14. Commitments and Contingencies

Commitments

The Company leases offices and equipment under noncancelable operating leases, subject to certain provisions for renewal options and escalation clauses. Future minimum payments (including those allocated to an affiliate) under these leases and commitments, net of payments under sublease agreements, are as follows (in thousands):


	Rent Payments (a)		Sublease Receipts		Total Cash Outflows
Year ending December 31:
2016	$	8,144	$	(1,020)	$	7,124
2017		8,170		(915)		7,255
2018		8,320		(894)		7,426
2019		8,434		(527)		7,907
2020		8,684		(119)		8,565
Thereafter		68,043		—		68,043
	$	109,795	$	(3,475)	$	106,320

(a)

As described in Note 5, Acquisitions and Dispositions, the Company sold RE/MAX Equity Group and RE/MAX 100 in 2015. In connection with these sales, the Company assigned its obligations under and rights, title and interest in a total of 18 leases to the respective purchaser as described further below. As of December 31, 2015, the Company was no longer contractually obligated to make rental payments under the respective lease agreements except in the event of default by the purchaser, and thus are not reflected as future minimum rental payments. In addition, the Company sold RE/MAX Northwest on January 20, 2016 and the related assets and liabilities sold were classified as held for sale as of December 31, 2015. Total rental payments under the three related operating leases of $2,740,000 are reflected as future minimum rental payments for purposes of this table.

Minimum rent payments under noncancelable operating leases are recognized on a straight-line basis over the terms of the leases. Rent expense, excluding amounts related to gain or loss on sublease, was $10,629,000, $12,362,000 and $12,686,000 for the years ended December 31, 2015, 2014 and 2013, respectively, net of amounts recorded under sublease agreements of $1,163,000, $1,126,000 $674,000 for the years ended December 31, 2015, 2014 and 2013, respectively.

In April 2010, the Company entered into an 18-year lease for its corporate headquarters office building (the “Master Lease”). The Company may, at its option, extend the Master Lease for two renewal periods of 10 years. Under the terms of the Master Lease, the Company pays an annual base rent, which escalates 3% each year, including the first optional renewal period. The first year of the second optional renewal period is at a fair market rental value, and the rent escalates 3% each year until expiration. The Company pays for operating expenses in connection with the ownership, maintenance, operation, upkeep and repair of the leased space. The Company may assign or sublet an interest in the Master Lease only with the approval of the landlord.

Upon entering into the Master Lease, the Company became the primary lessee for all facilities located on the headquarter property and issued subleases to two retail tenants already established on the property. The subleases range from 4,000 square feet to 10,500 square feet, have initial lease terms ranging from 5 to 10 years and renewal options ranging from two 5-year renewal options to nine 5-year renewal options. Anticipated revenue from these subleases exceeds the expected costs that will be incurred by the Company.

During March 2011, the Company entered into a sublease agreement with an unrelated third party to lease up to 20,000 square feet of the office space under its Master Lease. The estimated costs the Company expected to incur related to the subleased space exceeded the anticipated revenues the Company expected to receive under the sublease agreement and as such, the Company recorded a liability with a related loss on the sublease. In November 2012, the sublease was terminated prior to its expiration date. As a result, the Company commenced efforts to market the office space for sublease with a new tenant. On November 15, 2013, a sublease agreement was entered into with a new tenant with a sublease term of five years to lease up to 20,000 square feet of office space under its Master Lease. As such, the Company recorded an adjustment to the existing liability and recorded a loss related to the subleased office space of $1,179,000 to “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Income during the year ended December 31, 2013. The aforementioned loss and associated liability was attributable to the Company’s Real Estate Franchise Services reportable segment. As of December 31, 2015 and 2014, the short-term portion of the liability was approximately $349,000 and $346,000, respectively, and is included in “Accrued liabilities” in the accompanying Consolidated Balance Sheets. As of December 31, 2015 and 2014, the long-term portion of the liability was approximately $799,000 and $1,148,000, respectively, and is included in “Other liabilities, net of current portion” in the accompanying Consolidated Balance Sheets.

Contingencies

In connection with the sale of the assets and liabilities related to the Company’s owned brokerage offices as described in Note 5, Acquisitions and Dispositions, the Company entered into two Assignment and Assumption of Leases Agreements (the “Assignment Agreements”) pursuant to which the Company assigned its obligations under and rights, title and interest in a total of 18 leases to the respective purchasers. For certain leases, the Company remains secondarily liable for future lease payments over approximately the next 65-month period under the respective lease agreements and accordingly, as of December 31, 2015, the Company has outstanding lease guarantees of $6,630,000. This amount represents the maximum potential amount of future payments under the respective lease guarantees. In the event of default by the purchaser, the indemnity and default clauses in the Assignment Agreements govern the Company’s ability to pursue and recover damages incurred, if any, against the purchaser. As of December 31, 2015, the likelihood of default by any purchaser on the Assignment Agreements was deemed to be less than probable and as such, the Company did not record a liability in the accompanying Consolidated Balance Sheets nor a related charge in the accompanying Consolidated Statements of Income during the year ended December 31, 2015.

In addition, the Company maintains a self-insurance program for health benefits. As of December 31, 2015 and 2014, the Company recorded a liability of $309,000 and $285,000, respectively, related to this program.

Litigation

The Company is subject to litigation claims arising in the ordinary course of business. The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable and for related legal costs as incurred. The Company does not reduce these liabilities for potential insurance or third-party recoveries and any insurance recoveries are recorded in “Accounts and notes receivable, current portion” in the accompanying Consolidated Balance Sheets with a corresponding reduction to “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income.

In connection with the Company’s acquisition of the net assets of HBN on October 7, 2013 (as described in Note 5, Acquisitions and Dispositions), several shareholders of HBN (the “Defendants”) dissented from the transaction and demanded payment for their shares in excess of consideration paid. Pursuant to the dissenters’ rights statute in the State of Colorado, on February 11, 2014, HBN petitioned the District Court of Denver County, Colorado (the “Court”) to determine the fair value of HBN. A trial occurred between April 14, 2015 and April 17, 2015. The Court rendered a decision on December 28, 2015 and concluded that the fair value of HBN on October 7, 2013 was higher than the amount paid. Accordingly, the Court awarded the Defendants $3,153,000, which represents the amount of the Defendants’ share of HBN’s fair value as determined by the Court in excess of the consideration paid, as well as accrued interest from October 7, 2013 through the date of judgment. In addition, the Court’s decision provides for the payment of certain costs incurred in connection with the litigation and additional interest from the judgment date until the payment date. On February 2, 2016, the Company paid $3,251,000 to satisfy fully the judgment in the case. As a result of this conclusion, the Company recorded an accrual and corresponding charge of $2,703,000 in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income during the year ended December 31, 2015 in addition to the previously recorded amount of $26,000 during the year ended December 31, 2014, and the Company recorded an accrual and corresponding charge of $522,000 in “Interest expense” in the accompanying Consolidated Statements of Income during the year ended December 31, 2015.

Except for the ongoing litigation concerning the acquisition of the net assets of HBN, management of the Company believes other such litigation matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on the Company's financial condition, results of operations and cash flows.