Do Real Estate Brokerage Firms Have a Conflict?

By Manuel Fishman, Shareholder, Buchalter Nemer

There has been a bit of an uproar lately as to whether large national brokerage firms have a conflict of interest in representing both owners and tenants, in general and in the same transaction. The argument goes that brokers are beholden to owners, and therefore do not aggressively represent or advocate for tenants, in particular as it relates to disclosures of physical conditions, measurement standards for rentable square footage, and opaque property and asset management fees. Some have painted this as a “David vs. Goliath” issue, with building owners and brokers being the Goliath, and the small tenants, who are the rent generators, being cast as David.

Marketing space in commercial buildings is not easy. The value a brokerage company brings to the table for an owner is measured in the difference between a successful lease-up program and a gaping hole in a building’s pro forma based on occupancy. By far the highest cost in a lease transaction, after tenant build-out, is the brokerage fee. The lesser-known fact is that the majority of that fee goes to the “procuring” broker – the broker that procured the tenant – and that broker is usually the tenant’s broker. So, a national brokerage company that can represent both the landlord and the tenant, through separate leasing teams – which is called “dual agency” – can keep more of the fee “in house” than in a transaction in which two brokerage companies are involved.

Does that in and of itself present a conflict? Not under the laws of most states, which allow for dual agency. However, dual agency must be disclosed to each party and each party must consent. Does one party get less effective representation because of this? If one tries to analyze this situation based on the choices of big corporate users of space, for example, the answer is no. This is because, in the majority of cases, the role of the broker is to be a “market maker.” Put in perspective, national brokerage companies see hundreds of transactions in a market, and have a database of transactions and deal terms that is incomparable – whether they represent owners or users of space.

While there is an argument that “tenant-only” brokerage companies add unique value to tenants searching for space, it is less clear if brokerage companies have an inherent conflict when they offer tenant services and place their tenant clients in buildings where they also represent the owner, so long as the dual agency is disclosed in advance.

The California Supreme Court recently handed down a decision that clarifies a broker’s duties where the brokerage company acts as a dual agent. The general rule enunciated by the court is that in a dual agency situation, a broker owes the same duty of utmost care, integrity, honesty and loyalty to both clients – the landlord and the tenant – even if the brokerage company has different teams representing each side. The court noted that the duty of trust and loyalty that a broker and salesperson owe might raise concerns that in certain circumstances confidential information about a client’s motivations and a salesperson’s beliefs might be subject to disclosure, and harm a client. However, the court concluded that, when properly supervised and implemented, dual agency does not pose a conflict of interest. This is because, in the majority of cases, the application of the broker’s duty arises in the context of disclosing facts materially affecting the value or desirability of a property.

While there are always exceptions, when brokerage services are placed within the full suite of services that are needed for a large owner or user of commercial real estate—including property and facilities management, budgeting, financial modeling and reporting, space planning, market intelligence and peer comparisons—the value that a full-service brokerage firm brings to both an owner and a tenant is greater than the potential for conflict in a dual agency context.