Wow, shame on me for not writing a post for over 1 1/2 months. I really got very busy with legal work, representing clients and attending conferences, etc. Shame on me and hopefully, this shameless dereliction of my duties wont happen in 2012. I have stored up a lot of comments on issues relevant to Commercial Real Estate and have had some very interesting conversations on CRE Radio over the last month and a half. More on that in a separate post.
I need to give credit to this post to Dan Smolensky of the Modal Group out of Chicago who started the discussion 6 months ago and asked the question:
"Lease Commission Rebate to Client. Is anyone giving clients part of their lease commissions?"
There were many comments to the question including people who questioned and condemned the practice on a totally ethical basis or some that felt that the practice was fine so long as some disclosure was made and that it was ok to make disclosure later, rather than sooner. From my perspective, depending upon the requirements of state or local law and your local broker rules, rebating part of your commission back to the tenant, should be fine, so long as full disclosure is made to all parties and I mean at the very least, the owner or landlord who is paying the commission and the listing broker.
I also think that disclosure should be made, in writing, sonner, rather than later. I am not sure that sooner means before execution of the LOI, but I would feel most comfortable, no later than at the time of execution of the LOI and certainly, not as late as execution of the lease. Please keep in mind that disclosure is the key here and they type of disclosure intended to fully inform all of the appropriate parties of the substance of the transaction. Simply inserting words into the LOI, simply for the purpose of avoiding potential liability is less important then the actual and clear communication of the intent to do so.
Howard, I also think one needs to look at who is the Tenant and who is the occupier. Take the case of a Franchisor entering into a lease as 'agent' for a Franchisee. The franchisor intends to use its power to negotiate a favorable lease and immediately assign the lease to the franchisee. The tenant (Franchisor) gets the benefit of the rebate. Disclosure in this case should also include the franchisor to franchisee, I'd like to think.
I had a somewhat similar situation involving the leasehold improvement allowance paid to the Franchisor even though the improvements were paid by the franchisee. Made no real difference to my deal financially; but the relationship between the franchisor and franchisee went south quickly and unfortunately, the franchisee thought the owner was in bed with the franchisor. It took some time to smooth those feathers and set the record straight regarding what the owner knew, didn't know and how the relationship worked between the three parties.
Peter Morris
www.beyond-the-building.com
Posted by: P | January 17, 2012 at 05:34 PM