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M.A. Allen, Inc., v. Johnson: Fire Does Not Remove Commission Obligations

A Louisiana court has considered what type of recovery a brokerage was entitled to receive under a lease when a fire destroyed the leased premises.

Clyde J., Kenneth Ray, and Clyde Ricky Johnson ("Owners") were the owners of commercial property which had formerly been used as a car dealership. The Owners hired J.L. Shilling of M.A. Allen, Inc. ("Brokerage") to represent them in the sale of the property. The parties entered into negotiations with Kenworth of Jackson, Inc. ("Kenworth"), which produced a three year lease with various renewal options as well as an option to purchase ("Lease"). The Lease obligated the Owners to pay a commission percentage of the rental amounts on an annual basis and also obligated the parties to pay the Brokerage a percentage of the commission price if the purchase option was exercised. The Lease also required Kenworth to obtain fire insurance for up to 90% of the replacement value of the building. Kenworth obtained fire insurance in the amount of $1.2 million.

The Lease was executed in July 1999, and the Owners paid the Brokerage the required Lease commission amount. On the first anniversary of the Lease, the Owners paid the second year's commissions in advance. However, three months into the second year of the Lease, a fire destroyed the building on the property. No attempt was made to repair the building by the Owners, and Kenworth stopped making payments pursuant to the Lease. Kenworth recovered $1.2 million in insurance proceeds and the Owners filed a lawsuit against Kenworth seeking recovery of the proceeds. Eventually, the parties settled the dispute, with the Owners receiving $1,112,500 from the insurance proceeds and Kenworth received the property.

The Brokerage filed a lawsuit against the Owners, seeking payment of both the remaining rental amounts as well as proceeds from the settlement, claiming that the settlement amounted to an exercise of the purchase option contained in the Lease. The trial court awarded the Brokerage a commission for the unpaid rental amounts, a commission from the sales price for the premises, and attorney's fees. The Owners appealed.

The Court of Appeal of Louisiana, First Circuit, upheld the award of commission from the sale and the attorney's fees but reversed the award of the unpaid rental amounts. The court first considered whether the settlement agreement amounted to an exercise of the Lease option and so entitled the Brokerage to a commission. The Owners argued that the option in the Lease contemplated that the property’s physical structure would be in tact at the time of sale and also that the rental time periods in the Lease would have expired when the option was exercised. Thus, the Owners argued that the Brokerage could not recover a commission following the fire on the property.

Looking at the evidence, the court found that the Owners and Kenworth had agreed to accelerate the time under which the option could be exercised following the fire. The court also found that the settlement agreement was tantamount to a sale of the property to Kenworth flowing from the option, as the Owners transferred their interest in the property to Kenworth as part of the settlement. Since the Lease gave the Broker a commission from the sale of the property, the court ruled that the Brokerage was entitled to recover a commission and so the award of the trial court was affirmed.

Next, the court considered whether the Brokerage could recover the unpaid rental amounts. The Owners argued that they should not be liable for the third year's rental payments, as no rent was ever owed for the third year and the Owners and Kenworth had not even negotiated the rental amount for the third year. The Brokerage argued that the Lease required the Owners to rebuild the premises if they were destroyed and the Owner should not be able to escape his commission obligations under the Lease simply because he did not rebuild. The court rejected the Brokerage's argument, finding that there was no obligation for Kenworth to exercise the option to purchase if the Owners had rebuilt the premises. Since the Owners had sold the property rather than rebuild it, the Brokerage was only entitled to recover a commission from the resulting sale. Thus, the court reversed the trial court's award of a commission for the rental amounts.

The final issue was whether the Brokerage was entitled to an award of attorneys' fees. The listing agreement provided that the Brokerage could recover attorney's fees in the event of a default. The Owners argued that they did not default on any obligations, and that the obligations of the listing agreement were negated once the Owners entered into the Lease with Kenworth. The court rejected these arguments, finding that the Owners had failed to pay the Brokerage a commission from the sale of the property and so were in default. Thus, the award of attorney's fees was affirmed.

M.A. Allen, Inc., v. Johnson, 879 So.2d 746 (La. Ct. App. 2004).