If you're satisfied that the skill level, experience, professional situation and personal style of a broker will suit you, it's time to sign a written contract to cement the relationship. Doing so will protect you from misunderstandings that commonly arise in working relationships that are only based on a handshake with no written evidence of your agreement.
The broker may produce a pre-printed standard contract which they’ll ask you to sign. If so, proceed with caution. Just as there's no such thing as a standard lease, there's no such thing as a standard broker's contract. It's all negotiable. In this Section, we'll look at some issues to consider when you and your broker put together a contract, such as:
how your broker will be paid
whether the broker has an “exclusive” or “non-exclusive" arrangement with you
how your broker will handle any conflicts of interest that may arise, and
the details of the legwork the broker will do for you.
There are no hard-and-fast rules governing how you'll pay your broker. Here are some common arrangements.
Commission. The broker earns a percent- age of the rent over the life of the lease, Most often, the landlord ends up paying the commission (we explain below how this happens). 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 she'll be paid only on commission, she won't earn anything unless you sign a lease. Sometimes a 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 her 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 this usually means choosing some variation on a commission arrangement. Even though you have contracted to pay your broker's commission, many landlords will pick up that expense instead. Here is how it works:
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.
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.
Your contract with your broker needs to re- solve more than the matter of who pays the broker for her services. The two of you must decide whether the broker has an exclusive relationship with you or a non- exclusive 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.
Non-exclusive. 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.
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 non-exclusive arrangement exposes the broker to the disappointing possibility that she will work long and hard for you only to have you secure space on your own. From your prospective, however, you wont want to sign an exclusive contract unless you have high confidence in the brokers 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 she succeeds in delivering space in the property specified in the contract. This arrangement will work welt 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 powerhouse properties 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 land- lord on a city Street downtown. He does not owe a fee to Bob.
Although your broker is duty-bound to find you the best space at the best terms, you cant ignore the fact that she or others in her office will represent other tenants along the way-some, perhaps, with space needs similar to yours. And unless she's a tenant's broker exclusively, she and her associates may have landlord clients, too- including some who might have space that you will want to see, In either situation, the broker may find herself representing two competing parties (two tenant-clients or one tenant-client and one landlord-client). Or, she'll 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.
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 he 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?
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 wont 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.
Conflicts With Landlord-Clients
If your broker, or anyone in her 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 proper- ties 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 land- lord. 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 84). Here, if the broker's relation- ship with a landlord-client pre-dates yours, you'll need the landlord-client's consent for the broker to work as a dual agent. A land- lord may be willing to give up the benefit of an advocate in exchange for a tepid go- between if he sees you as a desirable tenant who is seriously interested in the space. Conversely, if a landlord approaches your broker (or someone in her 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 he 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 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.
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 oral promise. Be sure to list these duties in the contract you sign with the broker.