Original article posted in Inside Tucson Business here.
The California Supreme Court heard arguments earlier this month in a court case that reveals a standing problem with commercial real estate negotiations that are conducted in places like Tucson.
The issue in Horiike v. Coldwell Banker Residential Brokerage Co. has to do with the fiduciary responsibilities of dual-agency representation in property transactions.
Dual agency occurs when one real estate company represents both the tenant and the landlord or building owner.
In the sphere of commercial real estate, it’s not uncommon for one broker to represent both a landlord and a business owner in a transaction for an office, retail or industry lease. Sometimes a dual-agency situation consists of one individual on both sides of the negotiations. Other times it is two individuals within the same firm.
When you use a dual agency, there is a question as to where the agency’s or individual’s loyalties truly lie—with you the business owner or with the landlord.
Here’s a local example of how dual-agency representation can put the business owner at a disadvantage.
A professional services firm that occupied 15,000 square feet of office space was approached by its building’s listing broker and landlord.
This broker and his landlord client focused on the great relationship they and the tenant had shared over the past 10 years. They offered the tenant a lease renewal they characterized as being below market.
The dual-agency broker deceptively promised the tenant that it would save the cost of a commission (actually, the commission is paid by the landlord, not the tenant) and that savings would be reflected in reduced rent.
Our office, which exclusively represents tenants in lease and purchase negotiations, contacted the tenant and offered to review the landlord’s terms.
We discovered that the deal was not as rosy as the tenant first thought.
• The proposed rent was $4 per foot higher per year than recent new deals we had finalized in the same building.
• The landlord wasn’t going to change the tenant’s base year for operating expenses.
• The tenant would pay an extra 40 cents per square foot per month in expenses, an increase that would have continued for another 10 years.
The tenant decided to move out of the building. We helped the company find higher-quality space in a better building and saved it almost $2 million.
Conflict of Interests
The apparent conflict of interest in dual-agency representation is reflected in the California case, which deals with a residential property transaction. Buyer Hiroshi Horiike used a Coldwell Banker agent to locate a home for purchase. The home he bought was listed by a Coldwell agent in another office.
After Horiike bought the home, he discovered the square footage was less than advertised. Horiike sued, saying that since both agents representing the buyer and the seller worked for the same broker, they both had a fiduciary responsibility to advise him to hire a third party to verify the square footage.
As commercial real estate tenant representatives, we often work with tenants who are caught unaware that dual-agency representation can cost them in the long run with higher rent and more overhead costs.
Having two agents from the same broker representing both sides in a negotiation is not illegal. But you can’t ignore the elephant in the room: Is your broker in a dual-agency situation working as hard for you as it may be working for its other client, the landlord?
A broker who has a listing on a building also has a fiduciary responsibility and contractual obligation to the landlord, whose goals and objectives are clearly different from the tenant. Can that broker fairly and adequately also represent the tenant?
According to a CoStar article dated Aug. 26, even the attorneys for Coldwell Banker in the court proceeding say they can’t. Conflicting fiduciary requirements can put salespersons at risk of being sued on either side of the negotiating table, according to the article.