Conflict of Interest in Commercial Lease Transactions – Part 2

By Bill White –

In part I, we discussed and provided a broad definition of conflict of interest.  In this part II, we will take a closer look at three different facets of conflict of interest as they present in commercial real estate transactions.

The most obvious occurrence of conflict of interest is what I call the “agent-agent” conflict.  This type of conflict occurs when an agent has a listing on a building within which the same agent is representing a tenant in negotiations for a lease.  Little imagination is needed to see this blatant conflict.  Under this scenario, the agent will usually have a well established and long standing contractual and financial relationship with the landlord.   The idea that the agent will represent his tenant-client’s interest without bias is both utopian and myopic.  Yet, it happens—all the time.

Another type of conflict is what I call the “agent-broker” conflict.   Commonplace in so called “full-service” brokerage companies, a huge and oftentimes unrecognized conflict exists when an agent represents a tenant in a transaction in which the landlord has contracted with the broker for whom the agent works.  This can either be in the same market, or on the opposite end of the earth.  No matter the distance, if an agent is representing a tenant in a lease transaction with a landlord, and that agent’s broker has a contractual relationship with that same landlord (even if in another city) that agent has a conflict.  For example, prior to forming White Space Advisors, I worked at an international “full service” brokerage firm.  I was representing a client in a lease for 16,000 square feet in Los Angeles.  The brokerage firm for whom I worked (my “broker”) had a contractual relationship with the owner of the Los Angeles building, but for  another building in different market. As negotiations got heated, I received a call from my broker demanding I “take it easy” on the landlord client.  This situation is difficult to avoid in markets where a landlord has multiple properties in various regions. Obviously, this and all conflicts of interest should be disclosed.  In practice, however, the disclosure may take place well AFTER the wheels have been set in motion—at times, almost as an afterthought.  Agents may downplay this type of conflict, but it is every bit as real and can have the same adverse effect on the tenant as other forms of conflict of interest.  Even the most ardently loyal and objective of agents can find it difficult to remain unbiased, especially if his broker and the landlord turn up the heat.  As the old adage goes, you cannot serve two masters.  One phone call from the landlord to its full-service broker about the agent’s deal in his building can seriously affect negotiations—to the tenant’s determent.

A less obvious, yet equally serious occurrence is when an agent has two (or more) clients with similar requirements vying for the same space.  Dual agency laws and disclosure requirements are ill-suited to successfully deal with this conflict.  As the market tightens, we will undoubtedly see more cases of this type of conflict.  Unfortunately, human nature may preclude both clients from simultaneously getting the best representation.  The natural inclination would be for an agent to push through, perhaps even subconsciously, the more lucrative deal for the agent.  The winner of this deal is the agent, again, many times to the detriment of the unsuspecting tenant.

The topic of conflict of interest in commercial real estate is multi-faceted.  These are just three types a tenant may encounter.  Well established traditional business practices prevent an immediate reform within the commercial real estate industry of this problem despite its far reaching and costly implications.  So what are the best ways to prevent or at least manage conflict of interest?  In part III, I will be sharing some tips on ways to reduce and manage conflicts of interest in commercial real estate transactions.

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