Legal Briefs
Practice Due Decency
Playing nice can have a big pay-off.
By Steven Heller, Esq. |
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.