Leases: How Does the Money Flow?
When tenants fail to pay deposits and advance rent on time, members sometimes get confused about the (up to) five different legal relationships lurking beneath the surface. This article should help untangle where everyone stands.
ORLANDO, Fla. – When tenants sign a lease, things typically go according to plan, with the listing broker and cooperating broker directing traffic when it comes to documents and money. But when a tenant signs a lease yet fails to timely deliver money owed to the landlord, members often call the Florida Realtors Legal Hotline to figure out what happens next.
The first relationship in the spotlight is typically the one between the landlord and tenant. If a tenant fails to perform under a lease, the ball is in the landlord’s court on how to respond. Sometimes, it makes sense to just cut the tenant loose and agree to terminate the lease. At other times, the landlord will pursue the tenant for any funds they owe, which could be deposit(s), rent, or advance rent. This decision rests with the landlord, and if they can’t work something out with the tenant, they often need to engage a lawyer’s services to try and enforce the lease.
The landlord would be well advised to consider a second relationship before making any decisions.
The second relationship is between the listing broker and landlord. The Florida Realtors Exclusive Right to Lease agreement provides that the landlord owes commission to the listing broker if the owner enters into a lease “regardless of whether the tenant fulfills the terms of the lease.” Therefore, a landlord should find out if the listing broker plans to enforce this right to commission, or if the listing broker is willing to let the landlord off the hook for some or all of the commission before settling with the tenant.
This brings us to the third relationship that might exist. The third relationship is between the cooperating broker and listing broker. Like the clause in the listing agreement, a cooperating broker is entitled to the offer of compensation in the MLS upon a “successful transaction,” which is defined as “a lease that is executed.” But if the listing broker isn’t paid because the landlord doesn’t have the tenant’s money, is the listing broker off the hook to pay the cooperating broker? Not necessarily. This is an arbitrable issue, and if the cooperating broker brings this question before a local board, the local board could certainly find that the listing broker owes the commission despite not getting paid by the landlord. The only exception is if a listing broker convinces a hearing panel that “through no fault of the listing broker and in the exercise of good faith and reasonable care, it was impossible or financially unfeasible for the listing broker to collect a commission pursuant to the listing agreement.” As you can see from the words “impossible” and “financially unfeasible,” this is a high standard for the listing broker to meet.
As always, we encourage our members to work with the landlord and tenant to reach an amicable solution for all parties under the circumstances. But when that’s not possible, it’s helpful to understand clearly how these three legal relationships work.
But wait, didn’t I say there could be a fourth and fifth relationship?
Yes, the fourth legal relationship is that between an escrow agent and the principal or principals. Principal is a legal term that means whoever’s money the escrow agent is holding. Any time a broker or associate receives money that is not commission or other payment to the brokerage company, it should be handled in strict compliance with the Florida Real Estate Commission’s (FREC’s) escrow rules. The associate will have one business day to deliver any escrow funds to the broker. The broker will have three business days (includes any time the associate takes to get funds to the broker) to deliver the funds where the parties order them to go.
Once the funds are in escrow, it’s important to follow the instructions of the principal or principals. For example, if it’s earned rent for the landlord, the landlord dictates where the funds go. If it’s a deposit, you’ll need to discern the instructions from both the landlord and tenant. There can be a few nuances, but this general starting point should be helpful to untangle most unexpected events, such as when a landlord and tenant say they’ve agreed to terminate the lease and order the escrow agent to give all funds to the tenant. An escrow agent in that situation would likely be bound to comply with the order, even if they haven’t been paid commission yet.
The fifth and final legal relationship is between an associate and broker. An associate would look to their independent contractor agreement to see when a broker must pay them. Typically, this obligation doesn’t kick in until the broker has collected funds. The associate could also check to see if they have any say in the broker’s decision to sue, settle for less than is owed to the company, or simply let the person who owes them money off the hook. This decision typically rests solely with the broker, although it’s technically possible for an independent contractor agreement to give an associate a say in the decision.
One final note. This article describes five legal relationships: landlord-tenant, listing broker-landlord, cooperating broker-listing broker, escrow agent-principal(s), and associate-broker. Is it possible for the landlord and tenant to authorize one of the two brokers to hold all funds in escrow until move-in date, at which time the broker will be authorized to use the first month’s rent as commission and deliver deposit(s) and advance rent to an appropriate escrow account? Sure, if the landlord and tenant authorize this shortcut. But if there’s confusion or something goes wrong, it’s very important to understand the five relationships outlined above.
Joel Maxson is Associate General Counsel for Florida Realtors
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