How the Legal Fight Against Conflicted Brokers Affects Commercial Tenants

Two months ago, a landmark case against commercial brokerage giant, Jones Lange LaSalle (JLL), was poised to flip the practice of conflicted brokers on its head. If you work in the CRE world, you know not only how common conflicted brokers are, but what a massive statement this is to take a legal stand against the practice. Not only this, but the war was waged against JLL, a $20 billion, “Big three” commercial real estate stronghold. 

And get this, they lost. 

Now another major name, CBRE has been thrown into the mix. Inspired by the win against JLL, a building owner sued CBRE over the commission earned on a lease deal. So, does this represent a massive turnaround for tenant’s rights? Not quite yet. Learn more about the recent case about CBRE, what was decided, and why it’s a reminder now more than ever that tenants must protect their rights. 

Dual Brokers Must Disclose Properly 

Several months ago, JLL was found guilty of violating the D.C. Brokerage Act, which states that any instance of dual representation must be plainly and obviously stated in lease documents.

S.C. Herman & Associates, a property management firm, offloaded the responsibility of finding a new tenant to CRE behemoth, JLL. JLL, like many of the big global companies, primarily represents landlords. 

Upon finding a lease for the space, JLL expected to receive the brokerage fee and sued S.C. Herman, claiming it never received its due commission. However, the landlord refused to pay, claiming that JLL never properly disclosed that they represented both tenant and landlord. The deciding judge even went so far as call dual agencies, “inherently suspect due to the broker’s inescapable conflict of interest in representing opposing parties to a transaction.”

This was received as a huge win for tenants’ rights. Because while conflicted was common practice, its ethics weren’t questioned on a legal scale until now…

So much of a win that it has set a precedent going forward and encouraged tenants to examine past deals where they may have been taken advantage of and the law can stick. 

The Case Against CBRE 

In 2018, a 600,000-square-foot sublease was signed by the Whittle School & Studios, prompting a lawsuit by the building's owner, 601W Companies against CBRE. The dispute arose because 601W argued that CBRE had not properly disclosed its representation of both parties in the transaction, and therefore should return the commission. However, CBRE claimed that it was only representing the Whittle School, and that Cushman & Wakefield represented the landlord. Although CBRE was involved as a property and project manager for the landlord, this did not equate to representation in the deal. Hmm, tricky. 

The residing New York judge dismissed this case, and decided that CBRE was entitled to keep the $11.6 million commission in the center of the dispute. 

Why did this happen? 

Well, it goes back to the semantics of the D.C. Brokerage law. In actuality, it does not bar the practice of dual representation…It just states that any instance of dual representation must be properly disclosed. 

This new development in the ongoing legal war highlights the fact that tenants must go through their leases with a fine-tooth comb. Albeit, that many may consider it unethical, conflicted brokers aren’t illegal, so this is a reminder for tenants to remain vigilant. Due to improper due diligence, tenants are regularly losing millions on brokers, who they believe solely have their interests at heart. They don’t know that they’re missing out on alternate properties that might be a better fit, better lease terms, and at a lower price.

Plus, with these cases, there are sure more to snowball in the next few years. As a result, landlords or major brokerage firms are likely to get more skillful about how they disclose instances of dual representation. With millions of dollars at stake, new lease revisions will be sure to reflect the fine print. So, tenants can never be too careful. 

Why Tenants Need to Beware Conflicted Brokers 

As such, it’s critical for tenants to understand the potential issues that can arise from dual agencies and be sure to ask about disclosure before entering into any agreements. 

The recent legal drama is finally hitting on an uncomfortable (and often unspoken) truth about commercial real estate. Dual brokers and conflicts of interest are commonly observed in CRE. Unfortunately, they usually come at the tenant's expense.

The primary clients of most leading commercial real estate brokerages are landlords, which can give them an advantage in negotiations over tenants. This can lead to individual tenants not receiving the most favorable deals as brokers may prioritize their largest clients over individual tenants.

Dual agency can also be advantageous for landlords as it eliminates the need to be concerned about competing offers. It's important to note that leveraging the value of one's tenancy against offers from multiple landlords is one of the most effective negotiation strategies. However, this crucial step may be overlooked by corporate service brokers. Therefore, it's possible that you may be shown properties that your representative's company doesn't have an exclusive agreement with, but you'll likely be shown far fewer properties than if you were working with a true Tenant Representative. Learn What a True Tenant Representative Is (And What to Avoid).

This means that you may be losing out on the best properties, terms, and location for your interests in exchange for what is most convenient for your broker. 

Conflicts of interest produce biased research. Biased research costs you money. And, when you’re talking about the magnitude of a ten-year corporate lease, you’re probably talking about a lease that is eight-figures. So, losing just ten percent of potential savings to your company could cost your company millions of dollars.  

Avoiding Conflicts of Interest in Your CRE 

Ultimately, tenants need to do their due diligence when selecting a broker in order to ensure they get the best deal possible. And this is critical because, often conflicted brokers will attempt to dissuade tenants’ fears by claiming there’s a proverbial firewall that separates tenant rep and landlord rep. 

 And while your broker may not work directly with the landlord or their broker, they report to the same chain of command.  

On the other hand, tenant representatives are just that, tenant representatives. By solely working for corporate tenants, and never taking landlord assignments, they protect your interests while ensuring you receive the fairest and most effective deal on the market.  In theory, this should be a no-brainer. How could you hold a fiduciary to get both sides of the deal the best deal possible? You may think you're making progress, but in reality, you're being held back by someone who doesn't have your best interests at heart. It's essential to identify and remove these obstacles to achieve success in your commercial real estate transactions. 

So, back to the CBRE case. What could have been another win for tenants is now an even more pressing reminder to be even more careful about who you offload your CRE responsibilities to. Working with a True Tenant Rep™ is the only way to ensure that you’re getting the best deal on every lease. Because not all Tenant Reps are created equally. 

Work with a True Tenant Rep™ at iOptimize Realty®

To truly get the possible outcome for your lease, you need to hire a True Tenant Representation broker. A Tenant Representative should only represent you, the corporate tenant. So whether real estate is your primary responsibility or you’ve been thrust into this role, a Tenant Rep is an ally that protects your best interests.

At iOptimize Realty®, we are True Tenant Reps™ with over three decades over experience solely representing corporate tenants. Our unparalleled and un-conflicted service, has saved our corporate clients hundreds of millions of CRE dollars. So skip the conflicts and give yourself some peace of mind. Reach out to a True Tenant Rep™ today.