Using Non-Disturbance Agreements to Protect Broker Commissions

Commercial Real Estate Professional Calls for Change to Industry Practices

Non-disturbance agreements have been around for a long time. They have become a crucial component in protecting corporate tenants from being removed from their space by lenders who may foreclose on the buildings occupied by those tenants.

Should commercial real estate brokers be entitled to the same protections...that, if a lender were to foreclose, the broker's rights to receive future commissions would also carry forward and become the obligation of the lender? 

Currently, in most states, broker commission agreements are personal service contracts between landlord and broker, and don't run with the land. Basically, if a lender were to foreclose on a building where a broker placed a tenant, the broker would likely have no standing. If the commission agreement provided the broker with the opportunity to receive commission payments for future events, such as if the tenant were to expand, extend its lease, purchase the building, or otherwise, in most cases, the lender would have no obligation to honor the commission agreement. And, the broker would likely receive no compensation under the commission agreement.  

Since commercial real estate brokers are often one of the primary reasons a tenant and a landlord are brought together, shouldn't brokers be entitled to the same protections often afforded tenants?  Like the tenant not being removed in the case of lender foreclosure, and like other protections afforded landlords, shouldn't the broker's rights also not be removed?

This approach has been applied from time to time, but only in extreme instances, and with a lot of effort. An industry wide standardized "broker non-disturbance agreement" is an idea whose time has come, especially at a time when so many commercial landlords are losing their buildings and while others are simply not capable of paying their bills, including commissions.  Like a non-disturbance agreement between a tenant and lender, a broker non-disturbance agreement would be a separate document between broker and lender.  In a broker non-disturbance agreement, the lender would agree, in the event it foreclosed on the landlord, to take-on the responsibilities to which the landlord agreed in the commission agreement.  In this manner, the broker's future interests would be protected through the agreement with the lender.

Some landlords may misunderstand the true positive value associated with offering broker non-disturbance agreements.  Consider the office building that is rumored to have financial challenges. Some brokers might be less eager to aggressively pursue transactions there for fear of not being paid. By offering a broker non-disturbance agreement, financially challenges landlords may be able to attract more brokers to their buildings, and ultimately, increase leasing activity and close more deals. 

Of course, other opportunities exist to protect brokers, including the inclusion in the lease document the right by the tenant to pay the broker its compensation, while deducting that cost from its rental obligations

Either way, commercial real estate brokers certainly provide valuable services to tenants and landlords. And, with the extreme challenges and very real risks that exist in today's business climate, like others, brokers are entitled to reasonable protections and the expectation that they will receive the compensation to which they are rightfully entitled, especially those to which others have contractually committed to pay.

Copyright Real Estate Strategies Corporation 2011.  All Rights Reserved.

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