Defining a Broker Fee Agreement
Broker fee agreement pdfs are standard operating procedure in the real estate industry. When a commercial or residential owner wants to sell their property, they usually find a business broker or real estate agent. These brokers and agents need some incentive to work with a seller so an agent will usually list the property for sale with the Multiple Listing Service. They also need to know how much that agent/agent’s firm will receive for properly marketing the property. That’s where the basic form of a broker fee agreement comes into play.
A commission owed on a commercial or residential property can be based upon a percentage of the purchase price or a flat fee. In addition, the amount of time that is required to sell or receive a qualified tenant can range from weeks to years . What the broker fee will be and when it will be paid are all vital to the success of the sale and the profitability of the real estate investment.
Therefore, the broker and owner of the property must enter into an agreement that shows the clearing of the following:
A broker fee agreement should at least contain these sections. The owner will then sign and send to the broker/executive realtor a Commissioner’s license agreement. In its most basic form, a Commissioner’s license agreement is nothing more than a one sentence statement that states that the state has reviewed a license application for a given broker and that the licensee has complied with certain requirements.
Contents of a Broker Fee Agreement
Most commonly, all broker fee agreements will consist of, among other things, the parties to the agreement, the scope of the services to be provided by the broker, fees and commission disbursement, indemnification and limitations of liability, and costs of legal counsel, as well as the governing and choice of law provisions. Almost every one of these categories is addressed in the new PDF feature, although the most important item to cover is the fees and commissions. Future blog posts will touch on the importance of each of these items as well as how to ensure you are protected by each of the key components. In addition, as mentioned above, while the majority of these sections are present in the PDF feature, you should consult each one to determine its strengths and weaknesses for various negotiated provisions contained in your new deal.
Creating a Broker Fee Agreement
In general, a broker fee agreement establishes the relationship between a broker and a client. To be enforceable, the agreement should include several key provisions: identification of the parties, compensation, the services to be rendered by the broker, and the duration of the agreement. The identification provision usually requires the following: the client is either a company or an individual and the client’s name is spelled correctly (i.e., John Smith v. Smith Real Estate, Inc.). While spelling is important, it is not the only way to identify a party to an agreement. Identifying the parties to the agreement could include listing the primary structure of the party (i.e., a corporation, partnership, limited liability company, etc.) and organizational state or jurisdiction (e.g., Delaware). In general, the compensation provision should include the "who", "how much" and "when" of the compensation. That is, who pays the compensation; how much is paid; and when the compensation is paid. It is also possible to include a "how" to identify the method of payment. For example, does the compensation need to be evidenced by a writing, or can the compensation be paid orally? The scope of services provision sets forth what services a broker is to provide to a client. This provision generally identifies the physical or real property to which the services relate and the type of services to be performed (i.e., consult, solicit and/or procure). In the context of a commercial lease, the scope of services may also set forth when a broker has earned its commission. Under certain circumstances, for example, a broker may only earn its commission once a lease is executed while under other circumstances the commission may be earned at various points in the deal making process (i.e., the lease is entered into, the tenant takes possession, etc.). In some instances, a landlord will retain a broker as a tenant representative to perform various duties throughout the term of the lease. In these circumstances, the provision should clearly set forth what these duties are and how long the broker is to perform them. Lastly, the duration provision sets forth when a broker is entitled to compensation. The duration provision is often times tied to milestones (e.g., an executed lease) under which compensation is owed or payable. In other instances, the duration may be for a specific period of time (e.g., one year) in which the broker’s right to compensation shall extend.
How to Use a PDF Agreement Effectively
Using a PDF format for agreements provides several advantages. PDF files can be both password protected and encrypted to keep the file secure. A properly secured PDF file can only be opened by a person who has been provided the correct password. The password can be time-sensitive, i.e., get a new copy of the agreement that is not password protected once the password expires. Most applications for creating PDF files also provide tools for front and back redacting. Redaction is a process that makes hidden or covered-up information on a document unreadable to everyone, including the user who applied the redaction. Redaction tools, when used properly, can be very effective in securing sensitive information. PDF files are also especially useful when sending an agreement to an email address. Most emails have maximum file size limits and these file size limits will still apply when sending an agreement to an email address, but the size of a PDF file is small and can be relatively easily managed . PDF files cannot be easily edited as a Word or WordPerfect document. This not only means the agreement cannot be inadvertently modified either when preparing it or after it has been sent, but the use of a handwritten signature can be added to a PDF file without having to print and scan the agreement. Not all applications used for creating PDF files include the ability to add a handwritten signature, so check to make sure this is supported in the application before getting rid of your printer. PDF files can be easily printed so the agreement always looks the same to the reader.
It may be necessary to set up a password to read a PDF file, but the time it takes to set up the password the first time you run the application is usually the only time you will need to set up a password because many PDF applications save the password the first time it is used.
Common Errors to Avoid
To prevent unwanted liability, it is critical to avoid common (and also often overlooked) mistakes when preparing or entering into a broker fee agreement, including the following:
1. Failing to prepare written contracts
If a landlord and a broker desire to be bound, it is often the case that written contracts must be exchanged. Otherwise, they run the risk of unwittingly becoming parties to contracts that were never intended. For example, a party may unwittingly contract into an automatic renewal if no other contract is ever entered into, even if they would not have freely entered into such a deal. More importantly, such surprises may lead to an unanticipated payment due if an agreement is never sought for renewal, yet the parties continue to act as if one exists. Therefore, it is critical to prepare all broker agreements in writing to avoid such all-too-frequent pitfalls.
2. Failing to include a commission schedule
Tenants and landlords, including those with multiple locations, often have their own commission schedules. If a commercial space is leased to a tenant with such an arrangement, the landlord will likely desire a commission structured like their other locations. Therefore, it is critical to outline the exact commission structure to be awarded to the broker in the broker fee agreement. If this is not done, ambiguity can lead to unwelcome surprises later. It is also important not to overlook this fact since commissions are often a significant portion of a broker’s revenue stream, and they can be motivated to sell additional products or services if all of the potential commissions are not included.
3. Overlooking additional terms and requirements
For example, is the commission due upon closing, at the lease signing, at the buildout/signage approval, or at some other time? Or, what happens if a retail store opens but closes within several months, preventing the landlord from recouping losses? It is important for landlords and brokers to vet these terms and decide what works for their individual needs before signing a broker fee agreement.
4. Failing to regularly review the terms of existing broker fee agreements
The commercial real estate market in California changes rapidly, and failing to adapt to recent changes may raise due diligence concerns down the road. Regularly reviewing broker fee agreements is key to a successful commercial real estate business.
Where to Locate Broker Fee Agreement Templates
The Internet has made finding templates for a broker fee agreement quite easy because the vast majority of brokers and agents have a standard form they use. Once you determine what language you need, you can easily find a broker fee agreement for your state and/or region. In addition to the completed agreements from other real estate professionals, there are also services that sell template contracts .
Most online real estate schools have the ability for new licensees to download a variety of forms for free when they register for the school.
A simple search of "real estate broker fee agreement [your state]," or "real estate agent broker fee agreement [your state]," or some combination of these words should yield you a number of results.