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CA Legislator Introduce Bill Banning Dual Agency Representation in CRE Transactions

CoStar Exclusive: Proposed Legislation Prohibiting Deal Double-Ending Comes in Wake of California Supreme Court Decision Last November
April 4, 2017
A member of the California State Assembly has introduced legislation that would prohibit real estate agents and brokers, their brokerage firms or associate licensees from engaging in dual agency broker representation in commercial real estate transactions.

The legislation, introduced March 30 by state Assemblywoman Lorena Gonzalez Fletcher, D-San Diego, comes just a few months after a decision by the California State Supreme Court in a case involving dual agency that potentially has far-reaching impact on how real estate brokerages and agents do business in the state and across the country.

Gonzalez Fletcher last week introduced Assembly Bill 1059, which would add a section to the California Civil Code prohibiting a brokerage firm, broker or any of the broker's or brokerage's licensees from acting as a dual agent in its representation of both the buyer and seller or any of their principals in the same commercial property transaction.

The legislation defines a seller as any person or entity, including a lessor or landlord, "that leases or sells, offers to lease or sell, intends to lease or sell, or is interested in leasing or selling commercial real estate that he, she, or it owns or controls, while a buyer is defined as any similar person or entity, including a lessee or tenant, that buys or leases commercial property.

While a commonplace practice for decades in both residential and commercial deals in the U.S. and around the world, several states in recent years have moved to regulate or ban dual agency real estate transactions in order to limit potential conflicts of interest and increase transparency in property sales. California, where dual agency deals are legal, in January 2015 adopted Senate Bill 1171, which requires disclosure to clients of dual agency relationships in commercial property transactions.

Gonzalez Fletcher's proposed legislation, which has been scheduled for a May 2 hearing date by the Assembly Judiciary Committee, defines fiduciary duty as the responsibility to act for the benefit of the principal in all matters relating to the agency relationship.

The issue of fiduciary responsibility in real estate transactions was a key consideration in the California Supreme Court's decision last November upholding a lower-court ruling that a listing broker had a fiduciary duty to both the buyer and the seller in a dual agency transaction involving the sale of a Los Angeles home. Hong Kong businessman Hiroshi Horiike sued Coldwell Banker and its agent, claiming they breached their fiduciary responsibility in a dispute over the square footage of a Malibu home purchased by Horiike for $12.25 million in 2007.

Several observers, including Jason Hughes, president and CEO San Diego-based tenant representation firm Hughes Marino, said the decision potentially has major implications for the business practices of full-service brokerages in California and across the U.S. Hughes, who previously helped spearhead the SB 1171 disclosure law and was among several real estate companies that filed briefs in the Horiike case, has formed a new nonprofit organization called the Association for Commercial Tenants (ACT) to advocate for the rights of businesses and tenants in commercial transactions.

Doing away with dual agency would level the playing field for tenants, says Hughes Marino President and CEO Jason Hughes.

Hughes approached Assemblywoman Gonzalez Fletcher's office about potential legislation to regulate dual agency after the Supreme Court's decision last fall.

"For the last 100-plus years, the commercial brokerage industry's primary constituent has been landlords, but the real consumers are tenants," Hughes tells CoStar. "Companies that lease or purchase office, industrial, manufacturing, retail, R&D, lab, and other space have always been on the short-end of the receiving stick in the commercial real estate industry. I fully support this bill and I know there are thousands of companies who lease and purchase commercial space who support it also."

In supporting the proposed legislation, Hughes noted a statement published last month by the Royal Institution of Chartered Surveyors (RICS), a global real estate accreditation body that certifies property and construction professionals, that advances more stringent conflict-of-interest requirements for its members, including an official ban on dual agency in the United Kingdom.

While a handful of states such as Colorado, Kansas, Florida and Wyoming specifically prohibit dual agency, Hughes noted that about a dozen states closely follow California's example on real estate regulation.

"Prohibition of dual agency would truly level the playing field for tenants, offering them legitimate transparency and conflict-free representation, something that should have happened decades ago," Hughes said.

The legislation must be moved through committees and approved by the full Assembly, with the process repeated in the State Senate, before it can be sent to the governor for signing, should it advance that far.

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