A conflict of interest in a commercial real estate transaction can absolutely mean trouble, which is why dual representation is illegal in commercial real estate in most US states
This is a brief discussion of a rather complex situation, governed by California Civil Code §2079.139d, which we’ll discuss further in a future blog. Nonetheless, the majority of commercial real estate brokers generate most of their revenue from landlord representation, so it’s important to understand where a conflict of interest can occur if you’re venturing into the office space leasing or buying arena.
A dual agent is defined by the aforementioned legislation as “an agent acting, either directly or through an associate licensee, as agent for both the seller and the buyer in a real property transaction.” When a real estate broker signs a listing agreement with a landlord, they have a fiduciary obligation to represent their client’s best interests. Therefore, a listing broker representing both sides of a real estate transaction (or arguably a broker representing a tenant with a requirement that matches some of their own property listings) has a clear conflict of interest.
In reality, it’s all about ethics!
Regardless of what legislation or requirement is in place for a broker to represent the best interests of both parties, the real estate negotiation process is not a mediation, so cannot be expected to be fair to both sides in reality. In this situation the broker may not have any incentive to manage the tenant improvement or relocation process for the tenant once the real estate transaction has closed. Furthermore, given the choice, it would be unwise for a listing broker to negotiate in the best interests of a tenant on one of their listings and risk their profitable relationship.
It’s also important to note that a conflict of interest can exist practically anywhere and can be open to subjectivity. Even a tenant representation firm that only represents tenants arguably has multiple potential conflicts of interest, for example, competing sublease listings from various clients that could also be competing against each other in the same industry or location. Or simply relationships with certain business clients that are competitors of other clients in the same industry, also represented by the same firm, as is common in the legal industry.
What’s most important above all is the level of trust you have with your commercial real estate advisor to disclose any potential conflicts of interest BEFORE you engage them, and of course represent your best interests throughout the real estate process. The best way to do this is to enter into a formal written representation agreement with your advisor, which states the broker’s fiduciary obligation to represent your best interests, and to disclose and actual or potential conflict of interest.
In reality, it’s all about ethics! It shouldn’t matter what legislation or agreement is in place to govern dual agency or address any conflict of interest. A great real estate advisor is one that can prove they’re an ethical real estate advisor by their actions before and throughout the real estate process.