Pamela Kripke: California Real Estate Ruling Shakes Up Dual Agency Norms
Imagine a campaign manager working for two opposing candidates. Or a law firm attempting to defend both plaintiff and defendant. People and companies tend to steer clear of such arrangements and their inherent conflicts of interest, whether inspired by statute or common sense. But the business of real estate has for decades operated knee deep in dueling allegiances, to the dismay of some tenants who come up short when brokerages represent both buyers and sellers. With a recent court decision, that practice–“Dual Agency”–may now be trickier to pull off.
The California Supreme Court upheld a lower court’s ruling in November confirming that a listing broker has a fiduciary responsibility to the buyer and the seller when his brokerage firm is representing both, setting a significant precedent for obtaining and sharing information in residential and commercial transactions. The case, Horikke v. Coldwell Banker, concerns the purchase in 2007 of a $12.25 million Malibu mansion by a Hong Kong businessman (Hiroshi Horikke) who claimed that the square footage of the home was exaggerated, unbeknownst to him at the time of the sale. The figures given to Horikke were provided by the seller’s agent and not corrected by the buyer’s agent, both of whom were employed by Coldwell Banker.
Now, following the decision, such misinformation would have been squashed before the buyer actually paid for more house than he was getting or a corporate client lost millions in a bad leasing deal. While the specific case centered on a residential real estate dispute, the ruling may have implications in the commercial real estate space, where a majority of firms routinely represent both landlords and tenants.
“It’s the beginning of a systematic change in our industry,” said Jason Hughes, President and CEO of San Diego-based commercial real estate firm, Hughes Marino. “The court confirmed that brokers have significant conflicts of interest when representing both tenant and landlords in transactions.”
To ensure that conflicts are minimized, real estate companies that participate in this complicated dance may need to make changes in how they operate, such as creating alternative categories of agency relationships, perhaps, and disclosing information to brokers that they previously wouldn’t. Limiting these dual-broker transactions has some in the industry reeling. The California Association of Realtors, for instance, which represents more than 175,000 licensed real estate agents in the state, filed an amicus brief stating that consumer choices would be limited as a result of the court ruling.
Some brokerage firms, however, anticipate little adjustment. “The limited decision in this case was consistent with the way JLL does business – we act in our clients’ best interests with transparency and adherence to our high ethical standards, including full disclosure when we represent multiple clients in the same transaction, ” said Peter Belisle, Southwest Market Director for JLL, a Chicago-based commercial real estate company with 280 offices worldwide.
In California, brokers are required to supply an additional disclosure document to clients at the initial engagement. “Though the guidelines are not that clear about when it is supposed to be presented, I understand philosophically why it is important on both sides, particularly with sales, when you are dealing with a transaction that is ending, versus leasing, which is ongoing,” said Gabe Kadosh, Vice President, Retail Services, Colliers International. “I tell my clients that I am really just a middle person, and I try to balance both sides.”
Firms that don’t engage in dual agency business to begin with, of course, will have to do nothing to comply. Real estate companies that represent only tenants are already free of conflict. Some might argue that they provide an advantageous landscape for buyers, and have, always.
“We have known that these conflicting allegiances are an issue,” said Gail Corder Fischer, Executive Vice Chairman of Fischer, a Dallas-based global corporate real estate firm that has represented tenants exclusively for 30 years. “You’d never accept them in any other aspect of your business, so why would you when you are dealing with something as expensive as your lease? When there is no bias, there’s never a question of whether or not a tenant got the best advice and deal.”
The buying, financing, managing, leasing and selling of real estate assets is a lucrative cycle that sellers’ agents need and want to maintain, according to a 2014 Fischer report identifying how tenants lose out when agencies represent both parties. Also, natural biases cause people to gravitate in certain directions, the report claims, especially when they stand to benefit materially.
The Horikke ruling could have an impact on companies used to dual agency practices that went unquestioned, for the most part. “You have a lot of brokers doing things their own ways, and any time you shift those ways, it could be a burden,” said Kadosh, who added that more clients have asked him recently if it is appropriate that he represent both parties. “It used to be a little more landlord-friendly, but this creates more awareness for tenants.”
To help both tenant and landlord feel the transaction is fair and transparent, according to Kadosh, brokers may come up with certain caveats in deal structures, word agreements in certain ways or have parties provide tax returns, sales returns and other data, especially with large institutional clients.
“I’m not sure how large brokerage firms are going to continue doing business as usual,” said Katie R. Jones, attorney with California-based Miller Starr Regalia, “while adequately representing both sides of a transaction.”