Listing or selling commercial property involves a series of contracts and negotiations, beyond the lease or purchase contract itself. These negotiations start before you even list the property, as the seller will have a listing agreement with the broker.
Whether you are selling or leasing, there are many important factors for negotiation between the owner and broker. Some brokers use standardized forms, such as the AIR Listing Agreement, whereas many other have their own custom forms. Although these forms can vary significantly, there are several key issues that are ripe for negotiation. This article highlights the more significant areas we see in dispute.
When Commission is Paid
Timing of the payment of commission is critical in commercial lease listing agreements. The owner needs to carefully examine when the obligation for the commission begins. For instance, if the listing agreement requires a commission to be paid upon execution of the lease, but the tenant has a lengthy due diligence period and then backs out of the lease, then what? Under many listing agreements, the owner still has to pay a commission. Therefore, it is very important for the owner to protect themselves and try and negotiate that a commission is only due upon the payment of rent or the tenant moving in.
Timing of commission payments can also be an issue in listing agreements for sales. Occasionally, listing agreements require payment of a commission on sale before closing. This can even include requiring a commission be paid upon producing a ready and able buyer willing to pay the seller’s desired price. This can be an issue for owners if they do not want to sell to a particular buyer or if the sale falls through for some reason. Thus, owners will want to add language that ensures that a commission is only paid upon close of escrow. Otherwise, an owner can be forced to pay a commission even if the property does not sell.
When Does the Agreement End?
Listing agreements typically are for a set duration (or at least from the owner’s perspective, should be!). Typical listing agreements are for anywhere between 6 and 12 months. Generally, this is an acceptable arrangement as the broker needs time to market the property and solicit offers. However, what happens if the owner is not satisfied with the broker’s efforts (or some other unexpected situation arises)? Can the listing be terminated? The answer depends on if you negotiated for such an option!
In an ideal world, the owner will want the ability to terminate the listing for any (or no) reason. Many brokers will understandably balk at this, so this is where negotiations begin. It is common to have some sort of notice period, so as to avoid immediate termination. Negotiating termination “for cause” is also common. A wise broker will typically require that he or she is entitled to collect the commission if any prospects that he or she identified. Many brokers will also seek to have any out-of-pocket expenses be reimbursed if they are terminated without cause.
This issue is one that can be ripe for dispute after the agreement is entered, so carefully considering these issues and crafting specific language is crucial.
Level of Discretion Allowed to Owner
Whether to accept or reject an offer, and whether such acceptance or rejection was reasonable, is something that most owners want to have discretion over. The risk of not having this protection is to prevent or resolve a disputes over whether an owner “unreasonably” rejected an offer that the broker has procured. The broker may feel as though he or she obtained an offer that met the owner’s expectations and thus is entitled to a commission. Having language to deal with this issue is necessary.
An owner wants to ensure that the agreement does not “obligate” them to accept certain offers or otherwise require them to pay a commission on certain terms. Ultimately, the owner should have reasonable latitude to consider each offer independently based on the specific circumstances. Many standard listing agreements strip this right from the owner, so it is critical to review and negotiate these terms.
Most listing agreements require the owner to provide some level of “warranties” about the property, condition of the property, status of the owner, etc. While these provisions can be understandable, sometimes the listing agreements are overly broad and burdensome. Overly broad warranty requirements could expose the owner to liability, so limiting the requirements under these provisions is beneficial to the owner.
Indemnity provisions can be a significant negotiating point, as both sides want the other to cover them in the event of default between the parties or other issue triggering liability from a third party. Many listing agreements essentially require the owner to indemnify the broker for any liability the broker may incur in marketing the property. Such a provision is cumbersome for the owner, as these provisions can potentially require an owner to indemnify the broker even if the liability is incurred for something that the broker did. Thus, an owner should make sure that he or she is only responsible for its own action or inaction.
Further, a seller should obtain cross-indemnification from the broker. If the broker defaults or triggers a claim from a third party, the owner should be indemnified by the broker for such conduct. This should include any claims from a prospect or cooperating broker. For example, if a cooperating broker sues related to a commission dispute, the broker should defend the owner on any such claims.
Post-Termination (“the tail”)
Brokers want to ensure that they receive their commission if a prospect they identified purchases or leases after the listing agreement ends. This is an understandable desire, but the owner still needs to ensure the provision is reasonable.
The owner should ensure that specific requirements are met by the broker to ensure that the eventual purchaser/tenant actually was procured by the broker. A straightforward way to do this is to require the broker to submit a written list of all prospects for which the broker intends to claim a commission. Such list should be delivered very soon after the listing agreement terminates (as in days rather than weeks). The types of prospects should also be defined, so as to only include prospects that actually submitted an offer or letter of intent, actually viewed the property with the broker or personally discussed offers, etc. The owner does not want to be stuck with a prospect list five thousand people long because the broker merely sent a massive email blast to everyone in its database.
The foregoing items are a snapshot of the negotiable issues that arise in listing agreements. Many other issues can arise, and the foregoing are intended to highlight those issues that we have seen cause disputes most frequently. It is important to carefully review and negotiate the listing agreement. Remember, all of this is negotiable, and the owner should not hesitate to negotiate to protect themselves.