‘Inherently Suspect’: Why Is Dual Agency Everywhere In U.S. CRE When It’s Banned In The UK?
Commercial real estate brokerage is a profession filled with traditions and legacy, passed through generations of new agents — and it is one that has long been resistant to reform. But a pair of lawsuits this year in the nation’s capital has cast a spotlight on one of the industry’s most controversial, longstanding practices: dual agency.
In the U.S., the same entity often represents both sides of a lease or sale transaction — sometimes an individual broker, but quite often different brokers from the same firm. Known as dual agency or representation, this practice is the bedrock of many of the nation’s biggest deals.
The largest real estate organization in the United Kingdom banned the practice in 2018. But in the U.S., as the giants of commercial brokerage have gobbled up market share, critics say clients have fewer choices than ever.
That could present problems as office landlords — which are typically more lucrative clients than tenants — face an increasingly shallow market and put pressure on their leasing agents to cut deals for their buildings.
“With consolidation, the five or six big firms are all conflicted,” said Cresa President Greg Schementi, a former president of Americas tenant representation at Cushman & Wakefield. “The scope and scale of the largest providers that represent both occupiers and investors has exploded over the last five, 10, 15 years.”
Dual representation has its staunch defenders, including tenants who say they prefer to have one entity acting as a middleman in negotiations. Brokers who have worked at firms like CBRE, JLL and Cushman & Wakefield said there are strict internal controls in place to prevent conflicts of interest.
Many believe allowing brokers to represent both a landlord and a tenant, or a seller and a buyer, allows them and their clients to work out the best approach to protect themselves and their interests. Brokers said any perception of unfairness wouldn’t be worth the reputational hit.
But while dual agency is the subject of some judicial scrutiny and is a consistent theme of criticism — especially by brokers at firms like Cresa that only represent tenants — attempts to ban the practice in various states have gone nowhere in the face of staunch opposition.
“The obstacles the industry has thrown up to any kind of legislative advancement to protect tenants suggests that, absent some truly cataclysmic event — can’t imagine what that would be — there’s not going to be a legislative fix,” said Peter Smirniotopoulos, a George Washington University adjunct professor who authored a study about dual agency in commercial real estate.
In a 2019 law review article, he called for abolition of the practice.
“Their fear is that if the issue starts to be addressed in some meaningful way at a state level, which is where it would have to happen, that they’d have to start choosing between being a listing broker and being a tenant representative,” Smirniotopoulos told Bisnow in an interview. “They’re not at all willing to give up what would easily be hundreds of millions, if not billions, of dollars a year annually.”
CBRE, JLL and C&W didn’t make anyone available for an interview for this story. When asked to provide or explain their policies on dual representation and preventing conflicts of interest, they declined.
Banned In Britain, OK In The USA
The UK Royal Institute of Chartered Surveyors, which sets standards for land, property and construction businesses, banned dual agency for its members in 2018. It based its decision on a 2017 research report that “found that property agencies that act for both tenants and landlords often do not have sufficient separation between the departments.”
RICS membership includes the majority of real estate professionals in the country, meaning that most of them must adhere to this ban.
Dual representation’s presence in the U.S. — in contrast to the ban in the UK — is partially explained by cultural differences. The UK is quicker to invite government intervention to smooth out problems in an industry, said Sam Chandan, a professor and director of the Center for Real Estate Finance at New York University‘s Stern School of Business.
“We are much more likely in the United States, whatever industry we may be looking at, to see market failures addressed … [with] the emergence of structures that are essentially privately regulated,” Chandan said. “We’re less likely to see public regulation of markets.”
Brokers and politicians, particularly on the West Coast, have pushed to pass legislation regulating dual representation for commercial deals with varying degrees of success over the last decade.
A 2013 Washington state Senate bill would have prohibited dual agency in certain transactions, but was ultimately defeated, with the local chapter of the Building Owners and Managers Association commenting at the time “to our knowledge, consumers of commercial brokerage services have raised no concerns over dual agency.”
In 2014, California’s legislature passed a measure requiring disclosures for dual-representation deals. The bill became law in 2015 and applied regulations to commercial brokers that are more in line with requirements for residential brokers, mandating disclosure of prior business relationships with landlords or tenants in a commercial deal.
Under the law, if a firm is handling both sides of the deal, the managing broker of that firm must make the disclosure, according to Sacramento Business Journal reporting.
The law was championed by Jason Hughes, co-founder of Hughes Marino, a San Diego-based tenant representation firm, but opposed by the California Association of Realtors, which called it an unnecessary complication.
“It wasn’t just one situation, but years and years of seeing abuse,” Hughes told the Sacramento Business Journal at the time. “I’m not the type to call a business and tell them their broker is making a big mistake, but when I looked into it, I saw it was just wrong.”
But two years later, Hughes was unsuccessful in his bid to outlaw dual representation in the state altogether, an effort that followed a California State Supreme Court ruling in 2016 that said a listing broker had fiduciary duty to both buyer and seller in residential dual agency transactions.
His effort faced stiff opposition from industry associations like AirCRE, a Southern California membership organization. Most people in the industry saw the legislation as a solution in search of a problem, Jamison said.
It is unlikely that more attempts to outlaw dual agency will be successful in the future. Jeffrey Kirks, who runs the Kirks Institute, a D.C.-based group aimed at “helping licensees in the commercial real estate field stay legal” and former vice president of licensing, compliance and education at Transwestern, said the industry’s large mergers in recent years mean a change in regulation will be even harder to introduce.
“It would be difficult, when 90% of the marketplace is controlled by five firms, to get rid of dual agency,” he said. Although, he added, “there’s no political will to change the rule because, in most cases, it’s not broken.”
But one 25-year-old law already on the books is having a major impact today. The government of Washington, D.C., passed The Real Estate Licensure Amendment Act of 1996, which allows leases negotiated with dual representation only with the written consent of all clients in the transaction, and requires a “conspicuous” disclosure in a leasing agreement or a separate dual agency disclosure form.
The law was passed and stood on the books for 25 years, and little attention was paid — until JLL filed a lawsuit last year against an office owner it claimed had skipped out on a $781K commission. The landlord claimed JLL didn’t properly disclose that it also represented the tenant in the lease, a coworking company that backed out of the space in the early days of the pandemic.
U.S. District Court Judge Florence Pan ruled in March that JLL couldn’t legally collect the commission, the first time any judge had ruled on the D.C. law. It sent shockwaves through the local brokerage industry, Bisnow reported last week, and could have millions in ramifications if it is upheld on appeal.
An Imbalance Of Power
Critics of dual representation argue that because landlords have deeper pockets and more important relationships with their brokers, the practice creates an imbalance of power that favors landlords and makes money for property owners and brokers alike at the expense of tenants.
“It causes, at best, confusion and, at worst, direct-on conflict where one of the parties or more is left wondering who’s representing them,” said Paul Massey, a broker with nearly four decades of experience who has worked at CBRE and Cushman & Wakefield. “This is an issue facing all the firms out there, especially the national companies.”
Massey founded B6 Real Estate Advisors in 2018 and outlawed any form of dual representation at his firm.
“It’s very, very murky,” he said. “It’s never a level playing field of loyalty because the parties’ interests are not exactly aligned.”
Smirniotopoulos, the GWU professor and a real estate attorney by trade, devised a method that would allow brokerages to maintain the benefits of dual representation without the ramifications, he said — allowing tenant and landlord brokers to input information into an anonymized system without communicating directly, avoiding instances of undue pressure. He pitched it to one of the country’s largest CRE firms, but it wasn’t interested, he said.
“That’s evidence of how they’ve treated the whole thing, which is the last time I checked, they made a larger percentage of revenues from client representations, most of which are dual agency, than they do from any other aspect of business,” Smirniotopoulos said. “The implications, I think, are that commercial tenants aren’t well-represented. They’re not shown the best options.”
For office spaces in particular, the shifting dynamics of today’s market exacerbate the issue, Cresa Vice Chairman Tom Birnbach said. With office landlords under immense pressure to fill their office space and corresponding drops in property valuations that rankle investors, the heat is on to get the highest rent possible.
“You get more and more pressure on these firms that represent both occupiers and landlord, more pressure from the landlords, and ultimately it’s the occupier that’s going to suffer,” Birnbach told Bisnow.
Other opponents to dual representation pointed to the benefits reaped by the brokers themselves, not just the landlords — usually at the expense of tenants.
“It’s better for the broker, not for the tenant — some tenants mistakenly assume you are getting a better deal without a broker,” said one New York City broker who asked to remain anonymous. “The broker collects a commission on both sides, savings do not get passed onto the tenant.”
Investors and landlords are the largest clients of the world’s major brokerage houses, and because of that clout, they are able to exert their power to get the best deals for themselves when deals are represented by just one firm or broker, Schementi said.
But other brokers who have worked at the major firms said any pressure put on brokers by landlord clients is never exerted on tenant reps.
“I’ve never heard of a market leader say to a tenant broker, ‘Don’t negotiate too aggressively with this landlord because he’s a client of the firm.’ I’ve never seen it,” said Ernie Jarvis, a former Washington, D.C., market leader at CBRE. “Your fiduciary is to your tenant, so you’re legally obligated to act in your client’s best interest, not in your company’s best interest.”
Jarvis Commercial Real Estate CEO Ernie Jarvis
Dual representation can exacerbate what economists call “information asymmetries” — when one side of a transaction has less access to information. Brokers play an essential role in addressing those asymmetries by providing a closer step toward a level playing field, NYU’s Chandan said.
In almost every case, a buyer or a tenant is at an informational disadvantage, purely because they don’t own the property. The power imbalance puts tenants at a stark disadvantage, said David Marino, Hughes’ partner at Hughes Marino.
“You know, this whole business is rigged against the tenant because the tenant is signing leases based on what the landlord demands,” Marino said. “They’re not able to go to the market and have a transparent process. There’s nobody that’s representing the little guy, right?”
On the contrary, Jamison argued that the “little guy” is precisely whom dual agency benefits.
More sophisticated clients have in-house representation and teams of people who help them navigate the real estate process and get deals done, but small-business owners want to be able to simply call the number they see on a broker’s marketing sign, he said.
Including two brokers on a minor transaction like the one a small business needs would result in commissions that aren’t necessarily worth the time it would take to get a deal done, Jamison said, which in turn could make it difficult for a small-business owner to find a broker to represent only their side of the deal.
“In our world of smaller mom-and-pop-type leasing, probably 90% of the time, we’re acting as dual agents,” he said. “Why? Because probably the majority of the time the prospective tenant would not be able to get the interest of another commercial real estate agent to go work on something that they’re going to make 150 or 200 bucks on. And so who’s hurt in that transaction? The individual who’s hurt is the mom-and-pop.”
Supporters argue that transparency and disclosure to both parties is all it takes to appropriately manage any conflict of interest, perceived or otherwise.
Deal by deal, being on both sides is an easier process, said James Famularo, the president of retail leasing at Meridian Capital Group in New York City. A broker can be Switzerland, he said, driven not by ego but a need to close a deal.
“Brokers play sides: It’s me against you. In reality it should be: ‘Hey, let’s work together and negotiate amicable terms and fair terms for both sides and we’ll be able to push the deal through,’” he said, adding it is important to follow the law dictating disclosure to all parties.
Being on both sides means he can express both parties’ motivations to each other, he said, adding that it is his clients — not himself — who reap the rewards when he represents both landlord and tenant in a lease.
“Any broker with half a brain knows if he leans too far on one side, he’s gonna kill the deal for himself, his client and his customer,” he said. “You really got to put on the mediator hat.”
For some tenants, it is more about the trust in the person they choose as a broker, so who they represent and when is irrelevant, even if it is their prospective landlords. Stratis Morfogen, who owns the restaurant Brooklyn Chop House, uses Famularo as his broker and has leased New York City restaurant space from landlords Famularo also represents.
“I trust him … he makes deals happen because he tries to find a fair point,” Morfogen said. “If it doesn’t work for both sides, it’s just not going to work.”
Some brokers said the decision of representation is a matter for the clients themselves, not a practice that needs more regulation. Jarvis, the CEO of Jarvis Commercial Real Estate, said the majority of leases involve sophisticated real estate occupiers who are fully aware of the circumstances and able to protect their own interests.
“If the clients thought there was a conflict of interest, they wouldn’t allow it,” Jarvis said. “When it’s disclosed that means they’re aware of dual representation and they consent to it. If they sign a disclosure, that means they’re satisfied.”
But protecting interests goes to the heart of this problem, according to Smirniotopoulos, the George Washington University professor.
The last decade has been dominated by major brokerage mergers. Three years ago, JLL made a $2B acquisition of HFF. In 2015, DTZ and C&W joined forces in a $2B deal, after DTZ had acquired Cassidy Turley. In 2012, Newmark‘s parent, BGC Partners, merged the brokerage firm with Grubb & Ellis Co. That list doesn’t include the dozens of local players the major firms have snapped up in recent years.
“As a consequence, the problems associated with dual agency have become more acute and more pervasive in the world of commercial real estate generally, and in commercial leasing transactions in particular,” Smirniotopoulos wrote in 2019, five years after his first report. “There can be no middle ground. Advance written notice and a written waiver of the inherent conflicts of interest does nothing to address, much less ameliorate, those stark conflicts.”
A shrinking pool of representation options is happening as the stakes are only getting higher for the brokerage industry amid soaring office vacancies in some of the most expensive real estate markets in the world.
“There’s always pressure to secure tenants, everybody wants to succeed,” Cresa’s Schementi said. “But when vacancy is where it’s at now in some places, the competition has increased greatly … When there’s 20% vacancy, they have to put people in the building.”
In D.C., where office vacancy is sitting at record highs, the brokerage industry is anxiously awaiting the outcome of JLL’s appeal in its D.C. dual agency dispute. If the appeals court upholds District Court Judge Pan’s decision, it could open the door for landlords across the city to claw back commissions from their brokers who didn’t follow the letter of the law.
In her opinion, Pan wrote that the landlord appears to be “taking advantage of JLL’s technical non-compliance with the law to avoid paying a commission that JLL rightfully earned.” Nevertheless, she denied JLL its claim, based on the 1996 law that specifically outlined how dual agency must be disclosed.
“This reflects a recognition by lawmakers that dual representation is inherently suspect,” Pan wrote in the ruling, “due to the broker’s inescapable conflict of interest in representing opposing parties to a transaction.”
Jon Banister contributed reporting for this article.