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Dealing with a tenant representative broker.

The advent of tenant representative brokers has brought a new dimension to lease negotiations for commercial office building space. No longer does the property owner sit squarely across the negotiating table from the prospective tenant. Instead, he or she may face a team that includes a professional real estate broker who is working exclusively for the tenant.

In the past, the broker usually either represented the interests of the landlord or acted as a space-shower without an active negotiating role. In either case, the brokerage commission was paid by the landlord.

Under the current rules of the game, however, the tenant rep broker is engaged by the tenant to help define his or her space needs, locate suitable lease space, and negotiate the terms of a lease contract with the property owner. If there is a snag, the tenant rep broker will go to bat for his client, the tenant, not for the landlord.

Despite this fundamental change, however, the property owner still is expected to pay the brokerage commission up front, even when it goes to a tenant representative broker. This paradox has spawned considerable misunderstanding and numerous lawsuits.

The ultimate goal for landlords is to protect themselves financially as well as legally and still make the best deal for themselves when their client uses a tenant rep broker.

Evolution

Several factors have contributed to making the tenant rep broker an accepted and, some would insist, an essential member of the negotiating team.

First, as commercial office building leasing evolved from a simple show-and-tell business into a complex analytical process requiring the use of computerized market studies and cost comparisons, many tenants have felt the need for professional brokerage consultation. And, because they have not been able to turn to the landlord's broker for assistance in drafting leases or negotiating more favorable terms (because that broker is working for the lessor), many tenants have chosen to enlist professional brokers who specialize in helping lessees.

Second, the brokerage community itself has begun to see the need for a dedicated relationship between the tenant and broker. Why, some have reasoned, should a broker spend time and money showing a prospective tenant commercial office space only to have the tenant bypass that broker and sign a lease at the last minute using another broker or working directly with the landlord? In that last-minute switch, the original broker invariably loses both the client and the commission after devoting substantial time, effort, and talent to the project.

Thus, more and more brokers have decided to sign on in the very beginning as the tenant's exclusive representative in both the search for space and the final lease negotiations. In this way, they are able to guarantee themselves the entire commission, or at least a cut of it, depending on whether the landlord's broker is involved in the deal and demands a percentage.

Impact

The initial impact of tenant representative brokers on the real estate industry has been mixed.

On the plus side, many property owners have discovered that negotiating with a tenant rep broker, either directly or as an adjunct to the tenant, has actually streamlined and accelerated the lease negotiation process.

Tenants often do not have the know-how, staff, or resources to assess their space needs, determine cost limitations, and compare competitive offers. Nor are they conversant with the lexicon of real estate leases. This can slow up the entire lease negotiation process and may result in a stalemate between the two parties.

With the help of a professional broker who can provide technical expertise in drafting an RFP (a request for proposal, which is simultaneously submitted to prospective lessors), analyzing competing proposals, and making preliminary recommendations, tenants may be able to determine what they need with greater accuracy and finalize the leasing deal more quickly. In the long run, this increased efficiency saves everyone valuable time and money.

On the down side, some property owners have found the concept of tenant representative brokers confusing, contradictory and, at times, expensive. Why, they ask, should the landlord pay the commission of a broker who is representing the tenant? If the landlord writes the check, they reason, the broker should be working for him or her.

However, property owners sometimes fail to take into account that the charge for the brokerage commission--whether it is for the landlord's broker or the tenant's broker--is (or should be) calculated into the monthly rent. Because the tenant pays the rent, all commissions are ultimately paid for by the tenant.

If two brokers are involved in a deal, the commission is usually split, with the procuring broker receiving a greater percentage than the representative broker. If no broker is used, however, a commission is usually forgotten; few landlords actually will reduce the monthly rent to reflect the absence of the commission charge.

Lawsuits

The best way for property owners to protect themselves from lawsuits arising from a misunderstanding about which broker is working for whom is through agency disclosure.

In Florida, an agency disclosure provision in the disciplinary section of the real estate license law requires that, prior to signing a contract for the sale or purchase of property or prior to signing a lease agreement, a real estate broker must give written notification to both parties telling them who he or she is representing.

Thus, the broker who is representing the owner (or seller) must notify the prospective tenant (or buyer) in writing that he or she is in fact representing the owner. Similarly, the broker who is representing the prospective tenant must advise the owner in writing that he or she is in fact representing the tenant.

According to Jim Mitchell, Florida's Assistant Attorney General, that state enacted its agency disclosure statute in October 1988. Since then, many other states have adopted similar provisions.

"The problem goes back to the buying and selling of property," he says. "The Federal Trade Commission found that 72 or 73 percent of property buyers went to the closing thinking the broker represented them when in fact the broker represented or was employed by the seller. This agency disclosure provision is the mechanism by which the state put the buying and selling public on notice that the broker was not necessarily representing them."

In states without such a disclosure law, owners are advised to draft their own disclosure statement and make sure that all parties involved in the negotiations understand it and sign it.

By the same token, a tenant rep broker can protect him- or herself from the encroachment of other brokers by asking the tenant to sign a letter appointing the broker as the exclusive broker or by asking the landlord for a letter of protection attesting that he or she was the first broker to introduce a tenant to the property.

A property owner who is unsure about what statutes apply to real estate transactions should contact the state commerce department or state attorney general's office to find out. This may avoid some unpleasant surprises, such as the case reported last April in the Wall Street Journal in which a federal judge ruled that New York law permitted a real estate broker to insist on getting his commission from a property purchaser who fails to go through with a transaction that the broker arranged.

This case underscores the need for real estate sellers (or lessors) and buyers (or lessees), whether commercial or residential, to negotiate written brokerage agreements specifying who will pay the commission and under what terms. Usually such agreements stipulate that brokers will be paid upon completion of the deal, not merely for setting up a possible transaction.

A good rule of thumb is this: When in doubt, put it in writing. This pertains to any real estate transaction, whether it is a purchase, sale, lease agreement, or commission payment. Under the statute of frauds in many states, a court may rule a real estate transaction invalid unless it is explained in writing in a document that has been signed by both parties.

Perhaps the greatest challenge for a property owner who must negotiate with a tenant rep broker is how to make the best deal for him- or herself while maintaining a business relationship that will encourage that broker to return with repeat business.

Alan Hayman is co-founder of the Hayman Company, a national real estate management, investment, and brokerage firm located in Troy, Michigan.

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Title Annotation:Legal Issues
Author:Hayman, Alan
Publication:Journal of Property Management
Date:Nov 1, 1992
Words:1445
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