Divorce can be ugly, especially when one party doesn’t want to be known as a divorcée.
As construction projects turn south, developers and their marketers are increasingly splitting up, leading to battles over termination fees.
These fees, which are often specified in the original marketing contract, used to be viewed by developers as the cost of changing their brokerage midway through a project, said real estate attorney Gary Rosenberg. Typically, when the developer terminates an agreement with their marketing firm without cause, payment is due.
However, as the market slows, developers often don’t have cash on hand to make that payout, which can be on the order of $500,000.
“If the project is going under, the marketing person is not the last bill you pay — never mind the first,” Rosenberg said. “This is the person who’s losing $500,000, complaining to the developer, whose project is down $10 million.”
As a result, some lawsuits have been filed recently over termination fees.
As The Real Deal reported in its April issue, Corcoran Sunshine filed a lawsuit in state Supreme Court alleging that the developer of Five Franklin Place in Tribeca owes the firm a $500,000 termination fee. In that case, Corcoran said it terminated its agreement with the building after the developer failed to pay it more than $100,000 in marketing expenses.
Also in April, Core Group Marketing filed a court notice involving termination fees against the developers behind the Jasper, an 80-unit condo in a converted office building in Murray Hill at 114 East 32nd Street, between Park Avenue South and Lexington Avenue.
Core says it is owed a $500,000 termination fee for a nixed marketing agreement with the building, which is currently in foreclosure.
At the time, Core CEO Shaun Osher said, “Unfortunately, due to its own financial constraints, our client has placed us in a position where our last avenue to recoup the monies our client owes us is through the legal process.” He declined to expand on that because of pending litigation.
Observers say there may be more termination fee battles to come.
“There’s a lot of shifting going on right now,” David Maundrell, president of aptsandlofts.com, said, referring to the musical chairs of marketing firms at new development projects. Maundrell notes that termination clauses typically bring the marketer “much less” than what would be earned if the development sold out.
For example, if a firm is hired to sell a 52-unit building in Williamsburg where prices are an average of $500,000 a unit, it can expect to make nearly $800,000 (assuming a 3 percent commission). But if the firm ends up collecting a termination fee it could only end up making $50,000 to $75,000, Maundrell calculated.
“If a broker is being released, they want their expenses covered. Developers, on the other hand, want the option to walk away from a situation if it’s not going well with the broker,” Maundrell said.
For marketers, though, there’s a delicate balance of trying to get paid for their work while not burning any bridges with developers for potential future partnerships.
“Nobody wants to be known as litigious,” noted Rosenberg. “It’s never a good thing for somebody in the service business to litigate with a client.”
As a result, many monetary agreements involving termination fees are done as quiet settlements in conference rooms across the city, sources said.
Short of a rocketing upturn in the market, the easiest way to prevent this stress is a well-drafted contract, sources said.
Maundrell, for instance, said he insists that his termination fee clauses stand if the developer sells the property outright.
Otherwise, he has the full exclusive marketing period to work on a project, period.
“Most times it’s been ironclad, and [developers] have changed gears after the original exclusive agreement expires,” he said.
Also, confidentiality terms in such contracts are — or should be — standard, said real estate attorney Luigi Rosabianca, who has represented several marketing firms that have been terminated by developers in recent months. Rosabianca declined to name the clients or to discuss the suits.
“These matters should remain confidential, as they may have unintended effects on the respective parties, for example, bad press, improper assertions [or] business goodwill adversely affected,” he said.
Halstead Development Marketing, Corcoran Sunshine Marketing and Prudential Douglas Elliman Development Marketing Group declined comment.