Who’s in Your Corner . . .?

Conflicts of interest are not always glaring, often they are subtle and can easily escape casual notice. Regardless of their visibility, when a conflict of interest is involved it is invariably the tenant who loses – either by direct and upfront costs or through poorly negotiated terms that haunt the client through the life of the lease. Though identifying a conflict can be difficult, finding conflict-free representation is a necessity for any potential lessee or buyer. One of our favorite examples highlighting this necessity is a case study we call ‘Who’s in Your Corner . . .?’

A New York-based firm had hired a major, full-service brokerage firm to handle the real estate transactions surrounding the relocation of a headquarters in a major, Midtown Class-A office building. Dissatisfied with the space after a short period, the firm decided to relocate to a larger space in a second and equally prominent Class-A Midtown office building. The same brokerage firm was retained and a second and more suitable space was identified. The brokerage firm found a new tenant that was interested in the first space – and at a significantly higher rent - and negotiated with the landlord regarding an early exit to the lease. The landlord demanded a buyout of fifty percent (50%) of the remaining lease value which the brokerage firm presented to Firm A as a good deal and the best that could be negotiated.

Unfortunately for Firm A they had walked into a somewhat common circumstance when they hired this conflict-ridden brokerage firm to represent them. The brokers, interested in finalizing yet another deal and collecting the three commissions (the buyout, Firm A’s second lease and the lease for Firm B occupying the vacated space) had no incentive to tenaciously represent Firm A’s interests in the buyout negotiations. They had, in fact, a significant disincentive to alienate the landlord they had done business with in the past and expected to do business with many times in the future. The brokerage firm’s self-interest was not aligned with their client’s interests and a seven-figure buyout request was the resulting cost to Firm A.

Fortunately for Firm A they were suspicious of this high buyout cost and after speaking to advisors, including their hedge fund primary broker, they were directed to Austin Hanover, Inc. (AHI), a truly conflict-free expert. AHI interviewed the firm and looked at the leases involved and a clearer picture came into focus. The first and most obvious finding was that the brokerage firm had not even followed the subleasing and assigning mechanics of the lease, leaving the firm fully exposed. The second conclusion was there was a ‘potential’ conflict of interest and a lack of diligence in representing the firm’s interests and strengths in the buyout negotiations.

The company interested in the space that Firm A was vacating had an excellent credit history and had agreed to pay a square-foot rent nearly 170% of what Firm A had been paying. There was no doubt the landlord was highly interested in this transaction. The brokerage firm was clearly interested in the remaining two commissions – contingent on the buyout and leasing to the second company – as well as keeping the hedge fund as a client. Without fully understanding it, the hedge fund was in a very strong position in the buyout negotiations. All that was lacking was a knowledgeable advocate to illustrate to the hedge fund the differing points of view and the strengths of the parties relative to Firm A’s actions and wants.

Armed with this perspective Firm A approached their own brokerage firm and demanded further negotiation. Realizing the financial interests involved and the newly-educated firm’s determination, the landlord conceded and allowed the lease to be terminated at no cost to the tenant. With the simple introduction of a conflict-free advisor, Firm A had saved a multi-million dollar buyout fee by simply being shown the strength of their position relative to the financial concerns of the other party.

Searching for conflicts of interest in any form of representation should be the first step in every company’s due diligence. An incorrect yet often held belief is that a ‘friendly’ relationship between a tenant’s broker and the landlord will help the tenant secure favorable terms. The opposite is the more common result as full-service brokers have forward-looking and financially intertwined relationships with landlords and challenging a landlord for a tenant or a single transaction is not in the broker’s self-interests. Securing appropriate and conflict-free representation is an absolute must that will pay dividends both in the immediate and long-term futures for your company.