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New Commercial Real Estate Law Aims to Create Transparency

By Joe Gose

A new California law that went into effect on Jan. 1 requires commercial real estate agents and brokers to provide clients with written disclosures regarding whom the agents represent, potential conflicts of interest and fiduciary duties.

The new rules mirror those that for years have applied to residential real estate agents and in particular are aimed at “dual agency” representation, in which an agent represents a buyer and seller—or a tenant and a landlord—in a single transaction. As part of the disclosure process, clients must consent to the arrangement in writing at the beginning of the relationship. Even where no dual agency exists, commercial real estate agents are required to still make disclosures and receive consent.

Among other stipulations, the law significantly limits what commercial property agents in dual relationships can reveal to their clients about the negotiations—they must not disclose confidential information provided to them by either party to the opposite party, for example, such as telling a landlord that a tenant would pay more, or vice versa. Additionally, if two agents working in the same brokerage represent opposing parties in a transaction, it is considered dual agency, according to the law and a recent California Court of Appeals ruling.

The statute was conceived by Jason Hughes, CEO of San Diego-based tenant-representation brokerage Hughes Marino, as part of an effort to create more transparency within the industry. Commercial property agents that have represented landlords for years have also appeared to represent tenants on a lease but were not required to provide disclosures about potential conflicts of interests, he said.

Those conflicts may include possible kickbacks, promotional trips or even favors—such as a promise to pay for construction of a swimming pool in a broker’s backyard—as incentives to close a transaction, Hughes said. Similarly, he added, tenants without conflict-free representation often are not provided knowledge that could substantially alter negotiations, such as a landlord’s need to land a big lease to boost value before an impending sale or news that a building’s mortgage is delinquent.

“I’ve been doing this for 28 years and have seen a lot of unscrupulous brokers misleading tenants,” said Hughes, who also has offices in Orange County and Los Angeles. “This law doesn’t prohibit a tenant from hiring a dual agent—a landlord’s broker can still represent a tenant—but now the tenant is going to be aware that the broker has a conflict of interest, and it’s in writing.”

Some see the law as unnecessary. Steven Edrington, the president of Oakland-based Edrington & Associates, a residential and commercial brokerage, acknowledged that some agents cut corners, but most were already employing what the new law requires as part of good business practices. Agents who focus solely on commercial transactions may have an adjustment period, he predicted, while those, like himself, who focus on both arenas won’t be affected much.

“You’re always walking a fine line in dual agency—you’re in the middle and have to represent everybody fairly,” said Edrington, who last year served as a director for the Northern California Chapter of the Certified Commercial Investment Member Institute. “But just fully disclose, be upfront and tell everyone what they need to know, and you’ll avoid a lot of pain, suffering and heartache.”

The disclosure bill didn’t garner much public opposition as it wound its way through the California State Assembly. The California Association of Realtors put up some resistance when the measure was being debated in the senate late in the process, arguing that when it sponsored disclosure legislation for residential brokers and agents several years ago, it had deliberately left out commercial transactions.

“The reason for the different rule is the different level of sophistication and complexity that exist in non-residential transactions,” CAR said, according to legislative analysis of the bill. “We believed, and experience seems to bear it out, that simply requiring disclosure of multiple agency relationships and allowing commercial practitioners to utilize their own contracts and forms is sufficient to protect the parties.”

Hughes counters that even some large companies with financial executives, much less a small business operator, are not always aware of potential conflicts of interest when negotiating with an agent who first and foremost represents the landlord.

“You can’t forget about the dry cleaner that occupies 800 square feet in a retail strip mall,” said Hughes, who is expanding Hughes Marino into Silicon Valley. “If he ever buys a house, he’s protected. But [until the law passed], he wasn’t protected on a business lease that could make or break him.”

This article originally appeared on The Registry.

Jason Hughes is founder of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.

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