Tenant Leasing Illustrated August 2020 Avoiding Sublease Screaming

Hello,

As the world (including the commercial leasing world) comes to grips with COVID-19, we expect we will soon enter a period of expanded subleasing activity. This will require that agreements be put in place with experienced real estate brokers.

In today’s issue, we raise five issues to address as a sublandlord when negotiating a co-broker agreement with the subtenant’s broker or “outside broker.”

Sincerely,

Alan

Mintz & Gold LLP

Avoiding Sublease Screaming

The Fuji-Q Highland amusement part in Fujiyama and Tokyo Disney have taken COVID precautions to a new level by trying to limit flying virus laden droplets through a ban on screaming on their roller coasters.

To emphasize the point in Fujiyama, the park’s chief executive and his corporate boss rode the roller coaster on video with nary a peep and the video ended with a message “Please scream inside your heart.”

This is on a ride that holds the world record for fastest acceleration, managing to reach 112 miles per hour in 1.56 seconds and hitting the scale of five out of five for what amusement parks call “scream points.”

Not such a big deal, since many readers of this newsletter scream inside their hearts each month (they have even been known on occasion to hit seven out of five on the scream point scale!).

Matter of fact, I think you may be suppressing one right now.

The video was meant to respond to complaints that stopping a scream on a roller coaster is not possible and this has inspired many social media posts of stone faced people taking the “serious face challenge.”

Screaming violations are not punished. In Japan, after all, the COVID rules are voluntary, even wearing a mask, but almost everyone follows the lockdown measures and new cases and deaths are way down notwithstanding a relatively older population.

Scream limitations are just one more way our world has changed over the past few months.

In commercial leasing, particularly office leasing, we may see another change soon through a large uptick in subleasing.

Not surprisingly, many tenants are rethinking their office needs and finding that they do not need so much space.

Some have faced financial difficulties and need to retrench.

Notwithstanding the creative and interpersonal advantages of having employees in one interactive space, many other businesses have fared quite well working remotely and are not sure they need so much space.

Many (although not all) employees prefer to work from home and, as is usually the case, cost is a large factor, so these businesses are looking to cut costs in an uncertain environment.

Some of these tenants will look to sublease out a portion of their space and others might try to sublease their entire space and look for new premises.

These downsizing tenants, as well as tenants with expiring leases, will need new space and may be more cautious in today’s business climate.

They may prefer the flexibility of a shorter term and often lower cost both in terms of rent and build out that a sublease can offer.

We have already spoken with a number of clients considering a trip down the sublease path, some as sublandlords and some as subtenants, and we expect that this activity will only increase in the coming months.

It is prudent for prospective sublandlords and subtenants to retain experienced real estate brokers to help them on this journey.

We have addressed in past newsletters some of the pitfalls to be wary of when entering into a sublease brokerage agreement (see here and here).

Today we are focusing on the more limited issue of a sublandlord’s need to make sure that it has buttoned up the documentation with the subtenant’s broker or “outside broker.”

A sublandlord can enter into separate direct brokerage agreements with its listing broker and with the outside broker and address the payment of the commission to each broker individually.

It is more common though for a sublandlord to enter into one agreement with its listing broker that provides for payment of the entire commission to the listing broker.

With two brokers, this will include the “override” so that the aggregate commission will usually consist of one and one-half commissions with the listing broker having the direct relationship with and being obligated to pay the outside broker.

With either structure, save yourself from a future sublease broker terror induced scream by following these five suggestions:

  • Work through procuring broker. It is easier for you as sublandlord and more customary to have one brokerage agreement with your listing broker and have them enter into a direct agreement with the outside broker that requires your listing broker to pay the outside broker from the amount it receives as commission from you.
  • Set override. Your brokerage agreement with your listing broker should indicate the amount of the “override” or additional commission paid when there is an outside broker. Usually, instead of one full commission as defined by the listing agreement, you will be obligated to pay an additional amount (150% of a full commission) with one full commission paid to the outside broker and the balance to the listing broker. It is better to specify the allocation since you do not want the listing broker to take a larger than customary share and make outside brokers less interested in your space.
  • Require co-brokerage agreement. The listing broker should procure a co-brokerage agreement from any outside broker, naming you as a third-party creditor beneficiary and otherwise reasonably satisfactory to you and the listing broker. Your listing broker should not deal with any outside broker who fails to enter into a co-broker agreement.
  • Include your input. You should review the form of co-broker agreement or, at a minimum, require in the broker agreement with your listing broker that the co-broker agreement will provide the following (which, of course, among other things, should also be covered in your agreement with the listing broker):
    • That no commission will be due to the outside broker unless and until a transaction is fully consummated setting forth the same conditions to be satisfied by the listing broker.
    • That such commission will be computed and payable in accordance with the provisions of the listing broker’s agreement.
    • That you have the unrestricted right in your sole discretion to reject any offers submitted on behalf of a proposed subtenant.
    • The conditions that must be met in order for a commission to be earned.
    • Most important of all, that the outside broker will indemnify you from the claims of any other party for compensation claiming to have dealt with the outside broker in connection with the transaction and/or any employees of the outside broker claiming payment for salary, commission, expenses or other compensation (your agreement with the listing broker should have a similar indemnity which also covers claims by the outside broker).
    • Any other aspects of the transaction important to you, such as confidentiality,
  • Address need for direct agreement. In the event that your transaction is structured for you to have a direct agreement with the outside broker, you will need to enter into an agreement as with any other broker. As is sometimes the case, if the listing broker agreement was executed without legal representation and does not include certain important provisions such as indemnification from the outside broker, you must require that the outside broker enter into a direct broker agreement before you agree to execute the sublease.

Sadly, comedian Carl Reiner passed away this month. Although famous for being Sid Caesar’s sidekick in Your Show of Shows, creating the Dick Van Dyke Show and his role in countless movies, he will always be to me the straight man interviewing Mel Brooks’ 2000 Year Old Man. We cannot confirm the 2000 Year Old Man’s view on subleasing, but that routine provided the most succinct explanation for belief in a higher being:

CR: “Did you believe in any Superior Being?”

MB: “Yes! A guy named Phil! He was very big. Very strong… I mean, he could kill you. So, we did everything he asked.”

CR: “And you revered him?”

MB: “Yes, we prayed to him.”

CR: “How long was his reign?”

MB: “Oh, not too long. Because one day Phil was hit by lightning. And we looked up, we said… ‘There’s something bigger than Phil!'”

Follow the suggestions above and you will not need to pray in order to address your need for a proper agreement with your outside broker.