What is a Commercial Listing Agreement?
A commercial listing agreement is simply a real estate purchase contract between a commercial real estate owner (i.e., the "seller") and the buyer (i.e. the "purchaser") (as generally applied in a commercial real estate context). The owner of commercially zoned real property (apartments, industrial buildings, office buildings, etc.) will enter into a commercial listing agreement with a licensed real estate broker or real estate sales person (or both), who will then market the property to potential purchasers through various means such as the Multiple Listing Service, Loopnet, CoStar, and so on.
"Commercial" as used in this context refers to multiple categories of real property (office, retail, industrial, etc . ) being used for business and/or economic purposes (i.e., generating income). A physical location is typically needed to conduct business, operate the business, store inventory, and so forth.
The listing agreement between the seller and the real estate broker usually involves a retainer fee (which can be absorbed by the sale price), and the broker is either paid by a commission (a percentage of the selling price of the property) or a flat rate (depending on the broker).
The listing terms and conditions will be contained in the purchase and sale agreements, and the terms and conditions will outline the contingencies for closing.
Essentials of a Commercial Listing Agreement
The parties. The commercial listing agreement must identify the parties to the agreement, i.e., the broker and owner. For purposes of the commercial listing agreement with the owner, the owner would be the landlord or seller of the real property that is the subject of the broker’s services. The broker may be a sole proprietorship, corporation, limited liability company or partnership, and will most likely have a registered business name. Regardless of whether the broker is a sole proprietor or associated with an agency, the commercial listing agreement should identify the parties to the agreement with complete clarity.
The property. For the commercial listing agreement, the owner of the real estate will be the party being asked to enter into the agreement. However, the real estate broker must be identified in the agreement as well. The commercial listing agreement must contain the legal description of the real property that is the subject of the contract. For purposes of a commercial listing agreement, the legal description of the property is typically the one that is recorded in the office of the county clerk and recorder. The commercial listing agreement may also reference addresses, tax pin numbers or plat maps, but the legal property description must also be included in the commercial listing agreement so that the provisions and performance by rights of each party can be properly determined and enforced.
Listing price. The commercial listing agreement should include the listing price for the real property that is the subject of the agreement, which may provide an incentive for the broker to aggressively and actively market the property to various potential purchasers.
Commission. The commercial listing agreement should set forth the terms of the commission owed to the broker in connection with the sale of the property, i.e., the commission due to be earned, what triggers the commission and payment terms. If the sale involves the subdivision, development or improvement of property, the commercial listing agreement may incentivize the broker to actively market the property for an aggressive sales price if the property is sold at a specified point in time.
Different Types of Commercial Listing Agreements
Listing agreements for commercial properties can take on different forms depending on the seller and broker’s negotiating power, the nature of the property, and the type of commercial real estate (CRE) use to which the property is dedicated. However, almost each state, including Michigan, has a set of statutory requirements for listing agreements. Although the majority of listing agreements include the same essential terms, they may not always be called the same thing, or have the same requirements. As such, CRE listing agreements often vary in the following manner:
Exclusive Right to Sell Agreements: An exclusive right to sell listing agreement essentially gives a broker an exclusive right to act as the selling agent for the listed real estate. The seller agrees to pay the broker a commission if the broker sells the property during the term of this agreement. Most exclusive right to sell listing agreements require that sellers only pay the commission to their primary agent if a cooperating agent brings the buyer (the broker of your choice). The cooperating agent would then receive the commission divided by two (the amount would be divided between the selling agent and the agent who brings in the buyer). Thus, to eliminate the middleman, sellers will pay the selling agent a slightly higher commission in exchange for finding the buyer themselves.
Exclusive Agency Agreements: This type of listing agreement may be used instead of an exclusive right to sell agreement. However, under this agreement, the seller is liable to pay a commission regardless of whether the broker or another real estate broker brings the buyer to the table. Unlike an exclusive right to sell agreement, the commission does not have to be divided, but does have to be paid to the listing agent.
Open Listing Agreements: Open listing agreements allow sellers to engage several brokers at the same time to sell their property. The seller has no obligation to compensate any of the brokers, if they bring a voluntary buyer or if the seller sells their own property. Commission is not owed if a voluntary buyer or the seller themselves find the buyer.
Advantages of a Commercial Listing Agreement
When you enter into a commercial listing agreement with a commercial real estate broker, you are given a significant advantage in the marketing of your property. These commercial listing agreements are similar to residential listing agreements, but the primary difference is the fact that they offer you greater benefits for you and your property. First, having a commercial listing agreement will allow for you to have professional representation. If you are a business or a bank, you can expect to hold a commercial lease with your lessor, and if traditional, you may actually own the property. Having a commercial listing agreement will allow you to retain the services of a professional. You will also have peace of mind that you are hiring someone to market and sell the property.
A commercial listing agreement is also important for the broker. The commercial listing agreement allows you and the broker to come to a mutual understanding of what duties are expected of each party in the deal. Essentially, a commercial listing agreement sets the parameters for the business relationship. This really cannot be understated in importance. It will cut out any confusion and miscommunication between you and your broker, and help you to be crystal clear on your understanding of the relationship.
Having a commercial listing agreement is also very important because it guarantees you a wider marketing reach. Typically, these properties are not going to be in front of the right people without the proper exposure, and having a commercial listing agreement will help you to get the property in front of those who would be likely to buy it. For example, having a commercial listing agreement may result in you getting your property up on the Multiple Listing Service as well as offering it to other area brokers in your particular area.
Legal Implications of Commercial Listing Agreements
Into the nitty gritty of commercial listing agreements, we now turn to legal considerations in commercial leasing agreements. All listing agreements should be reviewed to ensure they comply with any governing state laws and regulations. Often, states require specific language to be included in their listing agreements. Most states also require a commercial broker to have a valid real estate license. Moreover, a broker may not practice real estate unless their license is in good standing with the secretary of state to whom they are licensed. Many states also hold a broker to the ethical standards set forth by the National Association of Realtors, which may contain additional disclosure and other requirements. Many states track and enforce commercial brokers’ performance, for example, keeping records of transactions, contracts and fees. Any failure to comply with a broker’s responsibilities or obligations may result in the forfeiture of the broker’s license, as well as civil and/or criminal penalties. Furthermore, all such requirements vary among states and should therefore be reviewed by a qualified attorney in each state where the parties will be conducting business.
Generally speaking, the broker has the duty to present all offers to the client in a timely manner. The listing agreement stipulates that a commercial broker has the exclusive rights to represent the property owner during the term of the listing agreement. However , an owner can also retain a different agent, if and when the owner desires, upon providing prior written notice to the broker. Such notice is typically given in the form of a termination letter outlining the reasons of the termination, along with the requisite advance notice that the listing agreement requires.
Commercial listing agreements will also outline the dates and times whereby the commercial property must be made available for showing during the term of the listing agreement. It is advisable to obtain consent from the commercial owner prior to entering a site into the database system that a broker may use to display the commercial listing to the public and/or parties who may be looking for a commercial real property to purchase or lease. It is helpful to include in the listing agreement as to how brokers and agents can gain access to the property for viewing purposes and to establish an appointment system and notice requirements for prospective purchasers, lessees or their agents.
The law treats a breach of contract regarding a listing agreement as it treats any other breach of contract – the aggrieved party may bring a suit to recover their damages. Breach of a listing agreement is generally difficult to prove, particularly if there is more than one broker. The best defense is to have a well-crafted listing agreement.
Negotiating the Terms of a Commercial Listing Agreement
Negotiating a commercial listing agreement requires an understanding in negotiating business terms with your listing agent. Therefore, it is important to fully understand the meaning of each paragraph and what you are accepting.
An owner should have a plan and direction of what they expect from their listing agent and how much they believe their property should be worth. This can be obtained from market research and comparisons, such as the NICARIS commercial listing site. However, you must understand that brokers desire to obtain the most money they can for the property, especially if they are asking for a percentage of the sales price when the deal closes. Therefore, you may want an independent review of your listing agreement before signing.
An owner should also consider not only what the property is worth currently but what the future projections are when considering a listing agreement. Owners often focus on the current value of a property and ask for an automatic renewal for 3,6 and perhaps even 12 months. However, if you are refusing contract offers from potential buyers, getting a no-follow up letter from your broker, and/or spending tens of thousands of dollars in marketing and repairs to make the property look more attractive., perhaps the owner will realize their broker’s "professional" advice on the listing price was not in the owner’s best interest.
The owner should strongly consider limiting the automatic renewal clause to 30 days or less, not 3-6-12 months as many times these clauses can be honored by the listing agent getting the property listed for sale to ensure a renewal takes place and without any further efforts by the agent. Additionally, you may want to limit the amount of commission paid on any renewal to the lowest level allowed under the contract state law.
Costs associated with the sale of a property should not be all on the seller as the agent receives the bulk of the commission. For example, it is common for contracts to require the seller to pay for the following:
- Environmental Reports: Typically, you should have the buyer pay for these reports. The seller can demand payment of these costs at the closing.
- Land Surveys: The seller should not pay for the cost of land survey, especially since some municipalities require a site survey be performed and the property will not close without it.
- Title Search and Full Title Insurance Policy: The seller should request the buyer pay for the title search and pay for the "owner’s policy" of title insurance which will also protect the buyer’s lender. If the transactions proceeds to close, the seller can request to have the cost reimbursed at closing. The seller will also get any refund on the policy, but this may take several months before the refund is issued and not all title companies will issue the refund.
- Pre-Sale Commission: The owner should not have to pay a pre-sale commission to the listing agent. Some contracts are requesting percentages of the commission after the seller receives 10% of the sale proceeds. The owner should request all normal negotiated commission be paid at closing. This prevents the payments from being made if the transaction does not close.
In addition to the above expenses, common expenses requested to be paid by the listing broker are:
1. All expenses in excess for the first $100.00 for marketing and selling the property; and
2. Costs of advertisements in the newspaper (normally for print and online) and other associated publication fees and commissions to secure buyers.
Depending on the percentage of commission and cost of advertising, a seller may also want the agreement to state that they must approve of all advertisements used in selling the property and if approved, the listing agent will be bound to pay for all costs thereon.
A seller should also carefully review all language of the listing agreement and ALL schedules attached. Do not use the word "allow" as many listing brokers will try to obtain the right to call any and all emergency services and/or police. This is probably unnecessary and only means you are allowing the broker to call your cell phone at all hours. Also, language stating the listing agent may be authorized to bind you and/or your company in contracts should be avoided as should other agreements like easement agreements. This also applies to listing agreements for a partnership, owner of a LLC, or similar entity. The listing agent should require all contracts and other agreements be signed by you, not "common consent" as many listing brokers use this language when they do not want to enter a contract with the entity. If one of these types of entities are your listing agent, then require all contracts be with the individual owner of the property and not the partnership/LLC or other entity.
An owner should also consider what happens once the transaction has closed. When listing agreements expire, many times the listing broker will get upset if you sell to a party who was shown the property before the listing expired and the owner does not owe a commission. A seller should expect to get numerous calls over the next three years after the closing to which the seller should respond that the listing agreement has expired, the broker sold the property during the listing period, he should be thankful and have nothing to complain about. In addition, all subsequent agreements and contracts should require the seller or the entity to receive the commission on any subsequent sale or lease of the property. The seller should also consider having a "Non-Circumvent Clause," included. This clause states you agree not to move forward with the transaction without paying the listing agent an agreed upon commission if you approached the buyer/tenant after they were shown the property while under the listing agreement.
One last note regarding the retainer. There are no set guidelines as to how large the retainer should be or if it should even be refundable. The owner should consider requiring the retainer be received within a defined period of time (typically 2-4 weeks) and consider it not being refundable. The amount should equal the amount of rent for a year in a single-tenant property or a small percentage of the expected expenditures for fees in a two-tenant or multi-tenant property. The retainer should also be held in an attorney’s trust account and the owner should be the named beneficiary of the trust account with the right of notice to the agent that the retainer needs to be returned.
Key Pitfalls to Avoid in Commercial Listing Agreements
Even though commercial listing agreements serve as the foundation for a real estate sale, many parties fail to appreciate the significance of these documents and the real impact they can have on the transaction. Often, both buyers and sellers tend to rush through the elements of a commercial listing agreement, but these agreements can be complex and should be handled and reviewed carefully. For example: In any situation, especially where large sums are involved, it is a good idea to have an attorney read through the entire commercial listing agreement before executing it. The cost of the attorney reviewing the commercial listing agreement will more than likely pale in comparison to the losses that could be incurred from any damages resulting from failing to consider these potential pitfalls.
The Evolution of Commercial Listing Agreements
Looking ahead, the traditional commercial listing agreement is evolving to meet changing market demands. The trend towards more seller-friendly terms will continue, as brokers keenly feel the competitive pressures of the 4% commission rate environment and are asked by sellers to justify their professional fees. The broader trend of dematerialization, embodied in online transaction platforms, will transform how real estate transactions are done, but will not displace the human element that is indispensable to commercial real estate transactions. More than any other real estate sector , institutional-grade commercial real estate transactions will continue to be transacted by well-resourced professionals because of the complexity of the asset class, the need for extensive due diligence and negotiation, and sophisticated structuring. While the commercial real estate marketplace in Canada may not yet be as transparent or mature as that in the United States, the trend lines are pointing in that direction. Canadian brokers will need to keep up with this evolution in order to stay relevant and value-add to commercial listing agreements.