Tenant Representation: A Complete Representation Agreement

May 11, 2017

Tenant Representation: A Sample Appointment Letter

If you have completed the process of interviewing tenant rep brokers and have selected a brokerage to work with, it is advisable to sign a tenant representation letter to formalize the partnership. In other words, an agency agreement, appointment letter or mandate letter.

It is important to know what tenant representation services you will be receiving and often landlords will require a copy of the engagement letter to ensure that you actually hired that particular real estate brokerage to represent your interests.

do I require a tenant representation letter for commercial space

Below is an actual corporate real estate brokerage template provided by a reputable brokerage firm, with some commentary added.

<Date>

Mr. <Broker>

Vice President

Dear Mr. <Broker>,

On behalf of <Tenant> we hereby authorize <tenant representation firm> to exclusively represent our organization for renewal or relocation of our office presently located <current address>.

Note: ensure that "renewal or relocation" is included - you want to ensure the landlord receives the message that you are evaluating all options available. If the letter only says "renewal" you may be telegraphing the message that you are a captive tenant. True tenant representation means you will be evaluating all relocation options as well as the potential to renew your lease.

It is understood that <tenant representation firm> will provide to us the following services:

1. Complete review of all possible alternatives, either by physical introduction or by written form, in the market including our existing location.

2. Complete building analysis of the desired alternatives.

3. Implement, co-ordinate, review and analyze the proposals of each desired alternative and present these findings to our real estate committee, including a lease review or lease abstract of the existing building.

4. Negotiate, on our behalf, the terms and conditions of any renewal, relocation or purchase agreement through a written letter of intent or offer to lease but at no time will you be authorized to commit to any agreement on our behalf.

Notes:

"Complete building analysis" is a vague phrase. This means that the broker will obtain the basic leasing information - size, net rent, additional rent, floor plan, etc. and will provide a cash flow analysis of the shortlisted buildings. Feel free to modify to provide more specifics, but it really is not necessary for the purpose of this mandate letter.
Point # 3 is very powerful. It really drives home the point to your existing landlord that the whole market is in play for your tenancy.
Point # 4 - note that purchase options should be included in this letter. Even if you are not interested in purchasing a building it adds to your negotiating leverage if the landlord feels that he may lose your tenancy to a purchase opportunity. A smart real estate broker will also ensure that purchase options are included in their template just in case you decide you want to buy a building.

We hereby direct all landlords to deal directly with <tenant representation company> in any dealings for the consideration for our tenancy or ownership and expect <tenant representation company> to be remunerated with standard brokerage commissions from the respective landlord with whom we conclude a lease or purchase transaction.

Note: has the broker disclosed to you what the market commissions are? Ensure that you understand what the fees are and if they vary from building to building or from submarket to submarket. A broker providing strong tenant representation will do that.

This agreement will be in full force and effect immediately and will continue until the completion of a lease or purchase agreement by our organization, or until <date>, whichever comes first.

Note: your tenant rep broker probably put in a generous time period for the contract. By default, most agents put in your lease expiry date. That seems to make sense but what if the agent does not really perform well? You should shorten the time period in case things do not work out with the broker and you decide to either switch agents or do the deal by yourself.

Sincerely,

Per: ____________________________________

Missing Items:

Recourse for non-performance.

What if you are not satisfied and want to terminate the tenant rep broker? Here is a simple sentence you should add that you probably will not find in your agent's template:

<Tenant> may terminate this appointment on written notice if, acting reasonably, it is unsatisfied with <brokerage's> service delivery.

Keep the wording vague and in your favor. The brokerage may want to insert specifics, but it could turn out that you just do not trust or like your agent, and you want to end the partnership for those reasons. They may also want to insert a remedy period to cure the problem. Although you may consider that if that issue arises, but it would be better not to agree to that on paper.

Automatic Renewal

It is in the real estate brokerage's best interests to insert an automatic renewal clause in response to a short time period you insert for the contract. It may look something like this:

If a lease or purchase agreement has not been finalized by <appointment termination date>, then it is agreed that this agreement will automatically be renewed for sixty (60) day periods until the process has been concluded.

There is no harm in this if you have the right to terminate the contract. It actually will save you the hassle of signing new engagement letters every time the term has expired on the previous letter.

Hold Over

It is somewhat customary to protect agents on options that they present to you, as that is part of the value they are providing to you. For some reason most agents do not include this as a request in their representation letters - it is normally only found in their appointment letters when they are hired to sublet your space.

Protection on Unpresented Options

This is somewhat of a controversial item. A brokerage requesting protection on this would insert wording something like this:

<Tenant> shall disclose all leasing and purchase alternatives to <broker> that <Tenant> discovers and said options shall form part of the master list of relocation alternatives.

The reason why they want protection is that we live in digital world in which information can flow very quickly.

It could be that a listing agent has a sublet that is about to come to the market and decides to email all tenants in your area before marketing it to the real estate brokerage community. While in this case you found out about the space before your agent, he could argue that he was going to find out about it and let you know.

On the other hand, a clause like this protects your tenant rep brokerage from being lazy. What if the options you are discovering should have been discovered by him?

It would be best not to agree to wording like this. Your prospective broker is looking for comfort that this is a partnership and you will not be searching for space on your own, but if you are always the first to the punch on new space options, then you do not want your agent to be protected on a list of spaces that you developed.

For more sophisticated projects, here are some other ideas on specific items to include:

Business Planning

Assistance with all aspects of business planning with respect to any potential merger and acquisition activity. Said assistance shall include:

Employee postal code plotting
Optimum site selection opinion
Financial analysis of all potential alternatives of acquiring or disposing of office space
Rental rate trends in selected nodes in <market>

Real Estate Research

Complete review of all possible alternatives, either by physical introduction or by written form, in the market including our existing location.

<Tenant Representation Brokerage> will search all industry standard sources of available space, including:

Complete a full "drive-by" and/or "walk-by" study of all desired areas to uncover any one-off alternatives not listed through any conventional channels (i.e. the only advertising is a sign on the property).
<Tenant Representation Firm> acknowledges they are on the e-mail distribution list for every major real estate brokerage and landlord in the <your market area>.
Highlight properties as they become available, and will also commit to emailing a new space survey on a weekly basis.
Email to the real estate brokerage community a confidential needs requirement that will detail our space requirements to uncover any shadow listings.

Evaluation

Complete building analysis of the desired alternatives. Including, but not limited to:
Age of building
Building vacancy rate
Building gross up factor
Floor plate size
Tenant mix
Parking
Landlord background
Operating cost history
Realty tax history
Completed and future renovations
Recent lease transactions
HVAC history
Amenities
Transit
Special landlord services
Space planning (note that for 10,000 square feet, market charge for a space plan is typically $1,000)
Interior design - recommendations and assistance in selecting colors, styles and furniture
Tenant representation opinion on each building

Financial Analysis

Implement, co-ordinate, review and analyze the proposals of each desired alternative and present these findings to our real estate committee. Said analysis shall cover all the points listed in Evaluation above, and additionally include financial analysis that covers the following:

Cash flow analysis for the term of the lease (including amortization of any landlord inducements)
Net present value calculation for the value of the lease
Construction budgets for estimated renovation cost (prior to negotiation)
Final construction budgets

Good with the hiring process for your tenant rep broker! If you need some assistance, we offer reviews and advice on commercial tenant representation agreements. Find out more about how we can help HERE (bronze package).

For more information on our process of how we review tenant representation agreements, letters of intent, offers to lease estoppel certificates and office, industrial and retail leases, check out this 90 second super duper serious video...