Tenant Representation Agreements Explained

A tenant representation agreement does two jobs. It establishes that the broker works for you, which gives you something concrete to point to if a question of loyalty ever comes up. And it tells landlords and their brokers whom to deal with, which lets your broker negotiate on your behalf and be recognized in the transaction.

Agency relationships in real estate are governed by state law, and the rules differ by state. In Illinois, where TAG is based, the Real Estate License Act provides that a licensee working with a consumer is presumed to be that consumer’s designated agent unless a written agreement between the sponsoring broker and the consumer provides for a different relationship (225 ILCS 454/15-10). The written agreement is therefore the document that defines the relationship, whatever the default would have been. That is the reason to read it closely. This guide is general information, not legal advice.

Most tenant representation agreements are exclusive. For the stated period and scope, you agree to work through one broker, and that broker is entitled to be recognized on a covered transaction.

Founders sometimes read this as a restriction that benefits only the broker. There are practical reasons for it on the tenant side too. A broker who is assured of being paid if a deal closes can invest fully in research, tours and analysis. Landlords receive one consistent message about your requirement, where several brokers approaching the same owner on your behalf would weaken your position and can produce disputes over who is owed a fee. And a single accountable adviser is easier to manage than several partial ones.

A non-exclusive arrangement is possible and some firms will accept one. Expect less commitment in return, since the broker may do the work and not be paid. If you want to test a firm before committing, a short exclusive term with a clear termination right usually serves you better than a loose non-exclusive one.

The term is the period the agreement runs. It should reflect the transaction. A search with a custom build-out needs more time than a furnished sublease. Check whether the agreement ends on a date, renews automatically or continues until a transaction closes, and prefer a defined end date.

Scope is where agreements differ most, and where a quick read can miss something important.

• Geography: one city or region, or everywhere the company might take space.
• Transaction types: a new lease only, or also renewals, expansions, subleases and purchases.
• Your current building: whether a renewal or expansion with your existing landlord is covered.
• Affiliates: whether the agreement binds parent companies, subsidiaries or sister companies.
• Property types: office only, or also industrial, lab and retail space.

Match the scope to what you actually want the broker to handle. If you are hiring a firm for a Chicago headquarters search, an agreement that covers every lease the company signs anywhere deserves a conversation. If you do want one firm coordinating several markets, say so in the scope and make sure the agreement describes how partner brokers in other cities are engaged.

In a standard lease, the landlord pays the commission, and the agreement will usually say that the broker looks to the landlord for its fee. What matters is the language around that statement.

• ✓Does the agreement say the broker will seek its fee from the landlord, and that we owe nothing if the landlord pays?
• ✓What happens if a landlord offers less than the broker’s stated fee, or refuses to pay a tenant broker at all? Are we responsible for the difference?
• ✓Are there deal types, such as subleases, purchases or consulting work, where we pay directly, and how is that fee calculated?
• ✓If we end a search without signing anything, do we owe a fee or reimbursement of expenses?
• ✓Will the broker disclose all compensation it receives on our deal, including any bonus offered by a landlord?
• ✓Is a fee owed only when a lease is signed, or at an earlier point such as a signed letter of intent?

The shortfall question is the important one. Some agreements make the tenant responsible if the landlord’s commission falls below a stated rate. Others provide that the broker accepts what the landlord pays, or that the broker must tell you in advance about any building where a shortfall is possible so you can decide whether to pursue it. Know which version you are signing. A broker should be able to explain its compensation on your deal in a few plain sentences.

Ask how you can end the agreement if the relationship is not working. Agreements vary: some allow either party to terminate on written notice, some allow termination only for cause, and some run to the end date with no early exit. A reasonable request is the right to terminate on written notice after an initial period.

Ending the agreement does not always end the obligations. Most agreements contain a protection period, often called a tail. If, within a set time after termination, you sign a deal for a property the broker introduced during the term, the broker is still entitled to its fee. The idea is fair: it prevents a client from ending the agreement the day before signing. The details decide whether it is fair in practice.

• How long does the protection period last?
• Does it cover only properties on a written list the broker delivers at termination, or anything the broker claims to have introduced?
• Does it apply to your current building?
• What happens if you engage a new broker during that period, and could two brokers claim a fee on one deal?

Ask for a written list of protected properties, delivered promptly at termination, so that everyone knows what is covered.

Look for what the agreement says about conflicts of interest. If the firm also represents landlords, the agreement may include your advance consent to dual agency, or a description of how designated agents are assigned if you pursue a building the firm lists. Consent given in advance, before you know which building is involved, deserves particular care. Ask your attorney what your state requires and whether you can reserve the decision until a specific conflict arises.

Also check for a confidentiality obligation covering your financial information and requirements, a statement of the broker’s duties, how disputes are resolved, and whether the broker can assign the agreement or delegate the work to people you have not met.

1. Ask for the agreement early, before you have chosen a firm, and compare it with other firms’ agreements.
2. Read the scope and confirm it matches the assignment you intend.
3. Read the compensation section and ask the broker to explain every case in which you could owe money.
4. Find the termination clause and the protection period, and ask for a written list requirement.
5. Read any dual agency or conflict language and ask how it would work in practice.
6. Have your attorney review the agreement.
7. Negotiate the points that matter. These agreements are forms, and forms can be changed.

A broker who is confident in its service should be comfortable with a client who reads the agreement carefully. At TAG we walk new clients through our agreement before they sign it and encourage review by their counsel, and we suggest holding any firm you interview to that standard.