This article discusses the benefits enjoyed by a broker and a prospective nonresidential tenant when the tenant employs the broker to locate space under an exclusive authorization listing.
A broker and his nonresidential tenant
An owner of nonresidential property holds an open house attended by brokers who are leasing agents to encourage them to locate tenants for his vacant space.
Leasing agents who are in attendance and represent tenants, typically called users, are handed the owner’s brochure on available space. The information includes a schedule of broker fees the owner will pay if a tenant is procured for the property. The informational handout also includes a tenant registration form.
One of the brokers who received a brochure inspects the property with a prospective tenant.
The broker completes the tenant registration form which identifies the broker and the prospective tenant. The registration form does not reference the fee schedule or any amount payable to the broker as a fee.
The registration form is handed to the owner, or the owner’s employee, who signs it and returns a copy to the broker.
Later, the broker prepares an offer to lease which is signed by the tenant and submitted to the landlord. The offer-to-lease form contains a provision which states the tenant will pay the brokerage fee in the event the landlord does not agree to pay the broker a fee. [See Form 556 §15]
The offer to lease is not accepted by the landlord. The landlord does not make a counteroffer.
However, without contacting the broker, the landlord and the tenant engage directly in lease negotiations. Later, they enter into a lease which does not provide for a fee to be paid to the broker.
In the lease, the landlord agrees to be responsible for payment of any brokerage fee due as a result of the lease, called a hold harmless provision.
On discovering the tenant’s occupancy, the broker seeks payment of his fee from the tenant.
The broker claims the tenant breached the brokerage fee provision in his offer to lease by failing to provide for payment of the fee he earned when the tenant leased the property.
The tenant claims he is not liable for payment of the brokerage fee since the landlord agreed to pay the brokerage fee under the hold harmless provision in the lease.
Can the broker recover his fee from the tenant?
Yes! The offer to lease signed by the tenant contains a fee provision which states the broker will receive compensation for his efforts should the tenant enter into a lease of the premises.
Thus, the broker is able to enforce collection of a fee from the tenant since the tenant signed an agreement regarding the leasing of the property which contained a provision calling for the broker to be paid a fee. [Rader Company v. Stone (1986) 178 CA3d 10]
Conversely, a broker who does not have an agreement signed by the tenant which contains provisions for the payment of a fee should the tenant lease property – such as a tenant listing agreement or offer to lease – will be unable to enforce collection of a fee from the tenant. An oral agreement to pay a brokerage fee is unenforceable against the client making the oral promise. [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]
Written fee agreements
A leasing agent has the opportunity to enter into a written fee agreement on at least four occasions during leasing negotiations:
when soliciting a nonresidential landlord for authorization to represent the landlord as his leasing agent to locate users and negotiate a lease acceptable to the landlord, called an exclusive authorization to lease [See first tuesday Form 110];
when soliciting (or being solicited by) a nonresidential tenant for authorization to act as his leasing agent to locate suitable space and negotiate a lease acceptable to the tenant, called an exclusive authorization to locate space;
when preparing a tenant’s offer to lease by including a brokerage fee provision in the offer; and
when preparing the lease by including a fee provision in the lease.
These opportunities are listed in order of the leasing agent’s declining ability to negotiate.
The employment agreement
A broker approached by a tenant to locate space should ask for and enter into an employment agreement with the tenant before analyzing the tenant’s needs, locating space or exposing the tenant to available space not listed with the broker.
The exclusive authorization assures the broker he will be paid for time and effort spent locating and analyzing available space should the tenant ultimately lease space of the type and in the area noted in the authorization. Through the exclusive authorization, the tenant commits himself to work with the broker to accomplish the objective of the employment – renting space.
The exclusive authorization form is similar in structure and purpose to a buyer’s listing agreement and includes:
the term of the retainer period;
the formulation for calculating the broker’s compensation [See first tuesday Form 113];
a description of the type and location of space or property sought by the tenant; and
identification of the broker as the agent and the tenant as the client.
The description of the property in the exclusive authorization specifies the space requirements, location, rental range, terms and other property conditions sought by the tenant.
Under an exclusive authorization to locate space, a fee is due if the tenant enters into a lease agreement for space similar to the space sought under the exclusive authorization, no matter who – the tenant’s broker, another broker or the tenant himself – negotiates the lease, called the exclusive clause or right-to-collect clause.
Also, under a fee provision containing a safety clause, a brokerage fee is due if property located by the broker and disclosed to the tenant during the retainer period is later leased by the tenant due to negotiations commenced during the one-year period after the exclusive authorization expires.
Should the tenant decide not to lease space during the exclusive authorization period, the fee provision is structured so the broker can include payment of a fee on an hourly basis for the time spent locating rental property, called a consultation fee.
Benefits of exclusive authorization
An exclusive authorization to locate space is mutually beneficial since it commits a nonresidential tenant and broker to work together to accomplish a single objective – the leasing of space.
Typically, an unrepresented tenant is at the mercy of leasing agents employed by owner. Agents employed by owners owe the employing owners an agency duty to use diligence in seeking the most qualified tenant and negotiating lease terms most favorable to the owners in exchange for a fee. Their only agency duty to a non-client tenant is to avoid misleading the tenant when making disclosures.
The exclusive authorization to locate space is an employment agreement. It imposes on the broker an agency duty to use diligence in locating suitable space and negotiating the best leasing terms available for the tenant in exchange for a fee – even though the fee is paid by the owner.
The tenant who exclusively authorizes a competent broker to locate space is saving time and money and has retained a professional advisor to conduct the search and handle negotiations to lease property on his behalf.
With readily available information, the tenant’s broker will be able to locate qualifying properties for the tenant’s review.
Conversely, the tenant who works directly with the owner’s broker will initially (and properly) see only the spaces that the broker has been employed to lease and will receive disclosures only when he asks for them.
In a rising market, landlords have superior negotiating power. Thus, it is in the tenant’s best interest to employ a broker as his exclusive representative.
Curiously, when the market allows landlords and sellers to control negotiations in real estate transactions, brokers tend to disregard employment by tenants and buyers who then most need representation. It seems to be easier to list property and wait for the inevitable user to contact the listing broker, instead of the reverse activity.
However, in a falling market, when tenants and buyers have more negotiating power than landlords and owners due to the increasing availability of space and properties, brokers are naturally less able to obtain written employment agreements from prospective tenants.
Also, when the market position of landlords weakens, landlords become more flexible in lease negotiations and more apt to employ brokers to help fill vacant space by locating tenants.
Interference with the broker’s economic advantage
Consider a nonresidential landlord who orally promises a broker he will pay a fee if the broker procures a tenant who leases space.
A prospective tenant for the landlord’s space is located by the broker. The tenant is orally advised by the broker that the landlord has agreed to and will pay his fee.
The tenant, after seeing the property and before signing an offer, contacts the landlord directly to negotiate a lease.
Ultimately, the tenant and landlord enter into a lease. The transaction does not contain provisions for a brokerage fee.
Here, the broker cannot enforce collection of his fee from the landlord who orally promised to pay.
Thus, the broker makes a demand on the tenant for the brokerage fee claiming the tenant knew about the landlord’s oral promise to pay him and interfered.
The tenant claims the broker is not entitled to recover anything from him since a written fee agreement does not exist to evidence the fee agreement with the landlord.
Is the tenant liable for payment of the broker’s fee which was orally agreed to by the landlord?
Yes! The tenant is liable for the brokerage fee the landlord promised to pay since the tenant:
was actually aware the landlord had promised to pay the broker a fee if the broker located a tenant; and
excluded the broker from lease negotiations with the intent of avoiding payment of the fee. [Buckaloo v. Johnson (1975) 14 C3d 815; Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 C4th 376]
When a tenant (successfully) induces a landlord to not pay the brokerage fee agreed to by the landlord, the tenant becomes liable for the fee the landlord promised to pay the broker whether or not the employment agreement between the broker and the landlord is oral or written. The broker is not pursuing the person who agreed to pay the fee.
Understanding dual agency
Now consider a broker engaged in locating space for a tenant. The broker does not ask for and is not employed under an exclusive authorization to locate space. The broker extends his search to space which he does not have listed.
The broker locates space acceptable to the tenant, space the owner does not have listed with a broker.
Solely to assure payment of his fee, the broker enters into a so called “one-time” or “one-party” listing agreement with the owner.
The broker does not advise the owner about his agency relationship with the tenant which was established due to his efforts to locate suitable space on behalf of the tenant.
On listing the property, the broker presents the owner with the tenant’s signed offer to lease. The owner rejects the offer by making a counteroffer. No disclosure or confirmation of the agency relationship with the tenant is made to the owner.
Negotiations conducted by the broker between the tenant and the owner ultimately result in an agreement to lease. The agreement contains a provision stating the brokerage fee will be paid by the owner.
The owner then discovers the broker was also acting as an agent on behalf of the tenant, a dual agency relationship which was not disclosed to the owner when he was induced to enter into the listing. The owner refuses to pay the broker his fee.
The broker makes a demand on the owner for payment of the agreed-to fee claiming he acted as the exclusive agent of the tenant at all times and undertook no agency duty to act on behalf of the owner by entering into the “one-party” listing.
The owner claims the broker is not entitled to his fee since the broker failed to disclose he was representing both parties as a dual agent.
Can the broker enforce collection of his fee?
No! The broker is not entitled to a fee. He was an undisclosed dual agent in the transaction.
The broker became the tenant’s agent when he undertook the task of locating and submitting all available space including space not listed with the broker, which might be suitable for the tenant.
On entering into the listing agreement with the owner, the broker also became employed as the owner’s agent. The result was a conflicting employment, i.e., control over the actions of both parties, which imposed a duty to disclose the resulting dual agency to both the landlord and tenant. [L. Byron Culver & Associates v. Jaoudi Industrial & Trading Corporation (1991) 1 CA4th 300]
To avoid losing the right to collect a fee on the transaction, the broker should have asked the tenant, rather than the owner, to enter into a written employment agreement before undertaking the agency duty of locating space on behalf of the tenant.
Thus, an agency relationship with the owner would not have arisen as the tenant’s offer to lease would have been submitted without first obtaining a listing from the owner, even though the owner may agree to pay the fee in an offer to lease or the lease itself.
No written authorization from tenant
Now consider a broker who represents a tenant without the tenant’s written authorization. The broker locates space and prepares an offer to lease. The space is listed with another broker.
Here, the broker should first enter into a written or oral cooperative fee-splitting agreement with the owner’s broker. [See first tuesday Form 105]
A cooperative fee-splitting agreement ensures payment of the broker’s fee on any lease his tenant may enter into for the space listed with the other broker. Oral agreements between brokers to share fees are enforceable.
Brokers all too often undertake the agency duty to locate space on behalf of a nonresidential tenant without first asking for and obtaining a written authorization granting the broker the right to represent the prospective tenant.
However, without a signed written authorization to act as the agent for a tenant, the broker has no initial assurance he will be paid by the owner or the tenant for his services rendered on behalf of the tenant.