Choose your own fee agreement

A broker has several opportunities to trigger payment of a fee during leasing negotiations, such as:

  • when the broker solicits an income property owner for authorization to locate users and negotiate acceptable leasing arrangements on the owner’s behalf [See RPI Form 110];
  • when the broker solicits or is solicited by a tenant for authorization to locate suitable space and negotiate leasing arrangements [See RPI Form 111];
  • when the broker prepares a tenant’s offer to lease which includes a fee provision [See RPI Form 556 §16]; and
  • when the broker prepares a lease agreement which includes a fee provision.

An employment agreement signed by a tenant, called an exclusive authorization to locate space, ensures a broker is entitled to receive a fee when the tenant leases space of the type and in the area noted in the authorization. This agreement is critical early on in the process to best set the expectations of the participants. [See RPI Form 111]

On entering into the exclusive authorization, the tenant commits to work with the broker to find suitable space to rent. In turn, the broker treats their representation of the tenant with diligence and care, locating suitable space on terms acceptable to the tenant.

The exclusive authorization to locate space is similar to an exclusive authorization to lease a broker enters into with an income property owner.

The exclusive authorization to locate space includes:

  • the term of the retainer period [See RPI Form 111 §1];
  • the agreement the broker will use diligence in the performance of the employment [See RPI Form 111 §2];
  • a formula for calculating the broker’s compensation and who will pay the fee [See RPI Form 111 §4];
  • a brief description of the type and location of the space or property sought by the tenant; and
  • identification of the broker as the agent and the tenant as the client.

Related Article:

Form of the week: Exclusive Authorization to Lease Property and Schedule of Fees — Forms 110 and 113

Get paid!

The exclusive authorization to locate space bears a few more similarities to the exclusive authorization to lease.

FIrst, when a broker enters into an exclusive authorization, their fee is collectible no matter who ultimately locates acceptable space or negotiates the lease agreement — whether it is the broker or the owner they represent.  The right to compensation is established by the exclusive clause in the employment agreement. [See RPI Form 111 §4.1a]

This form is also similar to an exclusive authorization to lease in that a safety clause allows the broker to collect a fee when property located by the broker during the retainer period is later leased by the tenant in negotiations taking place during the one-year period after expiration of the exclusive authorization. [See RPI Form 111 §4.1c]

When the tenant decides not to lease space during the exclusive authorization period, the broker may charge a consultation fee on an hourly basis for time spent locating rental property.  [See RPI Form 111 §4.2]

Benefits of exclusive authorization

An exclusive authorization to locate space is mutually beneficial for a prospective tenant and a broker.

A tenant working with a broker employed by the owner of the space they seek to rent is at an inherent disadvantage. This broker owes the employing owner a specific fiduciary agency duty to negotiate a favorable lease for the owner.

Conversely, the owner’s broker owes a limited, general non-agency duty to a non-client tenant. The general duty only requires the broker to disclose to the tenant all material facts which might adversely affect the property’s rental value, even though it doesn’t impart the same level of representation as a fiduciary duty.

The exclusive authorization to locate space, however, does impose a specific agency duty on the broker to best represent the tenant’s interests, even when the owner pays their fee.

The bottom line? Prospective tenants who exclusively authorize brokers to use their expertise and talent to locate space for the tenant save time and money. The broker conducts the search and handles negotiations to lease property on the prospective tenant’s behalf.

The most important thing for a broker to understand is their client’s objectives. The broker needs to confirm why the tenant wants to move into another space and what their present and future needs for the space will be. Thus, the broker is better able to find a suitable new location, or negotiate a renewal or extension of the tenant’s current lease.

The tenant lease worksheet

The description of the property in the exclusive authorization to locate space outlines the space requirements, location, rental range, terms and other property conditions sought by the tenant.

However, for a more detailed description of the property and the specific needs of the tenant, the broker uses a Tenant Lease Worksheet. [See RPI Form 555]

The Tenant Lease Worksheet covers three key areas the broker needs to consider:

  • the tenant’s current lease agreement obligations and conditions of their existing space [See RPI Form 555 §5];
  • the tenant’s current and likely future needs for leased space [See RPI Form 555 §4]; and
  • the tenant’s financial condition and creditworthiness.

Regarding the tenant’s existing space and current lease, the broker notes:

These facts help the broker determine the tenant’s rights and obligations under their present lease for timing the tenant’s relocation. To fulfill their fiduciary duty to the tenant, the broker needs to explain the beneficial or detrimental effects any lease provisions have on the tenant.

Next, the broker considers the tenant’s needs and goals for the new space. Here, the broker notes the tenant’s requirements for:

Some tenants may focus on specific locations relevant to their business. Others are looking for the lowest rent possible, regardless of location. [See RPI Form 555 §4.3]

A tenant’s business projections

In the event that a prospective tenant is starting a new business, the broker needs to get information on the tenant’s initial business projections. [See RPI Form 555 §2]

Sometimes a tenant’s desired space is simply too large or in too expensive a location. It’s important that a broker ground the tenant’s business expectations. The tenant may have to settle for space in a less desirable location.

Alternatively, the owner may accept rent in whole or in part through fractional participation in the ownership of the tenant’s business.

Conversely, a tenant may underestimate the potential future growth of their business. The premises they favor may be too small to handle later attempts to expand on the success of their business. Here, the tenant may need options or the right of first refusal on additional space, or a lease cancellation or buyout provision so they can vacate the premises without liability for future rents under their lease agreement.

A broker who considers the space needs and gross income of a tenant provides the most beneficial long-term service for both the owner and the tenant. Either way, the broker needs to match the right owner with the right tenant.

This article was originally posted August 2017 and has been updated.