What’s a Buyer-Tenant Representation Agreement?
Buyer-Tenant Representation Agreements are legal contracts that are intended to govern the relationship between a commercial real estate broker and the buyer-tenant that the broker is representing. The agreement designates the broker as the buyer-tenant’s exclusive agent. In other words, if you are buying one or more investment properties with a particular Texas commercial real estate broker representing you as the buyer-tenant, then you can no longer buy, sell , lease, etc., the property without going through that broker. Doing so could result in a breach of the buyer-tenant representation agreement and could subject you to legal liability.
Buyer-Tenant Representation Agreements in Texas are akin to residential buyer representation agreements. Be sure that you know the details of any agreement you are signing with your broker, so that you can avoid the repercussions of violating any exclusivity terms of the contract.
The Components of the Agreement
The key elements of a buyer-tenant representation agreement include the parties to the agreement, the duties of the parties and the duration of the agreement. The approaches to these key elements vary across the country. For example, when representing a seller, most states impose a duty of loyalty on brokers, requiring them to place the seller’s interest above their own. This duty is spelled out in Section 535.126 of the Texas Administrative Code based on the general rule that a broker who procures a buyer or seller to a real estate transaction and facilitates the transaction must be compensated by the person who engaged the broker.
As a matter of law, the only party that can receive a commission is an individual or business entity licensed as a broker under the real estate licensing statute. Subsection (h) of the Statute simply states that a broker must be directly compensated by his client. The parties can agree to any negotiated arrangement whereby a buyer pays a commission directly to his broker at settlement rather than inducing the seller to pay two commissions. The key to a buyer’s adjusting the total price of property with the aid of an agent is to make sure that the expert directly representing him is paid directly and not through the commission system designed for representing sellers.
Since pricing and compensation are critical to the discussion of the structural arrangements for sale of commercial property, one sees the importance of making one key element of the buyer’s agreement authorizing the buyer’s agent and broker to conduct an appraisal and set the commissions on a percentage basis. If the commission is negotiable down, the buyer and his agent can agree that the amount of compensation due to the agent will be deducted from the buyer’s cash at closing and applied to the agreed real estate transaction. This provision can usually be added without modifying the boilerplate used in the agreement. The purpose of such an agreement is to compensate the buyer’s agent directly.
Some broker and agent forms provide that the buyer will pay a commission equal to three percent of the sales price. If the buyer and agent agree that the price of the property affected by the agreement is $500,000, then the compensation would appear in the agreement as a line referring to that amount. In negotiating the amount of the commission under the Statute, the commission should read "minus a real estate agent allowance to buyer or seller."
Advantages for Purchasers and Tenants
Fifth, the representation agreement creates additional protections for you, the buyer-tenant. For instance, even if the transaction ends up falling through due to the fault of either party (such as your inability to get financing or inability to sell your own property), you will not end up paying your buyer-tenant representative (unless that person’s hourly rate becomes high enough to bill against the retainer). The seller who retained his or her own legal counsel, on the other hand, will be authorized to seek his or her legal fees and expenses from you if you breach any of the terms of the transaction (except for your legitimate failure to be able to obtain financing or your legitimate inability to sell an existing property).
Finally, you will benefit most by having your own real estate professional with whom you have an established and written relationship. By entering into a representation agreement, you will be assured that your buying agent will be working for you, as opposed to trying to be a neutral and unbiased conduit between you and the seller and his or her attorney, each of whom is making their respective case that "my client" has been harmed by the other party in some way. Such protection is especially important in negotiations for triple net leases where the chances of your leasing representative equally protecting both you and the landlord are extremely limited.
Duties for the Real Estate Agents
A buyer-tenant’s real estate agent is paid by the landlord’s broker. This is true even when the tenant is the one working with the agent to find an apartment. It’s not that the landlord pays all of the tenant’s commission and the tenant pays none of the commission – it’s a different way to think about it. A broker is paid for providing representation services to a client or customer. If an apartment is not leased at the end of the apartments for rent process, then the landlord pays a commission (which is split between agents) as a landlord customer expense. It is important to note that landlord’s broker and agent are not required to have a "sole agency" claimant representation agreement with a prospective tenant. That being said, when the landlord’s agent does enter into a lease with a tenant, the agent has a duty to fill the lease out completely – including all blanks – to avoid later inaccuracies and possible misunderstandings as to the monetary or other obligations of tenant and landlord under the lease. The landlord’s agent also has a responsibility to communicate to the landlord all of the terms of the lease agreement that have been negotiated with the prospective tenant.
Real estate agents have certain fiduciary duties to their clients. These fiduciary duties include honesty, integrity, loyalty, and a full disclosure of all information known about the material facts of the transaction. However, Texas law requires that an Apartment Locating Service have the following conditions in place with regard to locating an apartment for a consumer: • No exclusive listing agreements with apartment owners/managers; • Listing information and materials available to consumers without cost or obligation; and • No compensation for referral of customers or clients to the owner or manager. Additionally, if an agent notices a conflict of interest with a potential landlord or tenant, the agent must promptly inform the tenant of the nature of the conflict of interest. The agent must determine whether there is a conflict of interest that precludes their representation of the potential landlord or tenant.
How to Select an Agent
The single most important thing you can do to avoid problems with a buyer-tenant representation agreement is choose a competent and reliable real estate agent. As there are no regulatory standards for real estate agents in Texas, the best way to choose is to consider credentials, experience, and referrals from others.
Credentials
We can provide a list of real estate professional organizations that make it easier to determine the status or credentials of a real estate agent or broker. Some members hold professional designations from real estate industry trade organizations, which require real estate knowledge and experience. You can ask the agent if he or she belongs to any of these organizations, or refer to their website to find out. Many of these organizations publish lists of members who have earned professional designations. Some of these members will then have websites, allowing you to find out about their current activities, as well as their experience levels. Of course, you can also find out whether the person has an active license by searching for them on the Texas Real Estate Commission’s website .
Experience
Although agents may have lots of experience, if they don’t have experience with a transaction like the one you are considering, they won’t be able to represent you effectively. It probably makes sense to talk to the agent about their recent experience with writing tenant representation agreements and negotiating leases. If you do not intend to provide the agent with a tenant representation agreement, make sure that the agent has had experience drafting an agreement similar to the one you intend to use. It’s possible to use a standard agreement for this purpose, and not need to provide one of your own.
Referrals
Chances are that you know someone who has used a real estate agent to represent them in the past. Talk to them about their experiences with this person. But do a little digging into all the representatives considered, to get a better collective picture of their strengths and weaknesses. In our experience, the information you want and need to get from the agent is always freely given. The agent’s responsiveness to your inquiries will help you determine their competence relative to other candidates.
Legal Issues and Cancellation
Buyer-Tenant representation agreements are legal, enforceable contracts. This means the buyer and the real estate broker have a fiduciary relationship. The buyer is paying the broker for the broker’s service to find a lease property, and the broker has an obligation to perform. The association of real estate licensees that grants the real estate broker the authority to provide this service is the National Association of Realtors (NAR). The NAR Code of Ethics sets forth standards of practice for real estate professionals, and it protects consumers who choose to associate with members of the association.
If the buyer-tenant fails to negotiate or execute a lease contract, then the assignment of broker’s commission from the landlord landlord to the buyer-tenant may not occur. The real estate broker in Texas is entitled to a commission. But if the buyer-tenant does not enter into a lease, and thus a contract does not exist, the buyer-tenant may still owe a commission to the real estate broker.
Regardless of who pays a broker’s fee, the buyer-tenant will be liable to the real estate broker for a commission because the real estate broker has found a property that meets the client’s requirements. See, e.g., Heller v. Jowett, 738 S.W.2d 399 (Tex. App.—Dallas 1987, writ ref’d n.r.e.); Bank of the Southwest of Tex. v. Valley Nat’l Bank of El Paso, 741 S.W.2d 827 (Tex. App.—El Paso 1987, did not provide guidance. Those cases did not involve the NAR Code of Ethics, which was in effect at the time. However, those cases provide counsel that parties should expect to be held to a contract, regardless of whether the contract specifies the exact amount of a commission, or if the payment is based upon a formula.
A representation agreement terminates if the client cancels the representation agreement. This, of course, is what a "tenant/buyer" would do if he/ she was unhappy with the broker’s representation. This does not mean, however, that the tenant/buyer owes nothing to the broker if a fair compensation can be determined under the tenant-buyer representation agreement. In other words, terminating the representation agreement does not terminate the buyer/tenant’s obligation to pay a commission to the broker if the broker has done what the representation agreement required.
When the tenant pays a broker’s commission, that commission will then be used to reimburse the landlord for a reduction in the rent by the amount of the commission. If the relationship turns bad and the tenant-buyer is angry because he or she believes that the broker failed to act, the tenant-buyer will still owe one years commissions to the broker, but in the form of a credit to the landlord off the rent and thereafter a 10% increase in the upcoming year of the lease.
Frequently Asked Questions
This section is designed to answer some questions we frequently hear regarding buyer-tenant representation agreements:
Do I have to sign a buyer representation agreement to receive my access code for homes scheduled for showing?
No. You can easily register to receive a free code by selecting "Schedule a Showing" on the home detail page. This will bring you to a form that must be completed in its entirety prior to receiving your access code, including showing instructions.
Must I provide my name and phone number to receive a showing access code?
Yes. The code you receive does an agent no good if it cannot be traced to you. One of the most important responsibilities of a buyer’s agent is to protect your interest, you can’t possibly expect them to do this if they do not know who you are.
Are there any fees associated with the buyer representation agreement?
No. There are no fees charged to you whatsoever. The broker, agent, and/or publisher all receive a commission from the sale of your home through the MLS, this is how we are compensated for our time and effort spent working for you.
I use a different agent to actually show me properties. If I sign a buyer representation agreement with one agent, am I now stuck with them for all future transactions as long as the agreement is in effect?
No. As a real estate buyer you are entitled to change agents at any time for any reason. However, keep in mind that if you wish to be represented by a different agent in a transaction where our company is also representing the buyer , listing and/or landlord, and their relationship has been disclosed to you, your arguably limiting your options when choosing representation.
Why should I hire an agent when I have full access to some of the listings and more are added every day?
If all you need is access to the listings and price decreases, then you are probably right. The MLS has its limitations, but if you do not want a professional to be able to call and make appointments to show your home or accept an offer on your behalf, you probably don’t need or desire an agent. However, if you want someone with access to all listings, who can quickly match your needs to the right property, and who is available to you when you have questions, you should consider hiring a knowledgeable and experienced agent with whom you have a good relationship.
Should I hire a buyer’s agent even though I know the area well and have bought and sold several properties on my own?
In a perfect world you would be right. However, in most states the limitations of the system require that your agent have all of the tools and rights necessary in order to accomplish their job. Although you may have experience as a seller or buyer, the fact that you are on the opposite side of the transaction will often times hinder your productivity. Considering the complexity of the laws and regulations binding real estate shortcuts taken outside of the normal procedures required are almost always eventually regretted due to the uncertainty of the outcome and the fact that consequences from an incomplete process can last years.
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