Commercial Tenants: What to Know About Conflicted Brokers

In this article, you'll learn:

• The inherent conflicts of interest in dual agency brokerage in commercial real estate.
• The ethical dilemmas faced by dual brokers and their impact on tenants.
• The legal implications and recent rulings against conflicted brokers.
• How tenants can protect their interests by working with a True Tenant Representation Broker.

In a landmark case in the commercial real estate industry, a judge called dual agencies, “inherently suspect due to the broker’s inescapable conflict of interest in representing opposing parties to a transaction.”

While one representative handling the interests of two parties would raise a red flag to most, curiously, the practice is commonplace in commercial real estate. The case now represents a massive shift, highlighting the fact that huge firms that handle property management and leasing usually sacrifice the tenant the best deal. 

Dual brokers and conflicts of interest are commonly observed in CRE. Unfortunately, they usually come at the tenant's expense. However, the new case decision may change everything. So, if you’re a corporate tenant, landlord, or anything in between, you’ll want to read on. Common practices and ethics when it comes to commercial real estate may be experiencing a tectonic shift. 

Conflicted Brokers in Disguise 

Conflicted brokers in commercial real estate usually don’t go by that name. Obviously, no one would plainly identify themselves with a scarlet letter. You’ll probably see them go by terms like “corporate service brokers,” “designated agencies,” or “dual agents.” However, they all mean the same thing: a euphemistic name for a brokerage firm, typically a big one, that represents the landlords (and like to say they’re Tenant Reps too.) However, there is an apparent conflict of interest.

Albeit quite common, dual agents bring on a serious ethical dilemma for both parties involved. On the one hand, they are expected to serve two clients with a fiduciary duty – the landlord and tenant – while on the other hand, how could you??

The issue becomes even more complex when considering that most major commercial real estate brokerages have landlords as their biggest clients; thus, giving them more influence over negotiations at the expense of tenants. This can result in tenants not getting the best deals, as brokers may be more loyal to their biggest clients over individual tenants. 

Cut and dry: Tenants are usually at the disadvantage in this process. 

Landlords also benefit from dual agency since they don’t necessarily have to worry about competition. Remember, one of the most efficient ways to get what you want in negotiation is to leverage the value of your tenancy against multiple landlord offers. Corporate service brokers may skip this critical step. So, you may see properties that your rep's company doesn't have an exclusive agreement with, but in all probability not half as many as what a True Tenant Rep would show you. 

As a result, tenants often lose big time (whether they realize it or not) as all their eggs are placed in one basket. 

As part of this, tenants will also not likely see as many options as they would working with a True Tenant Representative. Dual brokers are more likely to show them spaces where their company has control, as opposed to open listings. Therefore, tenants may be missing out on

the properties, locations, and terms that are actually in their best interest (rather than what the quickest option was.) 

The Legal Stand Against Dual Brokers 

Each state has its own real estate brokerage laws. These laws are focused on residential real estate, and not on commercial real estate. The point is that the laws are written with the homeowner in mind, not the corporate tenant. Most states don't require disclosure in commercial real estate transactions, as to who represents which side. And this is where we began our story. 

It states that any instance of dual representation must be plainly and obviously stated in lease documents. But despite how frequently dual brokers conduct both sides of the deal, there hasn’t been any legal action regarding the law until now. 

S.C. Herman & Associates, a property management firm, offloaded the responsibility of finding a new tenant to CRE behemoth, JLL. JLL, like many of the big global companies, primarily represents landlords. 

Upon finding a lease for the space, JLL expected to receive the brokerage fee and sued S.C. Herman, claiming it never received its due commission. However, the landlord refused to pay, claiming that JLL never properly disclosed that they represented both tenant and landlord. And what happened?

The judge agreed that JLL wasn’t entitled to a commission because the conflict of interest wasn’t properly showcased. 

While the law in the landmark case doesn’t stop the practice of conflicted brokers entirely, it bars doing it sneakily. This helps to ensure transparency in the process, allowing both landlords and tenants to make informed decisions.

However, the entire process of dual agencies has been definitively banned in other places of the world. For instance, in the United Kingdom, the law cracks down on the typical excuse that potentially conflicted roles are designated to separate departments. 

Unfortunately, in America, the questionable ethics of the process are often sidelined. This is because real estate law in the U.S. is written with homeowners in mind.

On the other hand, commercial real estate transactions are assumed to occur on a far more sophisticated level, with legal representatives, real estate departments, etc. that go through leases with a fine-tooth comb. Transparency is assumed. According to Propmodo, “The D.C. law (at the center of the attention) is more so designed to protect less experienced real estate professionals. Most industry folks say it’s usually not a big deal if everyone knows what’s happening.”

However, with the most recent lawsuit, the tide is turning in the U.S. The 2018 lawsuit against JLL has now established a legal precedence for similar cases in tenant’s rights dilemmas. Now, it is popping up even in cases of residential real estate. "A lawsuit against Houlihan Lawrence in 2018 alleged “predatory behavior” in how the residential brokerage handled its dual agency practices...

Regardless of the future decisions of such cases, any legal action proves that the tide is shifting. Many have realized that conflicted brokers usually cost the tenant, whether they realize it or not. Due to improper due diligence, tenants are regularly losing millions on brokers, who they believe solely have their interests at heart. They don’t know that they’re missing out on alternate properties that might be a better fit, better lease terms, and at a lower price.

We cover this, and many other factors, in our free "How to Save On Your Next Office Space" video course.

Because how could you drive down prices when you’re working solely with the seller? 

As such, 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 get the best deal possible. Read: What is a True Tenant Representation Broker and What to Avoid. 

Now as for the future of the law or conflicted brokers in general, no one is completely sure what will happen. But, you can take control of your real estate. If you want to truly get the best deal, you need to use someone who will only have your interests at heart, a True Tenant Rep™.

However, in the meantime “The attention to dual agency has many top brokerages on high alert,” according to Propmodo. So, could this signal an end to conflicted brokers? Probably not. But, it is a win for tenant’s rights and a reminder to be wary of the landlord’s broker in sheep’s clothing. 

Work with a True Tenant Representation Broker 

To truly get the possible outcome for your lease, you need to hire a true tenant representation broker. A Tenant Representative should only represent you, the corporate tenant. So whether real estate is your primary responsibility or you’ve been thrust into this role, a Tenant Rep is an ally that protects your best interests. By only considering your needs, they will be able to:  

• Find you 3-4 times the number of suitable sites   
• Let you focus on your day job  
• Connect you to the professionals you need   
• Help you avoid costly mistakes   
• Honestly compare all suitable sites  
• Thoroughly analyze lease terms   
• Conduct negotiations with your landlord, far beyond just rent

At iOptimize Realty®, we are True Tenant Reps™  with over three decades over experience solely representing corporate tenants. Our unparalleled and un-conflicted service has saved our corporate clients hundreds of millions of CRE dollars. 

Learn what it's like to work with a True Tenant Rep™