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‘Dual Agency’ is Just Plain Old-Fashioned Conflict of Interest

The age-old biblical adage, “No man can serve two masters; for either he will hate the one and love the other…” certainly holds true today in the secular world of commercial real estate where it is being ignored en masse.

I refer to the “dual agency” situation in which a commercial real estate company, retained by the building or property owner, also represents the tenant in a leasing transaction. A landlord and tenant have very different interests at stake when negotiating a lease. The landlord tries to get the highest price and give the fewest benefits while the tenant tries to get the lowest price and most benefits.

Truth be told, dual agency is better described as an unavoidable conflict of interest since there’s no practical way for one broker to equally represent a landlord and tenant in a transaction. For reasons that escape me, this conflict of interest is perfectly legal in commercial real estate, unlike most businesses and professions where such a conflict of interest is forbidden either by law or a professional code of ethics.

Traditional commercial real estate companies have a fiduciary obligation to the landlord-the party paying the commission. They, the commercial real estate company, agree in writing to use their best efforts to negotiate the most financially attractive terms on each transaction for their client-the landlord. More specific, their sole job is to fill vacant space and keep existing tenants in their landlords’ buildings. Their objective is to achieve the highest rents possible while giving away as little as possible in the way of concessions and benefits to tenants-keeping their landlord clients happy.

Keep in mind that landlords provide their brokerage companies with steady streams of monthly revenues while individual tenants provide revenue on a spot basis-once every five to ten years when they sign a new or renewed lease. If landlord brokers do a good job, they will retain the listing for the building and even gain referrals to other landlords. These landlord brokers are in a constant job-interviewing state with their existing landlord clients and other landlords they are trying to win-over. It’s difficult to negotiate effectively against a landlord whom you are also hoping gives you a future building leasing assignment.

Certainly, there’s nothing wrong with doing a good job for one’s landlord client. The landlord, however, is only half the lease transaction equation. The other half sitting across the negotiations table is the prospective tenant-all too often with only the landlord’s brokerage company there to “represent” them.

The question you’ve no doubt asked by now is intuitively obvious: “How can a brokerage company whose primary responsibility it is to drive the best bargain for its landlord client also obtain the best deal for the tenant?”

The answer is equally obvious: It is impossible. Think about it; can an attorney or his or her law firm represent a party in a lawsuit while also representing the other side? The state bar, for one, doesn’t think so. Neither does anybody else with any sense of fairness.

One reason tenants think it’s in their interest to work with the landlord’s broker is the false notion of economy. The theory is that if they deal directly with the landlord, they’ll save money.

What they don’t realize is that the commission the landlord pays in most cases is essentially the same, whether or not the tenant is independently represented in the transaction. That means the landlord broker’s commission increases significantly, if not doubles, if the tenant does not hire his or her own broker to negotiate the deal. Ironically, the tenant, hoping to get a better deal by working with the landlord’s broker, actually bonuses the landlord’s broker who is contractually obligated to work against the tenant’s best interest!

Tenants need their own brokers who represent only their interests. They need focused experts who spend 100% of their time negotiating, protecting, and strategizing for the benefit of tenants-and tenants only. They need to understand that a landlord-focused commercial real estate company trying to sell their “tenant advisory group” is misleading and fraught with conflicts. Tenant brokers, whose brokerage company is not beholden to any landlord, are not conflicted-as they are indifferent to which landlord wins the tenant’s occupancy. Their only allegiance is to their client, the tenant.

Real estate transactions are fraught with disclaimers and disclosures about all sorts of issues that impact real estate values. And yet, there’s no requirement, legal or otherwise, that compels a landlord’s broker to disclose the financial gains that would accrue to the broker if there is no tenant representative.

Dual agency-serving two masters-has long been a major problem for commercial space tenants seeking fair lease terms. Until state regulations-or heightened industry ethics-are put in place to control the abuses brought about by this patently unfair practice, tenants will need to take the initiative on their own to seek out and retain a broker who exclusively represents only tenants.

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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