The Basics of a Tenant Representation Agreement
What is a Tenant Representation Agreement?
Within the real estate world, tenant representation agreement is a common term and concept. More specifically, it refers to the contract signed when a commercial real estate agent represents an organization during a tenant negotiation or when buying commercial real estate. As implied by its name, the contract is between the organization looking for space and the commercial real estate agent who will represent them in their search.
So, why is this type of contract necessary? Well, without one, you and your business could be headed for trouble. If you’re unaware of commercial real estate contracts, and you accidentally sign with two agents, it could place you in a position where neither person is able to represent you. Put simply, the failure to use representation agreements can leave your business unrepresented, a situation that isn’t ideal considering the amount of property leasing or buying activity taking place in today’s booming economy.
Beyond protecting you from signing with multiple agents, these agreements utilize effective strategies to guarantee long-term success. If we’re being honest , it’s safe to say that real estate is a complex industry to navigate regardless of whether you have a relationship with a trusted agent or not. Consider this for a moment: as a layperson, do you really know what you’re getting yourself into when signing a lease? More importantly, are you confident in that decision?
Representation agreements put you in the hands of someone whose job it is to put your interests before their own, meaning you and your business will receive priority in a situation where the average individual may not. Translating the fine print of a lease, locating available space, negotiating terms and conditions, and ensuring the most affordable deal possible all become something you can set your watch to.
While many tenants see true value in a tenant representation agreement, some are still hesitant to sign one for fear of the legal ramifications. But as long as the details and terms are clearly defined and expressed by both parties, you should have no qualms about signing a tenant representation agreement with a broker. The goal of commercial real estate is to eliminate any potential for conflict or miscommunication, in turn ensuring an adequate amount of time to be properly dedicated to your search for your new location.
Essential Elements of a Tenant Representation Agreement
Tenant representation agreements vary between state and territory laws, but often the essential elements that comprise such an agreement are:
Parties to the Agreement
This is primarily the real estate agent and tenant (the lessee/buyer).
Scope of Services
What the agent will provide for the tenant and vice versa. This can involve undertaking market analysis, finding potential sites, reviewing and negotiating lease agreements, drafting and preparing leases, surveying these, liaising with the prospective landlord, assisting with relocation and fit out (or negotiating fit out costs with the landlord) and any other matter that may arise through the process of representing that tenant.
Compensation
This is the commission payment for the service (and whether it is payable by the tenant or the landlord). In most cases, a tenant will agree to pay a fee on a successful outcome – that is, a successful transaction. However, if the agent is involved in anything more than the leasing transaction (for example, undertaking telephone support or advisory role) then the tenant may be expected to pay a set fee for the process.
Term of Agreement
How long the agreement lasts between the parties and what would occur on termination of the agreement – including termination rights and the payment of a success fee where applicable.
Advantages of Entering into a Tenant Representation Agreement
The primary benefit of a tenant representation agreement is that it offers legal protection to the tenant. The agreement clarifies the scope of the services the landlord is providing and the roles and responsibilities of the broker to the tenant. In other words, the tenant knows under what circumstances the broker will be representing it. If the tenant has any issues with the landlord or broker, the agreement gives the tenant a legal basis for recourse.
Having a tenant representation agreement also provides a tenant with greater negotiating leverage. A landlord often attempts to squeeze the best terms possible out of its tenant. If a tenant is not sure of its own authority to make certain concessions or get certain concessions from the prospective landlord, a tenant representation agreement allows the tenant to be transparent about its flexibility, which can help close a deal.
Finally, another benefit of a tenant representation agreement is that it gives the tenant unfettered access to the market. Tenants work with tenant representative brokers and salespeople to locate its desired space. Tenant representatives are frequently asked by their clients to show them "available spaces" in the market. People move frequently because they want to experience new neighborhoods, or they want a new space that offers particular amenities. Some tenants do not seek a particular property. Instead, they seek a property in a preferred market and want to be shown all available options. Because a tenant representation agreement allows a tenant to work with the broker or agent within the confines of the agreement, the tenant can explore multiple options within its target market without being strapped to a particular property.
Selecting a Tenant Representative
When picking a tenant representative, most people focus on the agent’s track record and their commission fees. While these are certainly important considerations, there’s more to finding the right representative than having a reliable reputation and being cost-effective. Finding a tenant representative who understands your needs and who you can trust to come up with the ideal solutions for your business is the better approach. You need professional expertise and representation that will meet increasingly high expectations in commercial transactions. The constant economic shifts and significant changes in the market may also require a deeper understanding of the prevailing market conditions. If you’re looking for someone you can rely on, the following criteria can be a very useful guide.
Experience
You should only consider working with a tenant representative who has significant experience within your industry. While it may be tempting to work with a young agent who costs less money, this strategy could prove to be detrimental if the deal turns sour. A good tenant representative knows how to effectively negotiate and secure an agreement that meets your requirements. This rarely happens without several years of experience. Being a lawyer is not enough. A good tenant representative must be a skilled negotiator with the ability to bring a new lease or renewal transaction to fruition. A tenant representative should also have experience in the scope of your project. If you’re opening a single outlet in a novel area, you probably do not need someone with a large track record. If, on the other hand, you’re opening chain outlets in multiple locations, you will want to work with someone who has extensive experience.
Industry Knowledge and Skills
An experienced tenant representative will have deep knowledge of all the elements that contribute to the decision-making process. Your representative should be fully aware of industry-related operational, budgetary, statutory, zoning, and business-related actions and considerations relevant to your industry. If they don’t have this level of familiarity, you may find it difficult to achieve the best outcome. A good tenant representative will be thoroughly familiar with the commercial real estate industry, which means being a property owner, a developer, and/or a practitioner in the areas of commercial finance, mortgage, lending, and leasing. A reliable, financially savvy tenant representative ensures the landlord is held to acceptable standards, such as having sufficient financial resources to cover all charges, taxes, and other expenses for the duration of the rental term. A good negotiator has extensive negotiation skills, knowing what must be done to save you money and time and how to limit your risk and liability. They must know the procedures for collecting rents, how to handle landlord/tenant issues, and what to do when a landlord requires a rental adjustment.
Client Testimonials
If you find yourself lacking experience in the real estate market, you may have to rely on previous clients’ testimonials when searching for a reliable tenant representative. You can find a tenant representative by browsing through available resources or by browsing through online listings. You’ll notice that certain agents have multiple testimonials compared to others. Those who have strong feedback from previous clients have probably secured good experience and industry knowledge. This is someone who knows how to prioritize your needs for the best outcomes. Before you hire a tenant representative, make sure they have sufficient experience, practical know-how, and a history of delivering good results.
Common Myths about Tenant Representation Agreements
There are a number of common misconceptions surrounding tenant representation that tend to cloud its true value and importance. It’s worth shedding light on the most frequent ones.
The most widespread misconception here is that the landlord or lessor will pay the entire broker commission, so it doesn’t make sense for you to hire someone to represent you. The reality is that oftentimes the commission is not the same amount as the landlord pays their own broker, the landlord doesn’t have a broker representing them or they could already be working with a brokerage you don’t like. In these cases, it may make sense to have your own representation to ensure that you are getting the best deal and that your interests are being advocated for.
You may not have heard about tenant representation, but that doesn’t mean it isn’t right for you. Some people view tenant representation as a service that is just for companies because they have an office manager or facilities manager speak for them to a tenant representative . However, individuals sign leases as well, and often need help deciding which location is best for their budget and needs.
I hate to use this phrase, but it’s worth mentioning. Even if a representative agrees to work on a flat fee basis, it’s worth asking them about possible fees. By being upfront about potential work hours and fees, you’ll avoid any surprise bills later on.
This is where it gets tricky. Both parties are undoubtedly trying to get the best deal and in some cases it may be a clear benefit to have representation on both sides. However, there are many potential pitfalls to having both landlords and tenants have representation in the same negotiation. Misrepresentation of interests and conflicting goals abound in these scenarios. For more about why it’s worth having representation by a tenant representative in a negotiation, download our free resource, The Importance of Hiring a Tenant Representative in Commercial Real Estate Transactions.
Steps to Executing a Tenant Representation Agreement
Before signing a tenant representation agreement, a tenant-representative broker must present the agreement and its terms to the tenant and have them reviewed and approved. Any questions and concerns that the tenant has regarding the agreement need to be addressed at this point, prior to the tenant signing it. Here are a few of the key steps that are usually taken to finalize a tenant representation agreement:
There are non-negotiable stipulations sometimes required by the landlord that cannot be changed. For example, the landlord may require that its lease form be used or that the landlord’s lawyer’s fees be paid by the tenant. Other times, the landlord will be open to the tenant-motivated brokers pushing the envelope to negotiate the terms. The goal is to structure the agreement in the best way possible for the tenant in order to maximize their opportunity in the new office location.
Most of the time, the layout of a tenant representation agreement is tried and true, but the broker may have certain stipulations they want included in the agreement. Some examples may be an auto-renewal of the agreement term, an obligation by the tenant to work exclusively with the broker, and a notice provision that allows the tenant to give notice if they do not want to renew their representation agreement upon conclusion of the current agreement.
A representation agreement is a binding legal document, so it is recommended that a qualified attorney review the agreement to ensure that the tenant’s interests are protected. An inexperienced broker may even insert terms or provisions into a representation agreement that may unintentionally bind the tenant to a longer term than necessary or subject them to paying a larger commission than what was anticipated.
Consequences of Not Having a Tenant Representation Agreement
Except in very small markets, landlords are almost always represented by a professional who fully understands the intricacies of leasing space and is prepared to take advantage of the lack of experience of the tenant. If you don’t have professional representation, the risk to your business could be substantial.
Many times during these negotiations, you’ll hear repeatedly that "this is a standard term found in almost every lease" or "this is customary in these types of leases" or "this is how it’s usually done in this market." The world of commercial real estate leasing in most cases is entirely custom-based. And who do you think the landlords are getting their information from? That’s right , from their professional representatives.
Some typical terms that could impact your business:
At the end of a typical negotiation where the landlord has the advantage, you end up with a lease that is legally binding and prepared by the landlord – and very likely not in your best interest. With no professional representation you may never even know what hit you.