By Jason Hughes
Nearly two years ago, Gov. Jerry Brown signed a bill to require real estate brokers and their salespeople to disclose when they are acting as dual agents, representing both sides in a commercial real estate transaction, and what duties they owe clients.
Senate Bill 1171 was an important first step to limit conflict of interest and increase transparency, but as the main architect of that law, I’ll be the first to admit that much work remains to be done.
Now, the California Supreme Court has the opportunity to take a second step in the Horiike v. Coldwell Banker case.
Hiroshi Horiike was represented by an agent of Coldwell Banker, which also represented the seller. He believed he was buying a 15,000-square-foot home in Malibu, only to find that the living area was actually 9,434 square feet. The seller’s agent never reported this discrepancy; the crux of the dispute centers on whether that agent had a duty to do so.
Coldwell Banker says that this was not a case of dual representation, because the seller’s agent and buyer’s agent were on separate teams in separate offices. Horiike argues that the firm was by definition a dual agent so it and its agents owed fiduciary duties to him.
At Hughes Marino, we couldn’t agree more. That’s why we filed a brief with the court in support of Horiike, who is simply shining a light on an ugly practice that has plagued the real estate industry for far too long.
Coldwell Banker argues that upholding an appeals court ruling for Horiike would lead to “a monumental shake-up of the real estate industry that will hurt consumers.” While it’s right about the shake-up, it couldn’t be more wrong that it will hurt consumers.
Being a dual agent puts a brokerage firm and its agents in an almost impossible position, since they owe fiduciary duties to both parties. Due to this conflict, the law prohibits them from advising either client regarding price since that would violate their duty to the opposing side. If you ask how much you should offer, all they can do is show you comps and let you make your own decision.
Further, if you make the mistake of confiding in the agent and sharing information that could weaken your negotiating position (e.g. “I’m having trouble obtaining financing,”) then the agent would be obligated to share it with the opposing party. It leaves you wondering what you can and can’t say to your agent, so you’ll be inclined to clam up. At that point, the dual agent is a glorified messenger. It’d be cheaper and safer to use FedEx.
The Horiike case could be a watershed victory in the real estate industry for consumers. It would likely cause full service brokerage firms to break up, since consumers and those firms would all know that they can’t adequately serve their clients’ needs as dual agents. This would restore some semblance of fairness to a system that has favored sellers and landlords for far too long. It’s why I’ve exclusively represented tenants and buyers for the past 25 years – because someone needs to level the playing field.
For the public, there is no benefit in fostering an environment that allows conflicts of interest to continue. It’s an environment that preys on small business owners and start-ups that end up paying over market value, robbing them of the opportunity to create additional jobs or invest in their companies. It’s an environment that perpetuates backroom wheeling and dealing instead of increasing transparency. For this reason, if Horiike loses, then we all lose.
A shorter version of this op-ed was originally published by The Sacramento Bee.
Jason Hughes is chairman, CEO, and owner of Hughes Marino, an award-winning commercial real estate company with offices in San Diego, Orange County, Los Angeles, San Francisco, Silicon Valley and Seattle. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 25 years. He writes about topics in commercial real estate from a tenant’s perspective on his blog, Downtown Dirt. Contact Jason at 1-844-NO-CONFLICT or firstname.lastname@example.org to learn more.