Question: May a commercial landlord’s broker refuse to split a fee with the tenant’s broker on an extension or renewal of a lease agreement which was accompanied by a fee schedule calling for payment of fees to named brokers on the tenant’s further occupancy?

Answer: No. The landlord’s broker is required to split their fee with the tenant’s broker when the tenant remains in possession following expiration of the lease term under an option to extend or renew the lease or other negotiated occupancy, and a separate fee agreement arising out of the original lease negotiation called for payment of a fee to named brokers on the tenant’s further occupancy of the property.

Enforcing collection of an earned fee can be a major headache when the landlord or their broker refuses to share a fee with another licensee who participates in negotiations. The drama can also spill over to interfere with negotiations between the landlord and tenant, a likely agency violation of interest to the DRE under their role of consumer protection in transactions involving licensees.

When a commercial lease expires and the landlord and tenant begin negotiations to remain in the property for an additional term, the payment of broker fee is not on the landlord-tenant negotiating table. As part of the transaction negotiating the original lease agreement, the landlord has already agreed to pay a scheduled amount of fees to the original brokers for the tenant’s further occupancy when the tenant:

  • exercises any option;
  • acquires any rights to the premises from the landlord;
  • remains in possession of the premises after expiration of the lease with the landlord’s consent; or
  • pays a higher base rent, whether by agreement or escalation clause. [See RPI Forms 552 §22.1 and 113 §2.2; see AIR CRE Standard Industrial / Commercial Multi-Tenant Lease agreement — Gross §15]

Under a commercial lease agreement, the tenant may exercise their option:

  • to extend or reduce the lease term;
  • to renew the lease agreement; or
  • to acquire ownership of the property. [See RPI Form 565; see AIR CRE §39.1]

When a tenant exercises any option, the landlord owes the agreed broker fee — period – when the agreed-to fee is set out in any type of written provision or agreement signed by the landlord.

When the tenant remains in possession of the property after the lease has expired without agreeing to a fixed term extension/renewal and the landlord accepts lease payments, this automatically creates a month-to-month tenancy. Here, the landlord owes a new broker fee, which the brokers named in the original fee agreements will split as they previously agreed.

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The fee-dodging landlord and broker

Consider a tenant who hires a broker to locate commercial property for lease. Upon finding and agreeing to a property and lease agreement terms, the tenant signs a multi-year commercial lease agreement with the landlord.

In the lease agreement, the tenant’s broker is identified, as is the landlord’s broker. Upon execution of the lease agreement, the landlord pays the broker fee, which the two brokers split as they have orally or in writing agreed to share.

Near the end of the lease term, the tenant asks their broker to begin discussions with the landlord’s broker to negotiate an extension.  They do and the landlord employs another broker who was not involved in negotiating the original lease agreement to represent them in the renewal/extension process.

The landlord’s new broker contacts the tenant directly, advising the tenant not to involve a broker in the negotiations to extend. Further, if the tenant does the tenant is responsible for any fees due their broker. As negotiations proceed with letters of intent, the landlord’s broker demand a hold-harmless provision to indemnify the landlord and new broker against any claims against them from the tenant’s broker – whether arising out of prior fee agreements or current involvement by the tenant’s broker.

While the terms of the extension are agreed to but entering into the extension/renewal are conditioned in continuing letters of intent on resolving the fee dispute by indemnification, the original lease expires and the tenant pays the landlord the regular monthly fee, which the landlord accepts. Thus, the lease agreement is converted to a month-to-month tenancy agreement.

Does the landlord need to pay an additional fee to the original brokers under the fee schedule agreed to on entering into the original lease agreement – whether or not they are involved in negotiating the extension or renewal?

Yes! The landlord owes the brokers in the original transaction an additional fee, as called for in the prior fee agreements with the landlord, which the brokers will split, since the tenant retained possession of the property on expiration of the lease term with the landlord’s consent.

Editor’s note: Relatedly, a new broker not named in the fee schedule arising out of the original lease agreement may be brought into the negotiations by either the landlord or the tenant. However, any fees due them are in addition and unrelated to the fee due either broker under the terms of the original agreements.

Fee sharing arrangement – no takebacks

In this case, even though the landlord attempted to dodge payment of a second broker’s fee to the tenant’s broker involved in the original lease agreement, they are obligated under the fee schedule rising out of the original lease agreement to pay fees as agreed, which the two brokers are obligated to split. This is true whether or not the brokers are further involved in the extension or renewal negotiations.

Withholding payment of a broker fee agreed to as earned on the tenant’s continued permission occupancy is unlawful conduct, as it is a breach of the original fee agreements. The written fee agreement is enforceable by the original brokers. [Calif. Civil Code §1624(a)(3)]

Formal documentation of an obligation to pay a fee — a written agreement containing a fee provision and signed by the principal involved — is the legislatively enacted and judicially mandated requisite to the right to enforce collection of a broker fee from a person who has agreed to pay it.

When the condition for earning the fee occurs as called for in the lease agreement, such as the tenant’s exercise of an option or negotiated extension of their tenancy, the fee is due and payable to the original brokers.

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