I recently had the privilege of speaking to 120 people on a topic called, "Tenant Buy Outs, Making Them Happen", at the Terra CRG Brooklyn Real Estate Summit at the Brooklyn Academy of Music. After the presentation, I had many conversations with people. I tried to talk as much as I could about Legal Project Management and its fee alternatives to the billable hour. Twice, I heard the "C" Word - Contingency Fee!!! People said, "Yes your alternative fee arrangements sound great, but can't I hire you and only pay you if you get the tenant out?" In other words, why can't my firm work on contingency?
Here are the five reasons why no client or firm should feel comfortable with a contingency fee billing arrangement on a commercial litigation of this type.
(1) Although I would love to be...I am not really your partner.
Let's face it -- you (the client) own the real estate. I (the lawyer) am merely your vendor. If I could switch places with you and I could own the real estate -- i would!
People like to say that a lawyer should be like "a partner" with their real estate clients. But, alas, I am not really your partner, am I? If I get a low rent, statutory tenant out of your building, so you can put a market rate tenant in, then your building is worth a lot more. You can borrow more against it, you can sell it for a higher price, the rent roll is higher and you can pay your investors more, and they are more likely to do another project with you. The benefits are exponential -- for you! Now what do I, as the lawyer, get? I get paid -- once. And well after the fact of the work I actually did, so the fee is arguably not as big as it looks because I was financing the salary, rent and tech to get the job done on spec.
Now let's say I don't get the tenant out. The downside is exclusively mine. I spent my salary and technology dollars and my time away from my paying clients, business development and my family, and you spent -- nothing.
In other words, "partnership" is the wrong word for this type of fee arrangement. The upside is both yours and mine -- but way more yours. The downside is all mine. That's a bad deal for any firm. As if that wasn't bad enough –
(2) When the risk is all the lawyer's, the client has no incentive to make reasonable decisions.
When you (the building owner) gamble with my (the lawyer's) time and money, you have absolutely no incentive to behave reasonably. It is easy to reject a good settlement offer and let it ride -- moving on to complicated motion practice, discovery, or trial -- on the lawyer's dime! Which leads me to the most fundamental point –
(3) Commercial contingency fees make us adversaries, not partners.
Thus, I often postulate that commercial contingency fees are unethical. In a commercial contingency fee arrangement I only get paid for a clearly defined, particular outcome. But in real world real estate litigation there are many outcomes that might work well for the client -- many of which are creative and not apparent on the day a case begins. These are not personal injury cases where the only possible outcome is a sum of money.
I do not want to be, and indeed I should not be, in a situation where I only get paid for a certain outcome and thus am not looking at the client's problem holistically.
Moreover, and perhaps almost as importantly –
(4) You get what you pay for in this world.
Undoubtedly, you can always find a lawyer to take your real estate work on contingency. But is that the lawyer you want? Given what I have said above, the only lawyer who would take your real estate work on contingency would be someone with not a lot else to do. But even a hungry lawyer will have some actual paying clients around. Your case, no matter how potentially lucrative, will drop to the bottom of that guy's pile because paying work is always better than work on spec, if you can get it. The moral here -- serious attorneys get paid a fair price. Lawyers who you pay nothing to for sophisticated cases, will likely deliver in kind.
But back to the fundamental problem –
(5) What about my Johnson Rod?
Did you see the Seinfeld episode where Jerry has a fight with his long-time mechanic and finds a brand new one. Jerry tells George, "This new mechanic is great!" George asks Jerry, "How do you know? What do you know about cars? He could tell you the problem is your Johnson Rod and how could you know if that's right or wrong?"
Thus, a guy at the Real Estate Summit said to me, "The problem is that if you tell me that writing a set of motion papers takes 20 hours, how do I know that it takes 20 hours?"
What about my Johnson Rod?
Here is my answer -- try reading them. I am not being facetious. You are a smart person -- you own the real estate! Read what your lawyer produces (and the papers they are responding to), ask questions, attend the oral argument. Was the work convincing? Was it tailored to your facts and circumstances or did it seem rote and cut and pasted? What is your lawyer's track record on other projects for you? For other clients? What do other firms charge for the same kind of work? You can ascertain what a fair price for quality legal work is.
I seek, through my Legal Project Management protocol, to empower my clients. Be empowered! What I cannot do with a clear conscience, however, because it benefits neither you nor I, is work on contingency.
Labels: Ch. 17 - Contingency Fees