New nonprofit fights back against the unethical practice of dual-agency brokerage
By Jason Hughes
A glaring and dubious conflict of interest has long been rampant in the world of commercial real estate. This practice known as “dual agency” describes a brokerage firm that represents both landlords and tenants in the same negotiation. It should be obvious to a first-year law student—or even someone with just a passing knowledge of law—that those two parties have opposing interests.
Unfortunately for most tenants, most commercial real estate brokerages primarily represent landlords. That makes buyers second-class citizens in negotiations. Adding to the frustration for tenants are international organizations such as the Building Owners and Managers Association (BOMA), which have broad reach and help stack the deck against tenants.
What recourse do representatives of tenants/buyers have? For starters, there’s a new nonprofit association ready to fight for the underdogs in this equation. The Association for Commercial Tenants (ACT) was specifically created to provide educational support, legislative guidance and industry unification. ACT stands in opposition to the inherent conflict of interest created by dual-agency brokerage, and is striving to even the playing field.
Many would say it’s about time. Here, then, is a look at the history of this unfair relationship, the unveiling of a ray of hope for those on the wrong end of landlord-tenant negotiations, and a rundown on the weapons tenants now have to fight back.
The Opening ACT
Landlords own buildings and tenants rent space in those buildings to operate their businesses. Tenants represent all kinds of businesses—law firms, supply companies, bio-techs, pharmaceutical start-ups and so on. Some companies own the buildings they occupy; some rent to save upfront capital that can be used to later grow the business.
Commercial brokerage was created more than a century ago, and it began as a way to help landlords sell and lease properties. It was only later that tenant representation became part of the industry.
BOMA came along and helped create a huge support system for landlords and their professionals. This union-like organization aggregated the voice of landlords, and gave a boost to a group that already had an unfair advantage.
Rental dollars paid for the industry to flourish. Holding all the cards, landlords were then able to manipulate the system to unfair advantage.
For example, over the past two decades there’s the all too common example of buildings magically growing in size. How is that possible? Building owners have found ways to get architects to be creative in their square-foot measuring guidelines. A space that was 100,000 square feet 20 years ago may suddenly be listed at 110,000 square feet today. Artificially growing the space means that the price can be bumped up. The building hasn’t gotten any bigger—but the interior spaces that are added to the measurement equation somehow grow, to the delight of owners. These are the kinds of practices that can be installed when a group is backed by money and clout.
Tenants, on the other hand, have long treated office space as a “need-to-have” expense. For tenants, leasing space is not their expertise. Therefore, they continually get taken advantage of—legally, economically and flexibility-wise.
Buyers have long had no bargaining power, no voice, and no super hero standing up for them (except for a few tenant-representation companies that exclusively work for tenants in lease and purchase transactions).
Now one of the leading providers of exclusive tenant representation has created an organization to be the counterbalance to BOMA—a group whose members today represent 10.5 billion square feet of property in the United States. The goal of ACT is to bring tenants the bargaining power, voice and protection that they deserve.
Why ACT Now?
After 25 years of providing award-winning professional service in commercial real estate brokerage and serving as a pioneer in the industry that exclusively represents tenants, my wife (COO of Hughes Marino) Shay Hughes and I founded ACT. Our mission is to expose landlords and other organizations that take advantage of commercial tenants, and shine a light into the dark corners of commercial real estate.
Shay and I own and operate commercial real estate firm Hughes Marino—a nationally recognized, 100-percent-family-owned business headquartered in San Diego. With offices up and down the West Coast, Hughes Marino has partners that span across the country and around the globe.
Commercial real estate tenants need and deserve an organization that is empowered to stand up for their rights. BOMA wields tremendous influence, monitors and lobbies legislative issues and publishes codes and standards on building measurements and other industry issues. ACT gives tenants a seat at the table and a voice to demand truth, justice and fairness.
Prior to founding ACT, I have personally taken on an active role in changing the industry. In 2014, I was responsible for getting California’s legislature and Gov. Jerry Brown to sign Senate Bill 1171 into law. Dubbed the Dual Agency Disclosure Law, it went into effect in January 2015. It was a small step toward overall transparency in commercial real estate brokerage disclosure, and a large victory for tenants.
Following that passage, in December 2016, California’s State Supreme Court upheld an Appellate Court ruling (Horiike v. Coldwell Banker) stating that dual agents have an inherent conflict of interest—and also encouraged Sacramento to modify the laws on dual agency in the state.
Our goal now is to make dual agency illegal in California—and across the United States.
Benefits of ACTion
Who can join ACT? Any company, or representative of a business or firm, that engages in the act of renting commercial office space.
One of ACTS’s major functions is to create awareness and propose legislation regarding the conflict of interest within dual-representation agencies. By becoming a member of ACT, companies are gaining strength in numbers. How? By uniting together with other tenants who negotiate with powerful landlords.
ACT is a nonprofit, and not a union, but members realize economic benefits in the same way any interest group with a shared interest bands together and stands united for a common cause.
Members have access to educational content, are frequently updated on codes, standards and practices, and can enter into transactions with the peace of mind knowing they are supported by unified clout.
Another benefit: ACT is revolutionizing the landlord-tenant relationship by creating a private registry of landlords that includes ratings by member companies. The nonprofit’s members can rate landlords on a scale that will note if certain entities are blacklisted for unacceptable business practices.
The ACT team is available by telephone or email, and delivers monthly bulletins to members, annual white papers on industry standards and updates on legislative and legal matters.
Examples of common lease discrepancies that ACT can provide information on include: base year expenses; operating expense reconciliation; capital expenses versus recoverable expenses; measurement of space; landlord relocation provisions; damage and destruction provisions; subleasing and assignment provisions; option to renew, contract, expand provisions; and parking expenses and double dipping with building expenses.
Coming soon, there are plans in the works for an ACT annual meeting, where members can participate in educational sessions with commercial real estate experts, as well as network with like-minded peers.
If you want to be a part of helping balance the scales of an injustice, ACT now.
This article originally appeared in Attorney Journal.
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 email@example.com to learn more.