§ 29A.10 Co-Brokerage in the Commercial Setting

• Jurisdiction: United States
• Publication year: 2022

§ 29A.10 Co-Brokerage in the Commercial Setting

[1]—In General

In residential leasing transactions, the brokers predominantly represent landlords. Tenant representation is quite rare. In the commercial arena, however, brokers may have a leasing function in addition to the other functions set forth in the management and leasing agreement for a building, or they may be hired by landlords for a specific project or time period, or by sublandlords, tenants or subtenants. In addition, commercial deals present potentially greater complexity than most residential deals. In these various settings, dealings between commercial real estate brokers, and the substance of co-brokerage agreements, depend in large part on the character of the brokers' relationship with the relevant parties and the resultant negotiation leverage between the primary broker and the co-broker.

When a building owner and its agent enter into a management and leasing agreement, a co-brokers are commonly called "outside" brokers. If an exclusive agent is hired only for leasing one specific space in the building or for a specific project with a limited time period, cooperating brokers are commonly termed "co-brokers." The latter term is also prevalent for cooperating brokers in cases where an existing tenant hires a broker for subleasing its space and when a prospective tenant or subtenant hires a broker to find a suitable premises. Often, however, the terms "cooperating broker," "co-broker" and "outside broker" are simply used interchangeably. On occasion, a building owner might enter into a direct agreement with two brokers, both of whom would be acting together as prime brokers and sharing the commission.

Co-brokerage agreements raise some basic issues. The first is whether or not the primary broker has the right to hire a co-broker. It would appear self-defeating for owners or landlords to deny such a right, but often they want to limit cooperating brokers or impose conditions on the use of cooperating brokers to limit their costs, to assure themselves that the broker is giving proper attention and providing quality service and to limit potential claims or other issues.¹ In addition to the primary broker's obligation to comply with such limitations and conditions, some or all of such limitations and conditions might have to be included in the co-brokerage agreement. The parties will need to determine and comply with any legal requirements.²

Another basic issue is the commission and the payment conditions. It is a common convention, especially in New York City, for the building leasing agent's agreement with the owner to provide that if the leasing agent is the sole procuring cause of the tenant deal, then one full commission is paid to the agent, but if a cooperating broker is involved, then one and one-half of a full commission is paid to the leasing agent to be divided with the co-broker pursuant to their separate co-brokerage agreement. This allows a sufficient level of commission in the pot to divide between the broker and co-broker to serve as an incentive for the co-broker's involvement. If the owner's agent is hired for a particular transaction rather than as the leasing agent for the building, there is less incentive for the owner to agree to one and one-half commission rate if a co-broker gets involved.

The method and timing of the commission payment to the outside broker or co-broker is a matter for negotiation, but should be subject to the primary broker's receipt of the commission from the owner or landlord. If the agreement does not state that the primary broker must receive the commission first, the co-broker might earn its commission and have it due and payable prior to the prime broker's receipt of payment from the owner or landlord. If the broker represents the tenant or subtenant, it is common for the brokerage agreement to provide that the broker will attempt to collect the commission from the landlord or sublandlord, and if the landlord or sublandlord does not pay the tenant or subtenant would be obligated to pay the full commission or the difference between the landlord's or sublandlord's payment and the broker's full commission rates. The co-brokerage agreement should provide that, in such circumstances, the prime broker's payment to the co-broker is subject only to the actual commission received by the prime broker, in case only a partial commission is paid by the landlord or the tenant does not pay. In certain circumstances, the co-broker might have the obligation to collect the commission and then pay the prime broker its agreed upon share.

Other conditions for payment of the commission to the co-broker may mirror the conditions contained in the primary broker's agreement with the owner/landlord. For example, there may be a...