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Collecting Your Leasing Commission

Collecting Your Leasing Commission

As a result of the struggling commercial leasing market, real estate brokers that represent tenants are having difficulty collecting their leasing commissions from landlords.  Typically, the landlord agrees to pay 25%-50% of the leasing commission upon lease execution and the remainder upon lease commencement or 6-12 months following lease commencement.  The landlord makes the initial payment, but then either delays or fails to make the subsequent payment(s).  Though the landlord knows it has a legal obligation to pay the commission under the lease and/or a separate commission agreement, the landlord makes a business decision to not pay because the broker’s remedies of arbitration or litigation are costly and months will pass before the landlord actually must make the payment.

In my commercial leasing practice, tenant brokers have started requesting that if the landlord fails to pay the leasing commission, the lease allow the tenant to pay the broker the leasing commission and offset such payments against future rent.  Unless drafted properly, this remedy unfairly exposes the tenant to a potential default under the lease and places the tenant in the middle of a commission dispute between the landlord and broker.  For example, if the tenant pays the broker the commission and offsets the amount against its rent, the landlord could dispute whether the amount is owed to the broker and claim the tenant has defaulted for an improper withholding of rent.  The tenant could face a lockout and damages for default.

Based on my commercial leasing experience, I have thought of a fair solution.  In the commercial lending context, lenders often require that a tenant execute a Subordination, Non-Disturbance and Attornment Agreement (SNDA) as a condition to making the loan to the owner/landlord.  The SNDA provides that if the owner/landlord defaults on the loan, the lender can instruct the tenant to make payments directly to lender.  In exchange, the landlord and lender agree to not disturb the tenant’s possession so long as tenant is making payments to the lender.

A similar agreement between the broker, landlord and tenant could work.  Following is a sample provision that I have prepared to address this issue:

Landlord agrees to pay tenant’s broker (“Broker”) a leasing commission (the “Commission”) as set forth in a separate agreement (the “Commission Agreement”).  If Landlord fails to timely pay Broker under the terms and conditions of the Commission Agreement, Landlord agrees that Broker shall have the right to demand payment of the Commission from Tenant and Tenant shall have the right make such payment(s) and offset the amount of such payment(s) against future rent owed under the Lease.  Accordingly, the following shall apply:

                 (a)           In the event that Broker notifies Tenant and Landlord of a default by Landlord under the Commission Agreement and demands that Tenant pay Broker the Commission owed under the Commission Agreement, Tenant shall honor such demand and pay the Commission directly to Broker and offset the amount of such payment(s) against the next rent payment owed to Landlord under the Lease.  In no event shall Tenant be required to make payment(s) to Broker in excess of those due under the Lease.

                 (b)           If Tenant makes payment(s) to Broker in accordance with this provision, Landlord agrees that Tenant shall not be in default under the Lease for failure to pay its rent and Landlord will not disturb Tenant’s possession of the Premises.  Instead, if Landlord believes the Broker’s demand for payment from Tenant is unauthorized or otherwise improper, Landlord shall seek recovery directly and solely from Broker and not from Tenant.

                 (c)           Broker agrees to indemnify, defend and hold Tenant harmless for, from and against any and all claims, damages, actions, losses and expenses arising out of Broker’s demand for payment, Tenant’s payment of any amounts to Broker, or Tenant’s offset of any amounts paid to Broker against rent payments owed under the Lease.

This sample language should be included in a separate agreement between the broker, landlord and tenant (similar to the SNDA).  If it is inserted directly into the lease, the broker could inadvertently become a party to the lease.

Prior to using this language in any agreement, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona.  You can contact him at ryan.rosensteel@azbar.org.

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2 Responses

  1. Ryan,

    Very interesting post. I think this is a creative way to address the problem of tenant reps getting paid. However, I have a couple questions as to how this works:

    1. Wouldn’t this have to be in place as a condition to Broker introducing the parties? I don’t see why any landlord or tenant would sign this otherwise.

    2. While this gives the broker another party to collect from, are his remedies for collecting from tenant any better than collecting from the landlord?

    Thanks for the information. This would be something to consider having on hand if the issue arises in one of my leases.

    I invite you to stop by my blog: leaselaw.wordpress.com (same as yours, minus the AZ).

    I’ll be adding you to my legal blogroll and would appreciate if you did the same. I’m based in Texas.

    Regards,

    Brian

  2. Brian:

    Thank you for the questions and the opportunity to clarify.

    Re: #1, this type of agreement should be signed prior to lease execution. It is a pro-active concept and does not aid in current collection efforts. If the landlord already failed to make a commission payment, it will not likely agree to allow the tenant pay the commission and offset against rent. The broker’s only remedies are litigation/arbitration or other debt collection efforts.

    In my experience, tenants value their business relationship with their brokers and want their brokers to get paid for their hard work. The tenants will assist with collection efforts as long as there is no adverse impact on the tenant for doing so. During lease negotiations, the tenant could insist on this type of an agreement as a condition to lease execution. It would be tough for the landlord to object (even though it will not like the agreement), because the agreement simply provides that if the landlord fails to pay the commission then the tenant can pay and offset against rent. Since the commission arises out of the lease and the landlord benefits from the broker bringing the tenant, this agreement is reasonable.

    Re: #2, the agreement allows the tenant to effectively pay the rent owed under the lease to the broker if the landlord fails to pay the broker. With my suggested language, the landlord permits these payments and cannot hold the tenant in default for doing so. This would be a powerful remedy for the broker. The tenant should not care who it is paying and likely prefers to pay its broker for the prior services. The keys are the non-disturbance language in paragraph (b) and the indemnification in paragraph (c).

    Let me know if this answers your questions. This is a new idea and a work in progress.

    Your blog looks great!

    Ryan

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