Tenant Representation Agreement Explained
A tenant representation agreement is a contract between a commercial leasing broker and a tenant that establishes the broker as the tenant’s representative. There can be more than one tenant representation agreement per tenant, if the tenant decides to have more than one representative.
The main purpose of this agreement is to set forth the scope, authority and exclusivity of the tenant’s representative, and the terms, subject matter and remuneration applicable to the efforts of the representative on the tenant’s behalf. This agreement gives the tenant’s representative the authority to make binding decisions for the tenant within the scope set out in the agreement unless otherwise stated.
This type of agreement differs from an exclusive representation , or exclusive buyer or seller agreement, which is a term most often used in the residential brokerage sector and Ontario’s Tarion system. A tenant representation agreement is different because it doesn’t establish the tenant as being the sole and exclusive tenant of the commercial space. The landlord (or landlord’s representative) maintains the right to lease the property to any tenant who applies, whether or not he has signed a tenant representation agreement with a representative.
Ontario Legal Requirements
Under the Real Estate and Business Brokers Act (the "Act") and the regulations under the Act, a Representative may only enter into an agreement with a potential or actual Residential Tenant (i.e., an individual over the age of 18 years) to provide Tenancy Representation Services if all of the following are fulfilled:
(a) The agreement has been reduced to writing (the "Agreement") and has been signed by both such parties.
(b) The Agreement sets out the types of Tenancy Representation Services the Representative agrees to provide.
(c) Where the Representative is entering into the Agreement on behalf of a Brokerage, both the Representative’s and the Brokerage’s real estate council registration numbers are set out in the Agreement.
In addition, the Agreement may set out a limit (the "Limit"), in terms of time and/or dollar amount, to the Representative’s obligation to provide Tenancy Representation Services to the Tenant. The purpose of such Limit is to allow for the possibility of moving or purchasing another residential property without the Tenant being obligated to pay additional fees to the Representative for doing so after such Limit has been reached. Subject to any Limit contained in the Agreement, the Representative continues to have an obligation to provide Tenancy Representation Services to the Tenant until such Obligations are fulfilled. Upon any Limit being reached, the Tenant is considered to have a Continuing Obligation to pay any additional fees to the Representative (the "Continuing Fees") for the additional Tenancy Representation Services provided by the Representative after the Limit is reached.
It is important to note that tenancies in social housing, by-law enforcement, rent deposit, tenant protection and rent control, maintenance obligations (repairs), eviction and rental work orders, along with other social housing matters are not covered by the Tenancy Representation Services. However, in some cases, such obligations may be subject to other protections/obligations provided for in tenancy-related legislation.
Key Terms and Provisions
Like all contracts, tenant representation agreements contain standard terms and clauses. The following are among the most common:
Parties:
This is where the landlord and the tenant’s name are included. There may be other parties named in the agreement that have a vested interest, such as a guarantor.
Address:
The specific address of the storefront or industrial unit.
Term:
The length of the lease (1 year, 3 years, etc.) that you are trying to find for your business. This is also known as the "term of the lease".
Compensation:
The amount of money that you will pay your representative for the service offered. In Ontario, it is standard practice for the landlord to pay the agent’s fee, however, it is always good to read the tenant representation agreement carefully to ensure you are not caught with surprise fees.
Confidentiality:
Essentially, an agreement that you will keep everything pertaining to the contract between you, the landlord, and secret from the general public.
Exclusivity:
A clause that protects you from the possibility of the landlord representing any other business seeking to rent the same space.
Authorized Signatory:
The individual at your company who has unilateral power to sign documents on behalf of the company (i.e. a president or chair).
Terminated Without Cause:
Essentially, this clause allows either the landlord or the tenant to end the tenant representation agreement without any explanation if certain conditions are fulfilled.
Termination for Material Breach:
Allows either you or the landlord to terminate the agreement in the event that the other party materially breaches any terms of the agreement.
Revocation of License:
In certain circumstances, an agent can revoke their license to represent you in order to act as a landlord’s agent (to earn more money) or if they are no longer able to perform the services required.
Advantages of Tenant Representation Agreements
Understanding Tenant Representation Agreements in Ontario
There are many benefits to using a tenant representation agreement when negotiating a lease. Some of the advantages of using a tenant representation agreement are as follows: The professional advice of the tenant representative, who is independent from the landlord’s representative and whose sole purpose is to act in the best interests of their client, the tenant. The ability of the tenant representative to educate the tenant on the negotiation process . The ability of the tenant representative to explain the market lexicon and its application to the transaction. The ability of the tenant representative to negotiate on behalf of their client, including structuring the deal. The ability to protect against unscrupulous landlords who refuse to negotiate or compromise the deal. The ability to create leverage where none existed. The ability to seize opportunity and make a deal where a tenant representative whose payment is based on a commission of the rent over the term of the lease would be unwilling to do so, as their payment may exceed their negotiations fees.
Selecting an Adequate Tenant Representative
When choosing a Tenant Representative, there are many factors to consider. I am Therefore going to list them for you in general terms. First off, there is no doubt that you are looking for a professional firm with several years of experience to carry out the task or a minimum of five years. Are they full-time professionals or part-time people who do some deals when they have time? You will want to interview at least three firms prior to making a decision.
1) Letters of Reference can be important, although it is easy to have many letters on file. 2) Will they do a detailed email market search and will they provide you a copy of this information. 3) Will they search confidentially to protect your identity. 4) Will they personally get involved in finding you space? 5) Will they help you review the lease and provide insight into what the costs shall be? 6) Will they ask you questions regarding what type of space that you will need? 7) Will they show you the space during non-business hours….or are you just part of a herd of cattle. 8) Will they accompany you during the entire tour of space? 9) Will they review the proposed lease with you? 10) Will they tell you that you should get your own lawyer to review the lease for you?
Not only should they carry out the mandatory duties under the Commercial Tenancies Act, they should understand how the market functions, and be able to show you equal and better alternatives. Experience has shown that some firms are simply order-takers, while others actually want to get the best result for you.
Myths and Frequently Asked Questions
Since the tenant representative agreement may be a foreign concept to many, we start with clearing up a common misconception: People in Ontario seem to think that all tenant agents get paid through the landlord. This is not the case.
Q: Do all agents get paid through the landlord?
No, many do not. The landlord’s exclusive agent gets paid through a commission in the form of a percentage of the landlord’s gross revenue. However, the tenant’s exclusive agent does not get paid through the landlord. Like other professionals who provide a service for a fee, the tenant’s exclusive agent earns his or her fee directly from the tenant (i.e. the tenant pays the agent a monthly retainer) because the agent’s loyalty belongs solely to the tenant.
So why are tenants still hesitant to sign a representation agreement with their tenant agents? For many tenants, the mere thought of paying a fee on top of their rent comes as a shock.
There is a misconception out there that the tenant has to pay the agent a fee for their services. The misunderstanding lies in the difference between paying the agent a monthly retainer and paying the agent a fee .
Q: Is there a difference between a fee and a monthly retainer?
The answer is yes. A tenant agent’s fee is based on a percentage of the annual rent. So if the tenant signs a lease for $4,000 per month, they will owe the tenant agent an annual fee of $4800 or $400 per month. If the tenant breaks or doesn’t renew the lease, the agent doesn’t get paid the full $4800 if he or she has only earned part of it.
The monthly retainer and the fee are not comparable. The tenant pays a monthly retainer for the services rendered. By way of example, the monthly retainer is $1000.00, but the retainer is not a fee. After the tenant’s lease has closed, a tenant agent may still be required to do additional work on behalf of the tenant beyond the scope of his or her duties under the representative agreement. We know that some landlords are difficult, some building permits are tricky, and construction projects can be a pain. A monthly retainer allows the tenant agent to continue to provide support and agent services to their tenant for the life of the tenancy.