F. Signing a Contract With Your Broker

LOOKING FOR SPACE AND USING BROKERS



1. Paying Your Broker

There are no hard-and-fast rules governing

how you’ll pay your broker. The most common way is to pay the broker a commission based on the value of the lease. This

approach is quite problematic for tenants,

since it puts the broker’s financial interests

at odds with yours, as explained in the section describing commissions, below. Fortunately, there are other ways to compensate

your broker.

Commission. The broker earns a percentage of the rent over the life of the lease.

More precisely, the broker’s fee goes up as

the tenant’s rent, square footage, and lease

term increase. But high rent is not in your

interests, nor is unnecessary space or a

lease term that is too long for your business

needs or plans. In short, working on commission introduces a total conflict of interest between you and your broker. Most

often the landlord pays the broker, but

you’ll still be stuck with a high rent, excess

space, or a needlessly long lease. The alternative methods of paying brokers avoid this

conflict, as you’ll see by reading below.

Here’s how the commission scheme

works in practice. For example, if you’re

leasing 2,000 square feet at $20 a square

foot for three years, the total rent is

$120,000 (2,000 x $20 x 3). A 3% commission would amount to $3,600.

If your contract with your broker provides that the broker will be paid only on

commission, the broker won’t earn anything unless you sign a lease. Sometimes, a



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broker will ask for an advance against the

hoped-for commission (called a retainer),

which is deducted from the commission

once it’s earned. If you don’t sign a lease,

the broker must return the retainer.

Flat fee. You pay a fixed amount (such as

$2,000) for the broker’s efforts in looking

for space for you, regardless of the success

at finding suitable space.

Fee based on success. You pay a fixed

amount only if the broker’s efforts result in

your signing a lease.

Hourly Fee. You pay by the hour for the

broker’s time.

You and the broker aren’t limited to

choosing only one payment method. For

example, you might agree to pay an hourly

fee that will be credited toward a success

fee if you ultimately sign a lease.

Which arrangement is best suited for you?

Naturally, you’d like energetic assistance

with the minimum of expense—and many

in the leasing game will tell you that this

means choosing some variation on a commission arrangement. There is no simple

cure, however, to the conflict problem

noted above. Even though you have contracted to pay your broker’s commission,

many landlords will pick up that expense

instead. Here is how it works:

• The space was listed with a landlord’s

broker. If you lease space that’s been

listed, it’s customary for the landlord

to split the commission he owes his

broker with your broker.

• The space was unlisted. If you lease

space that was not listed with a



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NEGOTIATE THE BEST LEASE FOR YOUR BUSINESS



broker, the landlord may still pay

your broker’s commission—primarily

to build up goodwill in the real estate

community. But if the landlord isn’t

so inclined, you’ll probably be the one

to pay the broker. To protect yourself

against having to pay an entire commission if the landlord balks, provide

in your contract with the broker that

the broker will instead accept a

lesser, fixed fee from you.

Depending on the fee method you agree

on, make sure your contract with your

broker covers these additional points:

• When is the payment due—in installments (if you pay by the hour) or when

you’ve signed a lease? If the latter,



how much time do you have to pay

the fee? Naturally, the longer you

have to pay the fee, the better, since

you’ll be incurring moving and leasing expenses at a rapid rate.



2. Exclusive and Nonexclusive

Arrangements

Your contract with your broker needs to resolve more than the matter of who pays the

broker. The two of you must decide

whether the broker has an exclusive relationship with you or a nonexclusive one.

Exclusive. The broker earns a fee whether

you sign a lease through the efforts of the

broker or through anyone else, or even on

your own.

EXAMPLE: Tenant Tom signs an exclusive



contract with broker Bob. Tom finds

space through a newspaper ad and

signs a lease. He owes a fee to Bob.

Nonexclusive. You owe the broker a fee

only if you sign a lease through the efforts

of the broker. The broker does not earn a

fee if you find space on your own.



• Do you have to pick up the tab for the

broker’s expenses, such as travel and

advertising? Obviously, you’d prefer



not to.

• If you pay a retainer or an hourly rate,

will you be entitled to a rebate if your

broker receives a commission from the

landlord? This understanding is fair,



and you’ll want to push for it.

• If you pay a retainer or an hourly rate,

will it count toward any commission

that you may have to pay? It should.

• If the landlord pays a commission, will

you still have to pay a success fee? You



shouldn’t.



EXAMPLE: Tenant Tom signs a non-



exclusive contract with broker Bob. Tom

finds space through a sign in a window.

He does not owe a fee to Bob.

Most brokers will prefer, naturally enough,

to have an exclusive relationship with you.

It will commit you to seriously using their

expertise and contacts, since you’ll have to

pay them when you lease any space. Working under a nonexclusive arrangement

exposes the broker to the disappointing

possibility of working long and hard for

you, only to have you secure space on



LOOKING FOR SPACE AND USING BROKERS



your own. From your prospective, however, you won’t want to sign an exclusive

contract unless you have high confidence

in the broker’s ability to deliver a rental,

since there’s no incentive for you to seek

space on your own.

If you are interested in renting space in a

particular building or shopping center, you

and the broker can agree that you’ll owe

the broker a fee only if the broker succeeds

in delivering space in the property specified in the contract. This arrangement will

work well for you if you’d like to be able

to do some space-finding on your own, but

want an advocate when it comes to certain

properties. For example, there may be one

or two large, sophisticated landlords who

have properties that might suit your needs.

You’ve wisely concluded that you’d like the

assistance of a broker when dealing with

these owners. On the other hand, you figure

you could handle less daunting owners

yourself. A contract that limits your broker

to pursuing space in the properties owned

by sophisticated players frees you to pursue other deals on your own.

EXAMPLE: Tenant Tom signs a specific



space contract with broker Bob to

secure space in either the regional

Riverside Mall or the equally large

Country Time Plaza. Tom winds up

leasing space from a single-rental landlord on a city street downtown. He

does not owe a fee to Bob.



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3. Avoiding Conflicts of Interest

With Your Broker

Although your broker is duty-bound to find

you the best space at the best terms, you

can’t ignore the fact that the broker or others in the office will represent other tenants

along the way—some, perhaps, with space

needs similar to yours. And unless you’ve

retained a tenant’s broker exclusively, the

brokerage may have landlord clients, too—

including some who might have space that

you will want to see. In either situation, the

broker may end up representing two competing parties (two tenant-clients or one

tenant-client and one landlord-client). Or,

your broker will realize she’s representing

one party (you) while her associate at the

next desk is representing the other (the

landlord). Your contract with the broker is

the place to address these potential conflicts.



a. Conflicts With Other

Tenant-Clients

It’s common for experienced real estate

brokers to specialize in certain types of

space or neighborhoods; that degree of

specialization is generally a plus for you.

However, the narrower the broker’s field,

the more likely it will be that the broker

will have more than one client who is looking for similar space. Who gets to see the

property first? And if both clients are interested, whose interests does the broker

push?



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NEGOTIATE THE BEST LEASE FOR YOUR BUSINESS



For instance, let’s say that you’re looking

for space for a restaurant and the broker

has another tenant-client who’s looking for

similar space. What happens if a terrific restaurant space becomes available? There are

two common solutions:

• The broker bows out. You can specify

in the contract that the broker won’t

represent either one of you but will

find other qualified brokers for each

of you.

• The eager client prevails. A second

solution is to say that the broker will

represent the first client who expresses

serious interest in the space.



b. Conflicts With Landlord-Clients

If your broker, or anyone in the office, also

handles listings for landlords, it’s possible

that you’ll become interested in the property

owned by the broker’s landlord-client. Your

broker cannot effectively represent both of

you, since your interests are clearly adverse.

Nor can she negotiate against a member of

her own office. How should your contract

deal with this dilemma? There are two

solutions, explained below.

Exclude that particular space. You can

specify that space listed by the broker’s

office is excluded from the range of properties your broker will show you. This will

mean that you won’t be able to ask your

broker to show you these properties or

represent you in negotiations with the landlord. But if you really want to pursue a

space listed by your broker’s office, you



will need the right to terminate the contract

so that you can engage another broker. If

this is the route you want, be sure that your

contract with the broker specifies that you

have an option to terminate in this situation

if it arises.

Ask the broker to act as a dual agent. The

other solution is to ask the broker to act as

a dual agent (dual agents are brokers who

assume a neutral position in space hunting

and lease negotiations, as explained above

in Section B4). Here, if the broker’s relationship with a landlord-client predates yours,

you’ll need the landlord-client’s consent for

the broker to work as a dual agent. A landlord may be willing to give up the benefit

of an advocate in exchange for a tepid gobetween if you are a desirable tenant who

is seriously interested in the space. Conversely, if a landlord approaches your broker (or someone in the office) after you

have signed a contract with the broker, the

landlord will need your consent before

your broker can be transformed from your

advocate into a dual broker.

You can probably see already that neither

of the above solutions is very satisfactory.

You won’t be happy narrowing your range

of possibilities if you have to exclude

appropriate space. If you terminate your

contract and engage a new broker, you’ll

find yourself negotiating against someone

(your ex) who may have a lot of important

information about you—your needs, financial situation, and bargaining intentions.

And the alternative—reducing your broker

to the status of a dual agent—leaves you



LOOKING FOR SPACE AND USING BROKERS



without a strong advocate. One way to

avoid these complications is to look for and

hire a broker who works only for tenants,

as emphasized several times above.

A trial marriage can mean an easy

divorce. See if the broker will agree in

the contract that either of you can cancel the

contract during the first 15 or 30 days. This

will give both of you chance to see if the

relationship is working—if it isn’t, you can

end it easily. Try to include language entitling

you to a refund of any fees you pay up front,

except for costs actually incurred by the

broker, such as those for advertising.



4. Clarify the Details in Writing

Your broker may be willing to perform

more services than just showing you space

and helping to negotiate a lease. You can

expect extra services if you’re hiring the

broker yourself, as explained in Section C,

above. Even if you are not paying the broker directly, you may be able to arrange for

some additional services. For example, the

broker may be willing to get traffic flow

data, utility bill information, or zoning details.

Brokers can also arrange for inspections

and line up contractors to finish, or “build

out,” the space. And your broker may

promise to show you a minimum number

of properties within a specified time, or

canvass a specific geographic area. If you

and your broker come to understandings

like these, don’t just rely on the broker’s



2/ 2 1



oral promise. Be sure to list these duties in

the contract you sign with the broker.



5. Provide for Searching Without

the Broker

At the end of your agreement with the broker, you may find yourself still without a

lease. You can, of course, extend the agreement, but you may want instead to terminate the relationship. Problems may arise if

you soon thereafter sign a lease for a property that the broker brought to your attention, even if lease negotiations had not

started when the broker was still under

contract with you.

There’s a fair way to handle this situation.

Provide that if you sign a lease on your

own with a landlord whom the broker

brought to you within six months of the

end of the brokerage contract, you’ll pay

full fees. True, this binds you longer than

you might wish, but if it also protects the

broker from easy abuse from clients who

plan an end run.



G. Handling Problems With

Your Broker

If you’re careful when choosing a broker

and spell out your agreement in a contract,

you’ll reduce the chances of disputes

later—but there’s no guarantee that all will

be smooth sailing. The secret, of course, is

spotting problems early. This section lists



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NEGOTIATE THE BEST LEASE FOR YOUR BUSINESS



some common signs of trouble and possible

solutions.



1. Signs of Trouble

If you encounter any of the following

difficulties, you know that you need to take

action:

• Are your questions being answered? If

important issues are addressed poorly

—or not at all—watch out. Eager to

close the deal, your broker may be

afraid that candor will get in the way.

For example, if the broker blows off

questions about environmental hazards on or near the property, or if you

can’t get a straight response to your

query regarding the anticipated jump

in the landlord’s property taxes (you’ll

probably end up paying for some of

it), get pushy.

• Are there available rentals that the

broker is not showing you? A broker

who steers you toward certain properties (such as those listed with his

office or that promise a higher commission) and away from others may

have hidden motives for doing so. It’s

appropriate to be suspicious. Your

broker is supposed to be showing

you space that’s most suitable for

your needs, no matter where it is.

• Are you being rushed? Anxious to close

the deal and earn the commission, a

broker may minimize or gloss over

problems with a space or a deal, or



fail to disclose key information. For

instance, you may not be told that the

anchor tenant in the shopping center

you’re considering is about to move

out. If you’re the last to learn about

important details like this, be advised:

You aren’t getting the full, undivided

attention of your broker.

• Is the broker disclosing key information

about you? Your broker may not share

important information about you—

such as your need to move immediately or your key negotiating points

—with the landlord or the landlord’s

broker. True, this information may

speed up the bargaining, but it may

also make it harder for you to strike

the best possible deal. If you learn

that your secrets are being shared, it

may be due to the broker’s eagerness

to close a deal—any deal—irrespective of what’s best for you.



2. Resolving Problems

If you’ve kept the lines of communication

open with your broker, a face-to-face airing

of your grievances may suffice to get things

back on the right track. Sometimes, however,

depending on the nature of the problem, you

need to consider more drastic action, such as:

• Complaining to the broker’s boss, if

there is one. To preserve goodwill, the

boss may either take steps to correct

the problem or agree to terminate the

brokerage contract.