Although it may be useful for businesses to engage brokers when attempting to sell real estate, sellers should be aware of—and negotiate—a few key items before signing a Listing Agreement.
Many enterprises that own land are not in the real estate business, so a Listing Agreement (also known as a Disposition Agreement) is often a matter of first impression for a company looking to sell its real property. Companies choose to sell property for a variety of reasons—such as exiting a geographic market, expanding beyond the capacity of a property, or seeking to capitalize on assets to reinvest in the company’s core business (e.g., in a sale leaseback).
Negotiating a Listing Agreement is usually the first step taken after deciding to sell real property and selecting a brokerage company. By engaging a broker, the seller outsources the responsibility of locating potential purchasers and leverages the experience and connections of the broker for a quicker, smoother sale process.
Scope of Services
The negotiation of a Listing Agreement starts after the seller identifies and decides to engage a broker. The broker, who usually generates the first draft of the Listing Agreement, typically provides a list of services it is offering the seller.
In representing the seller, the seller’s lawyer should discuss with his or her client the scope of services the client desires from the broker. The seller’s lawyer should be as specific and comprehensive as possible in describing the services to be provided by the broker. The ultimate goal, of course, is an executed purchase and sale agreement (PSA). But the services leading up to an executed PSA and closing are often varied in nature. The categories covered in the list of services should include market analysis, due diligence, marketing, transaction analysis, recommendation of professionals, negotiations, delivery of the executed PSA, and pre-closing activities.
These categories of services can be further broken down into specific activities:
- The market analysis contains market averages, absorption, market size, comparable sales in the area for a minimum of one year prior to the date of the Listing Agreement, salient market trends, comparable competitive listings, location maps, market updates, recommendation for listing terms, marketing period, and projected transaction terms.
- Due diligence might feature annotated electronic photographs representing the property and its noteworthy features, conditions, and concerns; governmental information such as zoning, taxes, pending assessments, and proposed condemnation actions; and other information affecting or involving the property.
- The broker’s marketing of the property should last for the duration of the Listing Agreement and include offering memoranda (such as brochures, flyers, direct mail, and electronic solicitation material), advertising materials and schedules, due diligence materials that facilitate the sale as approved by the seller, financial analyses or other documentation that supports sale scenarios, and showing arrangements and tours, if applicable. The costs of the broker’s marketing should be paid by the broker and not the seller.
- The transaction analysis should incorporate the comparison of the proposed sale to market benchmarks, comparable sales, and competitively listed properties; broker’s recommendations; purchaser’s background, motivation (if known), capacity, and reputation in the marketplace; financial assumptions and analyses of each offer and counteroffer; and a chronology of offer versus counteroffer, including a financial summary showing the proposed transaction compared to the original offer.
- Professional recommendations, if requested by the seller, should contain referrals for contractors, engineers, architects, space planners, designers, and other professionals to make the property more marketable and, if the client desires, the broker should assist in the interview and selection of these professionals.
While sellers should be directly involved in negotiations and hire outside counsel to address the legal points for the negotiations of the PSA and Listing Agreement, brokers are helpful in understanding larger market trends and pushing deals to a close. The broker’s participation in negotiations entails preparation of a request for proposal (or response to same), delivery of all offers to the seller and response to offers as directed by the seller, negotiation and finalization of a letter of intent, input on negotiations between the seller and buyer, and issuance of progress reports describing the status and nature of the negotiations.
Once negotiations are finalized, the broker should deliver the executed PSA, make sure that deposits owed by the buyer to the seller are made, coordinate onsite due diligence visits by purchaser, and assist with any necessary amendments to the PSA, assist with delivery of other due diligence deliverables, and assist with delivery of the closing documents. Once the sale is finalized, the broker also might be asked to prepare a spreadsheet showing the seller’s original offer and the pricing of the seller’s accepted offer in the final PSA.
The Listing Agreement should expressly state that the seller will be in charge of the overall negotiation process, with the broker only participating in the phases of the negotiation and providing the services previously discussed. The broker is an expert in the real estate market, should have knowledge of the market, and should participate in all phases of negotiations—but only as approved by the seller. As such, the Listing Agreement should make clear that the broker is an independent entity and not an agent of the seller.
As an independent entity, the broker should not be able to bind or obligate the seller to any third party, including buyers, other brokers, agents, or finders (even within the same brokerage company). Brokerage companies can be large and employ many brokers; the Listing Agreement should set forth the names of the brokerage team members representing the seller. Once the list is set, the seller should have the right to approve any changes to the brokerage team. If anyone from the team, or the larger brokerage company, also represents the buyer, the brokerage company should be required to disclose such representation and maintain a system, acceptable to the seller, creating a wall between the brokerage teams. The seller should understand what this system is in order to determine the acceptability and risks of any conflicts of interest.
Payment of Fees/Commissions
The seller should be responsible for its brokerage fees. The commission is earned for services rendered if, during the term of the Listing Agreement, the property is sold to a buyer procured by the broker, the seller, or anyone else. The broker may seek to include a clause stating that the brokerage fees also will be earned if the seller is a corporation, partnership, or other business entity and an interest in such corporation, partnership, or other business entity is transferred—whether by merger, outright purchase, or otherwise—in lieu of a sale of the property and for the express purpose of avoiding a commission.
The Listing Agreement should expressly state that the brokerage fee (usually a percentage of the sale proceeds) is only due upon the payment of gross sales proceeds and only if, as, and when a closing occurs and the purchase price is paid in full to the seller. The seller will probably want to allow the broker to cooperate with and to share its commission with other licensed real estate brokers, regardless of whether those brokers represent prospective purchasers or assist the broker, but the seller should not assume any obligation to any other broker.
The Listing Agreement should be clear that the broker is solely responsible for all compensation, fees, expenses, and brokerage commissions, if any, due to any cooperating brokers, agents, or finders engaged by the broker on a cooperative basis or who participated in procuring or representing a purchaser of the property. The agreement should also state that the seller has no liability in connection with such compensation, fees, expenses, and brokerage commissions. The seller should only be liable for the commission of its broker, not to exceed an agreed-upon percentage in the aggregate.
The buyer should be solely responsible for paying the commission of the buyer’s broker. No commission should be due for the transfer of title to the property, or any interest therein to
- any affiliate of the seller;
- any person or entity or its respective affiliates having an interest in the seller or its constituent members (or which controls, is controlled by, or is under common control with, such person or entity); or
- a lender to the seller or its affiliates or a mortgagee of the property or a party designated by such mortgagee or lender pursuant to a deed-in-lieu, foreclosure, or otherwise.
Term of Engagement and ‘Tail’
Two additional items that the seller should negotiate with the broker relate to the term of the Listing Agreement. A Listing Agreement should be negotiated to automatically terminate after a set period of time. Depending on the industry, it is standard to have the term of the engagement automatically terminate after 12 months. In all cases, the Listing Agreement should be terminable by the seller for any reason or no reason, and at any time, after prior written notice to the broker.
The Listing Agreement also will likely contain a “tail” at the end of the term. The tail is a period of time during which the broker or brokerage company will receive payment for the broker’s negotiations with buyers during the term of the agreement. If the tail cannot be eliminated, it should be narrowly tailored. Two of the most critical items to narrowly tailor are the length of the tail and who can be considered a party for which the broker is entitled to receive credit. The latter item can be particularly contentious, with debates over whether all broker contacts should be allowed as part of the tail or only those contacts with whom negotiations are ongoing, or somewhere in between.
The definition of what “negotiations” means in this context is hotly contested. The seller obviously desires that the negotiations be defined more comprehensively than the broker wants in order to reduce the number of buyers subject to the tail. No matter the result of the negotiations, the Listing Agreement should be drafted to require the broker, at the start of the tail, to provide the seller with a list of names to which the tail applies, thereby avoiding unnecessary potential litigation.
In order to further protect the seller, the Listing Agreement should provide that the broker will indemnify the seller and limit the seller’s damages under the agreement. The broker’s indemnity of the seller should be for
- all acts and omissions of the broker,
- any misrepresentation made by the broker,
- any breach of the Listing Agreement by the broker, and
- any claim against the seller by any broker or third party alleging to have dealt with or through the broker.
The indemnity should extend to protection of the seller’s officers, directors, employees, and affiliates. Finally, the seller should not be liable to the broker for any consequential, special, incidental, indirect, or punitive damages related to the broker.
While the specifics of every real property transaction are different, being aware of and negotiating key items prior to signing a Listing Agreement can help the seller clarify the scope and length of engagement with a broker and avoid unnecessary litigation.