Gov. Jerry Brown signed into law Friday legislation that makes it much more difficult for commercial real estate brokers to represent both sides of a sales or a leasing transaction.
Under SB 1171, carried by Sen. Ben Hueso, D-San Diego, effective Jan. 1, 2015, commercial real estate salespeople and brokers will need to provide in writing their exact proposed agency role in the future transaction.
In addition, this disclosure will need to be signed by the potential client prior to moving forward with any representation.
The written disclosure must fall into one of three statements: (1) Agent represents only the landlord/seller; (2) Agent represents only the tenant/buyer; or (3) Dual Agency: Agent represents both the landlord/seller and the tenant/buyer.
A dual agent is barred from providing any confidential information between the two parties unless written consent is obtained.
Jason Hughes, president and CEO of the Hughes Marino tenant brokerage firm, was instrumental in writing the legislation and has long argued that it is a conflict of interest for brokers to represent both sides, even though many do.
In addition, earlier this year the California State Court of Appeal ruled in Horiike v. Coldwell Banker that commercial real estate professionals working for the same corporate broker are dual agents if the listing office corporate broker is the same as the selling agent’s corporate broker.
Hueso didn't say brokerage firms should be banned from being dual agents; he said it just needs to be clear if they are.
"This disclosure bill is about consumer protection. … It allows the consumer to make an informed decision,” Hueso said.
Hughes agreed, saying that he also didn't want to ban the dual-agency practice, but he emphasized that it could create a lot of problems.
"Imagine you represent both sides and you're not allowed to transmit confidential information to the other party. How does that work?" Hughes asked. "If I were getting 80 percent of my money from landlords and I represent a tenant, it puts you in a very awkward position."
"Now when you think you’re getting nonconflicted real estate representation, it will actually be true,” Hughes added.
Attempts to reach qualified representatives from several other commercial brokerage firms were unsuccessful by press time.
Hughes said he asked Hueso to sponsor this new law because he recognized a need for transparency in the commercial real estate industry.
“It astounded me that commercial real estate salespersons and brokers were not required to provide written disclosure to their clients about any conflicts of interests they may have -- or who the brokers were actually representing,” Hughes said. “In residential real estate, agents are required by law to provide such disclosure immediately prior to engaging with a client. However, brokers for commercial transactions had no such requirement. What resulted was a tremendous amount of conflicted representation, which almost always adversely affected companies who were buying or leasing commercial space.
“Dual agents, who are typically biased in favor of landlords as a result of landlords providing the majority of their company’s compensation, will now be relegated to something like a messenger service ..." Hughes said. "For example, these dual agents will be specifically barred from telling the tenant that the landlord would accept less, and from telling the landlord that the tenant would pay more. Bottom line: Most companies will not find value in brokers whose company also represents landlords.”
Hughes believes this new law will be the catalyst to finally break commercial brokerage firms into two camps: either they will represent landlords or they will represent tenants.
“Representing both will have too many legal liabilities. In addition, tenants won’t find dual-agent brokers worthwhile to represent them,” Hughes said.