Expert: Jim Avancena, CPM - 11/20/2008

Question
I recently purchased a small commercial building with one tenant.  During the transaction, I was told that I was responsible for a 6% commission monthly because the tenant was brought by a commercial agent.  I have no contract and the term of the original lease is past.  The tenant is month to month and wants to renegotiate the monthly rent (to a lower rate).  As the new property owner, am I responsible for the commission, and if so, will the amount change if I accept less rent in the future?  Thank You.

Answer
Clint-

You say you have no "contract" and were "told" that you were responsible for a 6% commission monthly.  Do you mean that you have no written contractual agreement requiring you to pay a leasing commission?

If, as the official property owner, you have a verbal agreement with the broker that represented your one tenant you need to determine if you remember enough of the specific terms of the verbal agreement to know if you are required to continue to pay the commission after since the original lease term ended.  There is no standard practice regarding commission and expired leases.  What was the understanding between you and the agent regarding commission after the lease term expired?   Unless you specifically remember agreeing to pay the commission on a month to month basis after the lease term expired, I would not do so.

If the tenant wants to renegotiate the rental terms and remain your month to month tenant, I would look very carefully at the reasonableness of keeping the tenant in the premises at a lower rental rate.   Check through-out the local market and see if you can determine what rental rates are on similar space to yours and see if the lower rental the tenant is requesting might be acceptable in an economy that is very weak.

In the future, be certain to have a standard written commission agreement, signed by you as the owner and the broker (not signed by a leasing agent, signed by the broker) that addresses all of these kinds of issues.

Regarding your last question, if you agree to accept a lower monthly rental from your tenant, the commission payment will be smaller each month because 6% of a smaller monthly rent will be lower than the commission payment paid before you lowered the monthly rent.

Please note that any changes to the terms of the original lease terms especially: 1.) the change in the rental rate, 2.) the change to a month to month term, and 3.) state that all of the other terms of the lease are still in effect (be certain to list any other terms that are not in effect any longer), need to be written down and agreed to in writing by both parties.  This is usually called an Amendment to the Lease, and it is important to have because it will mean that all of the other terms of the original Lease are still effective, and that only the changes you stipulate in this new Lease Amendment have changed.

It is important for the tenant to still be required to have insurance on his premises and personal property, you need to hold a security deposit for any default on the tenants part, etc.  These types of provisions were probably part of the original lease.

The preparation of the appropriate Lease Amendment Agreement should best be done by an attorney knowledgeable about commercial lease law.  There are many potential problems that can occur if these changes are not correctly recorded and agreed to in a Lease Amendment.

Good Luck.

-Jim