What this article adds to the discussion: The new buyer representation rules have an application which may surprise some brokers – the negotiated, written representation of commercial tenant clients. Read on for a study of the buyer representation paradigm which, as the purchase of a fee interest negotiated by a buyer agent, relates equally to the purchase of a leasehold interest negotiated by a tenant agent. The legislative intent for the written buyer representation mandate to end the single-fee price-fixing regime in brokered real estate transactions leads to legislative follow-through for equal treatment to clear out antitrust violations in leasing transactions.
Users of commercial property need a negotiated written representation, too
As all real estate practitioners are well aware, new legislation effective at the beginning of 2025 requires a buyer agent to:
- enter into a written representation agreement and deliver an agency disclosure addendum; and
- do so when the agent, in expectation of a fee, begins to assist their buyer-client to locate and acquire an interest in property. [Calif. Civil Code §1670.50(a); See RPI Form 103.1; 2]
The written buyer representation agreement (BRA) is entered into by the buyer agent:
- as soon as practicable (ASAP) after determining the agent is to represent the prospective buyer-client; and
- always before the buyer signs an offer to acquire an interest in any type of property the buyer agent submits in expectation of a fee. [CC §1670.50(a)]
Though relatively simple on first blush, let’s take a moment to parse deeper into the ramifications of the paradigm for negotiating the buyer broker fee and documenting the representation of a buyer-client.
First point of clarification: these new rules are triggered by a broker’s representation of a buyer for any type of real estate.
Though the vast majority of commentary within the industry pertains only to single family residential property, the rules are equally applicable to the representation of a buyer in most all other situations too, such as the purchase of:
- multi-unit residential property with greater than four dwelling units;
- commercial property;
- raw land;
- a ground lease coupled with improvements; and
- mobilehomes classified as real estate. [CC §2079.13]
Numerous firsttuesday readers and affiliates who practice in the commercial market have commented that the buyer representation rules do not apply to them — that is not so.
Second point of clarification: these new rules involve the representation of a client who seeks to acquire an interest in real estate. Clearly, this covers a fee interest in a property, one type of estate conveyed in property transactions negotiated by agents in exchange for a fee.
But is the acquisition of a leasehold interest also targeted?
Yes! Any bet against this conclusion is a historical loser.
Buyers and tenants both face the same issues of opaque dealings in broker representation and price-fixing when it comes to their agents’ fees. The legislative spirit — intent — behind proper representation and agency duties owed clients applies fully to all broker representations, and thus both the representation of buyer and the representation of tenants.
As a matter of public policy and antitrust laws, tenants need to receive the same certainty of a written representation agreement with negotiated fees as buyers under representation rules. The real estate goals of both buyer and tenant clients are synonymous – the right to use real estate via possession. Only the extent of the possessory period — and capital contribution — is different. A net lease agreement presents the clearest example of the similarity of the ownerships.
Consider this: tenants purchase the right to the use of a property when they are granted a leasehold estate (tenancy). Thus, tenants buy a leasehold interest in the property they lease, paid for on an installment plan, called rent, as evidenced by the terms of debt provisions in a lease agreement which conveys the leasehold.
Fundamentally, the issue of acquiring ownership of a possessory interest in real estate — whether fee or leasehold — is this: both require a signed writing by the person conveying the possessory rights granted. Here, the tenant becomes the owner of a leasehold with the exclusive right to possess and use the entire property — without interference by the owner of the fee until the leasehold expires.
The ownership and title to the fee interest in the property, a passive residual right representing their capital invested in the leased property, remains with the landlord. But the landlord has no right to use the property during the period possession is conveyed. Thus, the right to possess the property under the leasehold, with priority over all later landlord activities, has been purchased by the tenant by conveyance of the leasehold estate.
Enter the tenant representation agreement forms.
Like their buyer brethren with broker representation to acquire — own — an interminable right to possession, two variations of an exclusive tenant representation agreement are used by a broker representing a tenant-client. Both versions employ the broker as the consumer’s sole agent, to locate and negotiate the terms and conditions to acquire a leasehold or fee interest in a property.
One version of the form is used when representing individuals to acquire either a fee or leasehold interest. Here, the length of the representation period is capped at three months. [See RPI Form 105.1]
The other version of the form is used when representing entities to acquire a fee or leasehold interest. In this instance, the length of the representation period is fully negotiable and is not capped at three months. [See RPI Form 105.2]
Critically, payment of the broker fee is protected by an enforceable writing no matter which fork on the ownership path the user-client decides to take to attain the right to possession — the fee or a leasehold ownership.
Editor’s note — Likewise, the Agency Law Disclosure is handed to the client prior to their commitment to representation, as a signed attachment to the tenant representation agreement. Both are needed, and signed, to enforce collection of an earned fee from a tenant. Simply attaching the Agency Law Disclosure to the lease agreement or letter of intent (LOI) is too late in the employment process to be functional. [CC §§2079.13(j), 2079.14]
Related article:
The ambidextrous commercial property user
Consider an individual user of commercial property who begins their search for property to occupy and operate their business. The commercial property user hires a broker to assist in their search.
Initially, the user suspects occupying the property as a tenant is more compatible with their needs than an occupancy acquired by the grant of fee title. However, they are amenable to acquiring a fee interest in the property when the terms of a purchase are financially more advantageous than the terms for leasing.
Simply put, the tenant as a user is looking for space to occupy — whether as a tenant or as an owner, the difference being a capital investment decision. The user’s ownership needs are ambidextrous — the space selected works for them in the same way, either way.
The commercial property user and broker enter into a tenant representation agreement assuring the broker an earned fee whether the user’s need for space is acquired as a leasehold or fee interest in real estate. [See RPI Form 105.1]
The broker presents the user with qualifying properties whether they are available for sale, for lease, or for sale or lease. The differences are a matter of who has the capital investment in the property, an income property investor or the user-occupant.
The user and their broker view a property available for lease. It’s acceptable and they commence negotiations with the landlord. After the landlord’s terms of occupancy are determined through an exchange of letters of intent (LOI), the broker inquires about whether the landlord will consider an offer to sell the property rather than rent it, and on what terms. The landlord’s response is positive.
The tenant broker writes up a purchase agreement offer and submits it to the landlord. The landlord on review of the offer determines it is more compatible with their current financial conditions to accept the offer. Escrow is opened and the tenant acquires the property — the fee simple, that is.
Here, the use of a written tenant representation agreement by the tenant broker assured a fee was earned and can be collected and retained. Regardless of whether the user acquires a fee or leasehold interest, the tenant representation agreement covers the broker in both circumstances.
Consider another situation where the broker locates a suitable rental property, which the tenant agrees to lease. Fee sharing agreements are negotiated verbally between the brokers involved. The tenant broker and tenant do not enter into a tenant representation agreement. Further, since fee ownership of the property was not being acquired, the broker believes they do not need a separate buyer representation agreement negotiated and signed by the tenant.
The tenant signs the lease agreement, which includes a right of first refusal to buy, as common provision in commercial leases of single user buildings. [See RPI Form 579]
The right to buy is evidenced by a separate agreement attached to the lease agreement as an addendum.
The right to buy includes details for payment of a brokerage fee — none of which are related to the leasehold estate conveyed to the tenant. [See RPI e-book Real Estate Property Management, Chapter 6]
The landlord decides to later sell the property and notifies the tenant. The tenant chooses to exercise what has become their option to purchase the property.
Related article:
As the tenant exercised their option to purchase the fee ownership in the property, are they a buyer of the property requiring a signed representation with their broker stating the amount their broker is to be paid as their expected tenant broker fee?
Yes!
Here, the tenant representation agreement is required to protect the broker for the collection of a fee in both instances, whether the tenant continued to lease the property, or acquires fee ownership due to the right of first refusal addendum.
Foresight dictates prudence — get the writings right
The Department of Real Estate (DRE) has jurisdiction only to police buyer representation and broker fee compliance on a transaction involving fee ownership. Thus, the written representation and broker fee arrangements to locate space for a tenant to lease is not, as of yet, enumerated for DRE enforcement.
The inclusion in the antitrust code of a broker’s need for a tenant representation agreement for acquisition of a leasehold interest will eventually be legislated. Laws for consumer representation by DRE brokers need consistency, as has taken place with the agency disclosure rules.
However, it is more likely a broker is sued by a tenant-client after a lease is entered into. Litigation drags in the courts to unequivocally answer this legislative shortfall and establish the conduct required of tenant brokers to earn and collect a fee.
Let’s examine the code scheme directly related to representation agreements.
Civil Code §2079.13(p) for agency relationships and disclosures, states:
“buyer-broker representation agreement” means a written contract between a buyer of real property and a buyer’s agent by which the buyer’s agent has been authorized by the buyer to provide services set forth in subdivision (a) of Section 10131 of the Business and Professions Code for or on behalf of the buyer for which a real estate license is required pursuant to the terms of the contract.
The referenced subdivision (a) of the Bus & PC defines the activities of a real estate broker, specifically mentioning the sale or purchase of real property. Thus, partial application of fee-fixing antitrust for brokers is limited to buyers of a real property interest. And just what is “real property:” the fee, the leasehold, or both?
Further, CC §2079.13(b) defines “buyer” very broadly to include lessees (and vendees) of interests in real property. Code wording addressing the representations brokers engaged in, states tenants who seek to purchase a leasehold interest by entering into a lease agreement are treated as “buyers” for agency disclosure law — a general application to all broker (and their agents by extension) activity rendering licensed services.
Inclusion of the representation of tenants under the legal scheme for agencies conforms to the spirit of California public policy for licensee relationships with consumers of their services. Exclusion does not.
The intent behind the agency law is to ensure tenants are afforded the same protections and duties as buyers in transactions conveying fee simple ownerships. From a public policy perspective, the buyer representation law is intended to end single-fee price-fixing activities of real estate licensees. The objective is to legislatively decouple the two sets of brokers from collaborating to set fees for each other in a transaction. Here, tenants need to receive the same level of protection as buyers.
Whether a user of property is buying a freehold or leasehold interest, the new standards of representation apply — as a matter of real estate agency law disclosure mandated to all buyers and those tenants entering into leases for more than one year.
But at this point, the courts have not yet had the occasion to weigh in — though they inevitably will. You just read the arguments generally well known today.
Editor’s note — To consider the evolution of legislative activity in a public policy situation, compare today’s relatively new buyer representation rules to the Agency Law Disclosure discussed above. When initially mandated for use in 1988, nearly four decades ago, the transactions targeted for agency disclosure to clients were limited to those involving one-to-four-unit residential properties.
However, as the years went on, the agency law was updated to establish a level playing field for all agency relationships of real estate brokers and their agents. The agency disclosure target expanded to include all types of clients and all types of real estate. Expect the buyer representation rules to undergo a similar expansion in the years to come. This trend is what a price-fixer calls the “slipper path” toward ending the game. [See RPI Form 305]
In the meantime, it is best for brokers to do everything within their power to protect the fee they and their agents expect to earn. Also, to avoid being in a class action for antitrust violation, or worse a complaint filed with the DRE, do not agree to split fees the owner has agreed to pay their broker as the source of your fee on a transaction without first negotiating a written buyer or tenant representation agreement with your client authorizing you to collect a fee when earned.
In recessions, tenants in financial distress – bankruptcy — often seek to claw back the fee from their broker when documentation with the client does not exist. [See RPI Form 105.1 and 105.2]
Just like the representation of a buyer purchasing a freehold interest, brokers need their agents representing tenants seeking to acquire either a leasehold or fee interest to enter into a tenant representation agreement. And do so as soon as possible on determining they are to represent the tenant as a client to earn, collect and retain a fee on the transaction.
