Commercial Real Estate Professional Calls for Change to Industry Practices
Non-disturbance agreements have been around for a long time. They have become a crucial component in protecting corporate tenants from being removed from their space by lenders who may foreclose on the buildings occupied by those tenants.
Should commercial real estate brokers be entitled to the same protections…that, if a lender were to foreclose, the broker’s rights to receive future commissions would also carry forward and become the obligation of the lender?
Currently, in most states, broker commission agreements are personal service contracts between landlord and broker, and don’t run with the land. Basically, if a lender were to foreclose on a building where a broker placed a tenant, the broker would likely have no standing. If the commission agreement provided the broker with the opportunity to receive commission payments for future events, such as if the tenant were to expand, extend its lease, purchase the building, or otherwise, in most cases, the lender would have no obligation to honor the commission agreement. And, the broker would likely receive no compensation under the commission agreement.
Since commercial real estate brokers are often one of the primary reasons a tenant and a landlord are brought together, shouldn’t brokers be entitled to the same protections often afforded tenants? Like the tenant not being removed in the case of lender foreclosure, and like other protections afforded landlords, shouldn’t the broker’s rights also not be removed?
This approach has been applied from time to time, but only in extreme instances, and with a lot of effort. An industry wide standardized “broker non-disturbance agreement” is an idea whose time has come, especially at a time when so many commercial landlords are losing their buildings and while others are simply not capable of paying their bills, including commissions. Like a non-disturbance agreement between a tenant and lender, a broker non-disturbance agreement would be a separate document between broker and lender. In a broker non-disturbance agreement, the lender would agree, in the event it foreclosed on the landlord, to take-on the responsibilities to which the landlord agreed in the commission agreement. In this manner, the broker’s future interests would be protected through the agreement with the lender.
Some landlords may misunderstand the true positive value associated with offering broker non-disturbance agreements. Consider the office building that is rumored to have financial challenges. Some brokers might be less eager to aggressively pursue transactions there for fear of not being paid. By offering a broker non-disturbance agreement, financially challenges landlords may be able to attract more brokers to their buildings, and ultimately, increase leasing activity and close more deals.
Of course, other opportunities exist to protect brokers, including the inclusion in the lease document the right by the tenant to pay the broker its compensation, while deducting that cost from its rental obligations
Either way, commercial real estate brokers certainly provide valuable services to tenants and landlords. And, with the extreme challenges and very real risks that exist in today’s business climate, like others, brokers are entitled to reasonable protections and the expectation that they will receive the compensation to which they are rightfully entitled, especially those to which others have contractually committed to pay.
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Corporate Advisor 
Good food for thought. Here in San Diego, most LL refuse to be obligated to pay commissions on lease renewals or they limit the commission to a ten year period; which in some cases includes the renewal term. Most LL pay the commissions upon lease execution. Their concern is that in the event another broker is representing the tenant in a renewal, they will be obligated to pay a double commission and the famous,most over used reason “What if the client defaults and does not complete the lease term.”
As you stated above, it all boils down to how much value does the LL place on your services and if he recognizes the importance of the relationship between you and the tenant.
Hank:
Thanks for your comment to my blog post. Please excuse me for taking such an incredibly long time to reply to you.
Keep in mind that when representing prospective occupants (tenants), the service a tenant broker delivers to the tenant’s landlord while the tenant broker acts as the tenant’s authorized representative, is to bring about an executed lease. The tenant broker may have other post-transaction execution obligations to its tenant client, based on the broker’s relationship with the tenant. However, the benefit derived by the landlord is achieved and finalized, not as the tenant performs or pays rent under the lease, but only when the lease is executed…PERIOD! The tenant broker’s job is done when the lease is fully executed, if not sooner, and that’s when the tenant broker’s responsibilities end and its compensation is due!
Landlords will do their best to move risks they should bear to anyone who is weak or dumb enough to accept those risks, including tenants, brokers, and others. In fairness to tenant brokers and landlords, if a landlord expects a tenant broker’s compensation to be at risk after it is due (see above), then that landlord should also be willing to provide that broker with additional compensation, a quid pro quo, if the tenant performs well. In the real world, the two go together. If a landlord is only interested in the tenant broker taking on the landlord’s downside risk without offering the tenant broker an equivalent or greater upside incentive, why would any professional worth his / her salt accept such lopsided, unreasonable, unfair, and unnecessary terms?
When a tenant broker accepts bad compensation terms for itself, that sets an equally bad tone for negotiations the tenant broker will have with the landlord on the tenant’s behalf. Such a poor showing by a tenant broker telegraphs very loudly to both the tenant client and the landlord that if the tenant broker is too weak to secure fair and reasonable terms for its own compensation, the tenant broker will likely be just as weak in securing terms for the tenant.
In order to secure a position of strength in negotiations, as a means of both protecting tenant clients and so that the tenant broker can achieve fair and reasonable compensation, tenant brokers should make their compensation requirements clear to all parties at the outset of each relationship, and should stick to their terms.
Wishing you continued success!
Andy
Nice post..thanks for sharing information about non disturbance agreements..really helpful.
Jeffrey T. Angley
Jeffrey:
Thanks for your note. Please remember that my opinions are based on business experiences, and that since I am not an attorney, I offer no legal advice.
Andy