NAR Lawsuit Could Impact CRE Commissions

In October 2023, a Missouri jury awarded a staggering $1.8 billion in damages in a case involving the National Association of Realtors (NAR) and certain real estate companies. Though this ruling related to residential brokerage commissions, this landmark verdict is sending ripples throughout the real estate industry and could have far-reaching implications for commercial transactions, in particular commercial leases, in the event that the standard broker landscape is ruled anticompetitive. 

Standard practice has been that sellers and landlords customarily cover the brokers’ fees in the commercial real estate landscape. This ruling puts these types of arrangements at risk and will likely reshape the industry by prompting stricter regulations, increasing transparency, strengthening client protections, and fostering a more ethical environment.

To safeguard their interests and navigate the evolving terrain, commercial real estate practitioners are advised to engage with qualified legal counsel to explore the integration of targeted risk management terms into their listing, commission and commercial lease agreements. 

Here are key considerations:

1. Disclosure and Transparency

Transparency is key in commercial leasing. The jury decision will likely lead to increased scrutiny of real estate companies involved in commercial leasing transactions. Parties engaging in unethical (or potentially illegal) practices will face stricter scrutiny from clients, regulators, and industry watchdogs. Both lessors and lessees should consider disclosing an abundance of material facts that could impact the other party’s interests. A well-drafted lease should emphasize the importance of full disclosure, fostering an atmosphere of trust and openness between the parties.

2. Antitrust Compliance

The specter of antitrust allegations in the Missouri case has prompted a reevaluation of industry dynamics. Commercial leases might now include explicit clauses committing both parties to strict adherence to antitrust laws, particularly as they relate to fee/commission splits. This commitment ensures that negotiations are conducted in a non-collusive manner, fostering an environment that discourages any form of anticompetitive practices. Including antitrust disclosures could also help to protect brokers from allegations that the brokers engaged in anticompetitive practices at the expense of their clients.

3. Addressing Regulatory Changes 

In the aftermath of this high-profile case, which will likely be appealed, the anticipation of regulatory changes looms large. Stakeholders should be prepared for potential shifts in regulations governing commercial real estate leasing transactions. Forward-thinking commission, listing and lease agreements should include provisions mandating prompt compliance with any new laws or regulations affecting the lease. This proactive approach positions industry participants to navigate evolving regulatory frameworks seamlessly, avoiding potential legal pitfalls and ensuring long-term stability. 

It will be more important than ever to clearly document the fee arrangement between the broker, tenant, and landlord and to specify in the lease what happens if the brokers’ commission is deemed anticompetitive. This mitigates risk for all parties.

4. Dispute Resolution

This ruling will inevitably lead to private lawsuits that could be time-consuming and expensive. Avoiding protracted legal battles necessitates a detailed and well-defined dispute resolution clause. Outline the specific processes for resolving disagreements, whether through arbitration, mediation, or another agreed-upon mechanism. A robust dispute resolution framework not only saves valuable time and resources but also contributes to a more efficient and harmonious leasing relationship.

5. Professional Standards and Ethics

Elevating the brokerage industry’s ethical standards becomes paramount in the aftermath of the Missouri verdict. Lease agreements should explicitly outline a commitment from both parties to maintain the highest professional standards and ethical conduct throughout the lease term and to work with one another in good faith. 

6. Risk Mitigation Strategies

Specify risk mitigation strategies that both parties will employ to protect their interests. This could include routine property inspections, required maintenance, and emergency response procedures. A proactive approach to risk management can prevent issues from escalating.

The Missouri jury verdict serves as a wake-up call for commercial leasing professionals. To mitigate risks in commercial leasing transactions, it’s essential to adopt a proactive approach and incorporate these risk management terms into lease agreements. Tailor these provisions to the specific needs of each lease transaction and seek legal counsel to ensure compliance with relevant laws and regulations.

As the commercial real estate leasing sector adapts to these changes, it will be crucial for industry stakeholders to embrace the reforms and work towards creating a more transparent, equitable, and trustworthy leasing market that complies with antitrust laws.

Remember, a well-structured lease agreement not only protects your interests but also fosters trust and transparency between lessors, lessees, and brokers and can help avoid some of the issues raised here. By taking these lessons from the Missouri case to heart, you can navigate the complex world of commercial leasing with confidence and reduced risk.

Barry is a partner with Morris, Manning & Martin, LLP and Hicks is an associate. Both are part of the firm’s real estate practice.