In the most unusual 2020 market, I found myself working on not one, but two assemblages. So I suppose there are developers out there who saw a brighter future for certain uses in the right locations. I consider this a positive sign for the future, for all of us. However, I also know—and therefore must caution my commercial real estate broker readers—that working on assemblage transactions brings certain rules, and serious legal pitfalls into play. Accordingly, here are some suggestions for brokers on how to proceed in carefully representing parties and not exposing their firms and themselves to liability.

Let’s start with some basic definitions. I consider an assemblage to mean the acquisition of two or more parcels of separately owned real estate (often but not necessarily adjacent) with the intent to combine the assembled parcels for development and/or resale. I use the term “Assemblor” to mean the party seeking to acquire real estate for an assemblage, and I use “Owner” or “Owners” to mean the present owners of the property or properties to be acquired by the Assemblor.

I will focus on the broker’s role in a potential assemblage, whether as either the broker representing the Assemblor as the “Assemblor Rep,” or also as the broker(s) representing the property owners, to be called the Listing Agent(s). While the law of agency and agency disclosure may vary a bit from state to state, a listing broker owes fiduciary duties to its owner, and those fiduciary duties will always include the duty to disclose all material facts. Those same fiduciary duties apply between the Assemblor and the Assemblor Rep. I will also add—though without citation to all states’ laws—that the mere payment of a brokerage commission does NOT create an agency relationship between the party paying the fee and the broker receiving the fee. I would also suggest that parties to a real estate transaction, however experienced they may be, often misunderstand this point. In Illinois, the license law makes a specific statement that the receipt of compensation from a party does not create an agency relationship between them in itself. See 225 ILCS 454/15-40. Nonetheless, when an Assemblor Rep takes its fee from an Owner, it is possible, without written disclosure that the broker does not represent the Owner, that the Owner will believe that the Assemblor Rep is the Owner’s agent.

When an Assemblor sets out to acquire one or more properties, the Assemblor may or may not disclose its identity and its intention to assemble the target property with others. The Assemblor may simply enter into a purchase contract with one owner at a time, perhaps using a straw person as a buying entity, with contingencies (due diligence, financing, etc.) or the Assemblor might identify and simply acquire an option to acquire the target property. The Assemblor Rep knows of the Assemblor’s intent—and this plan is, in my opinion, material information. The broker who is the Assemblor Rep has a duty not to disclose the confidential information of his/her Assemblor client, and I suggest that the assemblage intent is highly confidential information. It is therefore essential, that the Assemblor Rep NOT represent the owner(s) of target properties. Such representation of these owners puts the Assemblor Rep in an impossible position: knowing the assemblage intent of the Assemblor, being bound to the Assemblor not to disclose this intent, yet being obligated to owner clients to disclose that material fact, as it might have an impact on price or terms of the transaction.

Accordingly, my No. 1 rule is that the Assemblor NEVER represent owners of target properties unless he/she has the explicit written permission to disclose the Assemblor’s identity and to disclose the assemblage plan, including which properties are targeted, and the Assemblor’s development or resale intent. This information is rarely disclosed voluntarily, so my guidance is simply that the Assemblor neither list nor otherwise represent the owners. Arguably, accepting a sale commission from these owners would not—at least under Illinois law—create an agency relationship between the Assemblor Rep and these owners. However, in the owners’ minds, it may appear to create an agency relationship. Accordingly, written agency disclosure of Assemblor representation only is critical. I suggest that it may be simpler—and cleaner—if the Assemblor Rep explain to his client that it is better for the Assemblor to pay the Assemblor Rep commissions, thereby avoiding a possible mistaken impression of owner agency. Make sure that agency disclosure—more accurately in this case, disclosure of non-agency of the owner—is confirmed in writing, transmitted in a way where receipt can be confirmed. I often use the “delivery receipt” and “read receipt” options in Microsoft for key emails such as this one.

Occasionally the target properties are listed by other brokers, in which case, the agency of the Assemblor Rep is more easily disclosed, when these owners already have other agents. However, if the properties were not for sale and therefore were not listed, the presence of a single broker in the transaction can be misunderstood without non-agency disclosure. If the target properties happen to be listed by the Assemblor Rep’s firm, but with a different agent, you will likely have designated agency, so that Assemblor Rep is not imputed to also represent the owners; but make sure of that, because a dual agency throws the Assemblor Rep back into the dilemma of having competing duties of disclosure and confidentiality.

Assemblor Reps can avoid potential issues such as these by following four steps at the outset:

1. Identify the proposed assemblage area.
2. Determine whether the Assemblor Rep or his/her firm lists any of the target properties.
3. Determine whether the Assemblor wants to keep the assemblage plan and/or its identity a secret.
4. Identify whom the Assemblor Rep does/will represent, keep it that way, and disclose agency accordingly.

There have been interesting cases where a broker found itself in a pickle when representing a buyer whose identity and intentions were not disclosed. The following isn’t an assemblage case, but it highlights what happens when a buyer’s broker has confidential information, fails to disclose that information to a seller, and when that seller thinks the broker is in fact representing the seller.

The broker, let’s call him “Honest Abie” was a member of an orthodox Jewish synagogue and was honored to represent the congregation in finding and buying a home for its new rabbi. The home needed to be within walking distance of the synagogue, because the rabbi would need to walk from the synagogue to his home on Friday after sundown, and back to the synagogue on Saturday, in each case for Sabbath services. The number of homes available within this walking radius was limited; and if a seller knew the identity of Honest Abie’s client, that seller might hold out for a higher price, knowing why that house was of particular value to the congregation. The target house was found, Honest Abie negotiated the deal, the seller was to pay the fee, but when the seller learned before closing, that the buyer was the congregation, the seller held out for a higher price and refused to close. The congregation sued for specific performance of the contract, Honest Abie sued for his fee; and the seller prevailed in defending both claims. The sale contract was deemed voidable because it was fraudulently induced by a broker who represented the seller who had a duty to disclose all material facts, and failed to do so. The commission claim also failed because Abie had breached his fiduciary duty to the seller. So you can see that Honest Abie was indeed in a pickle, losing the deal, losing the lawsuit, and losing his commission. And it didn’t help that the pickle was a kosher pickle.

So, as you begin to work on an assemblage, be clear on whom you represent, who pays your fee, and what you may or may not disclose. The assemblage may be a career making transaction when it is done properly, and the rewards may be substantial, but as so often is the case, the risks are there as well.