Property Managers: Protect your Commission When a Tenant Becomes a Buyer

San Antonio, Texas Real Estate Attorney Trey Wilson wrote:

Many times, a residential or commercial tenant decides that they really benefit from or simply enjoy  living or operating their business in their rented premises. Often, this decision to "stay put" results in the purchase by the tenant of the property being leased.  When this happens, the Landlord/Lessor becomes the Seller, and the Tenant/Lessee the Buyer. 

But what happens to the Broker / Property Manager who, on behalf of the Landlord/Owner, located the Tenant, and managed the property during the lease term?  

Since rents will no longer be paid following the sale, the Property Manager's revenue stream from the lease payments necessarily dries up.  This is the case because the once-Tenant is now the Owner, and the Tenant's rental payments are likely replaced by mortgage payments.  The previous Owner (who was the Broker/Property manager's client) no longer maintains an interest in the property.

In recognition of the fact that the Broker / Property Manager brought the Tenant/Buyer and Landlord/Seller together (i.e. was the "procuring cause" of the lease that matured into a sale) the  written Property Management Agreement should be drafted in a manner that provides for a Broker's commission in the event of a sale to the Tenant.  

The Texas Association of Realtors (TAR) recognized the frequency of tenants becoming buyers, and has included a provision in its promulgated management agreement forms granting the Broker a commission in the event of sale. Both the TAR 2202 (Commercial Property Management Agreement) and TAR 2201 (Residential Property Management Agreement) provide for Broker's fees / commissions in the event of sale, whether to a Tenant of the Property, or otherwise.  

It's no secret, however, that many Brokers/Property Managers in Texas do not use the TAR forms (perhaps because they are expensive).  However, even when using non-standard forms, it is prudent from Brokers/ Property Managers to include a section in the written management agreement that provides for a commission in the event of a sale of managed property.  This clause should clearly reflect the value brought by the Broker when that sale is to a tenant secured by the Broker.  

Commissions provided-for in written Management Agreements are enforceable, and can provide a Manager/Broker with a nice parting-gift when a managed property goes out of management.