Owners/occupiers of commercial real estate may find themselves from time to time employing real estate brokers to represent them in commercial real estate transactions. To help business owners that find themselves needing to engage a real estate broker, I will explain here some of the basics of real estate commissions: how commissions are earned and paid, who pays commissions, who can receive a commission, and common types of commission disputes.
How are real estate commissions EARNED?
In Illinois and most other states, licensed real estate brokers earn real estate commissions when their efforts result in the consummation of a transfer of an interest in real property, i.e., a sale or lease of property.
The right to earn a commission for a sale or lease of commercial real estate is typically set forth in a commission agreement between the property owner and the real estate broker. In Illinois, to earn a real estate commission for the sale of real property, there must be a written agreement between the real estate broker and the property owner listing the property for a defined period of time. The commission agreement may contain additional conditions to the earning of the commission. If the buyer or tenant is represented by a real estate broker, that broker may either enter into a commission agreement with the seller/landlord directly or with the seller/landlord’s broker.
How/when are real estate commissions PAID?
Real estate commissions in connection with a sale of real property are typically paid in full at closing from the proceeds of the sale. If the sale is conducted through an escrow closing, which is common in Illinois, the escrow agent typically disburses the sales commission to the brokers for both seller and buyer out of the funds received from the buyer, before distributing the proceeds to the owner.
Real estate commissions in connection with the lease of property are most often paid in two equal installments: the first installment upon the signing of the lease and the second installment either on commencement of the lease term, upon commencement of rent payments, or when the tenant actually takes possession of the premises. In the case of office leases where the landlord or tenant will be building out the space, it is typical for the second installment to be paid upon tenant’s occupancy of the premises.
Who pays real estate commissions?
In the United States, real estate commissions are typically paid by the seller in the case of a sale of property and by the landlord in the case of a lease of property. The broker representing the seller/landlord will be paid directly by the seller/landlord. The broker representing a buyer/tenant will be paid either directly by the seller/landlord or by the seller’s/landlord’s broker from funds made available to the landlord’s broker by the landlord. Occasionally, all or a portion of the buyer’s broker’s commission will be paid directly by the buyer.
Who can receive a real estate commission?
In the State of Illinois, only licensed real estate brokers may receive commissions in connection with representing a party in a real estate transaction. Licensed real estate brokers are prohibited from sharing commissions with any unlicensed persons (individuals or companies), but are permitted to share commissions with a principal to the transaction. So, for example, a buyer’s broker may rebate to the buyer a portion of the commission paid by the seller but may not share it with an unlicensed “consultant” or affiliate of the buyer.
Common real estate commission disputes
In my previous practice as in-house counsel with commercial real estate brokerage firms, I saw my fair share of commission disputes. Here are some common types of real estate commission disputes that business owners might find themselves involved in:
- Two or more real estate brokers each claim the right to a commission as the representative of the same party in a transaction. The seller is responsible for paying the commission and so must figure out which broker to pay, making sure to avoid paying double commissions.
- The owner/landlord and broker disagree about whether all conditions to earning a leasing commission have been satisfied. In leasing situations this can be particularly difficult if the landlord’s broker is responsible for paying the tenant’s broker, and the conditions to earning the commission for the landlord’s broker and tenant’s broker are not identical.
- The owner/landlord and broker disagree about whether the conditions to payment of the second installment of a leasing commission have been satisfied. This situation most commonly arises when the conditions to payment of the second installment are not clearly spelled out.
- A tenant’s broker is not paid an earned commission by the landlord and/or landlord’s broker. Tenant’s broker may have a right to receive the commission from the tenant if the commission is not paid by the landlord/landlord’s broker.
Business owners should consult with legal counsel for assistance in reviewing commission agreements and/or representation agreements PRIOR to signing. Doing so can help resolve ambiguities and head off disputes before they arise by preventing or minimizing future disputes as to when commissions are earned and payable, by whom and to whom.
Boodell & Domanskis’s attorneys can provide assistance with review of commission agreements and, if necessary, with resolving commission disputes.