The Broker Exclusive Awakens
Since the first trailer eight months ago, Star Wars fever has gripped the country.
The movie has been a huge commercial success, with its North American gross passing Titanic and Avatar (although frankly, my dear, I don’t give a whatever, since adjusted for inflation, Gone with the Wind beats them all).
Every television advertisement seems to have a Star Wars theme and, of course, we have life imitating art imitating life as the movie tracks the 1987 hit Space Balls with its “merchandising, merchandising, merchandising.”
The plot is the same as Star Wars 4, and [spoiler alert for the three of you who have not seen it yet] can’t anyone build a Death Star that doesn’t have one tiny little flaw that every rebel knows about and blows the whole thing up?
But I confess I caught the fever too. It is fun to see Han Solo and Chewie back in action (even Princess Leia, despite the creepy plastic surgery) and the new characters work for me.
Commercial leasing naturally has a lot in common with Star Wars, from the strange aliens to document production at light speed.
Some might even say brokers are the Jedi Knights of commercial leasing.
Okay, mostly brokers would say that, but not to stroke already healthy egos, real estate brokers provide the market knowledge, guidance and negotiating skill that commercial tenants rely upon.
And ixnay on calling real estate lawyers the Sith lords of commercial leasing.
If you are a tenant looking for space, the broker will need an exclusive arrangement in order to protect its position while you will need to document the relationship and confirm that the landlord will be responsible for compensation.
If you are a tenant looking to sublease excess space, you will likely be paying the broker’s compensation and you will both need broker agreement protection.
In this issue, we focus on the first example, so channel your inner Yoda and cover the following twelve issues in your exclusive broker agreement:
- Identify the services, you will. Specify the broker’s services, including evaluation of options, financial analysis, comparison of offers and counteroffers, regular reporting, space tours, coordination of the tenant team and negotiation assistance.
- Specify scope of authority, you should. Indicate that your broker has no ability to bind you, that all inquiries should be referred to you and that you can reject any offer and make all final decisions.
- Quantify scope of retention, make sure to. Identify the particular project involved, especially if you are a large entity with many lightsabers in the fire. You may also be looking to purchase and, if so, clarify whether this broker or another broker will handle the purchase. You should also address extensions of your lease and expansions of your premises.
- Address exclusivity, you must. Your broker is entitled to a reasonable period of time to represent you exclusively and have all inquiries referred to it. A reputable broker will not represent you if there are other brokers involved. You want exclusivity too so that one broker can “level” offers from different buildings and allow you to compare “apples to apples”, rather than having different brokers pushing different buildings. But this exclusive period should not go on forever and there should be a limit, e.g. 6, 9 or 12 months depending on the nature of your search.
- For cause, terminate. Include the right to terminate the broker agreement for “cause”, e.g. failure to provide essential services or conviction of a crime. Generally, brokers will request a period of time to cure.
- Ignore the tail, you cannot. At the expiration of your broker agreement, there may be active projects in play. Your broker should be designated as the procuring broker if you subsequently enter into a lease based on “active negotiations” during the term, i.e., properties for which (i) you (or your broker on your instructions) has submitted or responded to a proposal and (ii) you enter into a lease within a specified period of time after such expiration. To avoid disputes, your broker should be obligated to submit a (reasonably sized) list at the end of the term of all bona fide “active negotiations”.
If you are engaging an exclusive broker for all of your leasing needs on various properties, you may also need to cover extensions and expansions on existing spaces for which other brokers may be entitled to commissions. In this instance, your broker should only be entitled to a commission for “meaningful representation” in connection with such extensions or expansions.
- Know of dual representation, do you? There may be another broker at your broker’s firm representing (or owning an interest in) your landlord. Although an inherent conflict of interest, this is an unavoidable fact of life in the industry, provided that full disclosure and confidentiality should be required and members of the broker “team” representing you should not be in a direct conflict.
In specific instances, you may want assurances that your broker team does not represent a competing tenant for a similar transaction (based on size, location, etc.), particularly if you are taking a large amount of space in a tight market.
- Identify key personnel, you shall. Your broker should specify the particular persons within the company devoting a significant portion of their time to your project and you should have the right to terminate the agreement if that proves not to be the case or if such persons leave the company without being replaced by someone acceptable to you.
- Landlord pays the commission, make clear you should. This may sound self-evident, but there should be no ambiguity that your broker will look solely to your landlord for any commission (particularly in a potential purchase situation where the buyer often pays the broker) and only “as, if and when” a lease is executed and all conditions precedent have been met.
- Request sharing, you can. Sharing is not just for kindergarten Jedi knights. Many larger tenants require that their broker split the commission. In some states, brokers cannot share commissions with non-brokers and as a result tenants sometimes form licensed brokerage entities. The common method to sidestep this requirement has been for the broker to forego the shared amount as a commission reduction and then have the landlord pass these sums along to the tenant as additional free rent. In New York, legislation in 2015 brought this practice out into the open by revising Section 442 of the Real Property Law to provide that, although a broker cannot share commissions with an unlicensed person providing broker services, nothing prohibits a broker from offering any part of a commission to the seller, buyer, landlord or tenant as an incentive for using the licensed services of that broker.
- Want indemnification, do you? Hmm? Your broker should indemnify you against claims of other brokers (including its own broker employees) for commissions based on dealings with your broker.
- Licensed, your broker should be. Your broker should represent that it is a licensed broker in the applicable jurisdiction.
Avoid the dark side of commercial leasing by using the Schwartz (and our twelve suggestions above) to properly document your exclusive broker arrangement. Glad you did, you will be… yes.