Why this matters: Learn to explain to your buyer and tenant clients the provisions contained within the buyer representation agreement and tenant representation agreement.
Follow along with an audio reading of this article adapted as a chapter from our upcoming Real Estate Practice course update.
Putting the representation forms into practice
Consider a buyer who is an individual seeking to purchase real estate. The buyer wants to work with a broker and their agent for advice and assistance to achieve their objectives in a property acquisition.
The buyer interviews an agent and determines the agent is best suited to help them acquire the property they seek.
The agent explains their next step is to enter into a buyer representation agreement authorizing the agent to represent the buyer exclusively.
The agent benefits from the representation agreement, since it assures them collection of a fee when the individual acquires the type of property they want. The buyer also benefits from the agreement, since the broker and agent are identified as the buyer’s fiduciaries, and the services they can expect the agent to diligently provide are clarified.
The agent explains the provisions in the individual’s buyer representation agreement, also known as a BRA, include:
- a retainer period, limited to three months;
- broker obligations;
- general provisions; and
- brokerage fee. [See RPI Form 103.1]
Critically, the buyer agrees the seller is to pay the broker fee from the funds accruing to the seller on the buyer’s price paid, as called for in the purchase agreement. Thus, when the transaction closes as expected, the buyer does not pay the buyer broker fee.
However, the buyer is to pay the fee in all other situations where the broker is entitled to a fee.
Further, the broker and buyer may agree to an hourly rate earned by the broker and paid by the buyer when the representation terminates without the broker otherwise earning a fee.
The agent prepares the form by entering a general description, location and size for the property sought. When the client seeks to rent a property rather than purchase it, the agent enters the location, rental amount and rental term sought. [See RPI Form 103.1]
The broker and buyer agree to the representation agreement and sign it. Only when the buyer broker obtains a representation agreement, signed by their buyer, may the broker submit their buyer’s purchase offer and expect to receive a fee on the transaction (and avoid violating real estate contract law). [Calif. Civil Code §1670.50(a)]
Related video:
Read more about the buyer representation agreement.
Renewing an expired representation
Continuing our example, the buyer reviews property available for sale with their agent. They view open houses independently and together. Eventually, the buyer selects a property suitable for acquisition, which may or may not have been initially located by the agent.
However, the deal falls through, and the period of representation has or is about to expire without purchasing a property.
The broker and the individual buyer then agree to and enter into a Renewal of Buyer Representation Agreement. [See RPI Form 103.1A]
The broker using the representation form enters:
- facts, including:
- the date the representation was entered into;
- the buyer’s name;
- the broker’s name; and
- the real estate services sought by the buyer. [See RPI Form 103.1A §1]
The broker also enters:
- the date the new retainer period is to expire, not to exceed three months from the date of the renewal agreement [See RPI Form 103.1A §2.1]; and
- other modifications to the representation agreement.
Related article:
FOTW: Buyer Representation Agreements and Renewals — Forms 103.1, 103.2, 103.1A and 103.2A
Preparing the purchase offer
The buyer and broker sign the renewal form. The agent and buyer continue to look for properties, and suitable property is located.
The agent prepares the buyer’s offer using a purchase agreement form with a fee provision calling for the seller to pay the buyer agent fee on closing. [See RPI Form 150]
The seller accepts the buyer’s offer which binds the seller and buyer to the terms of the purchase agreement. The purchase agreement acceptance is evidence the broker earned a fee under the buyer representation agreement. Escrow is opened with instructions dictated to call for the seller to pay the buyer broker’s fee from funds accruing to the seller’s account on closing. [See RPI Form 103.1 §4 and 150 §8.1]
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Representing an entity buyer
This same scenario works similarly for an entity buyer seeking to acquire real estate with the advice and assistance of a buyer broker. However, with an entity client, the expiration of the representation period calls for an extension on modification of the representation agreement, not a renewal of the agreement.
Thus, the broker representing a buyer which is an entity, while mandated to obtain a representation agreement to evidence the employment, may negotiate any acceptable representation period, both initially and on expiration. With an entity as the buyer, the broker is unaffected by the three-month limitation of the representation period for clients who are individuals. The renewal may happen for whatever time period the broker and entity buyer agree to. [See RPI Form 103.2 and 103.2A]
Related article:
Buyer Representation Agreements: The end of the “gold standard”
Breaking down the buyer representation agreement
Each section in the Buyer Representation Agreement has a separate purpose and need for enforcement. The sections include the:
- Retainer period: for individuals, the date the retainer period expires to end the employment may not exceed three months from the date of the agreement. For entities, the retainer period may be for any duration the broker and entity client negotiate as the three-month limitation for individuals does not apply. [See RPI Form 103.1 and 103.2 §1]
- Broker obligations: in which the broker commits to use diligence in serving the buyer’s needs in exchange for a fee as well as disclose conflicts of interest involving their representation of other clients with similar needs as the buyer-client [See RPI Form 103.1 and 103.2 §2]
- General provisions, such as:
- the buyer’s acknowledgement they have received the Agency Law Disclosure [See RPI Form 305];
- the buyer’s authorization that the broker may divide fees earned with other brokers, such as the seller broker;
- a mediation and attorney fees provision; and
- a provision indicating the agreement is governed by California law. [See RPI Form 103.1 and 103.2 §3]
Other sections in the Buyer Representation Agreement include the:
- Brokerage fee: which indicates the buyer agrees the broker earns a fee, either a percentage of the purchase price, or a fixed fee, when:
- the buyer’s objective is achieved during the retainer period;
- the buyer acquires a property within one year after the representation expires and when the broker introduced the buyer to the property during the representation period; or
- the buyer terminates the broker’s employment without justification during the retainer period [See RPI Form 103.1 and 103.2 §4.1];
- Further,
- the broker fees are the obligation of the buyer to pay except when the seller agrees to pay the fee [See RPI Form 103.1 and 103.2 §4.2]; and
- the broker and buyer may agree to an hourly rate earned by the broker and paid by the buyer when the representation terminates without the broker otherwise earning a fee. [See RPI Form 103.1 and 103.2 §4.3]
The Buyer Representation Agreement also includes sections on the:
- Type of real estate sought: in which the broker enters a general description, location and size for the property sought. When the client considers leasing, the agent enters the location, rental amount and term sought [See RPI Form 103.1 and 103.2]; and
- Signatures: where the broker, agent and buyer date and sign the prepared form.
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Fee simple estates and leasehold estates
Consider a buyer purchasing a home to live in, the ownership structured as a long-term ground lease no matter its remaining term. The lease rent represents the present value of the remaining use of the land, but not the rental value of the improvements. The price paid for the home reflects the value of the use of the improvements, subject to the long-term ground lease on the real estate parcel.
The buyer’s purchase-assist mortgage is secured by the buyer’s leasehold interest acquired by assignment of a lease agreement or conveyance on entering into a ground lease agreement.
Critical to earning a broker fee, the buyer’s representation form encompasses all types of real estate acquisition options that might be available and chosen by the client, including:
- a long-term lease agreement with rent based on the land value, excluding improvements; or
- the purchase of fee ownership covering both land and improvements.
Realty Publications, Inc. (RPI) publishes representation agreements, each including both acquisition options for earning a fee. [See RPI Form 103.1, 103.2, 105.1 and 105.2]
Related article:
Form-of-the-Week: Buyer and Tenant Representation Agreements — Forms 103.1, 103.2, 105.1 and 105.2
Long-term ground leases
The same client acquisition options are covered in tenant representation agreement forms as in the buyer representation agreement forms. A homebuyer with a long-term lease acquires ownership of a leasehold interest. By first glance at a property, you cannot differentiate between properties with leasehold-type ownership and those with fee simple ownership held by the user. Further, a broker’s agency duties are the same no matter the type of property interest — estate — acquired.
The ownership distinction lies in the financing used for each. For fee simple ownership, a mortgage is obtained to fund the acquisition with payments for the lender’s earnings, classified as interest. For leasehold ownership, the “lender” involved is the landlord who receives rent payment as their earnings for letting the property.
Rent is equivalent to interest paid a lender had the acquisition of a fee simple ownership been funded by a mortgage. Both arrangements provide the user with the occupancy of the property for a monthly payment. For a cash buyer of the fee simple, the monthly cost is the lost opportunity to receive interest on the cash used elsewhere than to own the fee estate in the property.
Alternatively, two sets of financing are needed for ground lease situations:
- a land lease with rent (the economic equivalent of interest on the value of the use of the parcel); and
- a mortgage as a lien on the buyer’s leasehold interest based on the value of the improvements on the parcel (usually after a down payment).
In the event of default, the mortgage holder secured by a leasehold interest forecloses to sell the tenant’s leasehold ownership for its value through a trustee’s sale. The property is resold for the value of the improvements only, and the new buyer becomes the owner of the leasehold with the right to possession subject to the ground lease agreement.
Related video:
Read more about trustee’s sales.
Tenant representation agreement forms
Tenant representation agreements must be aligned for compliance with buyer representation rules. To accomplish this, two variations of exclusive tenant representation agreements covering all types of real estate parcels and acquisition options are used:
- One, when the buyer-client you represent is an individual, the form used has a retainer period capped at three months. [See RPI Form 105.1]
- Or two, when the buyer-client you represent is an entity, the form used leaves expiration of the retainer period open to negotiations. [See RPI Form 105.2]
Payment of buyer broker fees are only protected when included in a representation agreement signed by the client, whether the user-client acquires a fee or leasehold interest during the representation or later.
Related video:
Read more about tenant representation.
A commercial tenant acquires fee ownership
Commercial property users, like occupants of residential property, may prefer to occupy a property as tenants. Often, the user is open to acquiring the fee simple interest — when financially advantageous.
A tenant broker enters into a tenant representation agreement to ensure they are paid a fee on either a leasehold or fee simple acquisition, or both, by their tenant-client, now and in the future. Tenant brokers do present their clients with properties available for sale, lease, or both, when locating suitable property to occupy. The difference between a sale and lease is whether the user makes a cash capital commitment or a consumer commitment to pay rent for the occupancy.
Both tenant representation agreements safeguard brokers against the inability to collect or defend a claw-back of future fees earned and complaints to the Department of Real Estate (DRE) related to those fees.
Related video:
Read more about representing commercial tenants.
Regulatory aspects by DRE authority to review licensing status
The DRE is now legislatively directed to police buyer representation and broker fee compliance under antitrust codes for fee ownership transactions. Further, future legislation will likely expand DRE authority to include tenant representation agreements for fees earned negotiating leasehold transactions.
Also, tenant brokers expecting to earn a fee when the client later acquires fee ownership to the leased property must consider the existence of fee provisions in today’s leasing transactions. The present agreement to earn a future fee on acquisition of the fee simple by the tenant is controlled by the buyer representation codes mandating compliance today to collect that future fee.
To better understand a tenant broker’s fee arrangements, a “buyer” is broadly defined in real estate agency codes to include, with fee simple buyers, a tenant acquiring a leasehold interest in real estate. The policy purpose is to ensure fee simple buyers and leasehold tenants receive the same consumer protections and agency duties owed to anyone acquiring either interest in real estate when assisted by a broker. [CC §2079.13(p)]
Also, understand that public policy protecting consumers of services in real estate transactions is in its early stage of evolution at both state and federal levels. In this context, brokers need to lean into it, if for no other reason than to protect the fees they expect to earn. Thus, enter into written representation agreements with all clients who intend to buy or lease. [See RPI Forms 103.1, 103.2, 105.1 and 105.2]
Related video:
https://journal.firsttuesday.us/needed-legislative-follow-through-foresight-dictates-prudence/97929/
Read more about representation best practices.
Breaking down the tenant representation agreement
Both versions of the Tenant Representation Agreement contain provisions addressing the:
- Retainer period: the tenant broker enters the beginning and end dates of the retainer period. For individuals, this period is limited to no greater than three months from the beginning date. For entities, the retainer period may be negotiated for any length of time and is not limited to the three-month period for individuals employing a broker. [See RPI Form 105.1 and 105.2 §1]
- Broker obligations: in which the tenant broker agrees to use diligence in the employment as well as disclose conflicts of interest involving their representation of other clients with similar needs as the tenant-client. [See RPI Form 105.1 and 105.2 §2]
- General provisions: the Agency Law Disclosure provided to the tenant is mandated; an authorization for the broker to divide any fee earned with other brokers; as well as a mediation provision and choice-of-law provision. [See RPI Form 105.1 and 105.2 §3]
- Brokerage fee: this includes a boilerplate antitrust notice about real estate fees as negotiable between the tenant and broker and not fixed by law, as well as the amount and payment of broker fees, including:
- the amount due when the tenant acquires real estate substantially the same as the type sought during the retainer period or within one year, or the tenant terminates the broker’s employment without legal justification during the retainer period [See RPI Form 105.1 and 105.2 §4.1];
- the percentage fee the broker is paid each year of the leasehold estate [See RPI Form 105.1 and 105.2 §4.2];
- the fee amount due the broker on the tenant’s acquisition of fee ownership of the real estate [See RPI Form 105.1 and 105.2 §4.4];
- the tenant is due to pay all broker fees unless the owner agrees to pay them [See RPI Form 105.1 and 105.2 §4.5]; and
- an hourly rate as an alternative to percentage fees. [See RPI Form 105.1 and 105.2 §4.6]
The Tenant Representation Agreement also includes sections on the:
- Type of space sought: where the broker enters a general description of the real estate, its location, size, rental amount and term the tenant needs for occupancy. [See RPI Form 105.1 and 105.2]
- Signatures: the broker and tenant date and sign the prepared form.
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