Real estate law can get tricky, fast—especially when you’re dealing with commercial property sales and leasing.  Because many of these transactions have such a big ticket attached to them, there’s tremendous incentive for commercial real estate brokers to get everything right and facilitate the smoothest transaction possible.

And, to add another layer of complexity to it, real estate laws vary by state, so brokers well versed in the ins and outs of one state may be fish out of water just across the border—even if they hold the applicable licenses.

There are several basic considerations a successful broker must take into account right off the bat.  We’ll cover these first.  A little later on, we’ll get into some legal issues commercial real estate brokers have come up against in a sour economy, as well as how best to effectively ensure they get paid when a tenant/landlord relationship goes south.

Basic Considerations

During the Commercial Intelligence Briefing Podcast presented by the National Association of Realtors, experienced real estate lawyer Jim Hochman noted that the exclusive listing agreement is really the “heart of a broker’s business,” and is essential to legal protection before, during, and after any real estate transaction.

As such, it’s important that brokers get the correct legal terminology in the document from the start.  As Hochman notes, every state has differing requirements, but if the documentation is all good, then it’s completely enforceable—meaning that there is a definite way for brokers to collect.

Hochman suggests that the best option is for brokers—even experienced ones—to “find good lawyers in the jurisdiction.”  Why?  Because, as he says “Commercial Real Estate Brokers, however well-intentioned, however well-trained, seemed to make certain mistakes over and over again.”

The two most common legal issues for commercial real estate brokers that Jim has dealt with over the years are: the failure to accurately represent details concerning the property in question, and the failure to clarify who you represent as a broker—especially if dual agency is involved.

So, with that in mind, consider the following:

Brokers Must Disclose to All Parties:

Who they represent at the time of first contact, if they’re a principle in the transaction, if they’re receiving compensation from more than one party, and copies of any and all documents any of the parties have signed that are in the broker’s possession.

Additionally, brokers must accurately state all the details concerning the property—such as zoning, utility usage, square footage, etc.—in order to avoid litigation after the transaction is complete.

There are also certain fiduciary duties (holding a trust for someone) that all realtors and brokers must hold themselves to.

These duties ensure that they’re doing their best to get the best deal on the property, disclosing any known defects with the property, knowing and using state-specific language in specific documents (including exclusive listing agreements), and holding all parties involved to the highest moral standards.

These are basic rules that all commercial real estate brokers must keep in the backs of their minds at all times.  But it’s also important to look at considerations that have arisen since the real estate market turned south—causing financing institutes to tighten their belts.

Considerations Created by the New, Unstable Market

This belt-tightening is a nationwide phenomenon.  As Mariwyn Evans writes in RealtorMag, the lack of liquidity is changing the way commercial leases are written. It’s also changing the way in which partnerships are brokered, and the types of recourse that struggling tenants and landlords have to fall back upon.

Consider that late rent payments account for nearly 70% of all legal disputes between tenants and owners/brokers.  The traditional method of solving this issue has been to file unlawful detainers against the tenants.

The problem is that such action negates the tenancy, and landlords are reluctant to evict tenants—even those in default on their payments—because finding new ones has become increasingly hard.  This has changed the legal field dramatically; with many landlords now filing breach of contract lawsuits instead.

Liens, which were once a common way for brokers to ensure commission payments when the time came, have become a bit of a double-edged sword.  With many lenders refusing to put their stamp on documentation unless the property’s title is clean, liens can actually serve to penalize a broker by effectively locking the owner in a cashless stranglehold.

If a lien is applied, the broker is making the financing process more difficult for the owner—which means it’s less likely the broker will ever see their profit.

Additionally, with the number of delinquent tenants on the rise, developers are refusing to pay full commissions until the “boots are on the ground.”  This can be disastrous for brokers if a handful of deals go sour before tenants move in.

Reasons for tenant absence range from economic downturns to lease modifications, to simple delinquency.  There’s really no easy way around this issue, and often a broker’s only recourse is to “trust their gut” when it comes to tenants. All they can do is their best to get good ones signing on the dotted line.

Evans also notes that the number of litigations against landlords (which affect brokers indirectly) has dramatically increased—such as “slip and fall” litigation—as tenants and their visitors are looking for easy ways out.  For one landlord, Bart Murphy, a bad relationship with a tenant and an unaddressed mouse infestation cost him a $125,000 lawsuit.

If the financial squeeze continues to be put on landlords, that will trickle down and likely affect brokers—either by cutting short their commissions or decreasing the number or frequency of future transactions.

Standard brokerage fundamentals are the tools that will allow commercial real estate brokers to avoid litigation and ensure their sales and leasing deals go off without a hitch.  These fundamentals really boil down to one simple idea:  Always do your homework.

Ensure that you’re dealing directly with the property owner and investigate further if necessary.  Be sure that everything is kosher with the title and make sure your legalese is up to snuff—or hire a lawyer with whom you feel comfortable working.  Ensure your documentation is perfect, and never compromise your ethical duty as a broker.

While cumbersome, taking this course of action as a broker is the easiest way to navigate the rough—and potentially expensive—waters of commercial real estate.

About the author

Matt Faustman

Matt Faustman

Matt is the co-founder and CEO at UpCounsel. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform. Before founding UpCounsel, Matt practiced as a startup and business attorney.

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