Car Talk and Future Options
In very sad radio news, Tom Magliozzi passed away on November 3rd.
Tom and his brother Ray, a.k.a. “Click and Clack”, have hosted the NPR weekly radio show, “Car Talk” for nearly 30 years.
Ostensibly about cars and car repair, it has been a platform for their banter directed at their callers and themselves, with regular routines such as humorous network identification, letters from viewers and ending credits.
My favorite callers included one who requested advice on winterizing a kit car, and who turned out to be from the Jet Propulsion Laboratory calling about the Mars Rover and another, “John from Houston”, who was calling about repairing the Hubble Space Telescope.
I have very little interest in cars, but I love the show. Tom and Ray’s regular admission that they provide answers “unencumbered by the thought process” was naturally an inspiration for Tenant Leasing Illustrated.
But they are no slouches; each was an M.I.T. graduate. And perhaps evidencing their true genius, they retired but for the last few years continued to run new edited shows that included previously broadcast segments with enough new material that you might not even realize you were listening to reruns.
The Mintz & Gold leasing team is revving its engines in anticipation that NPR may call and offer us the same slot for a new show called “Leasing Talk”, but in the meantime it strikes me that commercial leasing has its own version of “reruns”, i.e., future transactions with commercial brokers.
When a tenant needs to sublease space, it is forced as a sublandlord to play the role of a landlord, and this includes coming to terms with the brokers (both its own and its subtenant’s broker) for a brokerage commission.
One provision in the brokerage agreement that is often a sticking point is how to handle brokerage commissions on renewals, expansions, rights of first offer, rights of first refusal and other future options.
Some tenants obligated to pay a commission as a sublandlord will insist that the broker should not get paid five or ten years down the road “for not doing anything”, and there may be some validity to that argument, particularly if the option involves a future fair market rental negotiation or arbitration and/or requires the involvement of another broker.
But brokers will point out that in some instances they have already done all the work during the original deal to allow the option to play out automatically, which is particularly true if there is no other broker involved and the rental is to be determined on a “take it or leave it” basis with little or no negotiation involved (for example, where the option provides that the sublandlord will offer the space and, if the subtenant does not accept, the sublandlord will be free to sublease to anyone else as long as on the same (or substantially the same) terms).
The short answer is that an equitable result will not necessarily result from insisting that the broker is never entitled to a commission or insisting that the broker is always entitled to a commission.
Consider these six suggestions as a sublandlord so that you do not run out of gas when addressing lease options in your brokerage agreements:
- Put the brakes on commissions where appropriate. Some sublandlords will insist that no commissions are payable on any future transaction and this is certainly a simple way to resolve this issue. But also be sure to carefully review the brokerage agreement to be sure that you are not required to pay a commission with respect to all renewals, expansions and other future options.
- Limit to options included in the sublease. One compromise is to allow the broker a commission on options specified within the sublease document itself, but exclude a commission on renewals or expansions that were not originally contemplated. In this way, the broker is being compensated for the work he or she did to create the advantageous option.
- Set minimum standards. Even if the broker negotiates a future option in the original sublease, the broker is not always entitled to a commission. Require as a prerequisite that no other broker who represents either party is entitled to a commission in connection with such renewal, expansion or other option. You should not have to pay two commissions to your subtenant’s brokers (or to your own) on the same transaction!
Some sublandlords will further require that the broker be retained at the time as the exclusive broker. This may not be necessary for an option that does not require negotiation or arbitration but plays into the notion that the broker should be involved in the next transaction in order to get paid.
- Do not preclude the broker from being retained in the future. Even when excluding options not contained within the sublease, it is reasonable that such exclusion not prohibit the broker from earning a commission in the future pursuant to separate brokerage agreements in the event the broker is retained and identified as a party’s exclusive representative.
- Make sure to calculate the commission properly. Generally, an expansion is treated as a new sublease and a renewal is treated as if the term of the extension period were included in the original sublease. This is important since most commission schedules are weighted much more heavily towards the rent due in the early years of the sublease (e.g., 5% of the rent in year 1, 4% of the rent in year 2, etc.).
- Conformance of option and the sublease terms. An option set forth in the sublease may not conform exactly to the actual terms of the renewal, expansion or other option, but as long as substantially equivalent this should not necessarily affect the broker’s right to a commission.
Ray did a very touching tribute show the weekend after Tom died. As they often said, sometimes in life you have to “stop and smell the antifreeze”, and they certainly seemed to know how to enjoy the road they traveled. Follow the suggestions above regarding future options and you can keep your brokerage agreement from becoming a lemon on your leasing travels.