IDI is seeking reimbursement of a $404,551.80 commission paid in two installments to Grubb & Ellis brokers, Gary E. Lindsey and Robert O. Fulford II, who signed Act Manufacturing Inc. of Hudson, MA, to a 10-year lease for a 100,000-sf build-to-suit in IDI's Plano Business Park. The well-known Grubb team halved the commission with William D. Bailey, now a principal with Spaulding & Slye and Act Manufacturing's longtime real estate broker. IDI also filed a third-party petition for repayment against Spaulding & Slye.

Real estate sources say the lawsuit's underlying implication is that brokers are being asked to guarantee the creditworthiness of tenants, an impractical as well as risky proposition from the professionals' perspective. Also at the forefront of the dispute is the interpretation of the word, "occupancy." Act Manufacturing signed an acceptance paper and paid some rent, but never set up a desk or connected a telephone at the location, which is still empty despite active marketing, says an IDI source. Needless to say, the case has caught the attention of the Dallas-Fort Worth brokerage community.

The deal started to crumble Dec. 21, 2001, when Act Manufacturing went belly-up, filing a Chapter 11 about 15 months after it signed its first document for the industrial build-to-suit. According to court records, the bankruptcy petition came five months after the tenant signed an "acceptance of demised premises" document and paid three months' rent. On Jan. 25, 2002, Act Manufacturing convinced the court to reject the lease.

The brokers collected the first check in October 2000, a month after Act Manufacturing signed the first set of papers. IDI's conditions for the second payment were occupancy of the premises by the tenant; commencement of the lease term (which started July 1, 2001); the start of rent payments; and execution of the tenant's acceptance of demised premises. According to the IDI source, the second payment was made, without stipulations, before all conditions were fulfilled. The acceptance document was signed at the end of July 2001, court records indicate.

According to the lawsuit, IDI asked Grubb in March 2002 to return the commission, citing a breach of the agreement because Act Manufacturing never occupied the building, in its opinion. Three months later, IDI's Dallas attorneys filed the lawsuit in the district court in Collin County.

A Grubb & Ellis source in the legal department is confident the lawsuit will be in mediation within six months. Commission dissents are "unusual but not unheard of," the insider says, noting cases have an average life cycle of 18 months to two years. Mediation has a 95% success ratio so it's a relatively safe bet that the lawsuit won't end up before a Collin County jury.

Attorneys for the Texas Association of Realtors and the Texas A&M Real Estate Center say this could be a precedent-setting case if it climbs up the legal ladder to the appellate level. "It probably is a case of first impression in Texas," says Thomas Morgan, associate counsel for the Texas Association of Realtors.

The experts agree brokers realistically would be hard pressed to guarantee a tenant's creditworthiness. "There is a business decision about how much risk you're going to take in the course of doing business," Morgan says. Contested commissions are more commonplace in the residential real estate sector, but he says even then it usually doesn't get as far as the courts because of the possible fallout on future business. In any case, the contract's clauses clearly are open to interpretation, he says, noting that's a task for the court.

Judon Fambrough, an attorney for the Real Estate Center, says the breach of contract lawsuit could be saber-rattling "to get some out-of-court settlement" since there is no allegation that the brokers neglected their fiduciary duty to IDI, which hired them to find a tenant for the park. A commission is equivalent to a finder's fee. "When they sign a lease, I think your duty is done," he says.

The parties could have turned to SIOR to arbitrate since IDI is an associate member and Grubb is an active member. Mark Crowley, vice president of membership and information services for the Washington, DC-based organization, says confidentiality regulations prevent him from saying if they sought arbitration via the SIOR platform, one that requires active members to settle disputes. Associate members, he points out, have a choice whether to participate in SIOR arbitration. "We do have a very sophisticated system and it works well when it's called upon," he says.