Brokering sublease barter transactions

Real Estate Weekly, August 14, 1991 by Robert C. Epstein

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.