Newmark's Kay Davis Being Sued By Prominent Client For Must-Take Clauses
A veteran Atlanta office broker is being sued by a client for allegedly steering the firm into an unfavorable lease expansion at 191 Peachtree Tower.
Personal injury law firm Morgan & Morgan is suing Newmark Knight Frank and its Executive Managing Director Kay Davis in Fulton Superior Court for recommending the law firm agree to take additional office spaces at pre-negotiated rents, known as “must-take” clauses, as it expanded in the iconic 50-story Downtown Atlanta skyscraper.
“By advising plaintiff to enter into a 'must-take' agreement, defendants realized higher commissions than they otherwise would have under a right of first refusal arrangement,” Morgan & Morgan said in the suit.
Must-take clauses are lease arrangements where a tenant in a building approves ahead of time to take on more space at pre-negotiated terms. To an extent, must-take clauses are bets on the future of the office market on behalf of tenants. When it works well, a company can benefit by agreeing to rents lower than what the market may dictate once the new space becomes available, experts say. But the opposite can happen as well.
“As lawyers, our clients trust us to provide good counsel and to work in good faith. Similarly, we placed our trust in Newmark and Ms. Davis, and we allege they broke that trust, placed their interests above ours and should be held accountable,” Morgan & Morgan attorney Cory Simmons told Bisnow in an email.
Simmons did not answer follow-up questions. Davis did not respond to a Bisnow request for comment.
Since starting in the commercial real estate industry in 1986, Davis has had many accomplishments under her belt, including overseeing the development of Crown Pointe I and II in Central Perimeter and the Westin Buckhead Hotel while at Ackerman & Co. During the past three years, Davis has inked $150M and 750K SF in deals, according to her online biography. Her significant clients include the law firm Ogletree Deakins' 47 offices in the U.S., Fisher Phillips' 39 offices and the 100K SF renewal of Ricoh Corp. in Macon.
Morgan & Morgan moved to 191 Peachtree in 2006 and entered into a 10-year lease, according to the lawsuit. The lawsuit does not say how much space the firm has leased in total. According to the suit, toward the end of Morgan & Morgan's initial term, Davis approached the company about renewing its offices at 191 Peachtree and entering into must-take clauses for additional space. She allegedly told the company expansion there would be difficult without the clauses because the building was filling up.
“In exchange for this supposed 'limited space,' [Morgan & Morgan] would have to pay rents that were higher than normal and commit to terms that were irregular and unfavorable, such as options that permitted the landlord to change the location of the spaces, accepting these spaces 'as-is' with zero warranties, and requiring itself to lease the additional office space regardless of need at the time,” Morgan & Morgan officials said in the lawsuit.
Morgan & Morgan alleges it entered into multiple must-take amendments to “make use of thousands of square feet of additional space if or when it became available.”
There are a variety of clauses companies and landlords can dictate in leases that can give a tenant the option to grow in the future. There are right-of-first-offer clauses, which require a landlord to offer freshly emptied space to a tenant before space is offered to the wider market. There also are right-of-first-refusal clauses, which require a landlord to offer space it is about to lease to an outside company to an existing tenant at the exact same terms.
“It does happen, [but] it doesn't happen a lot,” Ford said. “It happens in a more dense city like New York.”
Ford is not involved in the lawsuit, nor is he commenting on the veracity of the allegations.
Bisnow reported in 2016 that Davis assisted Morgan & Morgan in renewing and extending its lease to 50K SF in the 1.2M SF tower. Davis reportedly negotiated with the landlord at the time, Cousins Properties, to allow Morgan & Morgan the rights to take up to 100K SF through 2021. In 2016, Banyan Street Capital and Oaktree Capital Management joined in buying 191 Peachtree from Cousins for $268M.
“We never wanted to leave 191 Peachtree, but with the building 90% leased and a 130-person staff that had long outgrown our space, we had to look for options that could efficiently accommodate recent and expected growth,” Morgan & Morgan's then-managing partner, Jim Kelleher, told Bisnow at the time. Kelleher has left the firm and now runs a personal injury law firm in Florida. He did not return calls seeking comment.
Cousins also did not return calls.
Morgan & Morgan alleges it discovered 191 Peachtree was below the capacity Davis had said it was when she advised the firm to sign the must-take leases. The firm alleges it would not have agreed to the clauses had it known the building was nowhere near full and that rental rates would have been more attractive otherwise. Morgan & Morgan said it began paying rent on the new spaces starting in March 2018.
Ford said must-take arrangements can benefit tenants by locking in rental rates for future space, especially if rental rates are projected to go up.
“If you're in a rising market, like things are hot, perhaps there's more reason to do a must-take clause,” he said.
In Morgan & Morgan's case, the firm alleges the opposite has occurred to it and is now obligated to pay higher rents than “was necessary for the same or similar office space,” space Morgan & Morgan claims it doesn't need.
“[Morgan & Morgan] is obligated to continue renting those additional office spaces for an unreasonable amount of time,” the firm said in the suit.
Office rents in Downtown Atlanta have grown steadily since the last economic downturn. At the end of 2016, when Morgan & Morgan negotiated the must-take clauses, Class-A rents were averaging $25.50 per SF, according to Transwestern. They rose to $26.50 the following year and Downtown Atlanta office rents now sit at $29.50 per SF, according to Transwestern. Last year, Bisnow reported Atlanta's office rents were the fastest-growing in the U.S.