15. Commitments and Contingencies

Commitments

The Company leases offices and equipment under noncancelable 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		Sublease Receipts		Total Cash Outflows
Year ending December 31:
2017	$	8,327	$	(915)	$	7,412
2018		8,504		(894)		7,610
2019		8,624		(527)		8,097
2020		8,875		(119)		8,756
2021		8,815		—		8,815
Thereafter		59,451		—		59,451
	$	102,596	$	(2,455)	$	100,141

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 $7,531,000, $10,629,000 and $12,362,000 for the years ended December 31, 2016, 2015 and 2014, respectively, net of amounts recorded under sublease agreements of $1,142,000, $1,163,000 and $1,126,000 for the years ended December 31, 2016, 2015 and 2014, 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. The lease for one of the retail tenants expired in November 2016 and was not renewed. The Company is currently seeking a new tenant for that property.

On November 15, 2013, the Company entered into a sublease agreement with a tenant with a sublease term of five years to lease up to 20,000 square feet of office space under the Master Lease. At that time, the Company’s expected costs related to the subleased space exceeded the anticipated revenues the Company expected to receive, and as a result, the Company recorded a loss related to the subleased office space of $1,179,000 during the year ended December 31, 2013. As of December 31, 2016 and 2015, the short-term portion of the liability was approximately $353,000 and $349,000, respectively, and is included in “Accrued liabilities” in the accompanying Consolidated Balance Sheets. As of December 31, 2016 and 2015, the long-term portion of the liability was approximately $446,000 and $799,000, respectively, and is included in “Other liabilities, net of current portion” in the accompanying Consolidated Balance Sheets.

Contingencies

In connection with the Purchase of Full House, as described in Note 5, Acquisitions and Dispositions, the Company entered into an arrangement to pay additional purchase consideration based on Motto’s future gross revenues, excluding certain fees, over the next ten years. As of December 31, 2016, this liability was estimated to be $6,400,000 and the short-term portion of the liability of $160,000 is included in “Accrued liabilities” in the accompanying Consolidated Balance Sheets and the long-term portion of the liability of $6,240,000 is recorded in “Other liabilities, net of current portion” in the accompanying Consolidated Balance Sheets.

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 three Assignment and Assumption of Leases Agreements (the “Assignment Agreements”) pursuant to which the Company assigned its obligations under and rights, title and interest in 21 leases to the respective purchasers. For certain leases, the Company remains secondarily liable for future lease payments over approximately the next 55-month period under the respective lease agreements and accordingly, as of December 31, 2016, the Company has outstanding lease guarantees of $6,222,000. 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, 2016, the likelihood of default by the purchaser on one of the Assignment Agreements was deemed to be reasonably possible and as such, the Company recognized a loss of $243,000 in “Loss (gain) on sale or disposition of assets, net” in the accompanying Consolidated Statements of Income during the year ended December 31, 2016. As of December 31, 2016, the short-term portion of the liability was $49,000 and is included in “Accrued liabilities” in the accompanying Consolidated Balance Sheets. The long-term portion of the liability was $151,000 and is recorded in “Other liabilities, net of current portion” in the accompanying Consolidated Balance Sheets.

In addition, the Company maintains a self-insurance program for health benefits. As of December 31, 2016 and 2015, the Company recorded a liability of $292,000 and $309,000, 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 IPO effective October 7, 2013, RE/MAX Holdings acquired the net assets, excluding cash, of HBN and Tails for consideration paid of $7,130,000 and $20,175,000, respectively. Regarding the acquisition of the net assets of HBN, 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, HBN petitioned the District Court of Denver County, Colorado (the “Court”) to determine the fair value of HBN. 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 provided for the payment of certain costs incurred in connection with the litigation and additional interest from the judgment date until the payment date. As a result of this conclusion, the Company recorded an accrual of $3,251,000 as of December 31, 2015, which was paid on February 2, 2016.

In connection with the Company’s acquisition of the net assets of Tails, several shareholders of Tails challenged the terms of the transaction and filed a shareholder action entitled Robert B. Fisher, Carla L. Fisher, Bradley G. Rhodes and James D. Schwartz v. Tails, Inc. in the Circuit Court of Henrico County, Virginia ("Tails I"). The Court dismissed Tails I on December 23, 2013. The shareholders appealed that decision. On January 8, 2015, the Virginia Supreme Court affirmed the lower court's dismissal of Tails I. On March 7, 2016, the same Tails I plaintiffs filed a shareholder derivative complaint and complaint for individual claims entitled Robert B. Fisher, Carla L. Fisher, Bradley G. Rhodes and James D. Schwartz v. Gail Liniger, Dave Liniger, Bruce Benham, RE/MAX Holdings, Inc. and Tails Holdco, Inc. in Denver District Court ("Tails II"). The Tails II defendants, including the Company, filed a motion to dismiss the Tails II complaint in its entirety on April 15, 2016. On July 26, 2016, the Denver District Court dismissed all of the Tails II plaintiffs’ shareholder derivative claims. The Court did not dismiss the Tails II plaintiffs’ individual claims seeking $384,000 in total for interest allegedly owed. On August 24, 2016, the Plaintiffs moved to amend their Complaint to add additional individual claims alleging breach of fiduciary duty. The Tails II defendants intend to vigorously defend their position that the Tails II plaintiffs are not entitled to the relief sought. The Company believes a range for the potential impact to its financial position and results of operation is not determinable as of December 31, 2016. Accordingly, the Company currently has not recorded an accrual in the accompanying Consolidated Balance Sheets.

Except for the ongoing litigation concerning the acquisition of the net assets of Tails, 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.