Listing/Commission Agreements – Do You Know what you Need to Know? 8 Essential Points
Whether you are listing a commercial property for sale or listing premises in it for lease, the listing agreement is a material document with significant implications on the broker, the owner (and property manager as agent of the owner). On a commercial deal, fees can range from thousands of dollars to millions of dollars so it’s a document that warrants just as much attention as any other material agreement to be entered into.
Owners, landlords, and managers, will appreciate relative certainty in the agreement especially on the material issues at the outset with a view to keeping them out of court or at least enhancing the chance of success.
As with all commercial agreements, it boils down to the relative leverage between the parties involved. Assuming a degree of sophistication to the readers of “The Legal Corner”, I will hi-light some of the essential terms that should be considered when entering a listing agreement. Some are simple to attend to upfront and are not that contentious (at least not initially if properly addressed). However others will require negotiation to arrive at a balanced agreement that rewards the broker for a successful achievement: and ensures the owner/manager receives relative certainty as to the services, the fees, the timing of payment and the expiration or termination of all the obligations.
1. The Term – this depends on many factors including the sums to be incurred by the Broker in advertising the premises, the uniqueness of the property, and the supply and demand for similar sites. Six (6) months is common. In the leasing context where an exclusive listing is being negotiated, a landlord or property manager may want the right to list the property on MLS at some point. Consider early termination rights noted below.
2. Early Termination Rights – these may require some payment to the broker for time and costs incurred to date for marketing etc. as well as a reasonable notice period but it still may be worthwhile for the flexibility it provides if circumstances change. What if the shareholders of the owner are parties to a buy-sell clause in their co-tenancy agreement and the option is triggered? What if a tenant has a right of first refusal or right to expand triggered on a 3rd party offer? Every owner and property manager should be aware of all pre-existing rights to purchase or to rent the premises that exist prior to entering into the listing agreement and carve them out.
3. The Agent – who is providing them at the broker? Did you go with a broker because of a particular person? What happens if that person cannot continue or changes employers? Does the broker have the right to list competitive properties to yours during the term?
4. Marketing – what will the broker be doing to market the property? What budget is there for the marketing? How often will it be using internet advertising? Advertising to foreign buyers? The agreement should obligate the broker to actively and diligently market the premises and specify what is expected in terms of services and budget in a schedule to the agreement.
5. The Fee Amount – it’s usually a percentage of gross or net rent (make sure additional rent is not part of that) or the sale price in case of a sale but you need to be very careful to deal with any exclusions such as tenant inducements like allowances and rent free periods, large closing or post-closing adjustments which reduce the sale price. Always check the “going rates” before entering into the negotiations.
6. The Timing of Payment – is the fee payable on “procuring a valid offer to lease” or “offer to purchase”? signing the lease?, occupancy?, payment of rent?. From a landlord’s perspective, all of the above are preferred. Is there a renewal/extension fee? If so, is the fee clearly set out?
7. Holdover Period – how long is it for and who which prospective buyers/tenants does it apply to? A sixty or ninety day holdover period is not unusual and a list should be provided as to who has demonstrated a serious – not casual interest – in the property. Don’t use wording like “introduced” or “shown” – they just lead to litigation and can be detrimental to an owner.
8. “May” v. “Shall” – if modifying a standard broker’s form or OREA form, be wary of the use of “may” in terms of each of the brokers obligations and consider carefully if it should be changed to “shall” so there is a definite obligation.
The Lessons: Treat the listing agreement as you would any other material agreement and run it by counsel. Beware the broker’s or other standard printer’s form such as the OREA form as they are drafted from the broker’s perspective but with legal input they can be revised to arrive at a balanced agreement that manages the parties expectations upfront which should avoid or minimize disputes later on. Clarifying the rights and obligations of each party at the outset is wise. That takes time and adds cost to the process but usually it pays off.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.[*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at [email protected] with your suggestion. Not all requests can be accommodated.]