Never try to hold a realtor accountable for the performance obligations of a new tenant.
Never try to hold a realtor accountable for the performance obligations of a new tenant.
Unknowingly many landlords have and are damaging their own reputation. Big or small, if you’re a landlord and you care about reducing time on market for your vacant spaces, in other words make sales happen faster and bring more money into your company then here’s an important tip – a tip that will undoubtedly elevate your reputation amongst the brokerage community.
Many landlords are on the right side of this issue. They do not attempt to hold realtors accountable for the performance of a new tenant. Rather, they think of the brokerage community as an extension of their own company – a fleet of hard working sales people at their disposal. Sales people who provide revenue generating opportunities for their companies. Often a significant lifeline.
There are some however, who have a different strategy and they have long been victims of their own perceptions. With this article I hope to get the discussion started around your board rooms on why this practice ensues and why it’s bad business.
What am I referring to specifically you ask? I’m talking about a strange policy amongst some landlords and developers who hold back broker commissions owed on a completed transaction until the new tenant opens their doors for business to the public. In other words, there is a deliberate delay in payment until the tenant takes both possession of the leased premises and then secondly, opens their doors to the public for business, often after completing renovations. Those property owners and managers who subscribe to this type of policy explain it as a process of deferring financial risk on commissions and a means to persuade the realtor to induce the tenant to comply with their legal obligations.
Here are the problems with this type of policy and why it’s a very bad decision for landlords to endorse it.
1.) Legally, there is no basis for it:
Section 3 of the Commercial Landlord/Tenant Act of Ontario reads as follows:
“The relation of landlord and tenant does not depend on tenure, and a reversion in the lessor is not necessary in order to create the relation of landlord and tenant, or to make applicable the incidents by law belonging to that relation; nor is it necessary, in order to give a landlord the right of distress, that there is an agreement for that purpose between the parties. R.S.O. 1990, c. L.7, s. 3.”
In essence what this law states is that the legal relationship between Tenant and Landlord in a commercial transaction is enacted solely on the basis of a lease being executed by both parties. The lease alone binds both parties to each other and gives grounds to sue for damages in the event of a breach.
With regard to a realtor, this means quite specifically that the realtor’s job is finished once the lease is signed by landlord and tenant. It is the end point of the realtors involvement in the transaction. According to this law, whether the tenant takes possession of the premises, opens for business or none of the above, if the landlord has agreed to work with an agent representing a tenant and the lease is signed, the broker fee is owed at that very moment. The realtor is engaged to bring a tenant. An executed lease is evidence of this completed work. If the tenant or landlord breach the contract, they have recourse. The realtor is not at fault.
2) Deferring Risk:
The perception that a landlord is deferring any actual risk by delaying payment until the new tenant opens for business is a false premise. In actuality what a landlord is doing is damaging their reputation and demotivating the brokerage community – demotivating sales agents who can bring them business.
Realtors have absolutely zero power over their clients. We can speak with them and express great discontent, but that’s it. There is no other way to elicit action. We do not have control over our client’s bank accounts, nor can we physically move them, or induce them by any forceful or coercive means.
In the great majority of cases tenants fulfill their obligations, take possession and open for business. There is however a bad apple in every bunch and in rare cases tenants do not fulfill their obligations. They could get cold feet or something negative could have happened with their business and their world fell apart. Who knows. This strategy of deferring risk is reserved for those rare instances. Those who employ it would then refrain from paying owed commissions entirely. Landlord’s know however, that should a broker pursue legal action in order to receive payment that according to section 3 of the Act, the broker would win.
3) The What Ifs:
What if the tenant goes under in six months? What if they don’t finish construction to a high standard? What if the tenant is a neglectful company and damages the property? Then we’re out a lot of money, some landlord’s would say and the commission as well. A common series of talking points, and all legitimate concerns no doubt. No realtor would argue that these aren’t legitimate risks one may be exposed to as a property owner. If that’s a problem however, maybe you’re in the wrong business?
There is a flip side to that coin. The what ifs go both ways. Tenants speculate as well and in some cases are victims of bad landlords. What if the landlord doesn’t do the work agreed to in the lease to a high standard? What if the landlord is slow to finish their work and it delays the opening and the tenant loses money or puts the business in total joepardy? What if the landlord is neglectful and doesn’t make repairs to the property and address issues in a timely manner? The sum of which is to say that landlord’s aren’t the only ones taking risks.
The point being illustrated here is that once both parties agree to sign the lease and move forward all taking points and contentions of risk are made moot. Furthermore the realtor has no control over either party.
4) Smart Sales Strategies:
Think about how most companies with dedicated sales people operate. How do telecom companies, call centres, car dealerships or other sales driven enterprises compensate and motivate their people? Do they defer their commissions for months on speculation that new clients will cancel service or return a product? Surely, your answer is the same as mine. It’s no. If they did, do you think they would be able to retain talent and survive as profitable businesses?
Sales driven companies very often use rewards and competitions to motivate workers and get the results they seek. Imagine the psychological impact on the brokerage community if landlords engaged in a similar practice.
As stated earlier, many landlords are already on this page and pay brokers on lease execution, or at the very latest on tenant occupancy. Some offer fun promotions with bonus rewards. When landlords offer prompt payment and show appreciation for business without attempting to tie commissions to tenant performance their reputations gleam. It’s a smart sales strategy.
5) Brokers Are Also At Fault:
In a highly competitive field where people are bidding on listings standards have fallen. Brokers, in an effort to make their contracts more palatable and less cumbersome have long dropped the ball on this issue.
Think about all of the other industries who employ rigid standards of collecting and enforcing payment for service. Lawyers, accountants, telecom, contractors, utilities and mostly everyone set deadlines and penalties for non payment. Yet, in the real estate game, we generally sit and wait for landlords to pay at their convenience because nobody wants to rock the boat or jeopardize a relationship. In reality, its the landlord’s non-compliance that puts them at risk. It’s puts their reputation at disrepute amongst the brokerage community and conversely slows their sales times.
While we all want the least cumbersome documentation, we do also have an obligation to set high standards and enforce contractual obligations. It serves to improve the reputation of brokers.
In my view listing contracts should have clearly described payment dates and penalties for tardy disbursement of funds or non-compliance. Brokerages should engage in setting these new standards at the earliest possibility. Real estate agents should not be fearful of losing business to competitors for inserting such a schedule in their contracts. Why? Well, because honest people doing honest business will have no issue complying with this element of your contract. In that regard, it’s really no different than any other service provider. If a landlord expresses discontent and chooses not to list with you because of this requirement then you may be better off. What is their true intention? Are they just looking to take advantage of your services with no intention of paying? Isn’t that a red flag? Is it wise as a realtor to invest your time and money into a marketing campaign if the landlord isn’t willing to commit to paying on time?
One final thought:
Holding a realtor accountable for the lease obligations of a tenant or a landlord for that matter makes as much sense as holding a snow plough contractor to account for the tenant’s obligations.
Ultimately the client decides where they want to go and what they want to do. Realtors are ethically tied to the best interest of their client. This means that when tenants ask for input on the reputation of landlords, their ability to follow through on contractual obligations, respond to offers in a timely manner and the relationship they can expect – and they do ask – there is an obligation to tell all.
Until next time.
– Mitch Gauzas