The Real Deal | January 30, 2018
By Rich Bockmann
When a busted partnership between a pair of brokers at Newmark Knight Frank gave rise to fight over a $1.1 million commission, a panel of three colleagues stepped in to settle the dispute.
The senior broker, Lawrence “Chip” Porter, claimed he was entitled to the 50/50 split for the Urban Soccer lease at the Brooklyn Whale Building. His argument was that they had verbally agreed to the split as partners, and their relationship with the tenant began while they were still a team. Junior broker George Valliades had a different take. He argued that Urban Soccer broke off talks after that initial meet and then came back to the table. He felt he was under no obligation to split his haul with his former partner.
What separated this quarrel from a run-of-the-mill commission dispute was the fact that Porter happened to be the son-in-law of Newmark president Jimmy Kuhn.
And that’s when things got interesting.
On the day of the arbitration, Kuhn showed up at the proceedings and “became outraged and caused a disturbance outside the room,” Valliades claimed in a lawsuit he filed against the company following the arbitration. The scene had “a visible impact on the panel and ultimately, on their bias,” he said.
The three-person panel decided in favor of Porter. Valliades is no longer with Newmark.
Brokerage is an eat-what-you-kill business, often described in terms of a lawless frontier where the rules of engagement can be codified with a handshake instead of a pen. Those are the perfect conditions, insiders said, to create the sort of gray areas where commissions hang in the balance.
“When people work entirely on commission, it’s possible for somebody to do a lot of work and wind up not getting paid,” said Henry Bergman, an attorney at the law firm Moses & Singer. “Also, when you’ve got one broker working with another broker, they tend to develop different views on who’s worthier.”
While brokers and managers told The Real Deal that the number of commissions disputes represents just a fraction of the thousands of deals inked every year, the stakes are high enough that when they do occur, both sides usually dig in. For seasoned dealmakers and their firms, millions of dollars often hang in the balance when they go to the mat to claim what they believe to be theirs. And for upstart brokers, a disputed commission could be the biggest deal of their careers.
And regardless of how many commission agreements get signed, or how rigorous the arbitration process set up by the firm, industry experts said that disputes happen at every level of the business.
“It’s the Wild West to some degree,” said Michael Weiser, president of GFI Realty Services. “Perhaps some brokers will say they’re going to shoot you before they pull out the gun, but they’re still taking out the gun.”
At the heart of every real estate commission – whether it’s a residential or commercial deal – is the legal idea of a procuring cause. A licensed broker is entitled to a commission when he or she has a contract and plays a direct role in consummating a deal, according to law.
But there’s a lot of room for interpretation, and experts said disputes often arise when one side of the deal questions just how significant a role the broker played in putting everything together.
“Performance often becomes an issue. Did a broker produce a ready, willing and able buyer?” explained new-development specialist Nancy Packes, who previously served on the Real Estate Board of New York committee that arbitrates residential brokerage disputes. “Typically, that’s where these things tend to get hairy.”
A broker with an exclusive to sell a home or an apartment, for instance, will show it to many potential buyers during the exclusive term and keep a list of those names. Should the exclusive expire and one of those potential buyers returns to do a deal with a new broker, the thinking goes, the original agent should be able to produce the list and prove their role in the deal. But that’s the kind of gray area where a dispute can arise.
“Perhaps some brokers will say they’re going to shoot you before they pull out the gun, but they’re still taking out the gun.”
On the commercial side of the business, when it comes to the world of large, institutional deals, most of these details and contingencies are spelled out in lengthy employment contracts and exclusive agreements. But in the rough-and-tumble world of street brokerage, exclusives are fewer and farther between.
“An open-listing world is a sea of gray to start with,” said Weiser, who said that more often than not, he sees disagreements arise when multiple brokers are involved and there’s no exclusive listing. “You don’t have to be doing something wrong; you can be doing your job well and you’re bound to run into conflicts.”
Muddying the waters is the fact that in real estate, unlike other parts of contract law in New York State, a written contract is not required. Verbal agreements and handshake deals will hold up in court as binding contracts, and in many corners of the business that’s how deals get done.
And it’s not just other brokers that dealmakers have to worry about. Sellers, clients and landlords have also been known to try in withhold a commission check.
“The defenses are myriad. There are a thousand different reasons not to pay them,” said Errol Margolin, a partner at the law firm Margolin & Pierce, who represents the Corcoran Group in many dispute cases. “People just don’t like brokers. They hate them. If they can cut the broker out of the deal, they will try. A lot of brokers aren’t careful. If they don’t dot their Is and cross their Ts, they can lose.”
The cautionary tale
It’s probably a telling sign that there are nearly as many formal systems to mediate commission disputes as there are disputes themselves.
Most of the large institutional firms require their agents to arbitrate disputes in-house, and formally document agreements on commission splits. For disagreements between brokers at different firms, REBNY offers its own arbitration process.
A spokesperson for REBNY said the board oversees around eight to 12 arbitrations a year, but declined to comment further on the details of the process. REBNY keeps standing committees of brokers, attorneys and other industry players to sit in on arbitration panels when an issue comes up.
And of course, there’s always the option to go to court. One of the highest-profile court cases in recent memory came to an end in December when Cushman Wakefield dropped its appeal to a lawsuit filed by a team of top brokers when they left for rival JLL in 2011.
After nearly 14 years with Cushman, the team led by Mitchell Konsker claimed they were owed millions. The two sides reached a settlement in 2014 on the base salary owed, but then spent several years in court arguing over attorneys fees and the bonus that the brokers were entitled to on the bigger deals. Known at Cushman as the 5-10-15 schedule, the brokers could earn a bonus that ranged from an extra 5 percent on deals worth more than $300,000 to 15 percent on deals over $800,000.
Konsker and his team had originally sued for no less than $8 million in wages and another $4 million in compensatory damages. But the sum they spent nearly four more years tussling over before Cushman dropped its appeal was just $150,000.
The brokers involved in the lawsuit and representatives for Cushman declined to comment. But a source with knowledge of the proceedings said ego played a big part in both sides going toe-to-toe for so long. In the retail world, Douglas Elliman’s Faith Hope Consolo took some hits in the press for a lawsuit brought by her former partner Joseph Aquino, who alleged that the brokerage withheld $1 million in commissions from him and used the funds to pay for Consolo’s lavish lifestyle. (A judge later dismissed the suit, and Aquino moved on to another firm.)
Cases like these put dealmakers in the headlines for the wrong reasons, and there’s always the concern that battling over a commission check can damage a reputation, possibly turning others away from potential deals with a broker.
But one broker disputed this view, saying that players will generally overlook a person’s past if there’s a profitable deal to be had.
“If you have two choices, to go with the good person or the bad person, you’re going to go with the good person,” the broker said. “But you don’t always have that choice. If there’s a deal to be made, you’re going to make that deal happen.”
But oftentimes parties prefer to resolve these matters out of public view, because there can be consequences to airing dirty laundry.
In 2016, for example, Cushman broker James Rougan filed a lawsuit claiming fellow broker Jeffrey Heller failed to honor their agreed-upon 50/50 split on the 470,000-square-foot lease they negotiated on behalf of Amazon at Vornado Realty Trust’s 7 West 34th Street.
“People just don’t like brokers. They hate them. If they can cut the broker out of the deal, they will try. A lot of brokers aren’t careful. If they don’t dot their Is and cross their Ts, they can lose.”
Cushman fired Rougan less than a week after he filed the lawsuit, but that wasn’t the end of the fallout. Sources said Amazon was incensed by the squabbling between the agents and the bad press that ensued.
At some point down the line, Amazonswitched brokers to a team at JLL headed by Derek Trulson, who represented the e-commerce giant when it inked a 360,000-square-foot deal in September at Brookfield Property Partners’ 5 Manhattan West.
Sometimes, there can be a more nefarious disincentive to pursuing a commission.
Adam Leitman Bailey, a real estate attorney, said he once represented a broker in a dispute with a heavyweight who hired a private investigator to dig up dirt on his client. The investigator, he said, found out the broker’s husband had an embarrassing health issue, and threatened to release the info as blackmail.
“It would have been very embarrassing,” said Bailey, who added that they settled the case, but didn’t get the full settlement. “Out of all the cases in my life, not one bothered me as much as that injustice.”
But while a battle for a commission check can get seared in one’s memory, most brokers have picked up and moved onto the next deals.
Colliers International president Joe Harbert said that while he hasn’t seen many disputes in his 30 years, he’s always got “one or two cooking.”
“There are probably repercussions,” he explained. “It’s time-consuming. It’s painful. Sometimes it’s hard after the fact to talk to that person.”
But there’s also the view that when there’s a deal, it means there’s money on the table, and no dealmaker worth their salt would let the threat of a little squabbling get in the way.
“’Eat what you kill’ means I’ve got to go find my own business,” Harbert added. “It doesn’t mean you’ve got to go eat your neighbor.”
View article here.