A leasing agent’s bargain

A broker is best able to assist an owner of commercial property in locating a tenant when the owner retains the broker by entering into an exclusive authorization to lease — more commonly called a listing or employment agreement. [See RPI Form 110]

Under the listing, the broker:

A broker acting solely as a leasing agent needs to convey they will not manage or operate the property in an ongoing arrangement with the owner as a property manager. [See RPI Form 590]

Compensation guaranteed

When a broker enters into an exclusive authorization to lease with an income property owner, the broker is assured payment of a fee for their efforts, as long as a tenant leases the described space during the listing period. Similar to representing a seller under an exclusive listing agreement, an owner may not avoid paying a brokerage fee when bound by the exclusive authorization to lease.

Even when the owner prefers to operate independently, a skilled leasing agent is their best opportunity to find a tenant on acceptable terms.

An effective leasing agent typically possesses experience and attributes an owner does not, such as:

  • extensive personal experience negotiating various lease arrangements;
  • constant involvement in leasing discussions with others in the trade; and
  • vast exposure to prospective tenants and their agents.

Get it in writing

A written exclusive authorization to lease  is the only way for a broker to protect their right to compensation for services performed under a California real estate broker license. No signed writing, no services. More importantly, a written exclusive authorization creates an obligation from the broker to the client to conscientiously and continuously work to meet the client’s objectives, whether the client is a tenant or an owner. [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]

Editor’s note — The renegotiation of an existing lease does not need to be in the form of a signed written agreement to collect the promised fee. Fees for negotiating modifications, space expansions, extensions or renewals of existing leases need not be written to be enforceable as the lease has already been created. [Shell v. Darneille (1984) 162 CA3d 957]

An exclusive authorization to lease functions similarly to an exclusive right-to-sell listing agreement.  [See RPI Form 102]

With a written listing to lease, the leasing agent is employed to “sell the use” of the owner’s property — a leasehold interest granted and conveyed by a lease agreement which transfers the right of possession. A seller’s agent “sells the ownership” by locating a buyer to acquire the fee simple interest in a property. [See RPI Form 102]

The fee schedule

A broker entering into an exclusive authorization to lease will attach a fee schedule to the employment agreement. [See RPI Form 113]

The fee schedule sets out the leasing situations that trigger the broker’s right to compensation, and includes additional fees without the broker’s further involvement for extensions, renewals and other continuing leasehold and purchase arrangements that the tenant or owner might pursue in the future. [See RPI Form 113 §2.2, 2.3]

The broker is entitled to compensation under the following fee provisions:

Clause by clause

It is the exclusive right-to-collect clause that makes a listing exclusive. Under this clause, the broker is due a fee when anyone procures a tenant during the listing period. [See RPI Form 110 §3.1a]

Even when the owner’s broker has no contact with a prospective tenant and the terms are different from the listing, the broker has earned a fee when the owner accepts the terms of a lease agreement during the period of the broker’s employment under the exclusive authorization. [Carlsen v. Zane (1968) 261 CA2d 399]

An early termination clause protects the broker from loss of time, money and effort spent locating a tenant when the owner removes the property from the rental market before the listing period expires.

Even when the owner interferes with the objective of the broker’s employment — to produce a ready, willing and able tenant on the terms stated — the broker has earned a fee.

An owner bound by an early termination clause who instructs their leasing agent to take a property off the market still owes the broker a full listing fee.

The early termination clause is not a penalty provision that produces a windfall profit for the broker. Here, the owner may simply allow the listing to expire without interference with the broker’s marketing efforts. Thus, the owner is required to pay the fee on exercise of their option to cancel the listing agreement. [Blank v. Borden (1974) 11 C3d 963]

Editor’s note — See RPI Form 121 for an agreement to cancel an exclusive authorization to lease during the listing period. [See RPI Form 121 §2.2]

A safety clause protects a broker’s fee when their efforts produce results during the one-year period after the listing period expires, known as the safety clause period. [See RPI Form 110 §3.1d]

Under the safety clause, the owner owes the scheduled fee when:

  • during the safety clause period, the owner enters into negotiations with a tenant the broker located during the listing period; and
  • the negotiations result in a lease agreement.

The safety clause also includes a perfection-of-rights provision. It calls for the broker, on expiration of the listing, to provide the owner with a list of the prospective tenants located during the listing period. Delivery of a list of prospective tenants is a condition precedent to collecting a fee when a named prospect leases during the safety clause period. [See RPI Form 122]

Under this clause, an owner who enters into a subsequent exclusive authorization to lease with another broker after (but within one year of) the expiration of the first broker’s listing period still owes the original broker a fee on any transaction resulting from their efforts — even when the original broker is not involved in the arrangement of the lease agreement. [Leonard v. Fallas (1959) 51 C2d 649]

As a “safety net” for brokerage services rendered, the clause discourages the owner from attempting to avoid payment of a leasing agent’s fee by:

  • waiting until the exclusive authorization agreement expires and then directly or indirectly approaching a prospective tenant located and solicited by the leasing agent; or
  • making special fee arrangements with a second leasing agent which re-ignite negotiations with a prospective tenant located by the first leasing agent.

Related article:

Demand for broker’s fee earned under the safety clause

Additional fees under the fee schedule on an extension

The exclusive authorization to lease also contains provisions to establish the listing agent’s fee and when it is earned. [See RPI Form 110 §3.1]

Further, the authorization to lease entitles the broker to receive additional fees for any extension, renewal or modification of the tenant’s occupancy under the original lease. [See RPI Form 113 §2.2, 2.3]

A more detailed fee schedule may be attached — containing formulas for calculating the brokerage fee earned based on the length of the lease negotiated with the tenant and the exercise of an option to renew, extend or buy. [See RPI Form 113]

For example, a fee schedule may also provide for a percentage fee to be paid when an owner and tenant enter into an agreement for the tenant’s continued occupancy or purchase of the premises on expiration of the original lease, even when the original leasing agent is no longer involved.  [See RPI Form 113 §3.1]

Here, when the owner and tenant negotiate a new lease for the tenant’s continuing occupancy and use of the premises on expiration of the original lease, the broker who negotiated the original lease is due an additional fee from the owner as agreed in the original listing since the new lease constitutes an extension of the original possession. [John B. Kilroy Company v. Douglas Furniture of California, Inc. (1993) 21 CA4th 26; see RPI Form 110 §3.3]

This article was originally posted July 2017, and has been updated.