Commercial Tenant’s Promise to Refund Broker Commissions Barred by Statute of Frauds – IL First Dist.

The plaintiff property owner in Peppercorn 1248 LLC v. Artemis DCLP, LLP, 2016 IL App (1st) 143791-U, sued a corporate tenant and its real estate brokers for return of commission payments where the tenant never took possession under a ten-year lease for a Chicago daycare facility.  Shortly after the lease was signed, the tenant invoked a licensing contingency and terminated the lease.

The lease conditioned tenant’s occupancy on the tenant securing the required City zoning and parking permits.  If the tenant was unable to obtain the licenses, it could declare the lease cancelled.  When the tenant refused to take possession, the plaintiff sued to recoup the commission payment.

Affirming summary judgment for the broker defendants, the Court addressed some recurring contract formation and enforcement issues prevalent in commercial litigation along with the “interference” prong of the tortious interference with contract claim.

In Illinois, where a contracting party is given discretion to perform a certain act, he must do so in good faith: the discretion must be exercised “reasonably,” with a “proper motive” and not “arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.” (73-74)

Here, there was no evidence the tenant terminated the lease in bad faith.  It could not get the necessary permits and so was incapable of operating a daycare business on the site. 

Next, the court found the plaintiff’s claim for breach of oral contract (based on the brokers’ verbal promise to refund the commission payments) unenforceable under the Statute of Frauds’ (“SOF”) suretyship rule. A suretyship exists where one party, the surety, agrees to assume an obligation of another person, the principal, to a creditor of the principal.

The SOF bars a plaintiff’s claim that seeks to hold a third party responsible for another’s debt where the third party did not promise to pay the debt in writing.

An exception to this rule is the “main purpose” defense. This applies where the “main purpose” of an oral promise is to materially benefit or advance the promisor’s business interests.  In such a case, an oral promise to pay another’s debt can be enforced.

The court declined to apply the main purpose exception here.  It noted that the brokers’ commission payments totaled less than $70K on a 10-year lease worth $1.4M. The large disparity between the commission and total lease payments through the ten-year term cut against the plaintiff’s main- purpose argument.

The plaintiff sued the corporate tenant for failing to return the commission payments to the brokers. Since the tenant and the broker defendants were separate parties, any promise by the tenant to answer for the brokers’ debt had to be in writing (by the tenant) to be enforceable.

The court also upheld summary judgment for the defendant on the plaintiff’s tortious interference count. (See here for tortious interference elements.)  A tortious interference with contract plaintiff must show, among other things, the defendant actively induced a breach of contract between plaintiff and another party.  However, the mere failure to act – without more – usually will not rise to the level of purposeful activity aimed at causing a breach.

The Court found one of the broker defendant’s alleged failure to help secure business permits for the tenant didn’t rise to the level of  intentional conduct that induced tenant’s breach of lease.  As a result, the plaintiff failed to offer evidence in support of the interference prong of its tortious interference claim sufficient to survive summary judgment.

Afterwords:

1/ A promise to pay another’s debt – a suretyship relationship – must be in writing to be enforceable under the SOF;

2/ A contractual relationship won’t give rise to a duty to disclose in a fraudulent concealment case unless there is demonstrated disparity in bargaining power between the parties;

3/ Tortious interference with contract requires active conduct that causes a breach of contract; a mere failure to act won’t normally qualify as sufficient contractual interference to be actionable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.