Brokers vs. developers: battling it out in court

Corcoran Sunshine and Five Franklin Place in latest legal standoff over struggling condo

Mar.March 31, 2009 05:05 PM

The Corcoran Sunshine Marketing Group has filed a lawsuit in New York State Supreme Court alleging that the developer of Tribeca’s Five Franklin Place condo owes the brokerage more than $500,000.

In the summons addressed to the developer, Corcoran said it terminated its exclusive sales agreement with Franklin Place last October, after the developer of the unfinished condo failed to pay more than $100,000 in marketing expenses. Corcoran argued that based on its initial agreement with the developer, it was entitled to a $500,000 termination fee if it ended its sales agreement with Franklin Place.

The lawsuit between Corcoran and Franklin Place LLC, which was filed in late January but is being reported for the first time by The Real Deal, is one of several recent suits between brokerages and developers. Real estate lawyers and brokers say they expect brokerage-developer litigation to mushroom as the market continues to trend downward and developers find themselves with less money for marketing expenses while condo plans are scaled back.

Allison Scollar, who heads up the real estate division at the law firm Guzov Ofsink, said she is currently working on a couple of cases between New York City developers and brokers, but she declined to name the parties involved.

“From the brokerage point of view, they give a lot of added value to a project,” said Scollar. “The other side of the coin is, if the broker and developer begin arguing, it is the developer’s product, and they have the ultimate say.”

Lawsuits are, of course, plentiful during downturns. In the early 1990s, there was also an increase in real estate litigation, said Scott Mollen, a partner at the firm Herrick Feinstein.

“There was an uptick in litigation between everybody,” said Mollen. “Lenders and sponsors, sponsors and brokers, purchasers and sponsors, sponsors and the attorney general, and between purchasers and brokers.”

As for Five Franklin, the developer is not taking Corcoran Sunshine’s allegations lying down. Last month Franklin Place LLC’s attorney answered the summons from Corcoran, denying nearly all of the brokerage’s allegations. The counterclaim, which was also filed in state Supreme Court, alleges that Corcoran Sunshine owes the developer a minimum of $8 million for damages, plus costs and fees.

It says the Corcoran Sunshine Marketing Group “failed to apprise defendant during 2008 that the market for residential condominiums in New York City, such as those contemplated for the Project, was trending downward at a pace that should have counseled a reduction in the advertising, marketing and showroom expenses being incurred by defendant … Instead, and knowing of the downward trend in the market, plaintiff actually encouraged defendant to increase, or at least maintain, its advertising, marketing and showroom expenses.”

Errol Margolin, a partner at the law firm Margolin & Pierce and the lawyer representing Corcoran Sunshine, disputed the developer’s claim.

“Their counterclaim is baseless,” Margolin told The Real Deal. “Franklin Place consistently ran a big balance [that] they only paid part of, and they were in such breach of their agreement that Corcoran had to terminate their association with them.”

Five Franklin may be facing other troubles as well. In December, the real estate Web site Curbed reported that the project was in default on its acquisition loan and is currently being marketed for sale.

Representatives from Corcoran; Franklin Place LLC’s principal, Leo Tsimmer; and Tsimmer’s lawyer in the suit, Jeffrey Dannenberg, did not return calls for comment on the litigation. According to Mollen from Herrick Feinstein, who is not involved in the Five Franklin lawsuit, the “termination fee” like the one sought by Corcoran is frequently built into brokerage-developer agreements.

“If the sponsor wants the right to terminate the brokerage firm without cause, then it is not uncommon that the broker will bargain for a provision in the brokerage agreement that provides for a termination fee,” said Mollen. “Of course, whether a termination is ‘for cause’ or ‘without cause’ may be a disputed issue.”

One of the other issues at the crux of the Corcoran-Franklin Place case — the allegation that Franklin Place LLC did not reimburse Corcoran fully or in an expedient fashion for marketing outlays — also applies to other brokerage-developer disputes. It is, for example, also the central issue in two recent lawsuits that Halstead Property has brought against developers.

As The Real Deal reported in late February, Halstead filed a suit against the developer of the Upper West Side condo conversion Park Columbus, Yair Levy, alleging that he owed the brokerage roughly $75,000 for outstanding expenses that include “advertising, supplies, printing and the like for the condominium project.”

Halstead also filed a suit about a month ago against North Manhattan Construction, the developer of the half-rental/half-condo project Bridges NYC in East Harlem.

The cases, according to the Neal Schwarzfeld, a partner at Penn, Proefriedt, Schwarzfeld and Schwarz who is representing Halstead, are “of a very similar vintage” in that they both involve Halstead seeking to recoup money for advertising expenses.

Stephen Kliegerman, the executive director of development marketing at Halstead, noted that when brokerages and developers sign sales agreements, the developer typically agrees to reimburse out-of-pocket expenses incurred by the brokerage in service of marketing a building.

Levy and the principal for North Manhattan Construction, Michael Waldman, did not return phone calls for comment on the suits.

Meanwhile, another aspect of the Corcoran-Franklin Place lawsuit is more applicable than ever when it comes to battles between brokerages and developers.

In Corcoran Sunshine’s suit, the brokerage alleges it is entitled to commissions on three units it put into contract at Five Franklin, if and when the sales close, despite the fact that the brokerage is no longer the building’s sales agent.

Lawsuits over commissions owed when brokerages and developers part ways are not uncommon. Last summer, for example, the Corcoran Group brought a lawsuit against the developer of a seven-unit condo at 526 East 80th Street, 538 Emmut Properties LLC.

The suit hinged on the fact that a Corcoran broker brought a unit in the building into contract before the brokerage and developer terminated their exclusive agreement. The unit’s would-be buyer then rescinded the offer for the unit and it never closed.

Corcoran argued that it was still owed a commission even though the unit didn’t close, but the court eventually dismissed the brokerage’s allegations.

Mollen, who wrote a case study of the lawsuit in the New York Law Journal, said the outcome of these types of cases “will be based on the precise language.”

“This is especially so when the courts are dealing with sophisticated parties who were represented by experienced counsel,” he said.

Corcoran Sunshine’s attorney, Margolin, noted that such cases often hinge on whether it can be proven that “the developer caused the condo not to close … If the developer refuses to close but a broker produced a buyer, the broker should be entitled to a commission.”

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