What You Should Know About a Brokerage Agreement for the Lease of Commercial Space
Sept. 13, 2019
A landlord and a broker typically enter into a brokerage agreement in connection with the leasing of commercial space. The best way to protect your interests is to consult an experienced real estate attorney before signing such an agreement.
Key Terms of a Commercial Lease Broker Agreement
A broker who finds a tenant for a landlord of commercial space is entitled to a commission. The broker will want the agreement to be “exclusive” which means the broker gets paid the commission regardless of which party brings the tenant.
The landlord should verify that the broker is licensed in the state where the rental property is located. The agreement should identify the rental space (office or retail) and the building address. Generally, the commission will not be earned until a lease is signed, the tenant has paid the first month’s rent in advance and taken possession of the property.
The agreement will describe the rate of commission for the initial term of the lease and any renewal periods. If a lease has an escalating rent provision, the parties may agree on a flat commission or a commission based on a percentage of ech years’ rent. Certain items that are not included in the rent may be excluded when calculating commissions such as the utility costs, any free rent or construction costs. The agreement should also consider the rate of commission if the tenant takes on additional space in the building (whether adjacent or on another floor).
An example a commission rate schedule for a five (5) year lease with an option to renew:
For the first (1) year of the lease, or any fraction thereof | 5% |
|---|---|
For the second (2) and third (3) year, or any fraction thereof | 5% |
For the fourth (4) and fifth (5)year, or any fraction thereof | 3% |
Any renewals | 2% |
While a commission rate may be calculated based on the changing rental rate, the commission is usually paid in one lump sum at the time of lease signing. It should be noted that if a tenant terminates, or violates a provision of, the lease, the landlord can sue the tenant to recover damages -- the amount the commission paid to the broker.
The agreement may provide a protective clause known as a broker indemnity whereby both parties state there are no other brokers entitled to the commission. If the brokerage commission is not paid, the broker can place a lien on the property.
A landlord may want certain key individuals in a brokerage agency to work on the lease the property and may name such individuals. Then, a new broker can only be placed on the matter if the landlord consents to such broker.
The Bottom Line
In the end, a commission agreement for the lease of property varies from a commission agreement for the sale of the property and the forgoing issues deserve serious consideration.