Legislation Fails to Make it Out of Committee After Getting Thumbs Down by Real Estate Industry Groups

By Randyl Drummer

Legislation introduced in California intended to prohibit CRE brokers from acting in a ‘dual agent’ capacity and represent both sides of the same commercial property transaction was turned back this week.

California Assembly Bill 1059 was introduced last year by Assemblywoman Lorena Gonzalez Fletcher, D-San Diego. However, business and real estate groups opposed the bill as written and language banning dual agency was removed before the bill was even sent to the Assembly Judiciary Committee for debate this week.

The original bill called for adding a section to the state civil code prohibiting a brokerage firm, broker or any of the broker’s or brokerage’s licensees from acting as a dual agent in its representation of both the buyer, seller, landlord or lessee or any of their principals in the same commercial property sale or lease transaction.

The revised bill, which sought to provide additional disclosures in dual agency situations, failed to achieve committee passage Tuesday in the face of continued opposition from several real estate and business groups, including the California Association of Realtors (CAR), NAIOP California, BOMA California, CBRE Group, Inc. the California Business Properties Association and the National Federation of Independent Businesses.

Opponents said the disclosure requirements in the bill would duplicate existing law and assess severe penalties for non-compliance, including the potential that real estate practitioners or an entire company could be forced to forfeit their licenses for first-time or inadvertent offenses.

“We have concerns with the current language,” said Christine Dugger, legislative analyst for CAR. “We think in some ways it demonizes dual agency in the statute, which we think is inappropriate. We just don’t think this bill in its current form is… ready to go, and will solve the problems that it attempts to solve,” Dugger said.

Dugger said the disclosure issue could be folded into two other bills intended to address real estate issues. Both of those bills were approved in committee on Tuesday.

“Our members support meaningful and timely disclosure of agency relationships,” said Matthew Hargrove, senior vice president of governmental affairs for the California Business Properties Association (CBPA), a legislative advocacy group representing CRE owners, tenants, developers, brokers, contractors, attorneys and other industry professionals.

“The current agency disclosure law in California protects consumers well by requiring brokers give two separate disclosures to consumers. There is no evidence that these disclosures are in any way inadequate,” added Hargrove.

Legislative efforts to ban or regulate dual agency accelerated after the California State Supreme Court handed down a decision in November 2016 upholding a lower-court ruling that a listing broker had a fiduciary duty to both the buyer and the seller in a dual agency transaction. In the case, Hong Kong businessman Hiroshi Horiike sued Coldwell Banker and its agents in a dispute over the square footage of a Malibu home purchased by Horiike in 2007.

Several other countries and a number of U.S. states have moved recently to ban or sharply limit dual agency deals. In November, the Office of the Superintendent of Real Estate, a regulatory agency of the British Columbia government, approved a ban on limited dual agency transactions. The ban goes into effect March 15.

In March 2017, the Royal Institution of Chartered Surveyors (RICS), a global real estate accreditation body that certifies property and construction professionals, published a statement containing more stringent conflict-of-interest requirements specifically banning the practice in the United Kingdom.

However, similar legislation introduced in California and a number of other states has faced tough opposition from real estate industry groups. AB 1059 was pulled from the Judiciary Committee’s calendar before downsized and set for hearing this week.

Gonzalez Fletcher told the committee that the California Supreme Court decision lends urgency to the issue, and that the bill’s goal is simply to improve disclosure of potential conflict of interest in dual agency deals, especially for smaller tenants or buyers that face language barriers or are not versed in the complexities of real estate contracts.

“We’re not trying to stack the deck against sellers or landlords,” Gonzalez Fletcher said. “We just think the tenant (or buyer) has the right and should know early on in the transaction, especially in dealing with mega-corporations, that the person representing you is also representing the landlord.”

“Yes, there’s a lot of opposition because the industry is very large and the segment that represents only tenants is very small. We have a huge imbalance of power here and that’s what happens when we try to correct things,” the assemblywoman said.

Jason Hughes, chairman and CEO of San Diego-based tenant representation firm Hughes Marino and a vocal critic of dual agency transactions said the current disclosure law “does not work very well.”

“Right now, in practice, it’s not being disclosed until typically the very end of the transaction when all the documents are signed, typically a stack of 100 pages and multiple signatures,” said Hughes, who helped draft SB 1171, a law enacted in 2015 requiring disclosure to clients of dual agency relationships in commercial property transactions. Such disclosures were already required for residential real estate deals.

“We think it’s really important that these tenants, who could be a dry cleaner, coffee shop all the way to the largest firms out there, at least be aware that there’s that potential for conflict,” Hughes said.

Committee members praised the legislation’s intent but voiced skepticism about what they described as lack of clarity regarding enforcement and potential duplication in the bill language.

“I like the intent, but even if we assume this is an effective disclosure, which I’m not necessarily convinced of, we would then have two ineffective and one effective disclosure. I’m not sure how that improves the situation,” said Assemblyman Kevin Kiley, R-Granite Bay. “What I’d like to see is all the parties who seem to agree on the principle of effective disclosure to actually try and make that happen.”

While the legislation failed to achieve passage out of committee, committee Chairman Mark Stone, D-Monterey Bay, agreed to stipulate that an amended bill could be submitted for reconsideration.

This article originally appeared on CoStar, which can be read here.