Yes, most of you have heard from me before on this particular issue. However, legal questions arise from time to time, and I have found that the broker’s best resource is his or her listing or commission agreement (and schedule of commissions) to clarify exactly when a commission is due, and how that commission is to be calculated. Equally important is the issue of who (i.e. the owner with whom the broker has a listing or commission agreement, and/or perhaps the successor owner(s) of the property) is likewise, critical. You have worked hard to procure a tenant and assist the owner in negotiating a lease, and for that lease, you have earned a commission. Depending on the use of the property, options to extend the term can be important to the tenant, such as a retail location. Likewise, an office user may consider, in addition to options to extend, the right to expand the leased space, should additional/adjacent space become available. That right to expand may be found in an option, a right of first offer, or a right of first refusal. Thinking ahead is always a good practice in life, and indeed, a good practice in commercial real estate brokerage. You have heard me say, or have read of my admiration for Wayne Gretzky, the fabled hockey star who explained the reason for his successful career: “I don’t skate to where the puck is, I skate to where the puck is going.”

Let’s run through a pre-flight checklist of sorts, and then I will share an interesting situation that one of my favorite clients recently encountered:

1. Do you have an enforceable listing or commission agreement? Knowledge of state license law and/or license portability limitations is critical. If your agreement isn’t enforceable, your leverage is gone. You are at the mercy of your landlord.
2. Does the state where the property is located have a statute that gives commercial real estate broker lien rights? The last count is still 34 of the 51 US jurisdictions, and lien rights differ from state to state as to breadth of coverage.
3. Does the lease which you have procured and negotiated afford the tenant any future rights beyond the initial lease term? Those rights can include options to extend, expand, contract, terminate, purchase the property, and other rights, such as rights of first offer, and rights of first refusal.
4. Does the lease name your brokerage firm as the party representing the landlord or tenant? Your agreement with the present owner is fine, but if the property is sold after lease execution but prior to the tenant exercising any of those future rights, is your claim against a successor owner protected in the lease? You want to be, what is called under the law, an “intended third-party beneficiary,” defined as a third-party (person or business entity) who/which benefits from a contract (i.e. the lease) made by two other parties. The intended third-party beneficiary status is more easily proven if the broker is named in the contract, and perhaps even stated as an intended third-party beneficiary, clarifying that the two parties to the contract intended to benefit the third party, i.e. the broker named in the lease.

My client has worked his way through a difficult negotiation of a retail lease (a fitness facility), with an out-of-state landlord who has been known to be hard on brokers, has been known to try and negotiate fees, and who has complained loudly and often about the present tenant’s failure (not our deal), the loss the landlord is taking on that first tenant’s failure, and the cost of building out the space for the new tenant. Numerous inquiries and suggestions of a reduced fee have been lobbed our way. My client has wisely responded that “we have a contract,” and continued to do his job to get the lease finalized. This client has an excellent exclusive listing agreement, so his claim, at least for the initial lease term, is well-documented; and the Illinois broker lien statute protects, indeed secures, this right to a fee. However, we then reached a point where the landlord stopped including the broker in the negotiations. Yes, this is a breach of the owner’s promise to refer all inquiries and negotiate all leases through the broker in a vain attempt to weaken the commission claim. This took us to the point where I was instructed to reply to the owner with a clear statement of my client’s claim, what the listing agreement stated, and what a broker lien looked like. I drafted a notice of lien, had my client execute it, and included it with the demand letter. We computed the commission based on the 10-year term that had been negotiated at the time when we were privy to the lease drafts.

The next step was the owner’s response, this time acknowledging the claim for a lease commission, but complaining that because the lease term had been negotiated to be 10 years (all negotiations, to that point, were based on a 10-year lease), my client should cap his fee at the amount computed on the first five years of the term. The owner’s response went on to indicate that if we wouldn’t agree to a commission cap, then the owner would change the term from 10 years to five years; and you guessed it, give the tenant an option to renew the lease for an additional five-year term. This well armed broker had a commission schedule that covered his right to lease commissions if the lease contained an option to extend and the tenant ultimately extended the lease, whether pursuant to the option or otherwise; but the commission rate on renewals is lower. Let’s not tempt the owner and his tenant to conspire on an extension that doesn’t track the option terms. Further, it is possible that once the landlord and tenant agree to a deal and sign that 10-year lease, that the landlord’s changing the lease term to five years, won’t reduce the right to a commission, based on the 10-year term. When a principal thwarts the broker’s efforts to earn the fee, the principal becomes liable for damages in the amount of the lost 10-year term commission.

This put my client in the proverbial catbird seat, reminiscent of the old commercial for oil filters. The mechanic rolls out from under the car leaking oil, and warns motorists that the car owner could pay me now (for the better oil filter) or pay me later (for the engine repair). At this moment, my broker client faced the offer of a cap, and was happy to state “Pay me now or pay me later,” because he had protection for options to renew or extend.

Remember, we need to keep thinking ahead, to protect that fee for years 6-10, either in the lease if a 10-year term has been finalized, or for years 6-10 if the owner and the tenant shift to a five-year term with an option to extend. My client may or may not be named as a third-party beneficiary in the lease, so let’s think about what that means if that happens. Lien rights in Illinois will support a claim for a future commission, BUT we must record the lien before the renewal term commences, and the claim can only be asserted against a party based on a writing signed by (or assumed by) the owner. Still in good shape, but perhaps not in great shape. Assume that the broker is not named in the lease and therefore cannot enforce the claim against the new owner if the property is sold, where will this leave us?

At this juncture, I am thinking about alternatives, a contract claim against this owner in five years, a potential claim for lien against the same or a successor owner-or maybe there is just one more arrow in the quiver. What if the broker recorded a document with the Recorder of Deeds that was not a lien, let’s call it a “Notice of Agreement?” Just what, pray tell, would be the impact of such a recording? Just theorizing here, but the buyer of the property is on constructive notice of the listing agreement, because the Notice of Agreement was recorded before the sale closed? Two things could happen, both of which are good: the buyer would require the owner/seller to get a release from my client-which we would gladly give in return for payment of the extension commission, or the owner might just have to indemnify the buyer, even place funds in a title indemnity to insure over the potential lien. So, the money is there when the tenant exercises his option to renew or renews in any case.

I am still skating to where the puck is going, I am still choosing top line oil filters, and frankly enjoying the thought of my client harvesting the fruits of our labors, that well-drawn commission agreement, that broker lien right, basically holding firm against an owner who just wants to pay a lower commission. At this point in time, all I see is broker leverage, as we approach the final negotiation of lease term and commission amount. Don’t you just love it when a plan works?