What is a Broker Agreement Used in a Residential Lease?
A Broker Agreement is a commonly used agreement in Texas residential leases. It sets out the relationship between the landowner and the broker. The broker is a real estate professional who acts as the intermediary or agent between the landowner and the tenant in the lease process. A broker would seek to find a prospective tenant for the landowner. The landowner engages the services and expertise of the broker for their property and the broker prepares a lease for the landowner .
In other words, an agreement between a landowner and a real estate professional whereby the landowner hires the real estate professional (broker) to find a prospective tenant, and if a tenant is found, the broker prepares a lease document.
It is beneficial for landlords to use a broker in the initial leasing process that offers the property to prospective tenants because they may have the expertise and experience as well as be more familiar with the housing market to make good recommendations for both the property and the pricing of the property.
Necessary Elements of a Broker Agreement
A broker agreement for a residential tenant representation or landlord representation of a lease should address the following areas:
ISSUES:
- Reservation of rights – The broker agreement should contain a language that reserves the rights of a leasing agent to work for other clients. If the broker agreement does have any limitations in it, then they should be set forth in writing expressly in the agreement.
- Scope of services – As a basic matter, the scope of services should be clearly defined. This could include an outline of the basic transaction steps that need to be carried out by the broker.
- Appointment of Agent – The agreement should outline who are parties and agents to the agreement. Most commercial tenant representation agreements will have the leasing agent or sub-agent signing the agreement along with the tenant directly.
- Commission Structure – The broker agreement should clearly set forth the commission structure for the lease. This will include a full commission fee, which is commonly split between the agent and his or her parent company. Sometimes the broker agreement will provide that the agent is working on an hourly basis for part or all of the lease transaction, which will help to set up the basis for an hourly rate with a retainer to obtain earned commissions. Finally, the broker agreement should also clearly set forth the commission structure if any option to renew is exercised by the tenant. This is important because it may be difficult to locate or remember the commission structure agreed upon with the tenant if the extension is exercised five (5) years from now with entry being made.
- Expenses for Services Rendered – In addition to the commission, the broker agreement should set forth the major expenses that could be incurred by the broker. Usually these expenses come in the form of advertising and marketing charges. Some brokers may also charge sales tax on the total amount of the commission received. If the broker will charge the owner for a leasing sign, set forth how much in advance of the lease commencement date the sign will be erected.
Requirements Under Texas Statutes
The legal requirements and regulations governing broker agreements for residential leases in Texas are set out in the Texas Real Estate License Act and the Texas Real Estate Commission (TREC) rules. Section 1101.558 of the Texas Occupations Code requires license holders to use a listing agreement or written agreement authorized by TREC when representing a landlord or tenant in a residential lease transaction. The broker is not required to use a standard form, but if the broker does use a standard form, he must use a contract form promulgated by TREC, form TAR-2001 "Residential Lease Listing Agreement" (Multi-Family), form TAR-2002 "Residential Lease Listing Agreement" (Single Family) or a unique form of the broker’s own creation. A standardized form such as form TAR-2001 or form TAR-2002 is not mandatory in Texas.
Texas Occupations Code Section 1101.558(e) requires the landlord and the broker to sign the broker’s unique form or the TAR listing form, depending on which agreement the broker chooses to use. If a standard form is not signed, the broker will have a very difficult time collecting his commission.
The broker must provide a copy of a signed Residential Lease Listing Agreement or his unique form of the Residential Lease Listing Agreement on each day the broker actually works under the agreement. The agreement may be provided by email, U.S. mail, or in person.
The "Service Fee Agreement" is an agreement for services the client hires the broker to do. It is not a broker agreement to pay any compensation to the broker. It is similar to a listing agreement between a broker and a seller. See Form TAR-2003 "Service Fee Agreement" (Single Family).
This agreement must be provided to the landlord at the time a rental property is evaluated for possible listing. A copy of this agreement must also be provided to the landlord on each day the broker actually works under the agreement.
If the client does not hire the broker, no copy of the agreement with the compensation language is required.
The aggregate amount of the "service fee" payable under the "Service Fee Agreement" for each day under the agreement must be entered into the blank in the following language in the printed form: Pursuant to this Service Fee Agreement, Broker may charge Owner a service fee that is equal to _________ percent of one month’s rent. If Owner requires professional property management services for the Property after entering into this Service Fee Agreement, Broker may add to the service fee amount set forth above an additional monthly service fee equal to __________ percent of one month’s rent for such property management services.
The "Service Fee Agreement" cannot contain any other compensation language. The parties should enter these amounts into the blank spaces, but in order for the broker’s right to receive compensation to be enforceable, the dollar amounts must be entered into the blank spaces.
Advantages of Broker Agreements for Landlords and Tenants
A broker agreement is a contract entered into between a landlord (or selling party) and a Texas real estate broker to engage the services of the broker to find a buyer or tenant for the property. The agreement gives a broker the authority to show listings to prospective buyers and tenants, act as a representative of the landlord, and to prepare all necessary agreements (such as lease agreements) in connection with the purchase or lease of the property. If a dispute arises related to the transaction, a mediator is appointed to handle the matter. Depending on the type of property, a broker agreement can be very beneficial as an excellent resource for landlords and tenants alike regarding rental and leasing agreements . Most importantly, for both parties, a broker agreement gives a level of comfort in communicating with a neutral, informed expert who can assist the parties in negotiations and help them navigate through the issues that may arise during the transaction. A broker agreement can also alleviate many issues and feuds between a landlord and tenant because the broker is a neutral third-party who lacks the emotional attachment to the deal that the other parties may have. A broker agreement may also prove very useful to first-time landlords and tenants who may not be well-versed in landlord-tenant negotiations.
Common Issues and How to Solve Them
The most common issue is the commission. There must be sufficient funds on deposit with the broker at or prior to the commencement of the lease to pay a commission to the broker. It is not uncommon for the owner to be obligated to pay the broker out of their own funds if their is insufficient money in the security deposit fund. This means that the owner will not have the countervailing leverage of not signing the lease until the amount is paid. If I can’t get the owner to sign off on the commission, I will refuse to act as a leasing agent. However, on most residential leases, the broker’s fees are less than my minimum fee, so I’m generally willing to act "for free" so long as I get paid the commission at or before execution of the lease.
Most practitioners include an addendum that references a specific fee. Because the definition of the fee may differ, it is best to spell out the specific amount. "All funds on deposit with the listing agent are unearned until a lease is signed." You should also prepare a sheet stating the fees for each type of agreement. Include a box for lease type with high, medium, and low fees and a "perpetual" fee.
Lastly, both parties – especially the owner – should understand that they are entering into a contract. This is often overlooked because realtors are often hired verbally and not with a contract. This is not smart business. It is important to know how much money you are spending and how much it costs to cancel the agreement.
Guidance for Negotiating a Fair Broker Agreement
Tips for Negotiating Favorable Broker Agreements for Texas Residential Leases
Whether you are a broker, agent, landlord or tenant, you will find yourself at some point entering into an agreement with a Texas licensed real estate broker to assist you in leasing residential property. While the Texas Real Estate License Act (the "Act") requires brokers to enter into written listing agreements with landlords when seeking to lease a property, the Act is silent regarding the relationship between the broker and the prospective tenant. Accordingly, much of the negotiation of the agreement with a broker is left to the respective parties to determine the terms. As a landlord, broker or agent with a client who is a landlord, you should consider provisions that protect your interests in a breach of a lease agreement by a tenant. You may want certain remedies incorporated into the broker agreement where the tenant does not occupy the property following lease execution. The broker agreement should specify that the broker is entitled to a fee if the tenant immediately vacates the premises without having commenced possession. Or, alternatively, if not vacated upon a breach of the lease, then the broker is entitled to receive a percentage of the lease fee until the property is leased, or to terminate the lease without liability. In addition, make sure the broker agreement with a tenant specifies the broker’s role . By clarifying the broker’s role, you will avoid misunderstandings that could result in claims against you or the broker. Where a broker conflicts with a client, the Act provides that a broker must act solely for the requesting person unless otherwise instructed. In the event of a conflict between you and your client, make sure that the broker’s agreement specifies how to resolve it. As a broker or agent, consider including a provision in the agreement with a landlord stating that leases must be in a prescribed form that permits the broker to change the lease document, signatures or parties to enforce its rights or assert claims under the lease as part of the listing and if not rented within a certain period, the listing will terminate within 30 days. The agreement should also state that if the listing is not extended, the broker is being provided with an implied referral to the renter for purposes of receiving a commission from the landlord. In addition, if a license holder is acting in a policy making capacity regarding a lease, the license holder is a policy maker and therefore must use a lease that indemnifies the lessor. The buyer could be an additional insured under the policy. On the other hand, if the license holder does not have those powers, then the license holder may not indemnify the lessor and could even be liable to the lessor for failing to deliver possession to the lessee in good condition.
