One of the most common challenges in commercial real estate transactions is understanding who pays the commission, as it can vary depending on several factors. In India, while commission is typically covered by the seller or lessor, market practices, deal structures, and the roles of the parties involved can influence this arrangement. 

Recently, Maharashtra introduced Clause 15A in the model agreement for sale, ensuring transparency by mandating that commission agreements between agents and clients be documented. 

For developers and investors, knowing who bears the commission cost and negotiating terms clearly is crucial to prevent disputes, especially with the regulatory framework in place under RERA.

This blog explores the key elements affecting commission payment, including agent roles, commission splits, influencing factors, and more, to provide a clear understanding of how commissions are handled in commercial real estate transactions.

Key Takeaways

• The seller or lessor typically pays commission in commercial real estate transactions, though this can vary based on market practices and the parties involved.

• In India, commissions generally range from 1% to 3% of the transaction value and are split between the buyer’s and seller’s agents.

• The roles of agents (listing agent, buyer’s agent, tenant’s agent) determine commission distribution, with dual agents sharing the commission between both parties.

• Commission rates are influenced by factors such as property type, transaction size, market conditions, and deal duration.

• Legal, stamp duty, and brokerage firm fees are common indirect costs that should be considered alongside agent commissions in real estate transactions.

Commission Structures and Payers in Real Estate

In commercial real estate transactions, the commission is often paid by the property seller or lessor, although the responsibility can shift depending on specific agreements or market conditions. 

The commission is a percentage of the transaction value and is typically split between the agents involved.

In India, commercial real estate commission is commonly structured as follows:

• Sale Transactions: Generally, the seller bears the commission cost. This is because the seller benefits from the sale proceeds, and the seller’s agent is often the primary agent driving the deal.

• Lease Transactions: For lease agreements, the landlord is typically responsible for paying the commission. However, in some cases, especially for long-term leases, tenants may also be asked to pay a share

While the most common arrangement is for the seller or landlord to pay the commission, it’s essential to negotiate these terms, especially in transactions where the buyer or tenant plays a more active role in securing the deal.

Example:

Consider a commercial property in Mumbai where a tenant is looking for office space.

Scenario 1: If the landlord’s agent negotiates the lease:

• The landlord typically pays the full commission.

• Example: A ₹1,00,00,000 annual lease would result in a commission of ₹1,00,000 (1% commission).

Scenario 2: If the tenant finds the property through their own agent:

• The tenant may be asked to share a portion of the commission with the landlord’s agent.

• Example: If the tenant’s agent is entitled to 50% of the commission, the tenant might pay ₹50,000, while the landlord’s agent still receives ₹1,00,000.

The exact split depends on the lease terms, and these agreements should be clarified at the start of negotiations.

Also Read: How to Become a Licensed Real Estate Agent in India

Understanding who pays the commission is only part of the equation. Equally important is recognising the roles different agents play in the transaction process.

Types of Agents and Their Roles

The property sector in India is projected to reach a market size of $ 1 trillion by 2030 and is expected to contribute 13% to the country’s GDP in 2025. This growth underscores the increasing importance of understanding the roles of agents in commercial real estate transactions. 

Various types of agents play distinct roles, each contributing to the overall transaction process. Understanding their responsibilities and commission entitlements is crucial for both buyers and sellers.

1. Listing Agent (Seller's Agent)

This agent represents the seller in the transaction. They are responsible for marketing the property, negotiating the sale price, and managing the listing. The listing agent typically receives a larger portion of the commission, as they are often the primary driver of the deal.

2. Buyer’s Agent

This agent represents the buyer, identifying suitable properties, conducting due diligence, and facilitating negotiations. In India, the buyer’s agent often receives a portion of the commission. In some cases, they may charge the buyer directly, especially if the seller is unwilling to share the commission.

3. Tenant’s Agent

In lease transactions, the tenant’s agent assists the tenant in finding suitable spaces, negotiating lease terms, and finalising the lease agreement. In such cases, the commission is usually paid by the landlord or lessor.

4. Dual Agents

In some cases, one agent may represent both the buyer and the seller, known as dual agency. The commission is typically split between the two parties. While this can create potential conflicts of interest, it may also lead to cost savings for both parties.

For developers, investors, or buyers looking to simplify commission structures and real estate transactions, BCD India’s expert advisory team offers valuable support. With in-depth market knowledge and a focus on compliance, BCD India helps clients make informed decisions and ensure smooth, transparent transactions. 

Also Read: Guide to TDS Implications for Sale of Property by an NRI in India

With a clearer understanding of agent roles, it's essential to dive deeper into how commission splits work and the involvement of brokerage firms in the process.

Commission Splits and Brokerage Involvement

In commercial real estate, commission typically ranges from 1% to 2% of the transaction value and is usually split between the seller’s agent and the buyer’s agent. 

While the standard split is 50/50, variations can occur depending on market conditions, negotiation dynamics, and the agents’ agreements.

Standard Commission Split

The commission is often divided equally between the listing agent and the buyer’s agent. For example, on a ₹10,00,00,000 transaction with a 2% commission (₹20,00,000), each agent would receive ₹10,00,000. However, the buyer’s agent may negotiate a larger share if they played a more significant role.

Brokerage Firms

Commission is further split between the agent and their brokerage firm. Brokerage firms typically take 30% to 50% of the commission, depending on the agent’s agreement. 

For example, if the agent receives ₹10,00,000, they might keep 60% (₹6,00,000), with the firm receiving ₹4,00,000.

Also Read: How to Write a Letter of Intent for Commercial Real Estate

While commission splits provide clarity on financial distribution, several other factors can impact the overall commission amount. Let’s explore these variables in more detail.

Factors Influencing Commission Amounts

The commission in commercial real estate transactions is influenced by several factors that can significantly affect both the percentage and the total amount paid. These factors include property type, transaction size, market conditions, and the duration of the deal. 

Understanding these factors helps all parties involved, buyers, sellers, and agents, better manage expectations and financial planning.

1. Property Type

High-value commercial properties, such as office buildings, shopping malls, and industrial facilities in cities like Mumbai and Bengaluru, typically command higher commissions. These properties require extensive marketing, detailed due diligence, and expert negotiations. 

Complex deals involving large-scale assets or specialised properties tend to attract premium commissions due to the added effort required to close the deal.

2. Transaction Size

Larger transactions generally result in lower commission percentages, but the absolute commission remains substantial. 

For instance, a ₹100 crore office space deal might have a 1.5% commission, while a ₹10 crore deal could attract 2%. 

The lower commission rate in larger transactions is offset by the higher transaction value, ensuring that agents are still compensated well for their involvement in significant deals.

3. Market Conditions

In competitive commercial markets like Mumbai and Delhi, where demand is high, agents may lower commission rates to secure deals more quickly. 

On the other hand, in slower or less active markets, such as emerging areas in Tier-II cities, agents might increase commission rates to compensate for longer sales cycles and additional efforts required to close the deal, adjusting according to local market conditions.

4. Duration of the Deal

Deals that involve extended negotiations, such as complex lease renewals, long-term commercial leases, or high-value transactions, often justify higher commissions. These deals can stretch over months and require significant time, effort, and resources from agents. 

In cities like Delhi, Bengaluru, and Mumbai, where these types of deals are more common, agents typically charge higher fees to account for the extended negotiation and due diligence processes.

Payment Timelines and Negotiability

In commercial real estate, commission payments are generally due upon the successful completion of the transaction, whether that is the closing of the sale or the finalisation of the lease. The payment is typically made within 30 days of the transaction's completion.

While commission rates are often seen as standard, they are negotiable. Depending on the complexity of the deal, the value of the property, and the level of competition in the market, commissions can be adjusted. 

Buyers, sellers, or tenants may negotiate lower rates or request that the commission be paid in stages to align with the property’s completion.

Commissions are often a central focus however, it's crucial to be aware of common misconceptions and indirect costs that can impact the overall transaction cost. Let’s break them down.

Misconceptions and Indirect Costs

Many people hold misconceptions about commercial real estate commissions. A common myth is that commission is always a percentage of the transaction value. While this is generally true, there are instances where fixed-fee structures are used, particularly in smaller transactions.

Another misconception is that commission is the only cost involved in a real estate deal. In fact, several indirect costs are involved, such as:

• Legal Fees: Documentation and due diligence will incur additional legal fees, often in addition to the commission paid to agents.

• Stamp Duty: In India, stamp duty is a significant cost for both buyers and sellers, and it is paid to the government as a tax on property transactions.

• Brokerage Firm Fees: When working with a brokerage firm, additional service charges or administrative fees may be incurred, which can impact the overall transaction costs.

• Registration Fees: These fees are paid for the registration of the property and are often calculated based on the property's value or the agreement value, whichever is higher.

• Property Inspection Costs: Some buyers opt for independent property inspections or valuations, which can incur extra charges.

• Mortgage-related Costs: If financing is involved, costs such as processing fees, loan origination fees, and appraisal fees can increase the transaction costs.

Conclusion

Understanding commission structures in commercial real estate transactions is essential for all parties involved. By being aware of how commissions are split, who pays them, and the factors that influence commission amounts, buyers, sellers, and investors can make more informed decisions and avoid potential misunderstandings. 

The increasing regulatory clarity, like Maharashtra’s Clause 15A under RERA, further ensures transparency, benefiting everyone in the real estate ecosystem.

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FAQs

Q: How does the RERA act affect commission payments in real estate transactions?

A: The RERA (Real Estate Regulation and Development Act) mandates transparency in real estate transactions, including commission agreements. Agents are now required to document and disclose their commission terms, reducing ambiguity and ensuring compliance with industry standards.

Q: Can a seller reduce the commission they offer to an agent in a competitive market?

A: Yes, in a competitive market, sellers may negotiate lower commission rates with agents to attract business, especially when there is high demand or when multiple agents are vying for the same listing.

Q: Do commission structures differ for residential and commercial properties in India?

A: While the commission structures are similar, commercial properties often involve more complex negotiations and higher-value transactions, which may lead to higher commissions compared to residential properties.

Q: Is there a standard commission rate across India for commercial real estate transactions?

A: No, commission rates vary by location, market conditions, property type, and deal size. While urban centres like Mumbai may see higher commission rates, smaller markets may have lower percentages or fixed-fee structures.

Q: How are commission payments handled in joint ventures or partnerships in commercial real estate?

A: In joint ventures or partnerships, commission payments are often negotiated between the involved parties, with the developers or investors deciding how to split the cost based on the agreement. Typically, the commission is divided according to each party's role in securing the deal.