In a commercial property context, the ‘flow of money’ refers to the payment of a leasing agent by a landlord for securing a lease. While this is common practice in the property sector, it raises the question of whether this incentive (the commission) leads to the actions of the agent unduly favouring either the landlord or the leasee.
What is the flow of money?
A landlord will engage a leasing agent to secure a lease deal; in return, the agent will be paid a commission-based fee. This is called the flow of money (or flow of commission). The tenant, meanwhile, will be required to deal with the leasing agent in order to obtain the lease.
Does the flow of money favour the landlord or the leasee?
The question of whether a leasing agent is ultimately acting in the best interest of the leasee or landlord is a complex and sensitive one. Understandably, the nature of the lease or engagement with the landlord will affect the dynamics of the proceedings.
For example, if a commercial tenant is seeking long-term surety for their business, they may engage in a lease term of 3, 5 or 10 years. For the leasing agent, this means any potential income arising from the transaction will only occur at these relatively long intervals. This will impact any benefit the agent stands to gain from the transaction, particularly if this is the only property they are representing for this landlord.
On the other hand, if a leasing agent is representing a landlord across multiple properties, there is the potential to gain multiple fees within the same period. This increased incentive could potentially influence the actions of the agent, who may act strategically in order to maximise their earnings.
While most agents will provide unbiased information in order to facilitate a fair deal for all parties, the fact remains that the information an agent discloses to a potential leasee is up to their discretion. This technically means that the tenant or landlord could end up being disadvantaged if the pull of commission swings the favour in the other direction.
Brokers vs CRES - who do they favour and who pays?
It’s also worth considering the role of broker commissions and corporate real estate services (CRES), which can work in the favour of either the landlord or the property occupier.
Brokers act on behalf of the landlord. They are paid a commission when they are shown to be the “effective cause” of the lease transaction, e.g. by providing an approved offer and a signed lease. The broker’s commission is added to the cost of the tenant’s lease rental and amortised over the cost of the lease - so essentially, the tenant pays the commission.
CRES providers represent the interests of the occupier of the properties (the tenant or the owner-occupier). Their expertise in commercial property can benefit customers by helping them save money on rental and property expenses, and minimising risk through assisting with strategic property decisions. CRES providers are typically paid by the party whose interests they represent and are not usually paid from the property funds.
How can unbiased property reviews help level out the playing field?
As discussed above, the current flow of money system creates a ‘loophole’ which means, in some cases, a potential tenant may not receive the complete picture about a commercial property, with certain pieces of information remaining undisclosed. This leaves the leasee at a distinct disadvantage when making a decision on a commercial property.
By providing an online platform that lets former and current tenants leave unbiased reviews about a property, we aim to close this gap and bring much-needed transparency to the commercial property industry.
Future tenants benefit from clear and open information about the property, while property owners and managers gain access to valuable property analytics and insightful feedback about their space.
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