Commercial Tenants and Buyers often wonder if their supposed Real Estate Broker is actually more interested in cashing a commission check than in helping them to find the right workspace at the best price. Unfortunately, they‘re usually right.
Even worse, though, do Occupiers understand what’s wrong when Commercial Brokers and Sales Agents try to “double-end” their deals and get paid on both sides of the table? In commercial real estate jargon, we call this “double-dipping” and it’s really a bad situation for Tenants and Owner-Occupants.
Landlords and Sellers can even feel pressured by their Listing Brokers, Landlords’ Agents or Sellers’ Agents to make unwanted price reductions or to accept lowball offers that are less than what they wanted. On the Occupier’s side of the table, Tenants and Buyers may feel their arms twisted by double-dipping Brokers to pay more than they budgeted to lease workspace or to buy a building.
So whose Broker is whose?
What’s really going on behind the scenes?
And why does it matter so much?
THE DIRTY SECRET NO ONE WANTS TO TALK ABOUT
Shockingly, in many transactions in the US, Commercial Real Estate Brokers have no (zero) legal obligation to look out for the best interests of the Tenants or the Buyers they work with. Sadly, too many Tenants and Buyers are unaware of this troubling fact.
Laws in at least 25 US states now allow a Commercial Broker to “work with” a Tenant or Buyer as a Transaction Broker, Facilitator, Intermediary, Dual Agent or Subagent.
Notice that I did not state “work for“, which is an entirely different matter that I will explain in a minute. All but the last of these relationships are pure Middlemen. None of them have any legal fiduciary duties of loyalty or obedience to the Tenant or to the Buyer they work with.
In some states, Texas as one example, the “Client” legally is not even a Client of an Intermediary, Transaction Broker or Facilitator; he or she is merely a “Customer.”
Such Brokers and Sales Agents might “work with” you as their Customer, but certainly not “work for” you as your advocate. That’s a critical distinction. They’re definitely not your Tenant Representative, 100% Tenant Rep, Tenant’s Agent or Buyer’s Agent.
All fifty (50) US states provide avenues for Commercial Brokers to double-end deals, i.e. work with both the Landlord and Tenant or both the Buyer and Seller in the very same transaction and, thereby, avoid any obligation to split or share commissions with an outside “Cooperating Broker“. A Broker (or his or her Brokerage Company) is legally allowed to keep the commissions on both sides of a transaction; hence the term “double-dipping“.
In such instances, detractors, including Consumer Advocates, maintain that neither a Tenant nor an Owner-Occupant is actually represented. That’s accurate because neither has an advocate nor champion sitting only on his or her side of the table.
A Consumer, in this case a Tenant or Owner-Occupant, should not assume that his or her Broker is obligated to represent his or her best interests, and his or her best interests alone, until one has first seen a formal, written disclosure describing the agency relationship under which real estate services are being provided. Tenants and Owner-Occupants should see this disclosure upfront, too, not at the closing table as some Tenants report Big Brokerage Companies are doing. By then, it’s usually way too late to hire a 100% Tenant Rep as an advocate and start over.
Even Landlords and Sellers looking to negotiate the best commission rates, to obtain the highest levels of service and to protect their legal rights in the event of a dispute, should start the process by making certain that they fully understand the form of representation that a Broker is offering to provide them.
Is it a “Single Agency” relationship, which is the optimum and best relationship for the Consumer? That is The Gold Standard of Representation, especially for Tenants and Owner-Occupants.
Or is it a legal relationship that leaves the door open for a Broker or his or her company to double-end your deal and double-dip on the commissions?
TYPES OF AGENCY RELATIONSHIPS
Agency relationships get created when one person or party agrees to act on another’s behalf, or to represent them, in dealings with a third party.
Once an agency relationship is established, Brokers (as Agents) owe their Clients “fiduciary duties of loyalty and obedience.” In a Single Agency relationship, an Agent is legally required to place its Client’s interests above and ahead of his or her own. An Agent does so by providing advocacy services with honesty and good faith, while carefully avoiding conflicts of interest or “self-dealing”.
There is much confusion, though, because rules governing Agency Relationships between Consumers and Real Estate Brokers vary considerably from state to state, and all have been rewritten in the last 25 years. Depending on the laws of the state in which they are licensed, Real Estate Brokers and Sales Agents provide services through one of six (6) relationships:
#1) Single Agency: In a Single Agency Relationship, a Broker represents only the interests of the Landlord or the Tenant (or the Seller or Buyer) in a transaction, either as the “Listing Agent” for the property or as a “Tenant’s Agent” or a “Buyer’s Agent” for the Occupier. Consumer Advocates strongly maintain that Single Agency is by far the optimum form of representation for a Client. This is The Gold Standard of Representation, especially for Tenants and Owner-Occupants.
#2) Designated Agency: This occurs when a conflict of interest arises within a Brokerage Company and one Broker is in a position to represent both parties on opposite sides of a single transaction; for example, the Landlord and the Tenant on commercial lease. To seemingly remove the conflict of interest, the Employing, Sponsoring or Managing Broker of the Brokerage Company separately designates two (2) of his or her In-house Brokers or Sales Agents, one to represent the Landlord and the other to represent the Tenant. The big trouble with Designated Agency is that it’s all “in-house” at the same Brokerage Company, allowing the firm to double-dip on fees or commissions.
When states require that Employing, Sponsoring or Managing Brokers implement safeguards to protect a Client’s confidential information, wise academics and Consumer Advocates say that Designated Agency is the next best alternative to Single Agency. But we maintain that there’s a giant drop off between #1 Single Agency Representation versus #2 Designated Agency. That is particularly true for the Tenant, which only needs one (1) lease at a time as compared to a Landlord that requires assistance from its Listing Broker or Landlord’s Agent with multiple leases in a single building or maybe even in multiple buildings in an entire investment portfolio.
Colorado and some other states offer Designated Agency. In reality, it’s creative legal wiggling by the Big Brokerage Companies and traditional Commercial Brokers to get Colorado and other state legislatures to exempt them with a pen from having hundreds of terribly troubling, very inconvenient conflicts of interest. You see, when the Big Brokerage Companies and traditional Commercial Brokers were previously seeking to represent Commercial Tenants, every single one of their property listings was an actual or potential conflict of interest. So the Colorado Legislature, as one example, gave Big Brokerage Companies and traditional Commercial Brokers just the legal loophole they wanted. In my opinion, you can expect to see this occur soon in many other states, too.
Texas allows designated agents now, too, but instead calls the Brokers or Sales Agents involved “Intermediaries” (please see #4, Transaction Brokers, Facilitators & Intermediaries, below), which is poor terminology that invites confusion with professional Intermediaries in 1031 Tax-free Exchanges of investment properties.
#3) Disclosed Dual Agency: This is when a single Broker or two (2) Brokers or Sales Agents working for the same Brokerage Company provide services simultaneously to both the Landlord and Tenant (or to the Seller and Buyer) in a limited, reduced agency relationship, which they must disclose to the to Principal Parties to the transaction. However, part of the required disclosure is that neither Broker nor Sales Agent is legally allowed or obligated to represent the best interests of either the Landlord or the Tenant (or the Seller or Buyer).
In states with no provisions for Designated Agency, the single broker or two (2) Brokers or Sales Agents affiliated with the same Brokerage Company may be considered Dual Agent(s). It’s rather like “double agents” in the world of espionage and it’s not a good situation for Landlords and Tenants or for Sellers and Buyers because Dual Agents are required to be impartial and cannot act as an advocate for either side or Principal Party to a transaction. The Principal Parties are actually unrepresented, even though they often do not realize it.
Although controversial even among Real Estate Brokers and Agents, Disclosed Dual Agency does present an opportunity for experienced Landlords and Sellers to negotiate discounted or “variable rate” commissions in advance, primarily because the Landlord or Seller would have to settle for a lower standard of representation than in a far superior Single Agency Relationship with a Broker or Sales Agent.
For Tenants and Buyers in the US, who don’t pay the commission to their Brokers or Sales Agents, since it’s paid by Landlords or Sellers, what Tenants and Buyers actually receive in Dual Agency situations are lesser standards of representation, including zero (no) advocacy for their best interests.
#4) Transaction Brokers, Facilitators & Intermediaries: Transaction Brokerage occurs when one (1) Broker or two (2) Brokers or Sales Agents at the same Brokerage Company work with a Landlord or Tenant or a Seller or Buyer in a non-agency, non-advocacy relationship. It may or may not be declared in writing but a Transaction Broker owes no fiduciary duties of loyalty and obedience to a Landlord, Tenant, Seller or Buyer. Transaction Brokers are not your advocates.
A Broker or Sales Agent that performs Transaction Brokerage is called, as you might expect, a “Transaction Broker” in some states but a “Facilitator” or “Intermediary” in other states. In Colorado, it’s called a Transaction Broker and in Texas it’s called an Intermediary.
Transaction Brokers, Facilitators and Intermediaries share the same disadvantages as Dual Agents because neither the Landlord nor the Tenant (nor the Seller or the Buyer) can expect a Broker or Sales Agent to represent the Client’s best interests during any negotiations. As a result, a Tenant or Buyer “working with” a Transaction Broker, Facilitator or Intermediary has little latitude to file a claim for professional negligence or omission by any such Broker or Sales Agent.
Another dirty little secret in both commercial and residential real estate is that some Brokers and Sales Agents intentionally avoid or dodge having the higher standards and duties owed to a Tenant, Buyer or Owner-Occupant under a Single Agency Relationship. Some Brokers and Sales Agents actually prefer to work as Transaction Brokers, Facilitators or Intermediaries. Why? Because it affords them much more “wiggle room” and greater margin for error, plus it leaves the door wide open for a potential double-dipping on commissions down the road.
#5) Providing Ministerial Services to Unrepresented “Customers”: Under US real estate laws, an unrepresented Tenant or Buyer is often called a “Customer”, not a “Client”. A Listing Broker for a property may avoid splitting a commission with an outside Cooperating Broker (Co-op Broker) by providing limited administrative services to an unrepresented Tenant or Buyer, i.e. to a Customer. Why? Again, it’s so the Broker or Sales Agent can collect fees and/or commissions on both sides of a single transaction.
#6) Subagency: It’s pretty clear that the Listing Broker for a property represents the Landlord or the Seller in a declared, usually written agency relationship, called a Listing Agreement.
But in some states, like Texas, without a written or declared agreement, all Brokers and all Sales Agents who work with Tenants or Buyers are actually legally “Subagents” of the Landlord or the Seller’s Listing Agent for the property.
That’s shocking but correct.
It means that all of the Brokers or Sales Agents involved in a Subagency State like Texas legally owe 100% of their allegiance, loyalty, obedience and expertise to the Landlord or the Seller. The Tenant or Buyer has no legal representation whatsoever, even from the Broker or Sales Agent that they are “working with”. No one is actually “working for” the Tenant or Buyer, which means that his or her “supposed” Broker or Sales Agent is actually “working against” him or her.
In a Subagency State like Texas, all of the Brokers and Sales Agents can legally gang up against a Tenant or Buyer, if the Tenant or Buyer does not elect to sign up a Tenant’s Agent or a Buyer’s Agent to act solely as its advocate and fiduciary and to protect and advance the Tenant or Buyer’s best interests.
Although Subagency was previously a national real estate industry practice in the US until the 1990s, this form of representation has largely fallen out of favor due to its lack of protection for The Public/Consumers and the legal liability risks for Brokers, Sales Agents, Landlords and Sellers. Nevertheless, Subagency remains the default or beginning legal relationship in a few states where nothing is in writing between a Tenant or Buyer and a Commercial or Residential Broker.
Colorado does not allow Subagency, but in Texas, it’s still the scary default relationship. Unfortunately, Subagency can turn into a nightmare for unrepresented Tenants, Buyers and Owner-Occupants. To be frank, I can’t even believe that Texas and a few other states still allow Subagents of Landlords and Sellers.
Every state in the US provides legal avenues for Commercial Brokers to double-end deals and double-dip on fees, which is usually the worst-case scenario for Tenants, Buyers and Owner-Occupants.
Of the eight (8) states that ban Dual Agency altogether, four (4) states still allow Designated Agency (Alaska, Colorado, Maryland and Texas); five (5) states allow Transaction Brokerage, Facilitators or Intermediaries (Florida, Colorado, Texas, Kansas and Oklahoma); and three (3) states allow both Transaction Brokerage and Designated Agency (Alaska, Colorado and Texas).
Designated Agents, Subagents, Transaction Brokers, Facilitators and Intermediaries, effectively, are all just Dual Agents and double-dipping under different legal names. Certain states’ outlawing of Dual Agency is pretty much an illusion and window dressing to assuage the legitimate concerns of Consumers/The Public.
Designated Agency, in particular, is artful window dressing that quite pleases Big Brokerage Companies and traditional Commercial Brokers, all of which seek in some manner to obfuscate and camouflage their many conflicts of interest. This still allows Brokers and Sales Agents to legally double-dip on commissions and fees. Dual Agents, Subagents, Designated Agents, Transaction Brokers, Facilitators and Intermediaries do little good for Tenants, Buyers and Owner-Occupants, since none of them are true advocates legally. Such Brokers and Sales Agents can practically get away with legalized stealing from Customers if you are not legally their Client.
To argue otherwise is disingenuous in my opinion but traditional, regular Commercial Brokers in the US go out there and practice it every day.
This troubling issue for Tenants and Owner-Occupants is critical enough for the Office of General Counsel in the New York Department of State to post a brief but strong notice to The Public. The warning is titled “Be Wary of Dual Agency you can read it at this link.
Honestly, the more I think about it, it’s obvious that Big Brokerage Companies and traditional Commercial Real Estate Brokers and Sales Agents believe that Tenants and Owner-Occupants are naive. And that Occupiers still won’t recognize conflicts of interest or do anything about them. At best, the whole situation is confusing, even to licensed Brokers and Sales Agents.
Some traditional Brokers still argue adamantly, that as long as they disclose double-ending and double-dipping to the Landlord and the Tenant or to the Seller and the Buyer, then it’s perfectly OK based on the “Everyone Knows About It Theory.”
Here’s a link to a stunning article titled Major US Tenant Files Suit Alleging Multi-state Real Estate Fraud & Bribery Scheme. It’s about what goes terribly wrong when a major US Tenant doesn’t take conflicts of interest seriously enough and engages a Big International Brokerage Company accustomed to serving two (2) masters in the same transaction. Letting the fox count the chickens doesn’t usually end too well and this story certainly doesn’t for the Tenant.
For Tenants, Buyers and Owner-Occupants, what is the point of working “with” a Broker or Sales Agent, even a friend or acquaintance, if they are not a true advocate sitting on your side of the table? It costs more or less the same to have your own true advocate, working “for” you, as it does to have a Broker or Sales Agent whose loyalty is either totally to the other side or whose hands are severely limited and tied halfway behind his or her back.
This is why true, 100% Tenant/Buyer Representatives (“Tenant Reps”), Tenant Brokers, Tenant Rep Brokers, Tenant’s Agents and Buyer’s Agents, like MacLaurin Williams and our colleagues at MacLaurin Williams Worldwide, practice only Single Agency Representation. That is The Gold Standard of Representation. We never consider representing two (2) masters in the same transaction. Just because the law allows (less principled) Commercial Brokers to double-end deals and double-dip on commissions and fees, we strongly believe that it’s highly unethical. We won’t do it.
But, for most traditional Commercial Brokers in the US, double-ending and double-dipping are simply business as usual. After reading this blog article, we hope that you can now identify the best Commercial Tenant Agent when you’re a Tenant, Buyer or Owner-Occupant looking for professional representation.
Contact William Gary, MBA, MIM, at MacLaurin Williams Worldwide at cell +1 303-901-1108 or email wgary@MacLW.com to confidentially discuss how to get The Gold Standard of Representation for your next commercial real estate transaction.