Conflict of Interest in Commercial Lease Transactions – Part 1

By Bill White –

Whether you realize it or not, the commercial real estate industry is fraught with conflict of interest.  In this three part series, I will explore the topic of conflict of interest within the commercial real estate industry by examining the following: What is conflict of interest?  What does it look like in a typical real estate transaction?  How can conflict of interest be avoided or at least managed?

Conflict of interest arises during any situation in which an entity has an interest sufficient to appear to influence the objective exercise of his or her fiduciary duties.  Most professional industries have laws or a professional code of ethics forbidding conflicts of interest.  But what about commercial real estate brokerage?   There are laws in place governing dual agency, but unfortunately this does not eliminate the problem of conflicts of interest in a real estate transaction.   And when conflicts occur, oftentimes tenants are on the losing end of the bargain.

The enforcement of dual agency laws and regulations in the commercial real estate industry is vague and muddled in comparison with other professional industries.  For example, a law firm must exercise a great deal of due diligence when determining whether a conflict exists before taking on a prospective client.  In most cases, if there is ANY appearance of conflict, the firm will refer the prospective client to another firm.  Law professionals have specific standards when dealing with conflicts of interest which they are held to as outlined in the American Bar Associations’ Model Rules of Professional Conduct.  Similarly, accounting firms and financial advisors alike are held to high standards of professional codes of ethics and/or strict laws when it comes to avoiding conflicts of interest.

So how is conflict of interest handled differently in the commercial real estate industry?  Instead of declining to do business with a client when there is a conflict of interest, a dual agency disclosure is executed by all the parties, and the deal moves forward.  The golden standard is disclosure, and essentially, it replaces the higher professional code of ethics to which professionals from other disciplines must adhere.

You may ask yourself, “If there is a known conflict, and it is disclosed, all is well…right?”    Not necessarily.  In part II, we will examine why as we dig deeper into the question of what conflict of interest looks like in a commercial real estate transaction.

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