To efficiently negotiate a commercial lease arrangement on behalf of a tenant, a leasing agent needs to possess a high level of knowledge and expertise regarding the terms of a lease. However, negotiating the best terms for the tenant requires proper due diligence by the agent to fully identify the tenant’s intentions and expectations for leasing a commercial property.

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 tenant or the owner arise on at least four occasions during negotiations:

  • when the leasing agent solicits a property owner for authorization to represent them by locating tenants and negotiating acceptable leasing arrangements [See RPI Form 110];
  • when the leasing agent solicits or is solicited by a tenant for authorization to represent them by locating suitable space and negotiating leasing arrangements consistent with the tenant’s needs [See RPI Form 111];
  • when the leasing agent prepares a tenant’s offer to lease to be signed by the tenant which includes a fee provision [See RPI Form 556]; and
  • when the leasing agent prepares the lease agreement on terms agreed to by the owner and the tenant which includes a fee provision.

Employment agreements with a tenant

A prudent broker enters into an employment agreement with a prospective tenant before fully analyzing the tenant’s needs for space to be located. [See RPI Form 555]

The tenant is asked to sign an employment agreement prepared and entered into by the broker prior to locating space, especially before exposing the tenant to available space not listed with the broker. [See RPI Form 111]

An employment agreement signed by a tenant, called an exclusive authorization to locate space, assures the broker and leasing agent they have earned and are entitled to receive a fee when the tenant leases space of the type and in the area noted in the authorization. [See RPI Form 111]

On entering into the exclusive authorization, the tenant commits to working 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 tenant under the employment is a promise to use diligence and care in locating suitable space on terms acceptable to the tenant. [See RPI Form 111]

The exclusive authorization to locate space, 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 tenant; and
  • identification of the broker as the agent and the tenant as the client, as well the identity of the broker’s leasing agent.

The description of the property in the exclusive authorization to locate space outlines:

  • space requirements;
  • location;
  • rental range;
  • terms; and
  • other property conditions sought by the tenant.

Additionally, the leasing agent prepares a fully detailed description of the property and expands on the specific needs of the tenant on a tenant lease worksheet. [See RPI Form 555]

Exclusive authorization ensures collection of a fee

When the tenant 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 employment agreement previously entered into by the tenant. Thus, the broker is entitled to collect a fee from the tenant, 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 §4.1(a)]

Also, fee provisions containing a safety clause allow the broker to collect a fee when property located by the broker and presented to the tenant during the retainer period is later leased by the tenant in negotiations commenced during the one-year period after the exclusive authorization expires. [See RPI Form 111]

When the tenant 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.

Benefits of exclusive authorization

An exclusive authorization to locate space is mutually beneficial to a prospective tenant and a broker/leasing agent.

The employment commits the tenant and broker to work together to accomplish a single objective – the leasing of space.

Understandably, an unrepresented tenant 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 tenant 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 tenant. The general duty requires the leasing agent to disclose to the tenant all material facts about the property which might adversely affect its rental value to the tenant.

The exclusive authorization to locate space is an employment agreement between the tenant and the tenant’s broker. It imposes a specific agency duty on the broker, owed to the tenant, even though the fee may be paid by the owner.

The prospective tenant 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 tenant’s behalf.

However, a tenant 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 ascertain their client’s needs and space requirements quickly and accurately. 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 – including the submission of a letters of intent (LOIs), offers and lease agreements.

Most commercial tenants 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 tenant wants to move into another space.

By uncovering the precise reasons for moving, the tenant’s agent is better able to find a suitable new location and premises or negotiate a renewal or extension of the tenant’s current lease.

Using a tenant lease worksheet

The Tenant Lease Worksheet published by Realty Publications Inc. (RPI) is used by a leasing agent when representing a prospective tenant in need of commercial space, to determine the tenant’s motivations, business needs and financial status. The worksheet also covers the type of property and lease terms sought by the tenant. [See RPI Form 555]

The worksheet itself covers three key areas the leasing agent needs to consider and analyze:

  • the tenant’s current lease agreement obligations and conditions of their existing space [See RPI Form 555 §5];
  • the tenant’s current and likely future needs for leased space [See RPI Form 555 §4]; and
  • the tenant’s financial condition and creditworthiness.

Regarding the tenant’s existing space, the leasing agent will determine:

A necessary review of the tenant’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 tenant 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 tenant’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 tenant’s rights and obligations under their present lease for timing the tenant’s relocation. To fully fulfill their fiduciary duty to the tenant, the leasing agent needs to explain their knowledge of the beneficial or detrimental effect any lease provisions have on the tenant.

Locating new space

Next, the leasing agent ascertains the tenant’s needs and goals for the new space.

Regarding the space requirements, the leasing agent needs to determine the tenant’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 tenant [See RPI Form 555 §4.10].

Some tenants 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.

On completing a tenant lease worksheet, the leasing agent will discover whether the tenant 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.

This article was originally published July 2013 and has been updated.