§ 29A.09 Brokerage Services on Behalf of Tenants

• Jurisdiction: United States
• Publication year: 2022

§ 29A.09 Brokerage Services on Behalf of Tenants

[1]—In General

Often an organization searching for commercial space as a prospective tenant will retain a broker to aid it in its search. In such cases, some aspects of the broker/employer relationship differ from when the landlord hires the broker. Obviously, instead of compiling a list of prospective tenants who might be satisfied with the particulars of a specific premises, when working on behalf of a single tenant, the broker compiles a list of prospective premises that might meet the prospective tenant's needs.

Certain specifics of the three basic provisions of the brokerage agreement—amount of commission and payment arrangements, description of the premises, and amount of rent—will usually differ when the broker acts on behalf of the tenant instead of the landlord.

A major point of difference regarding commission is that in many instances, the broker is expected to be compensated not by his client, the tenant, but rather by the landlord of the space to be leased. In effect, the broker must enter into two separate agreements to obtain a commission, raising possibilities of conflict of interest, the need for separate legal recourse in connection with two agreements, as well as other legal issues. If the commission is to be paid by the landlord, the tenant's form of agreement does not have to specify the exact time and circumstances when the commission is earned. Often, however, to minimize the chance that the broker can end up expending efforts and expenses while locating a suitable space without a final agreement by the landlord for payment, the broker negotiates for the tenant to have a choice of paying the commission if the landlord refuses or of paying the difference between a lower amount a landlord might agree to pay and a normal full commission. Such a provision, however, reduces the incentive for a broker to negotiate strenuously with landlords for a full commission. In fact, brokers have been known to approach landlords in the first instance with a proposal for the tenant to absorb some of the commission amount. Tenants, therefore, should resist such provisions and insist on full commission payment by the landlord. In addition, the tenant should insist on being provided with the proposed commission agreement with the landlord and on the right to participate in and approve any aspect of such agreement that could affect the tenant's interests.

The tenant should also limit the damages it would have to pay if it breaches the brokerage agreement to not more than the amount of one full commission that the broker would lose as a result of the breach. In this regard, the specific commission rates and basis for calculation of the commission should be specified, and these can be attached in an exhibit to the agreement. In this way, however, the same detailed issues concerning commission that a landlord faces rise up to confront the tenant.

An experienced broker normally insists on a limitation on the broker's liability under the agreement to the amount of commission that would be earned by the broker for its services in connection with the agreement.

The second major component of the agreement, the description of the premises, covers the important characteristics of the space desired by the tenant, instead of characteristics of a particular space. From the tenant's perspective, a more general picture is appropriate, with a statement to the effect that the tenant will guide the broker with regard to the tenant's requirements. From the broker's perspective, a more specific list of the tenant's requirements would be helpful in making the search more efficient.

The determination of the parameters of the third major component of the agreement, the rental amount, is driven by the tenant's financial situation and ability to pay rather than by the rental value and/or financing requirements of a particular property. This fact tends to make the rental provisions in a tenant's hiring agreement somewhat less specific than in a landlord's brokerage agreement.

Another issue that might be relevant could be whether or not the broker is allowed to deal with the tenant's current landlord, either regarding the tenant's existing premises, or in connection with other properties owned by the landlord. Depending on the particular situation, if the tenant has an opportunity to renegotiate or renew its existing lease or to forge an agreement for one of its landlord's other properties, the broker's involvement could either hinder or facilitate the negotiations. The tenant should assess the situation based on its knowledge of and relationship with its landlord and then determine whether or not the broker's involvement would be beneficial. The landlord could be more inclined not to pay a commission for a transaction with one of its existing tenants, unless the broker could prove valuable in overcoming some difficult aspect of a potential deal.

Issues relating to hazardous materials are always relevant in real property transactions. A provision in the agreement should address environmental concerns and the broker's responsibilities with respect to informing the tenant about the existence of environmental problems. Brokers normally want to be absolved from having any obligations in this regard, but tenants should at least require that the broker bring to the tenant's attention any information in the broker's possession that might bear...