Sellers and purchasers of commercial real estate must address a number of issues relating to the continued leasing of a commercial property between contract signing and closing. Agreements will typically contain a covenant of the seller to continue to operate the property in the same manner as it had prior to the date of the agreement, which would include normal leasing activity. Typically, these agreements will also include restrictions on the seller’s right to execute, amend, and terminate leases prior to closing. Since the economic impact of new leases and lease modifications (as well as terminations of leases) entered into after contract signing will accrue to the purchaser as of closing, purchasers will seek to have strong approval rights over new leases, lease modifications and terminations. On the other hand, sellers may very well seek to continue customary leasing practices in order to keep the property operating at its highest value should the purchaser fail to close.
An important aspect of this continued leasing activity is the manner in which the purchaser and seller allocate responsibility for leasing costs associated with new leases and lease modifications, particularly tenant inducement costs and leasing commissions. It is fairly typical for a purchaser to assume such costs since the purchaser will derive the benefits of the lease after the closing. While the division of responsibility for leasing costs seems relatively straight forward, sellers need to be careful not to become obligated to pay for brokerage commissions that are not reimbursable by the purchaser under the agreement.
Although a seller’s commercial leasing agreement with its broker will typically terminate effective upon the sale of the property, a selling owner may continue to be liable for a specified time period for brokerage commissions on leases signed after closing by tenants which the listing broker has commenced leasing activities and which are identified by the broker as being in active negotiations. Leasing agreements will require the broker to produce a “protected list” of prospective tenants identified by the broker prior to the closing for which the broker will be seeking leasing commissions should that prospective tenant sign a lease. The seller should arrange for the purchaser to agree to pay commissions on the protected list after closing. If not, a purchaser could enter into a new lease or lease modification after closing with a tenant on the protected list which could trigger an obligation of the seller to pay a brokerage commission without being entitled to reimbursement by the purchaser.
On the other side, a purchaser will want to limit the number of prospective tenants on a protected list. If the relationship between a prospective tenant and a terminated broker is too tenuous, the purchaser may be obligated to pay a commission to the purchaser’s broker as well as to a terminated broker that did little to procure the transaction other than make an initial introduction of the tenant. To avoid this, the scope of the terminated broker’s efforts in procuring the lease or modification are often required to meet a minimum threshold – such as the submission of a letter of intent or some other documentation milestone evidencing the basic deal terms.
For further information regarding the purchase and sale of commercial real estate, please contact:
Jeffrey M. Galkin at firstname.lastname@example.org or 312-368-0100.