Dual Agency-Single Broker of Record

In order to fully understand dual agency, it is important to understand that as far as representation is concerned, the law views the broker of record as the agent and the salespeople that hang their real estate license with that broker as licensees, not as agents. What this means is that a dual agency can exist even if two agents are involved in a transaction because they may share the same broker.

This is particularly important for companies that use a single broker of record for multiple sales offices. In such case, if a licensee from the Downtown office makes an offer on a listing held by another licensee in the Westside office, a dual agency must be disclosed to the parties. Again, this is because there is a single broker of record, agent, for both offices and both licensees are working under that broker/agent. Clearly the same is also true for a single licensee who is acting on behalf of, say, a buyer and seller.

It is important for brokers to understand all the laws surrounding dual agency and how these laws affect their duties of disclosure to their clientele.

Abitration Clauses

Arbitration is often offered as an alternate form of dispute resolution in commercial leases. By agreeing to use the services of an arbitrator, the parties agree to waive their rights to litigate disputes in civil court. There are a few matters, however, such as eviction, fraud and criminal activity where use of the public court system is mandatory.

Before agreeing to arbitration, there are a few things to consider. First, the process for preparing to appear in arbitration can be identical to preparing for an appearance in civil court. That is to say attorneys can be retained, depositions can be taken and evidence can be requested and exchanged. Therefore, the preparation costs can be the same as for a traditional court case. Also, the final decision of the arbitrator is binding and cannot be appealed, regardless of the legal standing for the decision. In other words, the arbitrator’s decision can be totally arbitrary and without legal precedent or standing. In addition, the cost/fees for the arbitrator can be higher than court fees and costs depending on the length of the arbitration. Finally, there is no assurance that an arbitrator’s decision will be any better or worse than that of a judge. That being said certain ADR companies such as JAMS employ retired judges almost exclusively. This is not to say that binding arbitration is without merit, it is potentially faster than the civil courts and some argue have more predictable outcomes than a jury trial. Also, if privacy is an issue, ADR can be much more discreet than the civil court system. In addition, in the event that there are technical elements to a case, many attorneys prefer to argue in front of an arbitrator with some level of technical expertise as opposed to a jury of laypeople.

A few precautions can be taken prior to agreeing to an arbitration clause. First, make vetting the arbitrator a part of the agreement. Selecting an arbitrator with an extensive real estate background would be wise. Also, the parties may want to consider setting financial limits. For example, the parties could exclude any disputed amounts that qualify for small claims court and/or placing a cap on the amount subject to the arbitration.

Subordination and Distressed Assets

In a real estate market where failing loans are more common than in years past, tenants should be aware of the concept of subordination. Any lease entered into subsequent to a loan being placed on a particular property will be subordinate to that loan. In the event that a lender takes ownership of a property through foreclosure, or other such means, it is under no obligation to honor a lease that commenced subsequent to the loan that was placed on the property. Clearly, the potential impact this could have on a tenant is devastating. Tenants considering entering into a long term lease and/or spending a great deal of money on improvements to a leased property should seriously consider investigating the solvency of the landlord and status of the loan to which their lease will be subordinate. In addition, tenants may want to consider making the receipt of a non disturbance agreement from the lender a condition for entering into a lease.

Video: AIR- Single Tenant Net versus Gross Lease

Negotiating with the GSA-Consultants

The ITC office building in Guam, (www.itcguam.net), has gotten a great deal of attention from the U.S. Government lately. As you may have seen in my profile, I'm the president of Fujita Property Guam, the company that owns and manages this 210,000 square foot office building. We are currently in various stages of negotiations with several U.S. Government tenants. As you may know, the job of negotiating leases on behalf of the Government belongs to the General Services Administration, (GSA).

Candidly I was shocked when I received the GSA's version of a request for proposal/solicitation. The document was over 100 pages. It was overwhelming to say the least. In addition to the volume of the solicitation, it required a great deal of attention to detail. Landlords are required to respond to a number of requests, surveys and questions. A potential property can be disqualified if just one error is made in response to the GSA’s solicitation. This is just the start of the process of leasing space to the Federal Government. If our building is selected, we will begin the process of negotiating the lease document and constructing the tenant improvements. I have been told that neither is easy because of the difficult requirements set forth by the GSA.  

Because of the importance of these transactions, I sought out a consultant that could provide guidance from start to finish. As it turns out, two former GSA employees have started a company that provides such consultation. It is called Unified Interest (www.unifiedinterest.com). They offer a comprehensive set of consulting services for dealing with the GSA.

Considering that the U.S. Government is expanding quite rapidly, the likelihood of leasing space to them is greater now than ever. Landlords, and brokers for that matter, should seriously consider utilizing the services of expert consultants to help them through the rigorous process of completing a lease transaction with the U.S. Government. Here's a link to an interesting article relating to GSA leasing. www.ccim.com/cire-magazine/articles/gsa-way

The Square Footage Debate

I worked on a large office lease transaction and part of the deal involved determining the exact square footage of the floor that the tenant would be occupying. We, the landlord, hired an architect to measure the space as did the tenant. Both architects were instructed to use the BOMA standard as their basis for measuring the space. As it turns out, the architects both came up with different results. As a resolution, we agreed to hire a third architect to measure the space. That architect, too, came up with a different number. Three professionals using an exact standard of measurement could not agree upon the square footage of a single space. This may sound odd, but it is not unusual. In fact, it is not uncommon for the actual square footage of a building to be different than what is shown on the original building plans. Obtaining an accurate measurement of any space or building can be tricky at best.

With that in mind, all leases have a section where the premises are described. Many people feel compelled to include the square footage as a part of that description when preparing the lease. I urge against that. It opens the door for disputes during the term, such as tenants wanting to renegotiate their rent based upon a discrepancy in the square footage of the space. In other words, in the lease the landlord states that the square footage is 1,000 square feet, but two years into the term the tenant decides to measure the space and comes up with 975 square feet. In addition, the California Court of Appeal has weighed in on this matter in the matter of McClain v. Octagon Plaza. For further information visit http://www.gordonrees.com/publications/viewPublication.cfm?contentID=576 

If it is necessary to provide the square footage in the lease, have an attorney draft language that specifies how the space was measured and by whom, and that the Lessor and Lessee agree upon same.

Getting an Estoppel Signed

Buyers in a transaction involving the purchase of a leased property will usually require the tenant to complete an estoppel certificate. By completing this form, the tenant has an opportunity to confirm the terms of the lease, verify that the landlord is in compliance with those terms and/or provide any other information relating to their relationship with the landlord. It is important for a buyer to have a solid understanding of the tenant's perspective of their relationship with the landlord; after all it is a relationship that the buyer will inherit. Because of its importance, the estoppel certificate is usually a condition of closing a sale transaction. Most leases have language that requires tenants to complete and execute an estoppel certificate within a certain time period, say 10 days. 

Despite its importance and the requirements of the lease, it is not uncommon for tenants to make completing the estoppel a low priority. This can lead to a delay in closing the sale transaction. Depending on the language of the lease, the landlord has a few remedies against the tenant. First, he can pursue a breach action against the tenant. This option is probably not practical considering the time required and the fact that most buyers do not want to inherit a lease that is in breach. Secondly, many leases have language which allows landlords to provide an estoppel on behalf of the tenant if the tenant refuses to provide it. That being said, most buyers prefer to have an estoppel provided by the tenant themselves. Perhaps the most effective option is a monetary penalty. Try adding language to your leases that allows for charging an amount equal to one month’s rent. This could be the most effective way to motivate a tenant to complete an estoppel certificate.

One last word on estoppels. It's not unsual for a buyer or lender to add language to an estoppel that essentially amends/modifies the lease rather than just confirm its terms. Tenants are under no obliation to execute such an estoppel.