Indemnities and caps in contracts are often points of contention, and brokerage agreements are no exception. This article considers key negotiating points of the broker’s indemnity and caps on liability in such agreements.
In preparing or reacting to a brokerage agreement, the party engaging the broker—which may be a landlord, a tenant looking to assign its lease or sublease a portion of its leased premises, a buyer, or a seller (the client)—will want the broker to indemnify, defend, and hold harmless the client for, among other things, (1) all acts and omissions of the broker, (2) any misrepresentation made by the broker, (3) any breach of the brokerage agreement by the broker, and (4) any claims by an outside broker or third party alleging it is entitled to a commission under the brokerage agreement. The indemnity should extend to protection of the client’s officers, directors, employees, and affiliates.
In response to the request for an indemnity, many brokers respond with a cap of their potential damages. The cap would also apply to potential liability under the indemnification provision. Some brokers set the cap at an amount not to exceed the commission payable to them under the brokerage agreement. This response could lead to an unclear cap on liabilities in a situation where there is a dispute before a final commission is determined if the brokerage agreement set the commission at a certain percentage of the rent or purchase price but such rent or purchase price has not been determined.
Other brokers insist that the cap should not exceed the amount of the commission actually received by the broker. In this case, a specific commission amount or formula must not just be set forth in the commission agreement; the commission must actually be paid to the broker. If the broker insists on this language, the broker may have no liability under the brokerage agreement if the transaction does not occur.
With either request, the client or its lawyer could imagine a broker creating a situation where the damages caused by the broker and incurred by the client dwarf the amount of the commission due or paid to the broker. Nevertheless, some form of commission cap, which applies to items covered by the indemnity, seems to be a well-accepted market convention.
In addition to the cap on damages, brokers typically push back on the specific indemnity language. For instance, the broker may try to change the indemnity standard from one covering “all acts and omissions of the broker” to an indemnity that covers only the willful misconduct and the broker’s negligence, or even just the broker’s gross negligence. Or the broker’s lawyer might argue that the broker should not be liable for “any breach of the brokerage agreement by the broker” but instead only be liable if the broker breaches the brokerage agreement and does not cure the breach. If the client is willing to accept the broker’s right to cure, the client’s lawyer must ensure that the brokerage agreement contains a notice and cure period.
Finally, for the indemnity covering “any claims by an outside broker or third party alleging it is entitled to a commission under the commission agreement,” a broker’s lawyer might contend that the indemnity should only cover claims that result in the loss of money or business by the client and not merely the fact that there is a claim. The client should push back by noting that even if no commission is due to the third party or outside broker, the client should not be the one defending against the claim and so this language should remain unmodified.
Regardless of the form of the cap on damages or the specific language in the indemnity, the client should not be liable to the broker for any consequential, special, incidental, indirect, or punitive damages related to the broker in the brokerage agreement. If the broker’s lawyer argues that this corresponding limitation on damages should be included for the broker, the client or its lawyer can point out that the broker’s general cap on the damages applies to all damages, including consequential, special, incidental, indirect, or punitive damages, and so the broker should not have both limitations on liability.
Despite some of the shortcomings to calculating and applying a cap on damages due under a brokerage agreement, some form of cap based on commissions seems to be a well-accepted market convention. The specific language that ends up in the brokerage agreement will ultimately turn on the leverage of the parties and the willingness of the broker to concede on points in the hope of landing a large commission.