Legal Briefs

Practice Due Decency

Playing nice can have a big pay-off.

Your mother always told you to be a good person, but was her concern your values or your business prospects? Decency during business negotiations may be the right thing to do, but it can also further personal relationships that create real business value for your bottom line.

Many tough negotiators exploit their leverage to the fullest extent to cut super-clever deals without considering the unhappy victims of their hard approach. After congratulating themselves for the sharp deal, these negotiators discover that resentful parties don’t perform their obligations (and won’t forgive the other side for failing to perform theirs), create costly problems carelessly, and are unlikely prospects for repeat business.

Businesspeople who compromise and follow good-faith negotiating practices will create trust and build business reputations, which are forms of goodwill that are measurable over the long term in real dollars. This principle is part of demonstrated economic theory and works the same way in everyday deals.

Commodifying Trust

The close-knit nature of real estate communities makes maintaining positive relations a requirement for healthy business. For example, if a landlord claims he can’t give a tenant free rent for the first few months while it ramps up its business, then he should explain that his cash flow won’t allow for it, given the large tenant improvement allowance and commission obligations. As an alternative, he should consider giving something else back to the other side if possible.

Negotiation victories can backfire when built primarily on trickery or hard leverage; on the other hand, when you allow for compromises and clarify what you truly need and why, you will secure both dollars and the other party’s trust. This trust is a bankable commodity worth maintaining, because satisfied partners are more likely to work constructively to solve problems with you and are open to doing more business in the future.

This approach may seem obvious, but in the trenches of deal making the same destructive dynamics repeatedly surface.

Relationships Over Law

Sometimes legal documents don’t matter. While contracts and legal instruments can be critical to protecting yourself and your rights and opportunities, in some cases, enduring relationships simply matter more.

For example, an office building landlord stopped making loan payments and went into default, but the lender didn’t foreclose, even after two years. Although the poor economy limited the lender’s options, the lender banked on the ability of the landlord, a well-connected and reputable developer, to work out a constructive resolution. Even if the deed of trust document dictated only foreclosure, the developer’s reputation and credibility bought him several extensions and the retention of this property.

The Big Win

In some deals, it pays to leave a few dollars on the table to get a deal done. For example, in the letter of intent, the seller finally succeeds in dragging his prospect to that huge number he wanted, but then halfway through negotiating the final contract, the prospect kills the deal and disappears. The big price wasn’t sustainable, and the seller pushed so hard to get it that the prospective buyer didn’t trust the seller to restructure a different deal.

The less-obvious case is when the big win seems to work, but backfires later. For instance, a landlord waited until lease execution time to spring his gambit: He announced he would reduce the tenant improvement allowance by $20,000 from what was originally agreed. No justification was given, but he was correct to assume that the tenant was too far into the deal to pull out. Later, he discovered that he’d mistakenly leased space holding critical electrical equipment, and the resentful tenant refused to cooperate. Keeping that $20,000 cost $150,000 for new electrical. The small upfront price to gain trust can save expensive costs later.

The same dynamic can play out in small daily matters, because a distrustful party becomes an uncooperative party when it comes to routine property management issues. Besides the aggravation, the lack of cooperation can mean significant transactional and administrative costs to constantly deal with problems, plus the opportunity cost of time and attention not spent on other matters.

Even friendly negotiations can lead to failure if the deal struck is unsustainable. If a tenant agrees to give the landlord its last penny in monthly rent, it may be stretched to the point where it has no margin of error — the first business setback means the tenant quits paying rent. The landlord might have been better off with a “worse” rent deal to keep a solvent tenant who pays the rent.

Repeat Customers

A solid reputation means people will do business with you again and again. Consider long-term deals like leases, where the tenant and landlord stay intertwined in an ongoing relationship. And there are repeat players: After a purchaser played dirty trying to buy an industrial property in Arizona, other Arizona industrial brokers heard about it and kept listings from him. There is also coincidence, even among lawyers: After a fully negotiated lease deal fell through when the tenant bailed out just before execution, a new tenant came along and had the very same attorney.

Reputation, integrity, decency, compromise, and relationships: These aren’t just moralistic words — they’re part of the path to business success.

Steven Heller, Esq., is an attorney with Gilchrist & Rutter PC, a real estate and business law firm based in Santa Monica, Calif. Contact him at sheller@gilchristrutter.com.

Recommended

Changing Climate, Changing Laws

Spring 2020

Legislation is responding to new wildfire risk requirements faced in commercial real estate development.

Read More

Environmentally Unfriendly

Nov.Dec.19

Michigan aims to tackle complications associated with vapor intrusion and emerging chemicals.

Read More

Valuing Retail Properties

Sept.Oct.19

Assessments can differ, so understand what considerations go into calculating the value of retail properties. A store owned and operated by Lowe’s in Georgia was valued by the local tax assessor at $10.4 million. Not satisfied, Lowe’s counsel hired its own appraiser, who valued the property at $3.9 mill

Read More

Paint the Town – But Get a Waiver First

July.Aug.19

One case highlights the many considerations real estate professionals need make when a property includes street art. What happens when the paint on the outside of a building suddenly becomes a property interest? It's a good question - one addressed in a shocking landmark case involving a New York property kno

Read More