Brokering sublease barter transactions.
As a result of the current recession there has been a proliferation in the number of sublease transactions involving bartering firms. A bartering firm is a business that maintains a stockpile of goods and services that it has purchased for less than market value for the purpose of exchanging for a profit such goods and services for other goods and services. In the subleasing context, a bartering firm provides goods and services (such as airline tickets, advertising time, rental car credits, telecommunications equipment) to a tenant for the right to retain the proceeds derived from a sublease arranged by the bartering firm of the tenant's space. Since the goods and services were obtained by the bartering firm for a below-market price, such firm can offer the tenant goods and services approximately equal in value to the rent the tenant is paying and still profitably sublease the space at rentals below the rentals payable by the tenant and perhaps below even the market rate. Accordingly, the sublease barter transaction provides a mechanism for a tenant paying above-market rentals during a recession, and therefore trapped in "lease prison", to maximize the reduction of or even eliminate its losses.
Actually, all three parties to such a transaction are better off; the tenant is better off because it has received goods and services that are of more value to it than the sublease rental it otherwise would have received in a down market, the bartering firm is better off since it has obtained sublease rental in excess of the cost of the traded goods and services, and the sublessee is better off because it has obtained space for less than it otherwise would have been required to pay.
Although bartering can conceivably be used in leasing as well as subleasing transactions, most landlords, unlike tenants, cannot maximize value from the types of goods and services that bartering firms offer. For instance, a landlord would have little use for thousands of hours of advertising time. Therefore, since barter transactions would rarely be used in a leasing context, this article discusses sublease, as opposed to lease, bartering transactions.
The emerging popularity of sublease barter transactions has raised issues not otherwise involved in brokering normal sublease transactions. Such issues are reflected in questions typically asked by brokers concerning licensing, protective contract language, the need for landlord consent, commission calculations and leverage. In order to facilitate broker involvement in sublease barter transactions, set forth below are responses to the most common inquiries made by brokers in working on these types of deals.
Does my real estate broker's license permit me to collect a commission on a sublease barter transaction?
Section 440 of the New York Real Property Law defines a real estate broker as "any person, firm or corporation, who, for another and for a fee, commission or other valuable consideration, lists for sale, sells, at auction or otherwise, exchanges, buys or rents, or offers or attempts to negotiate a sale, at auction or otherwise, exchange, purchase or rental of an estate or interest in real estate" In a sublease barter transaction, the right to proceeds from a sublease is being exchanged by a tenant for goods and services being provided by the bartering firm. The right to proceeds from a sublease would appear to be an "interest in real estate." Accordingly, although this conclusion is not crystal clear from the wording of Section 440, the sublease barter transaction in the absence of case law to the contrary would appear to fall within the types of transactions for which a licensed real estate broker is permitted to collect a commission.
Should language be added to a sublease agency agreement protecting my right to a commission for a sublease barter transaction?
Exclusive agency agreements entered into between brokers and tenants typically contemplate the payment of a commission to the agent only for a sublease, lease assignment or lease termination or a similar disposition of the space. There is normally no language providing for the payment of a commission to the agent for a barter transaction. Accordingly, in order for an agent to ensure that it will receive a commission from the tenant for a barter transaction, the exclusive agency agreement should contain protective language. An example of such protective language would be as follows: "As used herein, "Sublease" shall include an assignment, a lease termination agreement or an agreement by which a third party provides goods and services to Sublessor in exchange for the right to arrange for the sublease of the Premises and retain the amounts paid by the Sublessee."
Is landlord consent necessary to enter into a sublease barter transaction?
Most leases require landlord consent to a sublease, lease assignment or lease hypothecation or encumbrance or to an occupancy of the premises by third parties. Such leases do not contemplate the tenant entering into an agreement by which it will sell its right to sublease proceeds. In the type of bartering transaction described herein, the bartering firm will not occupy the premises, nor is it taking a pledge of or an estate in the lease or binding the real property. The bartering firm is merely purchasing the right to sublease proceeds. Accordingly, in the absence of case law explicitly holding otherwise, it would appear that in most instances landlord consent would not be required in order to enter into a sublease bartering agreement. Of course, the exact language contained in the lease restrictions on subleasing must be reviewed to make sure that landlord consent is indeed not required. Further, when the bartering firm arranges the flip of the space to the ultimate sublessee, the sublease will certainly need to be approved by the landlord.
How should a commission for a sublease bartering transaction be calculated?
Most sublease commissions are calculated by applying a percentage rate schedule to the rentals payable by the sublessee. In a sublease barter transaction the use of this type of calculation is complicated by two factors. Firstly, the bartering firm typically pays its consideration to the tenant in one lump sum. Secondly, such payment is in the form of goods and services, not dollars. It would be very difficult, therefore, to use the standard sublease commission calculations to determine a sublease barter transaction commission. Such calculations could only be used if the parties were able to first agree upon a schedule of sublease rental that could be equated with the goods and services paid by the bartering firm to the tenant.
Since the standard sublease commission calculations would be difficult to apply, an argument can be made for determining a sublease barter commission by using the calculations typically applied in determining commissions for a lease termination. Most sublease exclusive agency agreements provide that in the event that the agent is successful in procuring a termination of the tenant's lease, the agent will receive a commission calculated by applying the percentage rate schedule used in calculating sublease commissions to the rent that would have been paid by the tenant had the lease not been terminated. A claim can be made that the goods and services paid by the bartering firm to the tenant approximate the remaining rental that the tenant is required to pay to the landlord for the space involved. Although such goods and services are not paid to the tenant at the same time that its rental is payable to the landlord and cannot be assigned a definitive dollar value, it can be argued that to the tenant they have the same value as the rental the tenant is obligated to pay to the landlord. If the value of the goods and services to the tenant did not at least approximate such rental, why would the tenant have agreed to enter into the sublease barter transaction? Accordingly, it would make sense from an economic standpoint to calculate commissions for a sublease barter transaction based upon the rental that the tenant is required to pay its landlord for the balance of the term of its lease.
What leverage can I use to protect my right to a commission if I am representing a bartering firm?
Sublease bartering transactions are such a new concept that many tenants and sublease agents are not even aware that such types of transactions exist. As a result, tenants and agents who list space for sublease typically neglect to list such space for barter as well. Brokers representing bartering firms may therefore find themselves in a situation precariously similar to when their exclusive customers seeking space decide to take unlisted space. Since unlisted space is not being marketed and there is no offer by the landlord to pay a commission, a broker whose exclusive customer decides to lease unlisted space is not entitled to a commission from the owner of such space; such broker would only be entitled to a commission if he had in his exclusive agreement obligated his customer to pay the commission in the event that the landlord refused. Likewise, if a tenant lists space but such space is not offered for barter, a broker representing a bartering firm may find himself facing a tenant who refuses to pay a commission. It is advisable, therefore, for brokers representing bartering firms to get an acknowledgement from a target tenant prior to introducing the bartering firm to such tenant that the tenant is offering his space for barter and will pay a commission for a barter transaction. As an alternative, such broker could also enter into an agreement with his customer that either the customer will not enter into a bartering agreement with a tenant unless such tenant agrees to pay a commission to the broker or the customer will pay the commission to the broker if the tenant will not.
An issue related to the foregoing is how to protect the right to a commission of a broker representing a bartering firm if the amount of the commission cannot be agreed upon. As discussed in the previous section, a thorny issue raised by these types of transactions is how to calculate the commission. If the broker and tenant cannot after good faith negotiations agree on the commission, the broker must have some type of leverage over the parties to ensure that it will receive its commission if the transaction is indeed consummated. It would be advisable for the broker, therefore, to agree with the bartering from that no barter transaction will be executed unless a commission is agreed upon. Alternatively, it might be advisable for the broker prior to introducing his bartering firm customer to the tenant to agree with the tenant on a formula for the commission calculation.
Sublease barter transactions provide an alternative method in a down market to facilitate sublease transactions. They create value to the parties where it might not otherwise exist and therefore allow deals to be made that otherwise would not have been made. However, due to the relatively recent introduction of these types of transactions to the marketplace, there are very few brokers who have had much experience in handling such deals. In order to assist brokers in carrying out these sorts of transactions, this article has attempted to respond to those questions most commonly asked by brokers representing parties to such transactions. However, since every deal is unique, it is recommended that brokers seek advice of counsel in strategizing these types of transactions.
Roberty C. Epstein, Esq. Vice-President Peter R. Friedman, Ltd.
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|Title Annotation:||Insider Outlook|
|Author:||Epstein, Robert C.|
|Publication:||Real Estate Weekly|
|Date:||Aug 14, 1991|
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