the

Tenant’s broker. Section 17 made the Landlord exclusively liable for brokers’

commissions, with respect to both the initial lease and any renewal of it. In relevant part,

it provided:

“Landlord agrees to compensate the Real Estate Brokers referenced in Section 1.17 above in accordance with a separate agreement, and agrees to indemnify Tenant against any claims, damages, costs, expenses, attorneys’ fees or liability for compensation or changes which may be incurred by Tenant as a result of any claim of non-payment made by Real Estate Brokers. In no event shall Tenant have any liability for Real Estate Broker commissions. In addition, in the event Tenant exercises its Option to Renew pursuant to Section 32 below, Landlord shall pay Tenant’s Broker a fee of $617,928.50, and Landlord’s Broker a fee of $463,446.37.”

Section 19 gave the Landlord the right to transfer any portion of its interest in the

project and to assign the Lease to the transferee. The section continued that, following

such a transfer, “Tenant shall look solely to Landlord’s transferee for the performance of

Landlord’s obligations” and that,“[s]ubject to the rights of any lender holding a mortgage

or deed of trust encumbering all or part of the Project, Tenant shall look solely to

Landlord’s equity interest in the Project . . . for the collection of any judgment requiring

payment of money by Landlord arising out of [ ] Landlord’s failure to perform its

obligations under this Lease . . .” Section 31.8 provided that the Lease was binding on the

parties and their successors and permitted assigns. Section 23 of the Lease, however, stated

that the Lease “shall be subordinate to any ground lease, mortgage, deed of trust, or any

other hypothecation or security now or hereafter placed upon the Project.”

3 Not long after the TRAX lease took effect, MGP defaulted on its mortgage, and, in

January 2011, the property was sold at a foreclosure sale. BOA, the successor lender, was

the successful bidder, took title to the property subject to the Lease, and employed

Transwestern and C-III Realty Services, to market the property. An Offering

Memorandum prepared by Transwestern noted that the tenant, TRAX, had a five-year

renewal option and that “LL to pay TT Broker $617,928 and LL Broker $463,446.”

In March 2012, BOA’s assignee sold the property to DRV. As part of the sale,

which the court ratified, the seller transferred its interest in the TRAX Lease. In that

Assignment, DRV assumed and agreed to perform “all of the covenants, agreements and

obligations under the Lease and Contracts binding on Assignor or the Real Property,

Improvements, or Personal Property . . .” (Emphasis added). A similar commitment was

made in an assignment of the Lease to DRV’s lender – that DRV would “observe and

perform when due all the obligations imposed upon the lessor under the Leases and not []

do or permit to be done anything to impair the security thereof.”

In July 2015, TRAX renewed its Lease for an additional five years which, in

September, produced a demand by Cushman and Sloan that DRV pay the commissions

provided for in the Lease ($463,446.37 and $617,928.50, respectively). When DRV

rejected their demand, this lawsuit ensued.

In the Circuit Court, cross motions for summary judgment were filed. Cushman and

Sloan argued that DRV was liable because (1) the Lease covenant was one that ran with

the land, (2) even if it did not, DRV had expressly assumed the duty to pay the

4 commissions, (3) the plaintiffs could recover as third-party beneficiaries, and (4) they could

recover also under theories of successor liability and quantum meruit for unjust enrichment.

The court rejected all of those arguments. It concluded that the obligation to pay

commissions was a personal one of MGP that did not “touch and concern” the land, and

therefore did not run with the land. Relying on out-of-State cases, the court held that

merely taking an assignment subject to the Lease did not constitute an assumption of that

obligation under a privity of contract theory, and that, as neither DRV nor any of the lenders

from whom it derived its interest ever signed the Lease, it was not liable under a third-party

beneficiary theory. Successor liability was rejected because DRV never acquired the assets

of MGP and therefore was not a “mere continuation or reincarnation” of MGP. Finally,

the court concluded that the plaintiffs had failed to establish the requisite elements of

quantum meruit. The Court of Special Appeals affirmed for largely the reasons given by

the Circuit Court.

Undeterred, petitioners present to us some of the same arguments raised in the two

lower courts. They contend that (1) the Court of Special Appeals erred in determining that,

in order to be recognized as a third-party beneficiary, they must be a “primary party in

interest,” and (2) when a successor landlord expressly assumes a lease and represents that

he/she/it is assuming “all” obligations of that lease with knowledge of the lease provisions

benefitting intended third-party beneficiaries, the successor “is also assuming obligations

of the original Landlord to the intended third-party beneficiaries.”

5 DISCUSSION

As noted, the Circuit Court’s rulings were in the form of a summary judgment,

which is permissible where there is no genuine dispute of material fact and the moving

party is entitled to judgment as a matter of law. Md. Rule 2-501(f). On the issue that we

shall address, we perceive no genuine dispute of material fact in this case. The only

relevant issues are ones of law, which we review de novo.

Third-Party Beneficiary

Petitioners spend eight pages of their brief and spent a fair portion of their oral

argument supporting their position that they are third-party beneficiaries of the promise in

the Lease that the “Owner” pay the brokerage commissions due upon a renewal of the

Lease. Respondent really takes no issue with that (although it certainly does not concede

it) but urges that, even if they have that status, it is irrelevant. Because we agree with

respondent, we need not spend much time explaining yet again the purpose and contours

of the third-party beneficiary doctrine, other than to confirm what we said in Lovell Land

v. SHA, 408 Md. 242 (2009); Dickerson v. Longoria, 414 Md. 419 (2010); and 120 W.

Fayette v. Baltimore, 426 Md. 14 (2012), namely that a person is a third-party beneficiary

only where the promise sought to be enforced was intended for that person’s benefit and

the parties intended to recognize that person as the primary party in interest with respect to

that promise. See also Wm. T. Burnett Holdings v. Berg Bros., 235 Md. App. 204 (2017).

It is fairly arguable that petitioners were intended beneficiaries of § 17 of the 2010

Lease. They were the only persons named as the brokers, and the amount of commissions 6 that would be due to each of them on renewal were specified in the Lease. It is clear that

they were not the only intended beneficiaries of that provision, however. That provision

also was intended to benefit TRAX – the tenant – by placing the obligation to pay the

commissions solely on the landlord and exempting the tenant from any liability for those

commissions.

If we needed to do it, we would have to resolve whether third-party beneficiary

status requires that the third party be the primary beneficiary – ahead of everyone else – or

only a primary beneficiary. Comment a. to § 302 of the Restatement (Second) of Contracts

suggests the latter (“Section 2 defines ‘promisee’ as the person to whom a promise is

addressed, and ‘beneficiary’ as a person other than the promisee who will be benefitted by

performance of the promise. Both terms are neutral with respect to rights and duties;

either or both or neither may have a legal right to performance”) (Emphasis added).2

Given the basis for our ultimate decision, however, we need not resolve that issue but shall

assume, solely for purposes of this case, that petitioners would qualify as third-party

beneficiaries of §17 and therefore would have the right to sue anyone who may be liable

for paying the commissions.

2 The text of § 302 is consistent with that statement. It articulates the principle as follows: “(1) Unless otherwise agreed between promisor and promisee, a beneficiary is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.” 7 Liability of DRV

The critical issue here is not Cushman/Stone’s status but that of DRV. Relying

principally on a New York trial judge’s decision in Spivak v. Madison-54th Realty Co. 303

N.Y.S.2d 128 (Sup. Ct. Kings County, 1969), Cushman/Stone insist that, notwithstanding

that neither DRV, nor BOA, nor BOA’s assignors (or assignees) signed the Lease

containing the covenant to pay the brokerage commissions or expressly acknowledged or

agreed to be bound by that covenant, they are nonetheless liable because they assumed the

Lease with all of its obligations.

Reliance on the Spivak decision is curious because the judge in that case held exactly

the opposite – 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 correctness of that decision

was confirmed by the Appellate Division of the New York Supreme Court in Gurny,

Becker & Bourne, Inc. v. Bradley, 476 N.Y.S.2d 677 (A.D. 1984) and, indeed, is the general

rule among the courts that have considered the issue. See Coggins v. Joseph, 504 So.2d

211 (Miss. 1987); Blasser v. Cass, 314 S.W. 2d. 807 (Tex. 1958); Talcott v. Warren, 171

S.E.2d 907 (Ga. App. 1969); Keys v. Frazier, 213 So. 2d 276 (Fla. App. 1968); and

Cushman and Wakefield v. Progress Corporation, 568 N.Y.S.2d 56 (A.D. 1991).

The point made in all of those cases, regarded as well-settled, is that an agreement

to pay brokerage commissions on a renewal of a lease is a personal covenant that does not

run with the land, “that the mere assignment of a contract does not carry with it any

8 obligation by the assignee to assume the assignor’s obligation thereunder” [and] [“i]n the

absence of an agreement by the assignee to assume the assignor’s obligation, the assignee

has no contractual obligation to perform.” Coggins, supra, at 213. That is the case even

when the assignee takes the property “subject to the lease.” Keys, supra, at 277.

The Texas Court, in Blasser, explained the rationale for that rule. Personal

covenants of this type, it said, “being purely for the benefit of one having no interest in the

land, will not be enforced against successive owners of real property as a covenant running

with the land” because “[t]o burden lands with personal covenants would be to hamper and

impede real estate transactions to the detriment of owners, purchasers and agents.” Blasser

at 809.3

Against this consensus view, Cushman/Sloan argue that DRV did expressly assume

the obligation to pay their commissions by agreeing in the assignment of the lease to

perform “all of the covenants, agreements, and obligations under the Lease.” That is not

what the assignment said. It said that DRV agreed to assume the covenants, agreements,

and obligations “binding on the assignor.” (Emphasis added). Apart from the fact that

DRV never signed the lease, neither did BOA, the assignor from whom DRV obtained its

title, nor any of BOA’s predecessor lenders. Indeed, as we pointed out, both the Deed of

Trust and the Assignment that BOA acquired stated clearly that the Assignment “shall not

be construed to bind Lender to the performance of any of the covenants, conditions or

3 See also Italian Fisherman v. Middlemas, 313 Md. 156, 163 (1988), holding that where the lessee assigns its leasehold interest, the assignee becomes bound by “covenants running with the land.” (Emphasis added). 9 provisions contained in any such Lease or otherwise impose any obligation upon Lender.”

(Emphasis added). There not only was no clear assumption of the brokerage fee obligation

by BOA or its predecessor lenders but instead an express negation of such an assumption.

JUDGMENT OF COURT OF SPECIAL APPEALS AFFIRMED; COSTS TO BE PAID BY PETITIONERS.