Commercial Real Estate Brokerages and Conflicts of Interest

In this article, you'll learn:

• Dual roles in commercial real estate brokerages often lead to conflicts of interest.
• Why tenants often get less favorable deals when brokers also represent landlords.
• Legal cases that highlight conflicts of interest in commercial real estate.

When you hear, see, or read the name “commercial real estate brokerages,” what comes to mind?

Someone who works to finds tenants the best deal? Or, someone who works for landlords to find them tenants?

What your answer is will depend on what end of the spectrum you are, but if you are a tenant, you should hopefully see that the two points above can’t exist in the same broker. That is an apparent conflict of interest. Why then do commercial real estate corporate service firms play both sides of the coin like this?

Major commercial real estate firms have made their empires by representing both tenants and landlords. But while they benefit in this arrangement, the tenant consistently is at the short end of the stick. This means that tenants need to be hyper-aware of the professional they choose to represent their real estate transactions and their portfolio. Let’s discuss the conflict, why corporate tenants usually are at the disadvantage, and the evolving legal landscape surrounding the process.

What are Commercial Real Estate Brokerages?

Let’s start with the basics. When Propmodo asked the same question, "what are commercial real estate brokerages," the initial answer already pointed out some red flags that are widely commonplace. 

So, this should already sound fishy, in fact it’s the exact conflict of interest that we described earlier.

Many of these firms represent the interests of both tenants and landlords. Of course landlord brokers have a place, and that is to represent the landlord by securing them the highest price. But if you're a tenant, you don't want to work with a firm that represents both sides of the commercial real estate transaction. One of the ways to identify whether your representative also represents landlords is to see whether they advertise property listings on their website. 

How are Conflicted Brokers Conflicted?

Considering that the majority of commercial real estate brokerages cater primarily to landlords as their primary clients, it becomes apparent that landlords wield greater influence in negotiations, often at the expense of tenants.

This skewed dynamic can result in tenants not receiving the most favorable deals, as brokers may prioritize the interests of their landlord clients over the individual needs of tenants. The loyalty towards their largest clients usually creates an imbalance in the negotiation process, as tenants lose out on the best possible terms, concessions, prices and even potentially better suited buildings.

The only way to truly guarantee as a corporate tenant that you’re getting the best deal is by working with a True Tenant Representative. With a fiduciary responsibility to protect solely your interests, you never have to guess whether or not you got the best deal possible. Read: What is a True Tenant Representative and What to Avoid. 

Because landlords also reap advantages from dual agency arrangements as they are not required to contend with competition.

Less Competition = Less Leverage for Tenants

It is important to note that one effective strategy for achieving desired outcomes in negotiations is leveraging the value of your tenancy against multiple offers from different landlords. However, corporate service brokers may overlook this crucial step, resulting in a limited number of properties being presented to you. While your representative's company may not have exclusive agreements with all properties, a True Tenant Rep would likely provide a significantly broader range of options.

Because, dual brokers tend to prioritize spaces where their company has control, rather than exploring all possible listings and also considering properties that may fit your needs better than what your originally thought did. As a result, tenants may lose out on properties and lease terms that would genuinely serve their best interests, getting placed instead with the most convenient options. 

Want to learn how you can find the best office space for the best price? Enroll in our free video course! 

Consequently, tenants frequently suffer significant losses, often without even realizing it, as they entrust all their resources to a conflicted source. Moreover, when working with dual brokers, tenants are less likely to be presented with a wide array of options compared to collaborating with a True Tenant Representative.

Legal Stand Against Conflicts of Interest

However, recent lawsuits spotlighting the rampant conflict of interests have major players on edge. And the law at the center of it is the DC Brokerage Act, which albeit around since 1996, it has rarely been exercised to point out the tenant’s loss.

It states that any instance of dual representation must be plainly and obviously stated in lease documents. But most dual representation laws are written to protect the unsophisticated homeowner, not the corporate tenant. Most states don't require disclosure in commercial real estate (CRE) transactions and the practice is quite commonplace in CRE as the elephant in the room. 

But, amazingly in 2023, the law appears at the crux of a new firestorm of legal activity. It has given corporate tenants a platform to stand on in legal disputes that involve the practice of a broker who had their hand in both pots. Here are some of the last few notable cases tenants should be following:

This year a 2018 lawsuit against JLL was concluded. A client argued that JLL wasn’t entitled to a commission because the conflict of interest wasn’t properly showcased. The landlord refused to pay, claiming that JLL never properly disclosed that they represented both tenant and landlord. The deciding judge called dual agencies, “inherently suspect due to the broker’s inescapable conflict of interest in representing opposing parties to a transaction.” To learn more, read Commercial Tenants: What to Know About Conflicted Brokers.

Earlier this year a judged dismissed a 2018 lawsuit by the building's owner, 601W Companies against CBRE. The dispute arose because 601W argued that CBRE had not properly disclosed its representation of both parties in the transaction, and therefore should return the commission. The judge dismissed the case and CBRE was entitled to keep the commission. But it highlighted the semantics of the D.C. Brokerage law. In actuality, it does not bar the practice of dual representation…It just states that any instance of dual representation must be properly disclosed. 

Jason Hughes, founder of well-known San Diego brokerage firm Hughes and Marino, pleaded guilty to a conflict-of-interest charge after accepting $9.4 million from the seller of two downtown buildings while advising the city on the purchase of those properties. His conflicted service cost the city $200 million. To learn more about this case, read: This Conflicted Broker Cost San Diego $200 Million. 

Whether the brokers were found guilty or not, it proves that the tide is turning. Tenants are taking harder looks at old deals where they may have gotten taken advantage of.

And at the same time, as a parallel alongside the legal drama, True Tenant Reps have been showing tenants what is possible through unbiased reputation. For instance, iOptimize Realty^® regularly saves our clients up to 30% of their total CRE costs when compared with a traditional firm or unrepresented tenant. The legal disruption only with conflicted brokers shows the difference in experience tenants experience when compared to True Tenant Reps™.

But, while putting conflicts of interest on display, it also a reminder to corporate service brokers to be more skillful in the way they protect themselves. This represents a pivot on their behalf. Rather than change their practice, they are becoming more careful in their documents disclosing the nature of their role. So, if you’re a corporate tenant reading a lease in the future, you better be prepared with an adept, True Tenant Representative and a good lawyer.

So with this knowledge, its now on you as to whether you want to gamble on the ethics of a major corporate service brokerage. 

What Corporate Tenants Should Know

It’s critical for tenants to understand the potential issues that can arise from dual agencies and be sure to ask about disclosure before entering into any agreements. Ultimately, tenants need to do their due diligence when selecting a broker in order to ensure they see all the properties that suit the needs of their business, and receive the best terms for the best price in the location that best matches their interest.

And the tried and trusted way to achieve this is by collaborating with a True Tenant Rep™. With a legal obligation to safeguard your interests exclusively, you can eliminate any uncertainties and be confident that you have indeed obtained the most advantageous deal available.

Because the legal landscape is evolving, and tenants should stay informed and seek professional guidance to protect their interests. So if you're ready to learn all the tips, tricks, and latest trends in the commercial real estate industry, subscribe to our blog to receive invaluable market knowledge straight from the source, True Tenant Reps™.