This form is used by a leasing agent when entering into the employment of a prospective tenant as their sole agent for a fixed period of time, to locate a property for their occupancy and negotiate the terms and conditions of a lease agreement.
Various written fee agreements
A leasing agent’s opportunities, taken as early and often as possible, to enter into a fee agreement signed by either the user or the owner arise on at least four occasions during leasing negotiations:
- when the leasing agent solicits an owner for authorization to represent the owner to locate users and negotiate acceptable leasing arrangements [See RPI Form 110];
- when the leasing agent solicits (or is solicited by) a user for authorization to represent the user to locate suitable space and negotiate leasing arrangements acceptable to the user [See RPI Form 111];
- when the leasing agent prepares a user’s offer to lease to be signed by the user which includes a fee provision [See RPI Form 556 §16]; and
- when the leasing agent prepares the lease agreement on terms agreed to by the owner and the user which includes a fee provision.
Employment agreements with a user
A prudent broker enters into an employment agreement with a prospective user before fully analyzing the user’s needs for space to be located. [See RPI Form 555]
The user is asked to sign an employment agreement prepared and entered into by the broker prior to locating space; certainly before exposing the user to available space not listed with the broker. [See RPI Form 111]
An employment agreement signed by a user, called an exclusive authorization to locate space published by RPI (Realty Publications, Inc.), assures the broker and leasing agent they have earned and are entitled to receive a fee when the user leases space of the type and in the area noted in the authorization.
On entering into the exclusive authorization, the user commits to work with the broker and leasing agent to accomplish the objective of the employment — to rent space. In turn, the leasing agent’s commitment to the user under the employment is a promise to use diligence and care in locating suitable space on terms acceptable to the user. [See RPI Form 111]
The exclusive authorization to locate space form, similar in structure and purpose to an exclusive authorization to lease entered into by an owner, includes:
- the term of the retainer period [See RPI Form 111 §1];
- the agreement the leasing agent will use diligence in the performance of the employment [See RPI Form 111 §2] ;
- the 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 space or property sought by the user; and
- identification of the broker as the agent and the user as the client, as well as the identity of the broker’s leasing agent.
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 user. Additionally, the leasing agent prepares a fully detailed description of the property and expands on the specific needs of the user on a user lease worksheet. [See RPI Form 555]
Exclusive authorization ensures collection of a fee
When the user enters into a lease agreement with an owner acquiring space similar to the space sought under the exclusive authorization, the broker has earned a fee based on the fee provisions in the exclusive authorization to locate space previously entered into by the user. Thus, the broker is entitled to collect a fee from the user, if not the owner.
The fee is collectible no matter who — the owner or other agent of the owner — ultimately locates acceptable space or negotiates the lease agreement. The right to the fee as earned is established by the exclusive clause in the employment agreement. [See RPI Form 111 §4.1a]
Also, fee provisions containing a safety clause allow the broker to collect a fee when property located by the broker and presented to the user during the retainer period is later leased by the user in negotiations commenced during the one-year period after the exclusive authorization expires. [See RPI Form 111 §4.1c]
When the user decides not to lease space during the exclusive authorization period, the fee provision is structured so the broker can include payment of a consultation fee. A consultation fee is charged on an hourly basis for the time spent locating rental property. [See RPI Form 111 §4.2]
Benefits of exclusive authorization
An exclusive authorization to locate space is mutually beneficial to a prospective user and a broker/leasing agent.
The employment commits the user and broker to work together to accomplish a single objective — the leasing of space.
Understandably, an unrepresented user is handicapped when working directly with the leasing agent employed by the owner. An agent employed by an owner owes the employing owner a specific agency duty to use diligence in seeking the most qualified user and negotiating terms for a lease most favorable to the owner.
Conversely, the owner’s broker and their leasing agents owe a limited general duty to a non-client user. The general duty requires the leasing agent to disclose to the user all material facts about the property which might adversely affect its rental value to the user.
The exclusive authorization to locate space is an employment agreement between the user and the user’s broker. It imposes a specific agency duty on the broker, owed to the user, even though the fee may be paid by the owner.
The prospective user who exclusively authorizes a competent broker to locate space saves time and money. The licensed advisor conducts the search and handles negotiations to lease property on the prospective user’s behalf.
However, a user working directly with an owner’s broker will initially (and properly) only be first shown space the broker has been employed by an owner to lease.
Learning your client’s need for space
A leasing agent’s technical expertise enables them to quickly and accurately ascertain their client’s needs and space requirements. Once the leasing agent understands their client’s objectives, they can locate a suitable property. When located, what remains is to enter into lease negotiations — LOIs, offers and lease agreements.
Most commercial users are personally consumed by the constant demands of their business.
They typically have no sufficient time or expertise to devote to making decisions in real estate leasing transactions. Further, annual operating costs of leasing property — rent and maintenance — represent a small fraction of the business’s gross income, somewhere between 2 and 4%, high traffic shopping center space being the exception.
To best understand their client’s needs, a leasing agent needs to ask questions and get answers to confirm why the user wants to move into another space.
By uncovering the precise reasons for moving, the user’s agent is better able to find a suitable new location and premises, or negotiate a renewal or extension of the user’s current lease.
Using a tenant lease worksheet
The Tenant Lease Worksheet published by RPI is used by a leasing agent when representing a prospective user in need of commercial space, to determine the user’s motivations, business needs and financial status. The worksheet also covers the type of property and lease terms sought by the user. [See RPI Form 555]
The worksheet itself covers three key areas the leasing agent needs to consider and analyze:
- the user’s current lease agreement obligations and conditions of their existing space [See RPI Form 555 §5];
- the user’s current and likely future needs for leased space [See RPI Form 555 §4]; and
- the user’s financial condition and creditworthiness.
Regarding the user’s existing space, the leasing agent will determine:
- the type of building [See RPI Form 555 §3.1];
- the square footage [See RPI Form 555 §3.4];
- the monthly operating and utility costs [See RPI Form 555 §3.5]; and
- the user improvements and trade fixtures. [See RPI Form 555 §3.8]
A necessary review of the user’s current lease includes:
- the expiration date [See RPI Form 555 §5.2];
- monthly rent and periodic adjustments and assessments [See RPI Form 555 §§5.3—5.6];
- the obligation to continue to occupy the premises [See RPI Form 555 §5.2];
- the obligation to restore the premises or remove user improvements [See RPI Form 555 §2.8];
- options to extend or renew the lease or buy the premises [See RPI Form 555 §5.11];
- the user’s ability to assign or sublease [See RPI Form 555 §5.12]; and
- the amount of the security deposit and terms of its return. [See RPI Form 555 §5.7]
These facts will help the leasing agent determine the user’s rights and obligations under their present lease for timing the user’s relocation. To fully fulfill their fiduciary duty to the user, the leasing agent needs to explain their knowledge of the beneficial or detrimental effect any lease provisions have on the user.
Locating new space
Next, the leasing agent ascertains the user’s needs and goals for the new space.
Regarding the space requirements, the leasing agent needs to determine the user’s:
- future square footage needs [See RPI Form 555 §4.4(a)];
- phone, utilities and computer facility needs [See RPI Form 555 §§4.4(b), 4.6];
- heating and air conditioning requirements [See RPI Form 555 §4.7];
- parking, docking, turn-around and shipping requirements [See RPI Form 555 §4.8];
- access to freeways, airports and other public transportation [See RPI Form 555 §4.3];
- access to civic, financial, legal, governmental or other “downtown” facilities [See RPI Form 555 §4.3];
- response time for police and fire departments [See RPI Form 555 §4.9];
- access to housing areas, shopping and restaurants [See RPI Form 555 §4.3]; and
- any needs peculiar to the user. [See RPI Form 555 §4.10]
Some users may focus on specific geographic locations in the business market or population centers. Others may need the lowest rent possible, regardless of location within the geographic area they wish to conduct business. [See RPI Form 555 §4.3]
On completing a user lease worksheet, the leasing agent will discover whether the user wants to:
- stay in the same community due to their strong business and social ties to the area;
- keep their rent fixed or have predictable (fixed) annual adjustments over the next three to five years; and
- move closer to the freeway for quick access to customers in outlying areas.
Establishing the user’s business projections
When a prospective user is starting a new business, the leasing agent needs to get information on the user’s business projections at the outset. [See RPI Form 555 §2]
A user’s new business projections may be overly optimistic. They may want space that is simply too large or in too expensive a location. The user may have to settle for incubator space in a less desirable location which accepts “start-up” business users. Rent might be paid by the owner accepting a fractional participation in the ownership of the user’s business.
Conversely, a user may be underestimating the potential future growth of their business. The premises they favor may be too small to absorb their growth, frustrating later attempts to expand. The user will be forced to relocate again prematurely. In this case, the user may needs 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.
Also, over projection of the potential income of a user’s business when entering into a percentage-rent lease will reduce the owner’s projected rental income. Unless the leasing agent considers the space needs and gross income of a user, the leasing agent’s long-term service to either the owner or user is limited. Thus, the leasing agent needs to develop a method for matching up the right owner with the right user.
Form updated 06-2017 to include the Form Description at the top, white header/footer convention and RPI branding.
Form navigation page published 09-2017.