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If you own commercial real estate and want to rent it or if you want to rent commercial real estate from someone else, you may be thinking about hiring a real estate broker to help you. A real estate broker can help you with a commercial lease, and you should know something about what you can expect from a broker.
Real estate brokers have an important role in commercial leasing. Lessors have property that lessees want to use and are willing to pay for. Brokers bring the parties together, negotiate a mutually satisfactory agreement, and bring the transaction to closure.
The broker’s function is to work in its client’s best interest in carrying out the duties assigned to the broker in the brokerage services agreement. The broker also owes its client the traditional duties of loyalty, confidentiality, obedience, disclosure, reasonable care, diligence and accounting. The broker also has a responsibility of fair dealing toward the non-client party. The broker must use its best efforts to accomplish its client’s goals under the terms most favorable to the client.
Representing the Lessor
A lessor is a party who wants to lease property to someone else. The broker’s duty towards the lessor is to use his best efforts to obtain a ready and willing lessee to enter into a lease agreement in accordance with the terms specified by or acceptable to the lessor. In order to do this, the broker must:
- Identify exactly who owns the property and who has the authority to sign agreements on behalf of that party
- Identify the lessor’s goals, including what kind of lessee is desired
- Structure the basic outline of the lease agreement, including length of term, amount of net rent, additional charges, provisions for renewal options or purchase options and rights of first refusal
- Identify any restrictions on the use of space
Representing the Lessee
A lessee is the party who wants to rent property from someone else. The broker’s function in representing the lessee is similar to representing the lessor. The broker must use his best efforts to identify space acceptable to the lessee and to negotiate a lease agreement in accordance with terms specified by or acceptable to the lessee. In order to do this, the broker must:
- Identify how the lessee is organized and who has the authority to execute agreements on behalf of that entity
- Clearly identify the lessee’s goals
- Assist the lessee by identifying relevant market conditions and other factors that the lessee can use in getting the best deal
- Identify geographic needs, such as availability of transportation services, and the amount of space required
- Make provisions for future needs by including options to renew, options to purchase and rights of first refusal
- Identify a guarantor for the lessee if the lessor requires a guarantor
Brokers act merely as information gatherers and providers in their duties, and they usually may not give legal advice. If you need legal advice on real estate matters, you should contact a commercial real estate lawyer in your area.
Real estate brokers have to be paid for their services. Their commissions are typically set out in the brokerage service agreements. Commissions can be paid as a:
- Flat fee
- Percentage of net rental, which is the total amount due from the lessee less the amounts paid by lessee for real estate taxes, insurance premiums and common area maintenance expenses
- Percentage of rent actually collected
- Additional compensation when the lessee exercises a renewal option
- Additional compensation when the lessee exercises a purchase option or a right of first refusal
If you have questions about fees or anything else contained in a brokerage agreement, consider reviewing the agreement with an attorney.
Questions for Your Attorney
- Can a real estate broker go beyond the scope of his duties as they are set out in a brokerage agreement?
- What happens if I have a disagreement with the real estate broker over his commission?
- Can I terminate my brokerage agreement if the real estate broker does not appear to be actively seeking a tenant for my property?