Buying, Selling and Leasing Commercial Real Estate with Confidence

Because the holding of land is important to people and society, the State of Colorado established the Real Estate Commission to license and monitor those who practice in the industry. The Commission operates as one of the ten divisions of the Department of Regulatory Agencies. The practice of real estate therefore is subject to the laws, rules and regulations of the State of Colorado. Understanding these rules can greatly affect the relationship of the parties to a real estate transaction and the outcome of that transaction. The general public is most aware of the real estate industry when they become buyers and sellers of residential real estate. However, tenants and landlords of commercial real estate can be unfamiliar with the regulations and the fact that the laws established by the state regulatory agency apply to the selling and leasing of office, industrial and retail space as well.

The E series of rules are specific to a broker’s daily business such as the disposal of deposits, advertising, referrals, broker supervision, disclosures and closings. These rules directly impact the brokerage community in its dealings with the public. In addition these rules cover the relationships between brokers, both within and between firms, as well as the handling of offers and office policies. Of particular concern for the purposes of this article is the practice of the profession and the adherence to these rules as it relates to tenants and buyers of commercial real estate.

Rule E-13: Sign Crossing: This may be the most misunderstood and most unknown rule. A broker may acknowledge that they are aware that “sign crossing” is ethically wrong. However both the broker and the public may not be aware that a listing broker’s negotiation with a tenant or buyer who has entered into an exclusive right to buy or lease contract with another broker is in violation of this particular Rule, and, if practiced can be subject to a tort action as well. Specifically the rule states that a broker may not enter into discussions or negotiations regarding a purchase, an exchange, a lease or an exclusive right to buy or lease agreement if it is known that the tenant or buyer is under contract with another broker on an exclusive basis. In other words if a tenant is represented by a buyer’s broker and the landlord’s broker is aware of that agreement, the landlord’s broker cannot negotiate with that tenant but must honor the right to buy contract and the broker who represents that tenant. The landlord’s broker can, if he or she chooses, stipulate that there will be no cooperating brokerage fee paid to the tenant’s broker. In that case it is up to the tenant’s broker to work out a fee agreement with the client.

Rule E-34: Handling of offers: This instructs all licensees to submit the client’s offer to the listing broker if there is an exclusive right to sell or lease agreement with the landlord or seller. Additionally, under Statute 12-61-804 all listing brokers are required to submit all offers in a timely manner to the landlord or seller. Disregard or violation of this rule and statute can, upon the determination of the Commission, result in a twenty five hundred dollar fine, licensee probation or a permanent revocation the practioner’s license.

Rule E-38 Designated Brokerage: This rule, new to the industry within the past two years, is specific to the handling of relationships within one brokerage firm. This rule does not extend to a sole practitioner or a single individually owned brokerage company with only one licensee. Designation of the brokerage relationship now belongs to the employing broker who states in writing that the client relationship is with a specified broker or team of brokers. Before the designated broker rule, the client relationship belonged to the employing broker or company and the individual broker was acting as an agent of that broker. Now the designated broker owes his/her fiduciary obligation to the client and all confidential matters are no longer shared with other brokers in house. For example a broker in a multiple person brokerage firm who is designated to represent a landlord can no longer discuss confidential matters pertaining to that landlord with another broker in the same brokerage firm who may be designated to represent a specific tenant. A specific case comes to mind when a landlord’s broker receives an offer from two different prospective tenants. One offer is from a broker from another company. The second offer is from a broker within the listing broker’s company. The landlord’s broker must use utmost caution to treat all parties judiciously and avoid any discussion regarding the landlord’s intent except as it applies to each individual offer. This would also apply when there may be two offers from two different brokers within the same house.

Rule E-40 Double-ended brokerage relationships: Whether in a multiple person firm or as a sole practitioner, a broker is no longer allowed to act as a dual agent. If a broker is working with both the landlord and the tenant that broker must declare whether they are a transaction-broker for both parties, a single agent for the seller or a single agent for the buyer in which case the other party becomes a customer. For example, if a broker has a listing to lease an office building and a prospective tenant calls on the sign or advertisement, the listing broker must treat the prospect as a customer because there is no letter of engagement or employment between the prospect and the listing broker.

A tenant or buyer who wishes to retain the services of a buyer’s broker (a broker who represents the tenant or buyer only) is wise to ask for a letter of engagement or exclusive right to buy contract. This agreement outlines the relationship between the client and the broker as well as outlining the duties of the broker. For example the agreement must have defined terms such as a beginning date and ending date to the agreement. The duties are to include those actions which promote the interests of the tenant or buyer with “good faith, loyalty and fidelity”. Additionally, the motivating factors of the client, such as what the tenant or buyer is willing to pay or finance, are not to be disclosed.

What if the broker has a listing agreement with a landlord and also an exclusive agreement to represent a tenant and that tenant wants to lease space in the listed property? The broker’s agreement with the landlord must state whether the broker continues as the seller’s agent only (in which case he/she cannot represent the tenant at that property), the buyer’s agent (in which case he/she cannot represent the landlord), or a transaction broker who is allowed to assist both parties only as a facilitator but not as an advocate of either party.

Additionally it must be made clear to tenants who have entered into an agreement with a tenant/buyer broker that there is case law prohibiting the broker from the practice of law. Often times a tenant may ask the broker to review and comment on a lease document. The law to be applied states clearly that brokers are permitted to “fill in the blanks” on commission approved forms only. Real estate brokers are well beyond their license to create or write their own legal documents pertaining to the transaction of real estate. Rule F designates the forms which the Commission has approved as standard and include listing contracts, sales contracts, and settlement sheets.

Because the buying, selling and leasing of commercial real estate has become more sophisticated and advanced through technology and training, the public has come to demand a more professional and knowledgeable practitioner beyond just “knowing the market”. Brokers are far more independent and thus must be held to a greater degree of responsibility. The state licensing laws are in place to protect the public and hold the industry to a standard. In the end this results in a truly worthwhile and rewarding profession for the broker and a more confident public.

PAULETTE WRAY is principal of Wray & Associates, a Denver-based tenant representation firm. She can be reached at pwray@wrayassociates.net


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