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Wednesday, Jul 24, 2024

Keep Freedom in Landlord-Tenant Representation

Tim Hayes

Earlier this year, Hughes Marino, a tenant rep brokerage firm based in San Diego, sponsored California Assembly Bill 1059. If enacted, that bill would have outlawed dual agency in all commercial, industrial and retail transactions. Fortunately, serious reservations by several judiciary committee members, both Democrat and Republican, derailed the bill for this year’s session. However, Hughes Marino will likely make a similar attempt in the future, most likely during the 2018 session.

AB 1059 was a solution in search of a problem that does not exist. There is no evidence that brokerage clients want a change in existing laws. Those laws allow clients to choose either to have their own broker or to take advantage of the benefits of a dual agency relationship.

AB 1059 was based on the unfounded assumption that commercial real estate brokers do not honor their fiduciary duties to their clients. Strict licensing and disclosure rules already govern commercial real estate brokers. These rules already impose fiduciary duties on brokers and require maximum disclosure and other protections to the public. A broker violating those rules will already be subject to disciplinary proceedings, loss of license, or worse.

Disclosure Is Key Issue

A recent California Supreme Court decision (Horiike v. Coldwell Banker) held that a dual agency relationship creates more disclosure obligations for the real estate brokers, not less. The Court held that because the brokerage house in question acted as a dual agent, each individual agent had fiduciary duties to both buyer and seller. This created an obligation to discover and provide all material information to both parties. As a result, the clients in a dual agency relationship will have the benefit of more information, not less.

Further, in virtually all situations, the landlord pays both sides of the brokerage commission. Even when the tenant has its own broker, the tenant’s broker will look to the landlord for payment, creating the very “conflict of interest” which the sponsor claims AB 1059 will address. In order to avoid this purported “conflict,” the bill would have to include language barring tenant brokers from receiving a commission payment from the landlord. Tellingly, AB 1059 contained no such bar.

Freedom of Choice

AB 1059 would have required any tenant who wants to have a broker to hire a tenant rep firm. However, in smaller transactions, many tenants and buyers would be unable to even find brokers to represent them. This would impose burdens on small businesses who want to move into new space or expand existing operations.

In a commercial transaction, a successfully negotiated lease or sale is a win-win situation. Far from “the David and Goliath situation” imagined by the bill’s sponsor, the small tenant or buyer, for whatever reason it deems important, should remain free to choose to conclude a transaction in a non-adversarial environment.

Sometimes this can be most easily accomplished with the help of a dual agency relationship, with full disclosures to both sides as already required under present law. No good reason exists to prevent a tenant or buyer from making that choice.

Tim Hayes is the executive director of AIR-CRE, which represents more than 2,000 commercial real estate brokers throughout Southern California.


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