Does a Broker's Tail Ever Stop Wagging?

When an owner engages an individual as its exclusive listing broker to sell or lease his or her real estate, it is important for both sides to fully understand the commission obligations during the term of the listing, as well as any post-agreement protection granted to broker for its efforts during the listing term. One of the most significant and often negotiated terms of the listing agreement is what's known as the “tail period.” It is a standard clause in a listing agreement that requires the broker to register certain parties or transactions and a period of time during which the broker shall be protected and recognized as the broker for the transaction, entitled to be paid its commission pursuant to the listing agreement.

The tail period needs to be clearly defined, since the interests of the owner/seller and the broker appear to differ ' the owner may want the tail period limited as much as possible, in parties and in time, while the broker stands to benefit more from a broad list of parties continuing as long as possible. Although everyone expects that the deal will work out for the best during the listing period, the lawyers must prepare for the worst, protect their clients as best as possible, and make them aware of the issues and risks, without getting in the way of the business deal. It is very important to be clear with the post-agreement language at the start, because once the listing has been terminated or expired without being extended, the parties may not have the same positive feelings about each other that they had prior to negotiating the listing agreement, and any ambiguity can lead to an unnecessary dispute.

The tail period has two major components:

1. The first describes the conditions that have to be met to include a given tenant/buyer on the broker's registration list. The parties will agree that certain tenants/buyers are clearly protected (e.g., signed contract, draft lease out, signed or agreed upon LOI, or simply a submitted LOI). Inclusion of other tenants/buyers is generally subject to negotiation.
2. The second is the length of the broker's protection. There are several things to keep in mind here: The length of the broker's listing period; the type of property; and the length of time it takes to complete the deal. A term of six months is reasonable. However, in a new construction development, the protection period should be pushed to whatever is a reasonable time for leases to actually get signed based on the status of the project, and the period may also be extended, depending on the type of building or tenant being sought ' if they typically take longer to get leases signed.

Who Is Included in the Tail?

The owner/landlord's attorney should try to limit the protection only to those tenants/buyers that have expressed a legitimate interest in the property. An owner/landlord may also attempt to limit the number of parties a broker may include on the list, no matter the state of negotiations. Numbers range from five to 25. Apart from the financial obligation of paying a commission, an owner's/landlord's attorney and his/her owner/landlord client want to avoid a claim for a commission from another broker, from the initial broker, or from the replacement broker who needs to be made aware that s/he was excluded from a commission for certain tenants, at least for a certain period of time.

The broker's attorney will of course want more coverage, but does not want to be unreasonable. The broker is protected on any written offers (assuming the offer includes a brokerage clause that specifies the broker), even without a listing agreement, so the attorney should never agree to anything that limits the coverage to less than that. Additionally, the attorney should never agree to a set number of parties because the broker may receive more offers than the agreed-upon number.

However, where a landlord insists on limiting the number, the attorney can propose a compromise that all offers will be protected, plus up to “x” other parties that have expressed interest. All the offers will be covered (plus more) and the landlord gets the comfort of knowing that he will not receive an unreasonable list from the broker, which includes any tenant the broker talked to. By including all offers submitted or received, as well as any party (or a certain number of parties) which toured the premises and expressed an interest or engaged in active discussions, the attorney has increased the likelihood of the broker earning a commission, and protected the broker for work s/he actually performed. What the attorney does not want to do, however, is create a situation that hurts the relationship with the broker's client. Including anyone who toured the space or with whom the broker spoke ' as some brokerage firms may want to ' seems overreaching, and submitting a protected list that looks more like a phone book is not a good way to maintain a business relationship with that client.

How Long Does The Tail Wag?

As stated earlier, the landlord's interest is to limit the tail period, while still being fair to the outgoing broker (protecting the broker for a reasonable period of time), as well as to any new broker that may be hired to market the space (limiting the time during which they are excluded). Keep in mind that excluding the new broker from any of the prior broker's tenants in a given time frame may serve as a disincentive to the new broker. Although it is difficult for an owner/landlord to predict accurately how long a sale contract and a lease will take to be executed, the landlord's attorney will insist that there be a date certain by which no commission will be owed to the broker. Such date can be far enough out to be fair to the broker, but is commercially reasonable to agree that the parties need to terminate their relationship and remove any commission restrictions related to their new broker.

The broker has little control over how long attorneys and clients take to get a signed lease after the LOI has been agreed, and the broker's attorney should obtain protection for any lease or contract for sale as long as that lease is being negotiated. After all, that document should include a brokerage clause which names the brokers in the transaction. This way, if a party is negotiating an offer during the broker's listing, but a lease draft does not go out until after the listing period has expired, the broker will be adequately protected for as long as that lease takes to be signed. Practically speaking this is a fair result for both parties and therefore generally a fair request.

The owner's counsel will want some outside date, however, so that if a deal “dies” and is “resurrected” by another broker, the owner avoids paying two commissions. One way to handle this is to agree to an outside date that is likely to be met by continuous negotiations. Another way is to set an outside date for agreed upon LOI terms, or draft leases/contracts to go out, and then if those conditions are met during the agreed upon period, the broker's protection continues for as long as that is being negotiated.

Conclusion

Like many terms in a broker's listing agreement, the tail period can (and will) be negotiated. This article provides a framework that should lead the parties to a mutually agreeable resolution rather promptly, and hopefully prevent your clients from disputes related to these issues.

James T. Mayer is a partner in Holland & Knight's Chicago office, a director of the firm's Management Committee and the deputy section leader of marketing for the firm's National Real Estate Practice. Michael Taxin is General Counsel & Vice President, Operations with RKF, a brokerage firm specializing in retail real estate, headquartered in New York City.

When an owner engages an individual as its exclusive listing broker to sell or lease his or her real estate, it is important for both sides to fully understand the commission obligations during the term of the listing, as well as any post-agreement protection granted to broker for its efforts during the listing term. One of the most significant and often negotiated terms of the listing agreement is what's known as the “tail period.” It is a standard clause in a listing agreement that requires the broker to register certain parties or transactions and a period of time during which the broker shall be protected and recognized as the broker for the transaction, entitled to be paid its commission pursuant to the listing agreement.

The tail period needs to be clearly defined, since the interests of the owner/seller and the broker appear to differ ' the owner may want the tail period limited as much as possible, in parties and in time, while the broker stands to benefit more from a broad list of parties continuing as long as possible. Although everyone expects that the deal will work out for the best during the listing period, the lawyers must prepare for the worst, protect their clients as best as possible, and make them aware of the issues and risks, without getting in the way of the business deal. It is very important to be clear with the post-agreement language at the start, because once the listing has been terminated or expired without being extended, the parties may not have the same positive feelings about each other that they had prior to negotiating the listing agreement, and any ambiguity can lead to an unnecessary dispute.

The tail period has two major components:

1. The first describes the conditions that have to be met to include a given tenant/buyer on the broker's registration list. The parties will agree that certain tenants/buyers are clearly protected (e.g., signed contract, draft lease out, signed or agreed upon LOI, or simply a submitted LOI). Inclusion of other tenants/buyers is generally subject to negotiation.
2. The second is the length of the broker's protection. There are several things to keep in mind here: The length of the broker's listing period; the type of property; and the length of time it takes to complete the deal. A term of six months is reasonable. However, in a new construction development, the protection period should be pushed to whatever is a reasonable time for leases to actually get signed based on the status of the project, and the period may also be extended, depending on the type of building or tenant being sought ' if they typically take longer to get leases signed.

Who Is Included in the Tail?

The owner/landlord's attorney should try to limit the protection only to those tenants/buyers that have expressed a legitimate interest in the property. An owner/landlord may also attempt to limit the number of parties a broker may include on the list, no matter the state of negotiations. Numbers range from five to 25. Apart from the financial obligation of paying a commission, an owner's/landlord's attorney and his/her owner/landlord client want to avoid a claim for a commission from another broker, from the initial broker, or from the replacement broker who needs to be made aware that s/he was excluded from a commission for certain tenants, at least for a certain period of time.

The broker's attorney will of course want more coverage, but does not want to be unreasonable. The broker is protected on any written offers (assuming the offer includes a brokerage clause that specifies the broker), even without a listing agreement, so the attorney should never agree to anything that limits the coverage to less than that. Additionally, the attorney should never agree to a set number of parties because the broker may receive more offers than the agreed-upon number.

However, where a landlord insists on limiting the number, the attorney can propose a compromise that all offers will be protected, plus up to “x” other parties that have expressed interest. All the offers will be covered (plus more) and the landlord gets the comfort of knowing that he will not receive an unreasonable list from the broker, which includes any tenant the broker talked to. By including all offers submitted or received, as well as any party (or a certain number of parties) which toured the premises and expressed an interest or engaged in active discussions, the attorney has increased the likelihood of the broker earning a commission, and protected the broker for work s/he actually performed. What the attorney does not want to do, however, is create a situation that hurts the relationship with the broker's client. Including anyone who toured the space or with whom the broker spoke ' as some brokerage firms may want to ' seems overreaching, and submitting a protected list that looks more like a phone book is not a good way to maintain a business relationship with that client.

How Long Does The Tail Wag?

As stated earlier, the landlord's interest is to limit the tail period, while still being fair to the outgoing broker (protecting the broker for a reasonable period of time), as well as to any new broker that may be hired to market the space (limiting the time during which they are excluded). Keep in mind that excluding the new broker from any of the prior broker's tenants in a given time frame may serve as a disincentive to the new broker. Although it is difficult for an owner/landlord to predict accurately how long a sale contract and a lease will take to be executed, the landlord's attorney will insist that there be a date certain by which no commission will be owed to the broker. Such date can be far enough out to be fair to the broker, but is commercially reasonable to agree that the parties need to terminate their relationship and remove any commission restrictions related to their new broker.

The broker has little control over how long attorneys and clients take to get a signed lease after the LOI has been agreed, and the broker's attorney should obtain protection for any lease or contract for sale as long as that lease is being negotiated. After all, that document should include a brokerage clause which names the brokers in the transaction. This way, if a party is negotiating an offer during the broker's listing, but a lease draft does not go out until after the listing period has expired, the broker will be adequately protected for as long as that lease takes to be signed. Practically speaking this is a fair result for both parties and therefore generally a fair request.

The owner's counsel will want some outside date, however, so that if a deal “dies” and is “resurrected” by another broker, the owner avoids paying two commissions. One way to handle this is to agree to an outside date that is likely to be met by continuous negotiations. Another way is to set an outside date for agreed upon LOI terms, or draft leases/contracts to go out, and then if those conditions are met during the agreed upon period, the broker's protection continues for as long as that is being negotiated.

Conclusion

Like many terms in a broker's listing agreement, the tail period can (and will) be negotiated. This article provides a framework that should lead the parties to a mutually agreeable resolution rather promptly, and hopefully prevent your clients from disputes related to these issues.

James T. Mayer is a partner in Holland & Knight's Chicago office, a director of the firm's Management Committee and the deputy section leader of marketing for the firm's National Real Estate Practice. Michael Taxin is General Counsel & Vice President, Operations with RKF, a brokerage firm specializing in retail real estate, headquartered in New York City.