California, as is often the case, may signal a change coming to the CRE industry that could completely upend the way business is done. Last November, a California court ruled that the fiduciary responsibility in a dual agency transaction lies with the broker.
New on the horizon – Assembly Bill 1059 has been introduced to the California Legislature to ban dual agency relationships in all commercial real estate transactions. Specifically, the bill “would prohibit an agent from acting as a dual agent in a commercial real estate transaction,” while also preventing different individuals in the same firm from acting as an agent for both parties in the same transaction.
This has the potential to dramatically change the way our industry conducts business. As a result, it’s important to consider whether we as a community are really prepared to ban dual agency altogether and what the consequences of such a ban could be.
Why Some Want to Implement a Ban
The argument for doing away with dual agency is tied to what some view as a conflict of interest: How can an agent representing the buyer, who is looking to make the best deal, equally represent the seller in the same transaction who is trying to maximize their profits from the sale?
Commercial real estate transactions, particularly industrial space, are often done this way, with the dual agent acting as the liaison between the two sides. The California legislation would ban dual agency in all commercial transactions as part of an amendment to the Civil Code.
California would not be the first state to seek a ban on dual agency. If passed, it would be following a trend where several states have or are in the process of altering the practice. However, of those where there is a ban on dual agency, many provide exceptions for what are called “designated agents” who act as intermediaries or “transaction brokers.”
More recently, a number of other states have decided to join the movement toward some form of ban on dual agency and at the very least, increased transparency in real estate transactions.
The Argument for Not Banning Dual Agency
On the other side of the debate are those that believe current disclosure requirements in commercial transactions are more than enough to offer complete transparency in real estate transactions. If both sides are aware that there is one agent, acting as a neutral party and both agree, brokers should be able to continue under the existing structure.
Industry experts have and continue to argue that banning dual agency outright would hamstring an already successful process for handling transactions. Additionally, such a change still doesn’t solve the problem of financial liability when there is a suspected conflict of interest in a real estate transaction.
Though proponents of the bill claim it will level the playing field for tenants and buyers by eliminating potential conflict of interest, a closer look at the consequences shows just the opposite. A recent communication from AIR CRE outlined three (3) key points worth noting:
1. The ban will harm small businesses, by adding costs and negatively impacting relationships.
2. It will introduce unnecessary regulations to an already transparent commercial real estate transaction process.
3. This change will ultimately eliminate freedom of choice, and provide certain firms with additional commission fees for services that are not wanted, but rather, are mandated by law.
Form Your Own Opinion & Act
The United Kingdom recently passed a new law impacting dual agency transactions. The fact that real estate law in the U.S. is left to the individual 50 states presents obvious hurdles to an outright, nationwide ban on dual agency. Considering recent actions, it is something worth watching more closely.
For now, the immediate threat impacts California. Well thought out, improved transparency measures will ultimately help make CRE transactions better for all parties. However, in this real estate professional’s opinion, AB 1059 only hurts our industry and the clients we serve.
The first step in fighting AB 1059 is to sign a petition opposing the bill’s passing and contact the Assembly Judiciary Committee members via letter, email or phone call and let them know you oppose the bill. You can find more information available on each at: www.aircre.com