Stan Mullin specializes in the sales and leasing of industrial land and buildings in southern Orange County, California.

His areas of expertise include: entitlement, contract language, construction schedules, development, assessment district and community facility district bond financing and he specializes in corporate real estate matters.

How To Protect Your Commissions

Moderator: Stan Mullin - Grubb & Ellis 
Newport Beach, CA

Date: April 25th, 1998
Location: Tucson, AZ

Getting Paid When...

Options To Lease or Purchase Are Exercised

If you are concerned about getting paid, the description of the terms of the Option should be reasonably broad (you could say...”..in the nature of..”), as most Options are not exercised under precisely the terms outlined in the initial Option agreement (i.e. the tenant may have an option to purchase, for which you would be paid, but instead the owner of the business acquires the property and then extends the lease on the building. In that event you may have difficulty collecting the commission for the purchase or the extended term). 

If you expect to be paid, first make sure that you have an agreement indicating when and how much you are to be paid, in writing. Insure that the prevailing party’s legal fees will be paid by the losing party, in the option language.

Get the tenant to sign an estoppel certificate, stating that you are their broker and that the estoppel is not valid without the counter-signatures of the owner and broker

The Landlord Wants You To Take A Note

Adding additional properties as security for the note in additional to the subject property will enhance your ability to be paid your fee. This is never a preferred scenario because it often takes a long time to foreclose on the security interest. Also, make sure you are scheduled to be paid interest on the note (if the party withholding the commission is able to avoid payment for an extended time period, the interest accrual will be another disincentive for him to withhold payment.

You Need To Be Paid By The Tenant or Buyer

Often referred to as a “net offer”, insure that you have a written exclusive right to represent , stating that the tenant (or buyer) will pay. If you do not have an exclusive, insure that the contract states who is responsible to pay and when. As before, you can secure the payment with the assets of the “paying” party.


The Landlord (or Seller) Files For Bankruptcy

In most cases you will be an unsecured creditor. Submit your claim to the bankruptcy trustee or referee and hope for the best. Your best option, although rarely available, is to structure the escrow instructions (or lease agreement) so that the obligation to pay the broker is “joint and several” on the part of both parties, regardless of who represents whom. Then the payer has to hash it out with the bankruptcy party and it’s no longer your problem.

As well, you don’t have a right to a fee if the bankrupt owner brings to the probate court a buyer or tenant with whom he has agreed to terms (I assume you represent one of these two parties) and an alternate buyer/tenant shows up and makes a higher bid.

The Tenant Files For Bankruptcy

You Use A Registration Letter

Make sure that the party signing the letter is authorized to bind your client. As well, you may want to include language in the letter that provides the tenant or buyer with the right to pay the broker as an “offset” against rent or proceeds otherwise due to the landlord or seller if they don’t pay commissions when due. This applies to a lease, sale, expansion, option to purchase, renewal, etc. The concession you may wish to provide is to allow a minimum rental flow for debt service or pass-through expenses on the subject property (charge interest). As well, include arbitration language in the letter. You can’t sue to collect a commission if you don’t have a written listing, but you can sue for tort (Buckaloo vs. Johnson).

The Landlord Refuses or Can’t Pay

When You Don’t Have A Written Agreement

This is the position you don’t want to be in. You may be able to pursue and collect your fee if it is deemed the parties attempted to “cut out” the broker, if an implication existed of an agreement to pay a commission in the event of the lease or sale under the doctrine of “interference of prospective advantage”(McDonald’s case).

The Seller Instructs Escrow toEliminate the Commission Instructions

You Want To File A Lien To Collect

The Landlord or Seller Won’t Pay “Up Front”

You can arrange for an Annuity Fee Payment, which in many respects is a better alternative to an “up front” commission (see the attached article).

When You Procure a Prospect After Your Listing Has Expired

The attached article from the Daily Appellate Report of February 25, 1997 indicates that it is possible to collect your fee after your listing or a proposal has expired. (see attached)

Other Issues:

Do You Want Be A Third Party Beneficiary?

Typically, yes. In California and several other states, it must be in writing. In California, the AIR lease agreements provide signature blocks for the Broker(s). 

You Represent Both Parties

Precedent exists in many states that if you do represent both parties, and your fee arrangement is undisclosed, that either party may rescind from the transaction and neither is liable to pay a commission.

Is It Possible To Have The Lender Pay?

Yes. You can provide for the lender to pay in your “offset clause” (likely need to get lender’s signature in advance).

Ideas For Securitization

Remember that you can list any assets owned by the landlord or seller, in addition to the subject property, as security to pay your fee. Make sure language exists in your lease listing agreement that if ownership of the property is transferred during the listing, that the commission obligation remains in the event a tenant is found. Offset clauses or liens (in states where it’s allowed) are also good security. In reality, only a judgment can be securitized.

Liability Issues In Fee Collection

If someone hasn’t paid you, don’t slander the individual (it’s tortuous). Lack of full disclosure during the transaction can generate liability. Remember that if you choose to sue to collect, the other party may file a cross-complaint in which you may be listed as the primary defendant. If you as a salesman or your firm have acted in the capacity of a dual agent, even with the consent of the parties, you could be, by default, in a compromised position.

Ideas On Creating Paper Trail

If you fax your correspondence or list of potential properties to your client, without a cover sheet, your confirmation sheet will date and time stamp the document that was sent, providing easier confirmation that the information was received. It’s a good habit, as a broker, only to sign proposals and similar documents on the same sheet of paper that contains your client’s signature (otherwise during litigation, the paper with the client’s could be lost and only the one with your signature remains. If your client denies he authorized you to make the proposal on his behalf, you don’t have his/her signature to support what really occurred).

If you have forms that should be signed as a part of the due diligence or prior to completing the transaction, often the best time to have them signed is concurrent with the signing of the listing or exclusive authorization of lease agreements.

Use disclaimers in your proposals (i.e. This is only an invitation to negotiate. It is neither an offer nor a contract and no party shall have any legal rights or obligations to any other party until a definitive written lease (or purchase agreement) is prepared, signed by all parties involved and delivered to each principal.)

Take and keep in your file, notes of conversations and meetings. Use outside consultants as often as possible (environmental, design, engineers, construction, etc.) to provide expertise as needed.

What Provisions To Include In Your Agreements

Annuity Fee Payment

In lieu of collecting your standard 6%, have you considered taking an annuity at 7%? If you do, you will likely take on the responsibility of “servicing” the lease, which gives you reason to stay in contact with your client. If your payment is over time, you share the risk that the tenant continues to make his rental payments. The annuity would be secured by a lien or deed of trust. The attached article gives a good overview of larger amount in fees you typically receive by payment over time

Stan Mullin is a Senior Vice President in the Newport Beach office of Grubb & Ellis and specializes in corporate real estate matters. You can learn more about his firm by looking up www.grubb-ellis.com and he can be reached at smullin@earthlink.net.