ROFRs | Brokers’ Commissions | Town’s Prayer Practice

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ROFR Could Not Be Properly Exercised

ROFR Could Not Be Properly ExercisedIn AAR Allen Services v. Feil 747 Zeckendorf Blvd. LLC, the U.S. District Court for the Southern District of New York denied a party’s claim that it properly exercised its right of first refusal (ROFR) to purchase back real property it had sold. The Court concluded that the offer came from a straw-man and was, therefore, not a legitimate offer.

In 2003, AAR Allen Services sold its Garden City property to IStar Garden City LLC and simultaneously leased it back for 20 years. The lease provided AAR with a three-month’s right of first refusal to repurchase the property if IStar received a purchase offer exceeding $16.18 million that did not come from an AAR “affiliate.”

In 2008, IStar assigned the lease to Feil 747 Zeckendorf Blvd. LLC. Two years later, in January 2012, AAR entered into an agreement with Jones Lang LaSalle for “advisory services” related to AAR’s real estate holdings. According to this agreement, Jones Lang offered to buy the property for $16.28 million. Thereafter AAR attempted to exercise its ROFR. Feil refused the offer, claiming that Jones Lang was an “affiliate” of AAR within the meaning of the lease.

According to the decision, the lease agreement defined “affiliates” to mean “Persons (other than individuals), controlled by, controlling or under common control” with tenant. “Control,” in turn, is defined as “the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contracts or otherwise.”

Applying basic New York law of contract construction, the Court concluded that Jones Lang was an “affiliate of AAR” within the meaning of the lease. “Paragraph 30 of the lease agreement, along with its related definitions, was plainly drafted to prevent just the sort of gamesmanship AAR attempted in this case. Indeed, the obvious reason to include such a clause in a long-term lease agreement is to prevent one counterparty from making a straw-man offer and effectively holding a call option on the property at a below-market price. Consistent with that interpretation, the lease agreement defines “affiliate” in capacious terms: party A is an affiliate of party B if it has “the power to direct or cause the direction of the management and policies of [party B], whether through the ownership of voting securities, by contracts or otherwise.

The Court found that the agreement between AAR and Jones Lang “gave AAR that measure of control because it effectively required Jones Lang to do exactly what AAR wanted to do: namely, make a purchase offer for the Garden City property. That this measure of control came through positive rather than negative reinforcement – i.e., a benefit for complying rather than a punishment for breach – is irrelevant for purposes of the lease agreement, which also includes as “affiliates” entities “control[led]… otherwise.” Apparently, the agreement between Jones Lang and AAR required Jones Lang only to submit a purchase offer for the Garden City property in order to collect $360,000. The Court noted that under this agreement Jones Lang “effectively bore no risk in the transaction whatsoever,” because it knew that AAR would exercise its ROFR.

Accordingly, the Court concluded that Jones Lang was, for purposes of the lease agreement, AAR’s affiliate – “either by contract or, in the alternative, “otherwise.”

Standard For Earning Brokers’ Commissions

Standard For Earning Brokers’ CommissionsIn SPRE Realty v. Dienst, the Appellate Division, First Department recently clarified what it saw as “varying language” in interpreting the standard set by the highest Court of the State of New York for just when a broker’s commission is earned. The Court concluded that a real estate brokerage firm could proceed with a lawsuit seeking a commission from a couple who had backed out of buying an apartment, and then bought another apartment in the same building 18 months later.

According to the decision, the defendants are a married couple who retained the brokerage firm in 2006 to help them buy a luxury apartment in Manhattan. One of the principals of the brokerage firm showed the couple several apartments over more than a year.

In October 2007, the broker introduced the couple to the developer of a new condominium building being built. The developer showed the couple layouts and renderings for the building. In July 2008, the broker negotiated a deal for the couple to purchase two units in the building, forming a duplex, for $11.5 million. Contracts were reviewed and exchanged between the parties and the broker also searched for an architect for the couple to convert the new apartment into their desired duplex.

In August 2008, the couple withdrew from the deal, telling the broker that they had dropped their plans to buy a new home. The brokerage firm continued to assist the wife, who was looking for commercial space for her art and antiques store, but all the while telling the broker that the couple had no further interests in the condominium building being constructed.

Nevertheless, in February 2010, the couple bought a different duplex in the same building for much lower price of $6.5 million – which the broker argued was a result in the economic downturn. The brokerage firm sued the couple in May 2013, alleging that they had deliberately concealed their continued interest in the building in order to avoid paying a commission. The couple’s motion to dismiss the complaint was denied and they took an appeal.

The Appellate Division, citing a 1971 Court of Appeals’ decision, recognized that under New York law a broker earns a commission when it “produces a buyer who is ready, willing and able to purchase at the terms set by the seller.” It cited a second Court of Appeals’ decision from 1980 expanding the standard by holding that a broker need not be the “dominant force” in a deal, but only the “procuring cause.”

The Court pointed out that the departments of the Appellate Division have used “varying language” in interpreting the standards set forth by the Court of Appeals. In particular, the First Department had described the standard in at least two ways: (1) the broker has earned a commission when it has “brought the parties together in an amicable frame of mind, with an attitude toward each other and toward the transaction in hand which permits their working out the terms of their agreement”; and (2) the broker has earned a commission when there is a “direct and proximate link” between the broker and the deal.

To resolve the ambiguity, the Court adopted the “direct and proximate link” standard which, it concluded, was narrower than the “amicable frame of mind” standard, and more aligned with the Court of Appeals’ cases. In other words, here, the broker’s actions may have been a direct and proximate link between the introduction of the couple to the developer and their ultimate purchase of the second duplex. It then concluded that there was a question of fact about the brokerage firm’s role in the final purchase. “Although 18 months passed between the abandonment of the first transaction and the conclusion of the second transaction, whether defendants withdrew from the first transaction in good faith is a question of fact to be decided on the evidence.” “The answer will depend on when [the couple] renewed their interest” in the condominium and “recommenced negotiations with the developer of the property.” Simply, they may have never lost interest, but that is for a jury to decide.

Town Board’s Prayer Practice Approved By High Court

Town Board’s Prayer Practice Approved By High CourtThe highest court in the land recently held that the Town of Greece, located in the northern most part of Monroe County, New York, can continue its practice of having clergy members from local congregations say a prayer before its monthly town board meetings. The challengers to this practice claimed that it was violative of the Establishment Clause of the First Amendment as, although open to all creeds, the prayer was almost always Christian, as nearly all of the local congregations are Christians. Town of Greece v. Galloway, 134 S.Ct. 1811(2014).

In a 5-4 decision, there was no surprise that Justice Kennedy, who authored the Court’s opinion, was the swing vote. This time he agreed with the conservative bloc of Justices (Roberts, Alito, Scalia and Thomas), with the liberal bloc (Kagan, Ginsberg, Breyer and Sotomayor) dissenting. This split is so common that statistics from 2012 reveal that 70% of the time a case is decided on a 5-4 margin by the Supreme Court, the conservative bloc votes together and the liberal bloc votes together, with Justice Kennedy determining the outcome. This is why some scholars refer to the present Court as the “Kennedy Court,” rather than the “Roberts Court” – a tradition where the Court is recognized by its Chief Justice.

In Town of Greece, Justice Kennedy looked to history to come to his conclusion. He recognized that legislative prayer dates back to the First Congress and the framers of the Constitution. United States Supreme Court precedent also supported this conclusion. In Marsh v. Chambers, 463 U.S. 783 (1983), the Court found no First Amendment violation in the Nebraska legislature’s practice of opening its session with a prayer delivered by a chaplain paid from state funds. The decision concluded that “legislative prayer, while religious in nature, has long been understood as compatible with the Establishment Clause.” A later decision of the Supreme Court held that such a practice “lends gravity to public business, reminds lawmakers to transcend petty differences in pursuit of a higher purpose and expresses a common aspiration to a just and peaceful society.” See Lynch v. Donnelly, 465 U.S. 668, 693 (1984).

The challengers to the Town’s practice insisted on only “nonsectarian prayer.” The Supreme Court rejected this position. “To hold that invocations must be nonsectarian would force the legislatures that sponsor prayers and the courts that are asked to decide these cases to act as supervisors and censors of religious speech, a rule that would involve government in religious matters to a far greater degree than is the case under the town’s current practice of neither editing or approving prayers in advance nor criticizing their content after the fact.”

The challengers also sought to limit prayers to ones that referred to only a “generic God,” and the Court rejected this position too. “The law and the Court could not draw this line for each specific prayer or seek to require ministers to set aside their nuanced and deeply personal beliefs for vague and artificial ones.”

Notwithstanding, the right to legislative prayer is not without limits. “If the course and practice over time shows that the invocations denigrate nonbelievers or religious minorities, threaten damnation, or preach conversion, many present may consider the prayer to fall short of the desire to elevate the purpose of the occasion and to unite lawmakers in their common effort.” In such a circumstance, the practice would not be supported by history or precedent, and thus, would present a different case than the one presently before the Court.

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