Keeping Your Broker in the Loop to Help You
In another chapter, we spoke of the landlord trying to go directly to our client with regards to their exercising an option to extend. Well, the plot gets thicker.
Maybe you don't need a broker. Here's the scenario: The landlord asked the tenant if they wished to exercise their option to extend as negotiated in the initial lease. Why wouldn't the landlord, even as a professional courtesy, contact the broker? Probably for two reasons:
Big reason number one: He wasn’t to save on the commission fee.
Big reason number two: If the tenant uses a broker, maybe the tenant may get some information the landlord doesn't want the tenant to have.
In this case, both of the above came into play. To make things worse, the landlord's position was that they would pay a fee if we convinced the tenant to extend the lease beyond the two years called for in the lease—sound like extortion, anyone?
Does the broker bring value to the table? Too many landlords, this is the litmus test for paying a fee. Believe it or not, we might actually agree. Always ask this question: What is that value and when was it brought to the table?
At a real estate seminar, one of the leading real estate attorneys in Los Angeles addressed this specific issue. With regards to options, it was his opinion that any option negotiated on the front end required the broker to be paid. (Case law in California is actually a bit more expansive on this, but we’ll leave that to the lawyers).
How does this benefit you as a tenant? First, your broker negotiated a favorable position for you, so it would be your option as to whether staying in the premises at the end of the initial term would be in your firm's best interest. Without that option, the landlord could rent the space out from under you at expiration. Secondly, if the terms of that option were not fixed (i.e. everything but the rate wasn’t set in stone), you need your broker to advise you on market conditions and fair rate. Of course, you can let the landlord dictate to you what the market is. Do not be intimidated into thinking that you might make the landlord mad if you don't accept his offer—whose money is it?
What if I don't have an option? If you don't have an option, you need your broker more than ever. What is the benefit to you? Hopefully, that’s obvious. First, you need to shop the market to see if your present space can accommodate changes in your needs over the next several years. Secondly, how does the space compare to what is on the market?
Recently, two clients of ours were up for renewal. Their landlords knew we would shop the market. RFPs were prepared and sent to three competing properties for each client. The responses were real eye-openers. The present landlords came in the highest of all in both cases. Had the tenant just gone at it alone, they would have been paying 15-20% (yes, that's how cocky the landlords were) over market. While one client asked us to continue to negotiate with their present landlord, the second client refused to have any further discussions and will be moving.
The first landlord has been open with their discussions through our office while the second landlord refused to acknowledge any broker, yet still had the nerve to make an over market offer and expect the tenant to take it or leave it. Guess what? They left it.