Non-disclosure agreements, disclosed
Industry pros say NDAs do little to muzzle deal gossip
Last May, the chairman of New York REIT, a company that became notorious for having its dirty laundry aired in public, stressed the clandestine nature of a potential entity-level selloff of its $3 billion portfolio.
The process “generated over 80 executed nondisclosure agreements,” company chair Randolph Read told investors on a conference call at the time.
Those agreements, at least in theory, were designed to ensure the REIT would not have dozens of tongues wagging about prospective deals, which could give some parties unfair leverage.
“As a seller, you don’t really want buyers comparing notes and telling people what they’re bidding,” said Woody Heller [TRDataCustom], head of the capital markets group at Savills Studley, who was not involved in the negotiations. “You want them to bid based on what they’re paying, but every buyer wants to know what everybody else is paying.”
Despite Read’s proclamation, he and others at New York REIT surely had their doubts about how confidential the information was being kept, as industry players are near-unanimous in their belief that NDAs do little to muzzle shop talk.
“In general, these agreements are the bane of the industry’s existence,” Heller explained. “They don’t really serve a function, yet we all use them. They’re a pain in the neck.”
I’ve signed 10,000 of them if I’ve signed one, and I’ve never seen one litigated.
Any real estate pro whose business relies on turning chatter into commissions has had to hear – or utter – the statement: “I can’t say anything. I’m under a really strict NDA.”
But brokers who have signed one NDA after another say that the agreements are almost never abided by, and even less frequently enforced when an accusation of a breach comes up.
“They come in various degrees of tightness, but if somebody wants to circumvent it, they’re going to do it,” said Peter Hauspurg, CEO of Eastern Consolidated. “It gets done all the time, just by a whisper to a friend. I’ve signed 10,000 of them if I’ve signed one, and I’ve never seen one litigated.”
A boilerplate NDA is a “for your eyes only” agreement, which stipulates that a prospective buyer or broker can share sensitive information about a deal with certain parties – attorneys, partners, lenders, etc. – only insofar as it’s reasonably necessary to market or evaluate the deal. Stricter ones will bar the recipient from acting on that information, such as cutting a deal with a partner for a certain period of time that might be up to three years.
“The weaker ones are silent. The stronger non-disclosure agreements expressly say what other transactions are prohibited,” said Skadden, Arps, Slate, Meagher & Flom attorney Evan Levy, who’s worked on drafting many NDAs. “They’re not only worried about the non-disclosure, they’re also worried about what other transactions you might do.”
Proof is a whole different kettle of fish.
Some include more specific language about restrictions, such as barring a potential buyer from contacting an owner’s employees, tenants, lenders or any other parties without approval. Or they could include “non-circumvent” clauses, which specifically bar someone who was granted sensitive information from trying to cut a side deal.
NDAs will often have a section on terms laying out how long the agreement is in effect, such as two years past the date of the last disclosure.
There are, however, those “strict” NDAs, many of which spell out specific penalties that would be enforced if an agreement is breached. Several leasing brokers said they’ve signed NDAs that would force them to repay their commissions if sensitive information about a deal comes out.
Others provide for “specific performance” that paves a way for the aggrieved party to ask a court to step in and provide injunctive relief, such as ordering the side found to have breached the NDA to put a freeze on any deal they may be working on with the information.
“I’ve actually seen one NDA that negotiated damages for disclosure,” said Jonathan Mechanic, chair of the real estate department at Fried Frank. “I’ve seen some so concerned about it that they actually provided for a dollar amount.”
Those in the know said that while sometimes the bigger deals have more stern NDAs, it often comes down to just how carefully one side guards its information.
Edward Minskoff, whose Edward J. Minskoff Equities owns and manages a portfolio of some six million square feet, said the company is willing to negotiate NDAs according to tenants’ needs. Public companies, for example, may need to disclose signed leases to investors.
When it comes to brokers, on the other hand, the company insists on strict confidence.
“We do it [NDAs] all the time because, one, we’re not a public company,” he said. “We don’t have to disclose financial information. And so we prefer that brokers, especially, don’t disclose the terms of our deals.”
But enforcing NDAs is a different matter.
“Proof is a whole different kettle of fish,” said Sherwin Belkin, a partner at Belkin Burden Wenig & Goldman. “If A entered into an agreement with B, how do you find out if B talked to someone?”
There have been cases where an NDA led to legal action. In 2015 the New Jersey-based brokerage Endeavor Global Group Realty filed a lawsuit against a Brazilian investment firm it claimed violated an NDA in order to buy a Billionaires’ Row property through an LLC and avoid paying brokers’ fees. That case is still ongoing in court, and transcripts show that in October attorneys were trying to suss out who exactly was covered by the NDA.
It would be one way to get people to leave you alone.
And when Compass accused Corcoran Group in 2015 of launching a smear campaign against one of its managers, Gene Martinez, the brokerage alleged Corcoran breached an NDA and “maliciously published” Martinez’s employment contract.
The details of the contract were originally made public as part of a related lawsuit reported in TRD, but were later put under seal.
And in April, Sharif El-Gamal’s Soho Properties sued Hidrock Properties, alleging the firm used confidential information obtained during an air rights deal to “usurp the note” on the Dream Hotel Times Square site. In that case, the judge actually put a temporary restraining order on Hidrock from buying the note, but lender Colony Capital sold the loan so the point was moot and the case closed.
While many feel NDAs aren’t worth the paper they’re printed on, they could serve another purpose.
One broker, who asked not to be named, confessed to exaggerating the severity of NDAs in conversations with colleagues as an excuse to avoid jeopardizing valued relationships.
“I haven’t seen that, but that’s good,” Studley’s Heller said. “It’s a convenient excuse. It would be one way to get people to leave you alone.”