Why this episode matters: See how the use of a written tenant representation agreement by the tenant broker assures collection of a fee whether the user acquires a fee or leasehold interest in a property — the tenant representation agreement covers the broker in both circumstances.

The prior episode applies the new representation rules to a commercial tenant’s acquisition of a leasehold interest in a property.

Further, this new tenant representation material has been added to our Certified Buyer Agent (CBA)™ Training available to current and future firsttuesday students without charge.

A tenant’s exercise of their option to purchase the fee ownership in a property

Consider an individual user of commercial property who begins their search for property to occupy and operate their business. The commercial property user hires a broker to assist in their search.

Initially, the user suspects occupying the property as a tenant is more compatible with their needs than an occupancy acquired by the grant of fee title. However, they are amenable to acquiring a fee interest in the property when the terms of a purchase are financially more advantageous than the terms for leasing.

Simply put, the tenant as a user is looking for space to occupy — whether as a tenant or as an owner, the difference being a capital investment decision. The user’s ownership needs are ambidextrous — the space selected works for them in the same way, either way.

The commercial property user and broker enter into a tenant representation agreement, assuring the broker an earned fee, whether the user’s need for space is acquired as a leasehold or fee interest in real estate. [See RPI Form 105.1]

The broker presents the user with qualifying properties whether they are available for sale, for lease, or for sale or lease. The differences are a matter of who has the capital investment in the property — an income property investor or the user-occupant.

The user and their broker view a property available for lease. It’s acceptable and they commence negotiations with the landlord. After the landlord’s terms of occupancy are determined through an exchange of letters of intent (LOI), the broker inquires whether the landlord will consider an offer to sell the property rather than rent it, and on what terms. The landlord’s response is positive.

The tenant broker writes up a purchase agreement offer and submits it to the landlord. The landlord on review of the offer determines it is more compatible with their current financial conditions to accept the offer. Escrow is opened and the tenant acquires the property — the fee simple, that is.

Here, the use of a written tenant representation agreement by the tenant broker assured a fee was earned and can be collected and retained. Regardless of whether the user acquires a fee or leasehold interest, the tenant representation agreement covers the broker in both circumstances.

Right of first refusal to buy

Consider another situation where the broker locates a suitable rental property, which the tenant agrees to lease. Fee sharing agreements are negotiated verbally between the brokers involved. The tenant broker and tenant do not enter into a tenant representation agreement.

Further, since fee ownership of the property is not being acquired, the broker believes they do not need a separate buyer representation agreement negotiated and signed by the tenant.

The tenant signs the lease agreement, which includes a right of first refusal to buy, as a common provision in commercial leases of single user buildings. [See RPI Form 579]

The right to buy is evidenced by a separate agreement attached to the lease agreement as an addendum.

The right to buy includes details for payment of a brokerage fee — none of which are related to the leasehold estate conveyed to the tenant.

The landlord decides to later sell the property and notifies the tenant. The tenant chooses to exercise what has become their option to purchase the property.

As the tenant exercised their option to purchase the fee ownership in the property, are they a buyer of the property requiring a signed representation with their broker stating the amount their broker is to be paid as their expected tenant broker fee?

Yes!

Here, the tenant representation agreement is required to protect the broker for the collection of a fee in both instances, whether the tenant continued to lease the property, or acquires fee ownership due to the right of first refusal addendum.

Editor’s note – This material has also been added to our Certified Buyer Agent (CBA)™ Training designed to support a long-delayed enhancement in consumer protection. The CBA Training is available to current and future firsttuesday students without charge, or available à la carte outside of an enrollment for $35.

The CBA™ Training is a multimedia powerhouse, consisting of:

  • digital text written by our on-staff team of California real estate licensees;
  • scripted and fully-acted video which makes the concepts easily understandable and engaging;
  • 100% compliant buyer representation forms to use with buyer-clients, one for individuals and one for entities;
  • audio definitions to help cement the concepts in your memory;
  • interactive Knowledge Check questions to help to test your level of comprehension (and have some fun);
  • marketing materials for client assistance to help you respond fully to buyer-client questions with clarity and confidence; and
  • a full-color companion e-book which pulls all our related writings together in one place. [See RPI e-book Certified Buyer Agent™ Training: Directly Negotiated Representation]