GMAC Real Estate LLC and one of its largest franchisees, Metro Brokers Inc., are parting ways, with GMAC claiming in a lawsuit that it’s owed nearly $350,000 in unpaid fees and other losses on a 10-year franchise agreement that wasn’t due to expire until 2014.
Atlanta-based Metro Brokers, which boasts 2,100 agents at 26 offices, maintains that the company terminated its franchise agreement on Oct. 1 because of doubts about the direction in which GMAC Real Estate’s parent company, Brookfield Residential Property Services, is taking the franchise.
Less than two weeks later, GMAC Real Estate filed suit in federal court to establish its right to enter into franchise agreements with other brokers in Metro Brokers’ territory, stop the brokerage from using the GMAC Real Estate service mark and trademarks, and recover the money it says it’s owed.
Metro Brokers, which plans to announce its affiliation with another real estate franchise network in December, doesn’t dispute that it hasn’t paid franchise fees to GMAC Real Estate in months.
But Metro Brokers claims it was granted a one-year "franchise fee holiday" in February by former GMAC Real Estate President and Chief Executive Officer John Bearden. The reprieve helped Metro Brokers obtain an extension of its line of credit, executives at the brokerage and its bank say.
GMAC Real Estate disputes that claim, saying that discussions over a deferral of franchise fee payments broke down over the terms of written amendments to the 2004 franchise agreement between the two companies that GMAC was expecting to receive in return.
In its complaint against Metro Brokers, GMAC Real Estate said it became clear Metro Brokers was negotiating to join a competing franchise network. On Aug. 18, GMAC Real Estate sent Metro Brokers a notice of default of the franchise agreement, claiming it was owed $174,455 through July.
GMAC Real Estate warned that if payment wasn’t received in 30 days, Metro Brokers could face further action, including suspension of referrals, removal of the company from GMAC Real Estate Web sites, and termination of the franchise agreement. If the franchise agreement were to be terminated, GMAC Real Estate said its claims for future anticipated revenue would total more than $1.2 million.
Metro terminates
But it was Metro Brokers that, on Oct. 1, first sought to formally terminate the franchise agreement. Metro Brokers claimed that GMAC Real Estate’s Aug. 18 letter was itself an "event of default," because GMAC had repudiated the alleged agreement to provide Metro Brokers with a one-year reprieve from franchise fee payments.
Metro Brokers proposed a Jan. 16, 2010, termination date of the franchise agreement, to allow it to "exit the relationship in a businesslike manner," the brokerage said in a court filing.
The three-and-a-half-month notice would give both sides opportunities to put new franchise agreements in place with other companies, and allow Metro Brokers to complete the task of "de-branding."
Metro Brokers has four major electronic billboards around Atlanta, and also needs to manufacture and replace 5,000 yard signs and signage on 26 offices, the company said. In addition, it would have to replace business cards and other marketing material for 2,100 agents, and inform 5,000 customers of the changes.
But on Oct. 13, GMAC Real Estate served Metro Brokers with its own notice of termination, effective immediately, and filed suit against the company in U.S. District Court for the Northern District of Georgia.
GMAC Real Estate also sought an injunction preventing Metro Brokers from stopping GMAC from entering into franchise agreements with other brokers or licensing GMAC’s service marks and trademarks.
If GMAC Real Estate doesn’t partner with another brokerage quickly, "It is more than likely that (it) will be frozen out of the (Atlanta) market for many years," attorneys for the company argued. …CONTINUED
"The existing agents and brokers in the market, who would otherwise want to join or remain part of the (GMAC Real Estate) network, will be making decisions in the next few days and weeks as to the given real estate company with which they seek to affiliate," the company said in its motion for an injunction, adding that GMAC "will forfeit the opportunity to capture these potentially interested agents and brokers if (it) does not act quickly to seize a foothold in the market."
Metro Brokers does not oppose GMAC Real Estate from entering into agreements with other brokers, and the request for an injunction amounted to "scorched-Earth litigation posturing," attorneys for Metro said. An injunction would provide "emergency judicial resolution of a concocted dispute which does not exist," they said.
U.S. District Judge Julie Carnes on Oct. 21 denied GMAC Real Estate’s request for an injunction.
Gary Freed, an attorney representing Metro Brokers, said Metro will next ask the court to dismiss the lawsuit and order GMAC Real Estate to pay Metro’s attorney fees and costs. The October 2004 franchise agreement between GMAC Real Estate and Metro Brokers includes an arbitration clause, and the dispute has already been submitted for arbitration, Freed said.
"We think the lawsuit is some kind of show of force that backfired when they lost their request for an injunction," Freed told Inman News.
Motive for split
Kevin Levent, whose tenure as president and CEO of Metro Brokers predates the company’s 2001 affiliation with GMAC Real Estate by five years, told Inman News that GMAC filed suit after offering other, unspecified concessions.
Levent said in his opinion, the bottom line is "they’re upset with us that we’re leaving the network."
Metro Brokers has no past-due bills — other than the fees it allegedly owes to GMAC Real Estate — and a longstanding line of credit is its only bank debt, he also said.
"We’ve been in business for 30 years, and our financial health is just fine," Levent said, noting that the company has added three offices in the last 12 months.
Metro Brokers has accelerated its planned Jan. 16 break with GMAC Real Estate, and will now "dis-identify" with the real estate franchise by Dec. 15, Levent said. He expects to announce an affiliation with another real estate franchise network between Dec. 1-9.
Levent said the split was driven by the direction GMAC Real Estate has taken since the company was sold last year to Brookfield RPS, a division of Canadian-based Brookfield Asset Management Inc.
Brookfield RPS has been selling off company-owned brokerages to buyers who are willing to stay with the franchise, and has announced plans to drop the GMAC name and rebrand the franchise by the end of the year (see story).
Levent served as a member of GMAC Real Estate’s brand committee, and "I was concerned they weren’t moving in the direction I felt would be beneficial to a network we needed to be associated with," he said, declining to provide further details because of the lawsuit.
In a statement, GMAC Real Estate said that when Metro Brokers defaulted on its franchise agreement, "Kevin Levent was deemed no longer eligible to participate in the brand council."
Metro Brokers was GMAC Real Estate’s fifth-largest franchise in terms of gross commission income, the company said. …CONTINUED
"We understand the difficulties in the real estate market right now and are disappointed to see Metro Brokers … leave the network," GMAC Real Estate said in a statement. When Metro Brokers stopped paying its franchise fees, GMAC said, it "was forced to take legal action to enforce its rights under the agreement."
But Levent and Freed pointed out that GMAC Real Estate allowed Metro Brokers considerable leeway before filing suit, and maintain that franchise fees are not the root cause of the split.
‘Fee holiday’?
In a Feb. 26 letter, former GMAC Real Estate executive Bearden wrote an executive at Metro Brokers’ lender, Fidelity Bank, assuring him that a "liquidity crisis" affecting Metro Brokers was a "commonplace" issue in the real estate industry.
Metro Broker’s franchise fee payments to GMAC Real Estate in 2008 had totaled $352,721 — or about $30,000 a month. But Bearden’s letter suggested that GMAC Real Estate was willing to waive those fees to help Metro Brokers emerge from the slowdown.
Bearden told Ralph Thurmond, Fidelity Bank’s senior vice president for business and development, that because of Levent’s investment in technology, the brokerage was "better positioned than any other company to prosper from a recovery in the industry."
"As discussed, Ralph, Kevin is the leading broker in our national network," Bearden wrote. "Further, he is, in my opinion, the most innovative and effective leader in the entire real estate industry."
But Bearden lost his job as GMAC Real Estate’s president and CEO on June 12. In his letter to Thurmond, he stated GMAC Real Estate’s "willingness" to provide Metro Brokers with a break from payments "for the foreseeable future."
In signed affidavits, Levent and Thurmond said their meeting with Bearden the previous day at Metro Brokers’ corporate offices in Atlanta led them to understand that GMAC would continue a "franchise fee holiday" already in effect for the remainder of the year. Levent said he was not told that GMAC would seek a "refund" of the franchise fees it waived.
That was also Thurmond’s understanding of the agreement, and the promise of a franchise fee waiver "was an important part of the package which our bank considered in approving the increase and extension of the line of credit," he said in his affidavit.
Freed would later claim that Bearden’s letter amounted to modification of the franchise agreement, which was "utilized as an inducement to the making of a loan from Fidelity Bank to Metro Brokers." In an Oct. 1 letter to GMAC Real Estate, Freed warned: "To the extent that GMAC did not intend to honor the commitment … then the issuance of (Bearden’s) letter could be problematic."
In a signed declaration, Bearden recalled meeting with Levent and Thurmond on Feb. 25 at Metro’s corporate office to discuss the line of credit "and the need for Metro to continue to reduce its expenses in a very difficult real estate market."
Bearden said he advised Levent and Thurmond that GMAC would be willing to provide a "franchise fee holiday which could extend until the end of the year or until GMAC and Metro worked out a new franchise agreement and payment structure."
Lawyers for GMAC Real Estate say that although the company entered into discussions with Metro Brokers about allowing the brokerage to defer payments of its franchise fees, it expected Metro Brokers to agree to amendments to the franchise agreement between the companies in exchange.
Bearden’s letter "did not grant Metro a ‘franchise fee holiday’ or otherwise relieve Metro of any of its obligations owed," GMAC Real Estate said in its complaint. "Rather, the letter indicated (GMAC’s) willingness to consider an amendment to the agreement that might include a fee deferral."
A draft amendment to the franchise agreement included a proposed fee waiver from Jan. 1, 2009, through Sept. 30, 2009, lawyers for GMAC Real Estate said, and negotiations over the issue dragged on from March to August.
As of Oct. 13, the date GMAC Real Estate filed suit, Metro Brokers owed fees, charges, and other amounts due totaling $206,660, GMAC charged. GMAC Real Estate claims additional financial losses resulting from early termination of the franchise, including the loss of $140,486 in "reasonably anticipated fees."
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