Kenneth A. McCONNELL and Louise A. McConnell, Plaintiffs and Appellants, v. Harry L. COWAN, Defendant and Respondent.*
Plaintiffs brought this suit for declaratory relief, rescission, and to quiet title. The controversy arose out of a dispute as to the validity of a contract for a real estate commission. Defendant filed a cross-complaint praying that the contract be declared valid. Judgment was for defendant.
Plaintiffs are husband and wife. The husband having acted alone will be referred to as plaintiff. Defendant is a licensed real estate broker.
About one year prior to October 1952, defendant talked with E. D. Mitchell, the owner of the southeast corner of Broadway and Atlantic Avenue in Long Beach, concerning the leasing of the property. On October 24, 1952, defendant for the first time discussed with plaintiff the matter of putting a drive-in restaurant on the property. Defendant testified that plaintiff gave him a letter authorizing him to make an offer to Mitchell; he (defendant) had dictated the letter, it was taken down in longhand, and plaintiff had it typed. The letter was addressed to defendant: ‘Mr. Harry L. Cowan, Leasing Agent.’ (Italics added.) It reads:
You are herewith authorized to offer for me to Mr. D. Mitchell the owner of the Southeast corner of Atlantic & Broadway, City, the following proposition as follows: that
I will pay the sum of $750 per month for a portion of this property which size shall be acceptable to me, for the term of ten or fifteen years (which shall be also agreeable to me) and provided however that Mr. Mitchell shall expend the sum of $25,000 for improvements as per my plans and specifications to be used for the same type of business as I now operate.
I will only accept this location or part thereof provided Mr. Mitchell pays you your desired leasing fee. (Italics added.)
Defendant further testified that at the time plaintiff gave him the letter plaintiff had said ‘he would take the place whether he got the building built or he didn't get the building built. He would take a ground lease or take it with the building on it. * * * I was to see Mr. Mitchell to find out if I could get one of the deals.’ On October 24 plaintiff and defendant also orally agreed that in the event plaintiff was able to secure a lease of the property, defendant was to receive as a commission 5% of the net profits of the business transacted on the property.
Defendant testified that on the same day he gave the terms of the offer to Mitchell; he did not show plaintiff's letter to Mitchell; Mitchell wanted to consider the matter over the week end. The following Monday morning, October 27, defendant contacted Mitchell. Mitchell said he did not want to erect the building but he would lease the property as a ground lease. He (defendant) went to plaintiff's office and had a conversation with him. Plaintiff said he would lease half of the property for $500 a month. They then had a discussion as to the commission defendant was to receive for obtaining the lease; he wanted the oral agreement of the 24th to be put in writing. Plaintiff signed two sheets of blank letterhead and gave them to him. Later that day defendant typed a commission agreement on one of the sheets, and on November 5 he defined ‘net profits' on the other sheet. He gave plaintiff a copy of each letter.1
The letter of October 27 in part reads: ‘for and in consideration of ten dollars receipt of which is acknowledged by myself and other considerations given by you to me—guarantee to pay to you the sum of. * * *’ Defendant testified that he never gave plaintiff the $10. Relative to the ‘other considerations given,’ he testified, ‘I had intended to take that piece of property for myself, with Mr. McConnell. That was my discussion with Mr. McConnell. He said he had tried to obtain this piece of property, could not get it. * * * I said that I was going down to see Mitchell to see if I could line it up for myself. He said, ‘What kind of deal will you make with me, if you get it for me and not take it for yourself?’ I said, ‘What kind of a deal do you think would be fair?’ And that is how we arrived at the five per cent'; plaintiff ‘never could have gotten’ the lease without his (defendant's) ‘forbearance’ of his taking the lease himself. Defendant also testified that part of the consideration was that he was to obtain a lease on the property for plaintiff.
Defendant testified that on October 28, 1952, Mitchell executed in his office an instrument whereby he agreed to lease half of the property to plaintiff. After Mitchell signed the agreement, he (defendant) called plaintiff and ‘told him that we had a deal for $500 a month, ground rental, and then I believe I went on back to the office, that he had his check ready to cover this deal. * * * Mr. McConnell went back in my car to Mr. Mitchell's office.’ (Italics added.)
The agreement between defendant and Mitchell was typed on letter-size stationery and is in the form of a letter, addressed to defendant as leasing agent. It reads:
‘October 28, 1952
‘Mr. H. L. Cowan, Leasing Agent
‘206 Times Building
‘Long Beach, California
‘Dear Mr. Cowan:
‘Please be advised that I herewith agree to lease the ground (to Mr. Ken McConnell for the purpose of a DRIVE-IN) which ground is located at the Southeast corner of Atlantic and Broadway in the city of Long Beach upon the following basis: (1) [Half of present area.] (2) [For 10 years with option to renew for 5 years.] (3) [Rental $500. a month.] (4) [Lessee to pay half of any tax increase after ten years.]
‘(5) I will pay H. L. Cowan a three percent leasing commission on the total rental upon the signing of said lease and you have forty-eight hours in which to accept or reject this proposal. If Option on lease is excercised H. L. Cowan to receive his commission at that time on said option.
‘Yours very truly,
‘D. Mitchell [Signed]
‘Ken McConnell [Signed]
‘E. D. Mitchell
‘It is understood that this lease is to embody Lots 2, 4, 6, 8, 10, 12, 14, 16, the entire 16 ft. vacated alley and the West 34 ft. of Lots 1, 3, 5, 7, 9, 11, 13, and 15. Being approximately 190 ft. on Atlantic Avenue and 200 ft. on Broadway Avenue.
‘K. McC [Signed]’
Two different typewriters were used to type the agreement. The major part of the letter agreement was typed with pica type, while the last sentence of paragraph (5) and the paragraph at the bottom of the page describing the property were typed with elite type. The name ‘D Mitchell’ was written in blackish colored ink, while the name ‘Ken McConnell’ was written with emerald blue ink. The initialling of the last paragraph was done by plaintiff in the same blackish colored ink with which Mitchell had signed his name, but Mitchell approved the last paragraph by signing his name with royal blue ink.
Defendant testified that it was ‘possible’ that he drafted the letter of October 28, took it to plaintiff's office, plaintiff signed it, and then he took it to Mitchell's office where the last sentence in paragraph (5) and the description of the property leased were typed in, and that the entire instrument was not typed in Mitchell's office. Plaintiff testified that when he signed his name to the document, the provisions that appear in elite type were not present; they were added after defendant had driven him to Mitchell's office. Mitchell testified that when plaintiff signed the instrument, he (plaintiff) had not met him and that it was after plaintiff had accepted his proposal for the ground lease that he learned it was plaintiff who wanted to lease the property. Defendant never disclosed to Mitchell that he was receiving a commission from plaintiff.
After plaintiff and Mitchell had executed the agreement of October 28, they discussed the leasing of the other half of the property. On November 4, plaintiff and Mitchell executed two leases of the property, one for the western half, and the other for the eastern half. The lease on the latter half runs concurrently with the former. Mitchell testified that although defendant was not consulted with reference to the lease for the western half, it was because ‘we had agreed on everything in the lease before, and it was just merely a case of me telling Mr. Ulman [his attorney] what the provisions of the lease were and he wrote them down. There was no argument. * * * The conditions are practically those embodied in the agreement here [letter of October 28].’ Defendant did not assist nor was he in any manner involved in the preparation of the lease of the eastern half. After plaintiff and Mitchell executed the leases, Mitchell paid defendant $1,800 as a commission.
When plaintiffs rested their case, defendant's motion for a nonsuit as to the first and second causes of action, rescission and fraud respectively, was granted. The trial proceeded as to the third and fourth causes of action, declaratory relief and quiet title.
The court found that: Mitchell had no knowledge of the commission agreement between plaintiff and defendant, however, plaintiff knew defendant was to be paid a 3% commission by Mitchell; ‘[t]hroughout the transaction, defendant was acting as a middleman, bringing Mitchell and plaintiff together, and defendant was not acting as an agent of either Mitchell or of plaintiff’; the commission agreement between plaintiff and defendant is valid and defendant is entitled to receive 5% of the net profits of the business operated on the leased property. It was adjudged that plaintiffs take nothing on their complaint and it was declared that the agreement between plaintiff and defendant is valid. Plaintiffs appeal.
The finding that defendant was acting as a middleman was not a finding of fact, but was a mere conclusion of law and as such it may be disregarded as a finding. Wayt v. Patee, 205 Cal. 46, 53, 269 P. 660.
Plaintiffs claim the trial court committed three errors. In essence, however, all three alleged errors raise only one question: Was it error for the trial court to conclude that defendant was acting as a middleman rather than as the agent of either Mitchell or of plaintiff?
It is a well established rule, founded on public policy, that a broker cannot collect a commission from both parties to a lease transaction without disclosing the dual nature of his representation and obtaining the consent of each principal to the payment of a commission by the other. Hagge v. Drew, 73 Cal.App.2d 739, 741–742, 167 P.2d 263. A person employing a broker to negotiate a lease in his behalf bargains for the disinterested skill, diligence, and zeal of the agent for his own exclusive benefit. The rule is based on the doctrine that it is the duty of an agent of a lessor to lease the property at the highest price, and of an agent of a lessee to lease it for the lowest. Consequently, where he attempts to act for both sides, he is confronted with the impossible task of securing for each the most advantageous bargain. Gordon v. Beck, 196 Cal. 768, 773, 239 P. 309; 2 Cal.Jur.2d 778, § 107; 8 Am.Jur. 1036, § 87; Annotation 14 A.L.R. 466.
If an agent is engaged by both parties to effect a sale or lease of property from one to the other, he cannot recover compensation from either party unless both parties knew of the double agency at the time of the transaction. The law will not permit him to enforce his contract for compensation against either party. ‘The reason for the rule is that he thereby puts himself in a position where his duty to one conflicts with his duty to the other, where his own interests tempt him to be unfaithful to both principals, a position which is against sound public policy and good morals. * * * It is no answer to this objection to say that he did, in the particular case, act fairly and honorably to both. The infirmity of his contract does not arise from his actual conduct in the given case, but from the policy of the law, which will not allow a man to gain anything from a relation so conducive to bad faith and double dealing. And the fact that the party whom he sues was aware of the double agency and of the payment, or agreement to pay, compensation by the other party, and consented thereto, does not entitle him to recover. He must show knowledge by both parties. One party might willingly consent, believing that the advantage would accrue to him, to the detriment of the other. The law will not tolerate such an arrangement, except with the knowledge and consent of both, and will enter into no inquiry to determine whether or not the particular negotiation was fairly conducted by the agent. It leaves him as it finds him, affording him no relief.’ Glenn v. Rice, 174 Cal. 269, 272, 162 P. 1020, 1021.
There is, as defendant contends, an exception to this rule when a broker is employed as a mere middleman. Clark v. Allen, 125 Cal. 276, 57 P. 985; Hooper v. Mayfield 114 Cal.App.2d 802, 251 P.2d 330; Williams v. Kinsey, 74 Cal.App.2d 583, 169 P.2d 487; Carothers v. Caine, 38 Cal.App. 71, 175 P. 478; King v. Reed, 24 Cal.App. 229, 141 P. 41. A broker is simply a middleman when he has no other duty to perform but to bring the parties together, leaving them to negotiate and to come to an agreement themselves without any aid from him. Rhode v. Bartholomew, 94 Cal.App.2d 272, 280, 210 P.2d 768; Jensen v. Bowen, 37 N.D. 352, 164 N.W. 4. He merely brings the parties together in order to enable them to make their own contract; he neither negotiates for nor is he employed to negotiate by either side, since the parties when they meet do their own negotiating and make their own bargains. In such a case the broker is in no sense representing conflicting interests because he has nothing whatever to do with the trade; his advice and assistance are not called for. A middleman is in no fiduciary relation to his principal and does not sustain a confidential relation to either party. King v. Reed, 24 Cal.App. 229, 141 P. 41. Therefore, there is nothing against good morals and sound public policy in allowing a middleman to contract for and receive compensation from each of the parties. Clark v. Allen, 125 Cal. 276, 57 P. 985.
To be a mere middleman the agent must not be vested with the least discretion and the first employer must have no right to rely on obtaining the benefit of his judgment. If a broker takes any part in the negotiations, no matter how slight, he is not a middleman but is an agent. Rhode v. Bartholomew, 94 Cal.App.2d 272, 280, 210 P.2d 768; Abrams v. Guston, 110 Cal.App.2d 556, 557, 243 P.2d 109; Jensen v. Bowen, 37 N.D. 352, 164 N.W. 4, 5.
Defendant urges that he was only a middleman—that he merely brought plaintiff and Mitchell together so that they were able to make their own contract without any aid from him. The contention cannot be sustained.
Defendant conceded he dictated the initial offer from plaintiff to Mitchell and that he drafted the offer from Mitchell to plaintiff, which plaintiff accepted. Both of these instruments were in the form of letters addressed to defendant as ‘Leasing Agent.’ Thus he considered himself an agent in the transaction. The letter of October 24th authorized defendant to submit an offer to Mitchell. Plaintiff stated he would lease a portion of the property ‘which size shall be acceptable to me, for the term of ten or fifteen years (which shall be also agreeable to me) and provided however that Mr. Mitchell shall expend the sum of $25,000 for improvements. * * *’ This letter was merely an offer to accept an offer. Even if Mitchell had consented to erect a building on the premises, an agreement would have had to be reached as to the size of the property and the duration of the lease. Plaintiff had told defendant he would take the property even if Mitchell would not build. Plaintiff thereby put defendant in a position to negotiate with Mitchell concerning the erection of a building, the size of the property to be leased, and the length of the lease.
Defendant presented plaintiff's offer to Mitchell who wished to think it over. It was defendant who contacted Mitchell the following Monday morning to learn what the decision was; he had not arranged it so Mitchell could contact plaintiff inasmuch as he had not told Mitchell it was plaintiff who wanted to lease the property. Then defendant, not Mitchell, went to plaintiff's office and discussed Mitchell's offer with plaintiff. When Mitchell signed the letter of October 28th, defendant called plaintiff and told him ‘we’ have a deal. He testified that without his efforts plaintiff would not have been able to obtain the lease. In order to consummate the negotiations, defendant went to plaintiff's office to have plaintiff sign the document and to pick up the check. It was not until he brought plaintiff to Mitchell's office that plaintiff first met Mitchell—after all the important terms and details of the contract had been accepted by both parties. From the two sizes of type on the agreement of October 28th, it is clear that the letter was typed at two different times; that defendant had the major portion of the letter typed on a pica typewriter and that plaintiff then signed it, and that when they went to Mitchell's office the last sentence of paragraph (5) and the paragraph at the bottom of the page describing the property were added by using an elite typewriter; and that Mitchell and plaintiff then approved the minor insertions. This also accounts for the varied colors of ink that were used in signing and initialling the document.
As early as the fall of 1951, defendant had shown an interest in the property. The fact that he was desirous of leasing the property himself and then later for the consideration of the assignment of 5% of the profits agreed to secure the same for the plaintiff, negatives a conclusion that defendant intended to be only a middleman and leave plaintiff and Mitchell to negotiate their own contract. Defendant's commission from plaintiff was entirely dependent upon plaintiff's procuring an agreement to lease. He admitted that in the event the lease was not obtained he could not have received any commission because there would be no business from which a commission could be derived. Also, the amount of his commission would fluctuate according to the net profits of the business. He wanted to be certain that an agreement would be consummated and that the rent would be as low as possible so that net profits would be greater, rent being a charge against gross profits; net profits being inversely proportional to what the rental charge would be. If the business was such that it could pay 5% of its net profits to him as a commission, Mitchell was entitled to know this fact so that he could use it as a basis for determining the rent; particularly where defendant was to perform no services for the business after the lease was executed and where Mitchell was paying him a commission to secure for him a lease of the premises.
Defendant was in a position where he could either inflate or deflate the value or worth to one or the other of the parties. He could, if he so desired, exert his best efforts toward obtaining a lease at the lowest possible figure in order to further his interests by way of 5% of the net profits of the business to be paid to him by plaintiff. On the other hand, he could, without knowledge of the other, inflate the value of the lease to the lessee, thereby securing for himself a greater commission by way of 3% of the moneys to be paid for rent over a period of ten years.
Defendant was clothed with authority to do everything necessary, usual, and proper in the ordinary course of business to effectuate the purpose of his agency. Not only was he invested with, but he actively exercised discretion in advising plaintiff and in negotiating for him the lease of the property. He negotiated all transactions without interference of either party and without a full disclosure to both of them of all facts then known to him. The parties were not brought together until they both had agreed on the terms of the lease. It is immaterial that defendant did not participate in the execution of the lease itself; the lease embodied the terms agreed upon by both parties in the letter of October 28th. We conclude that defendant acted as an agent and not as a middleman.
Defendant having failed to disclose to Mitchell the dual nature of his representation and to obtain his consent to the payment of a commission by plaintiff, he cannot recover any compensation from plaintiff.
1. The letter of October 27, 1952 reads:‘October 27 1952‘Mr. Harry L. Cowan‘206 Times Building‘City.‘Dear Mr. Cowan:‘This letter will herewith constitute a firm agreement without any reservations whatsoever upon my part, that I‘(1) for and in consideration of ten dollars receipt of which is acknowledged by myself and other considerations given by you to me—guarantee to pay to you the sum of‘Five Per Cent of the Net Profit of the total volume of business transacted at the Drive-In to be erected upon a portion of the now vacant property located upon the Southeast corner of Broadway & Atlantic, Long Beach and owned by D. Mitchell.‘(2) This percentage shall be paid to you every three months for the entire term that this business is operated directly or indirectly by myself, my heirs or assigns. (in other words you shall receive this five percent each and every month—but paid to you each three months or four quarterly installments each year.‘Yours very truly,‘Ken McConnell [Signed]‘Made in duplicate this date.’The letter of November 5, 1952 reads:‘November 5 1952.‘Mr. Harry L. Cowan‘206 Times Building‘Long Beach‘California.‘Dear Mr. Cowan:‘In addition to my agreement made to you in the letter to you dated October 27th 1952 wherein you are to receive five percent of the net profits from the entire operation of my drive-in to be built on the Mitchell property on Broadway & Atlantic, Long Beach I further agree that this percentage shall be paid to you, your heirs or assigns, that also my income taxes will not be deducted from the net profits of said operation before computing your percentage, and that you may at your option inspect or have inspected my books.‘Yours very truly,‘Made in duplicate:‘Ken McConnell [Signed]’
SHINN, P. J., and PARKER WOOD, J., concur.