True Confessions of a Landlord’s Counsel: What a Commercial Tenant Needs to Know When Negotiat
Part II: It Starts With A Good Team: Do’s and Don’ts of Picking Brokers and Attorneys.
If you need new space for your business and know the parameters of what you need, such as size, general location, and any specific amenities (e.g., high traffic intersection, rail line spur, LEED certified platinum rated energy efficient building, etc.), then the next thing you need is a good, savvy tenant’s broker who works exclusively with the type of real estate with which your company is associated (they generally fall into three main categories: retail, office or industrial/warehouse). A good broker is critical to negotiating a successful lease as he or she will guide a tenant through the issues that the tenant will most understand and appreciate, i.e., what space they can obtain, and for what rent, given the current local market conditions.
Don’t be shy or worry about what it might cost you to engage a broker to assist you in your search. Typically a landlord will hire a broker (“listing broker”) to list its property and will pay the listing broker a commission upon execution of a lease. If the tenant has its own broker (“cooperating broker”) that prepares an offer or proposal (letter of intent) to present to the landlord’s listing broker, and as a result a lease is executed, then the tenant’s cooperating broker will typically share or split with the landlord’s listing broker the commission the landlord agreed to pay its listing broker. Though neither the landlord nor its listing broker is legally obligated to pay the tenant’s cooperating broker any portion of the commission without a written agreement with the cooperating broker, it is generally considered “bad form” in the industry for a listing broker not to work with the cooperating broker in reaching some agreed upon split of the commission. It is also not uncommon for the cooperating broker to include in the proposal it prepares for a tenant to submit to the landlord, a requirement that the landlord or its listing broker pay a commission to the cooperating broker. In any case, a tenant will not be obligated to pay a broker any commission unless the tenant agrees to do so in writing.
If a commercial tenant does not have a preexisting relationship with a tenant’s broker, the tenant should seek recommendations from others. The tenant can start with its own top management or ask its outside consultants (e.g., accountant, attorney, banker, insurance agent). If the tenant belongs to a civic club or trade organization it may seek recommendations from other business owners, and more likely than not, there may already be brokers within those clubs or organizations that are looking for potential clients. The commercial tenant should be appreciative of any recommendations it receives, but it also must be selective. Make sure the broker has more than a few years of experience under his or her belt and specializes in the field (retail, office or industrial) in which the tenant’s business is most associated. Of course, the tenant can also search the web as most brokerage houses will identify their brokers and the various fields in which they specialize. If a tenant approaches a broker in this manner, the tenant should ask the broker for references of past tenant clients and follow-up with those references about the broker’s performance.
It is not uncommon for a tenant to find on its own the location it wishes to pursue by way of noticing a large “For Lease” sign on a commercial property. These signs usually identify the brokerage company listing the property and the name of the particular broker responsible for showing the property and reviewing offers and proposals for the owner (i.e., the listing broker as noted above). A tenant may set out contacting the listing broker directly to obtain information about the space and wind up asking that broker to assist in preparing a proposal to submit to the landlord. The broker will happily prepare a proposal for the tenant’s review and signature and it will likely contain a provision that the broker is representing the landlord AND THE TENANT! Under California law, real estate brokers are permitted to represent both a landlord and a tenant in a lease transaction. The broker will owe a fiduciary duty to both the landlord and the tenant, and are subject to strict rules regarding this dual representation. Now, it is not to say that brokers do not take such relationships and their corresponding responsibilities seriously, but the tenant still needs to appreciate basic human nature. While the broker may be in a fiduciary relationship with the tenant for this particular transaction, the broker may be representing the landlord in multiple transactions with respect to this project, and likely other future projects for the landlord, so which client will the broker’s subconscious be favoring? The tenant should consider whether or not it would be better served if it had its own broker working for its interest, with no love lost between its broker and the landlord if its broker is aggressively representing the tenant.
With that all said, commercial tenants should also be aware that if it does find a broker to represent the tenant, that broker will undoubtedly first consider potential lease space in projects in which that broker or the brokerage house it represents has a listing with the landlord. That way the brokerage house and its broker keeps the full commission from the landlord, and need not split it with a cooperating broker. As a result the same dual agency (representing the landlord and tenant) issue will come into play. This may not be too bad if the tenant’s broker is merely a member of the same brokerage house where another broker is the listing broker for the landlord. Though it would still be considered a dual agency under California law since it is the same brokerage company, if the company is large enough, the individual brokers may not be hesitant to aggressively represent each of their clients. To be sure to avoid any sort of dual agency situation, a commercial tenant can focus its search for a broker by searching for those brokerage companies that exclusively represent tenants. Such brokerage companies are not as common, but there are a few out there.
Another reason for a tenant to engage its own broker in pursuing leasing a new site, is that it may help reduce the amount of attorney time (and therefore attorney fees) that may be needed in the transaction. As good as some brokers can be, for the most part they will still not appreciate all the nuances contained in a 40-60 page commercial lease. Once the landlord provides a lease to the tenant for review, the tenant can then provide the lease to its attorney for the initial read. The attorney can then identify all the trouble spots contained in the lease and review these items with the tenant and its broker (provided the broker is not also representing the landlord). Rather than having the attorney then attempt to negotiate the changes to the lease identified in the attorney’s review, the tenant and broker can pursue these negotiations directly with the landlord. Most landlords prefer not to use an attorney to negotiate their leases when they can, but will probably do so if the tenant has its attorney respond to the landlord’s initial draft lease. If the tenant and its broker can obtain concessions suggested by the attorney in the first round or two of negotiations with the landlord by themselves, and save the attorney for the final sticking points, a good amount of attorneys’ fees can be saved.
A tenant should employ the same methods discussed above for finding a good tenant’s broker for finding a good leasing attorney, though there are a few notable differences. First off, an attorney cannot represent both the landlord and the tenant in a lease negotiation because of the conflict of interest, so the attorney will always be on the tenant’s side. You will then want to find an attorney who spends 20% or more of their practice reviewing, drafting and negotiating commercial leases. Also, even if the tenant is looking for office or industrial space, an attorney that has spent a good amount of this time in retail leasing will generally have more exposure to issues that benefit a tenant, for the simple reason that there are more sophisticated tenants in retail than any other commercial leasing sector. As a result, the issues that are of most concern to retail tenants will have been extensively vetted by such an attorney, who can then apply them to retail office and industrial leasing.
Finally, beware of publications that pronounce the Best Attorneys or Super Attorneys as they are often run similarly to the Who’s Who type publications of self-aggrandizement, i.e., if an attorney subscribes to the publication, buys the book and/or a plaque for their office showing they are named in the publication, the more prominent the attorney will appear in the publication. Perhaps the only legitimate publisher that ranks attorneys is Martindale & Hubble (“M&H”) which publishes a general legal reference on the law of all fifty states. M&H also solicits reviews from attorneys about other attorneys that practice in their same local, and after evaluating the reviews gives the reviewed attorney one of three simple rankings, “AV” being the top rank. It may not be very scientific or accurate, but is based on the opinions of other attorneys who bother to take the time to respond to M&H’s questionnaire, and not whether or not the attorney buys their legal reference books or asks another attorney to provide a recommendation to a publisher.
Now that your team is together and you have located a potential site, it is time to propose an offer to the landlord. This is generally done by a letter of intent.