Confronting the Conflict of Interest Dilemma in Commercial Real Estate Representation
Could a pair of decisions, made four months and half a world apart, threaten the future of dual-agency representation in commercial real estate? The idea may not be as far-fetched as it sounds.
In November 2016, the California Supreme Court upheld an appeals court ruling that associates working for the same brokerage firm owe identical fiduciary responsibilities to each party and must be transparent in disclosing germane information. In the context of a commercial real estate deal, this means that brokers working in a firm that represents both a landlord and a potential tenant must disclose everything they know to both parties, short of the leasing price the landlord is willing to accept and the rent the tenant is willing to pay.
In the aftermath of this decision, commercial real estate experts suggested that California could circumvent the ruling by passing legislation to shift the legal agency relationship with the client from the brokerage to the individual broker, as Colorado and some other states have done.
However, the initial reaction from the state legislature was to float a pair of bills that would have further restricted dual agencies. One bill would have banned the practice outright, while the other would have clarified and expanded existing disclosure requirements. Met with intense resistance from the traditional real estate sector, both bills were pulled before reaching a vote.
In London the following March, the Royal Institution of Chartered Surveyors (RICS), a global real estate accreditation body that certifies property and construction professionals, dramatically limited the ability of dual agency representation among its members beginning January 1, 2018. In a binding declaration of professional standards and guidance, RICS stated, “An RICS member or regulated firm must not advise or represent a client where doing so would involve a Conflict of Interest or a significant risk of a Conflict of Interest; other than where all of those who are or may be affected have provided their prior Informed Consent.”
The statement continues, “Informed Consent may be sought only where the RICS member or regulated firm is satisfied that proceeding despite a Conflict of Interest is: (a) in the interests of all of those who are or may be affected and (b) is not prohibited by law, and that the conflict will not prevent the member or regulated firm from providing competent and diligent advice to those that may be affected.”
The document adds several thresholds that must be met to ensure there is no conflict of interest, as well as data collection and reporting requirements when a member chooses to proceed with dual agency representation.
While these decisions alone do not spell the end of the long-entrenched dual agency model, they are part of a newly heightened awareness of the potential for conflicts of interest when the same brokerage firm is sitting on both sides of the negotiating table.