LEASE AGREEMENT REFERENCE GUIDE 1540: PRO-OWNER STRATEGIES FOR BROKERAGE AND LEASING AGREEMENTS $49.95
Pro-Owner Brokerage Agreements to Lease Space
This LARG looks at how aggressive owners can structure brokerage agreements to lease their commercial space. The first article mulls over several business issues important to the owner. Many of these are not customarily found in printed forms handed out by leasing brokers. The Lease Clause Critique features extensive excerpts from two pro-owner brokerage agreements. The first is an exclusive agency agreement, where the landlord retains a broker, but keeps the right to lease space for its own account without paying commissions. The second agreement is a non-exclusive agency arrangement where the broker “registers” its prospective tenant with the landlord for specific space in the development.
Drafting the Unabashedly Pro-Owner Brokerage Agreement
Sophisticated owners rarely use the printed form Authorization to Lease supplied by the broker leasing their properties without modification. Generally, such commercial landlords prefer a pro-owner brokerage agreement which is far more specific on the business points of the brokerage relationship, such as:
Type of Agency. The contract should clearly provide whether or not a commission is payable if the owner procures its own tenant for the property or if another broker procures a tenant for the property. Frequently, owners have their own full time leasing personnel, and the agreement should clearly state whether or not a commission is payable if the owner's in-house leasing staff locates the tenant and negotiates the lease.
Personnel. Sometimes the owner wants only certain specified brokers to market the property, and designates them by name in the contract. The owner may want a termination right if the designated broker or brokers leave the firm for another during the term of the contract.
Exclusions. Sometimes, especially in mixed use developments, a broker is retained only to lease a particular portion of the development, i.e., the retail section of a mixed use development containing retail, hotel and office space. If the area to be leased by the broker is only a part of the entire property, the brokerage agreement should so indicate. Further, if certain tenants are to be excluded from the scope of the agreement, this must likewise be specified. Sometimes, for instance, certain tenants are already in negotiations with the owner prior to the execution of the brokerage agreement, and the owner wants to exclude these tenants from commission obligations under the brokerage agreement. Owners also sometimes wish to exclude existing tenants in an office or retail complex from the scope of the agreement, and prefer to negotiate an agreement that only applies to new tenants for the complex.
Term of the Agreement. Obviously, the agreement should clearly state when the agency relationship begins and when it ends, and if it is subject to any rights of cancellation in favor of either the broker or the owner.
Marketing Plan. Frequently, a contract will state the precise duties of the broker if a specific marketing plan for the property has been identified and agreed to by the parties. This kind of provision could, for example, provide for periodic progress reports to the owner on the broker's leasing activities for the property, including a discussion of specific marketing prospects for the property, a list of the names and addresses of all prospects contacted by the broker since the last report, a schedule of any media advertisements promoting the property, a report concerning any direct mail activities to market the property, and so forth. Provisions concerning the marketing plan may also refer to the type of marketing materials to be used by the broker to promote the property, and whether the owner will furnish such materials or reimburse the broker for the cost of producing them.
Signs. Project signs to be placed upon the property for marketing purposes may also be covered by the brokerage agreement. The owner may wish to restrict the location of leasing signs for the property, or may wish to limit the size or approve the color or appearance of such signs in the brokerage contract.
Lease Preparation. The owner frequently has a standard form lease which he desires to use for the property. Often, the lease form has been approved by the owner's lender, and the owner wants to make it clear in the brokerage contract that this is the form to be used. In addition, the agreement may stipulate that business or legal discussions concerning the proposed terms and conditions of the leases will be referred directly to the owner or to the owner's attorney, or specify that the broker is authorized to negotiate within certain parameters regarding the economic provisions of the leases.
Cooperating Brokers. The owner may also wish to have express requirements in the brokerage agreement which obligate the broker to cooperate with other brokers in marketing the property, i.e., to share commissions with other brokers for tenants produced by them. The owner may feel that this will expose the property to the widest range of tenants since cooperation will be mandatory under the agreement. Sometimes the agreement specifies the exact amount or percentage of the commission to be paid to the cooperating broker.
Calculation of Commissions. As in the case of the printed form, the amount of commission payable for a specific lease is often computed by reference to a schedule of percentages relating to the rental for the first several years of the lease. The brokerage agreement should also be quite clear as to what rentals are to be considered for calculation of the commission, e.g., whether a commission is to be based upon payment of operating expenses, real estate taxes, amounts amortized in the rent for leasehold improvements constructed by the landlord on behalf of the tenant, promotional fees, parking garage rentals, rentals payable by subtenants which exceed the amount of rent payable under the lease procured by the broker, etc.