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Every Broker Has an Achilles Heel

Plain Speaking
By: James Hochman

Yes, many of you who have attended my classes, both at SIOR’s Broker Bootcamp and elsewhere, may have heard my warning that agency, and agency disclosure, are indeed the broker’s Achilles heel. Two newsworthy lawsuits bear this out, and while I will comment on each of these pending cases, my message for all of my readers is to take extra special care to disclose agency—properly and early on in the process—and to keep a weather eye for potential dual agency.

Agency refers to those parties whom you do and do not represent in real estate transactions. It is your own professional Achilles heel. I can tell you from decades of experience in representing brokers, that when an aggrieved (disgruntled) party and potential plaintiff seeks damages from a broker, the first issue that the plaintiff considers is whether there was an agency relationship, and therefore whether fiduciary duties would be owed by the broker. Another possible consideration is whether a breach of fiduciary duty occurred. Plaintiffs’ lawyers love to claim a breach of fiduciary duties, among the highest legal duties that exist. If the plaintiff is extra fortunate, they find—or at least claim—that the defendant broker served as a dual agent, thereby owing fiduciary duties to two or more parties in the same transaction. The plaintiff’s lawyer will then claim that when a broker serves as a dual agent in a transaction, the broker has an irreconcilable conflict of interest and could not possibly fulfill all of their legal duties to both parties.

Dual agency is, however, permitted under the license acts of most—if not all—states. This is provided that the broker seeking to serve as a dual agent makes timely and complete disclosure of dual agency, and then obtains informed consent from both parties, to serve as a dual agent. Different states have different agency disclosure statutes, rules, forms for disclosure, and forms to confirm informed consent. For example, Illinois recommends language for disclosure, and requires not only consent to dual agency, but also written confirmation of the informed consent. Illinois does allow, though, something called “designated agency,” which allows different licensees affiliated with the same firm to serve as agents of different parties, provided that these different agents are named in writing as designated agents in the listing or commission agreement. Designated agency in Illinois requires notice to—but not consent of—the parties. Every real estate licensee would be well advised to review the statutes and rules for their states-regularly. Brokers sponsored by two of the largest firms—CBRE and at JLL—have found themselves embroiled in litigation over claimed dual agency. In these cases, dual agency in the hands of the aggrieved party in the transaction is both a sword, as a violation of the law and a basis for damages, and a shield, as a defense against claims for commission.

I will discuss and comment on facts as set forth in two pending cases, based only the pleadings and court orders I have read. I realize that each of these cases is pending, one in New York’s trial court where the landlord’s complaint is subject to CBRE’s pending motion to dismiss, and the other on appeal to the Circuit Court of Appeals for the Washington D.C. Circuit. That means that the outcome for each is yet to be seen, dependent upon how the judges view the facts and legal issues of each case. Nonetheless, even at this less-than-final stage of the cases, It is important to note just what facts are alleged, and how those allegations are playing out with respect to large commission claims, as well as significant damage claims asserted against the brokers and their firms. If my message were to be condensed into a few short words, it might be:

“Don’t let this happen to you. Understand what applicable law requires in the world of agency disclosure and recognize that we all have that Achilles heel.”

JLL’s case offers a fairly straight forward scenario. Per the facts as set forth in the published opinion in Jones Lang LaSalle Brokerage Co. v. 1441 L Associates LLC, __ F Supp 3d ___ (2022), 2022 WL 856517, we read the following: JLL had an exclusive leasing listing on an office property located in Washington D.C. While one JLL sponsored licensee represented the landlord, a different JLL broker represented and procured the tenant. JLL’s listing contained the requisite language to disclose potential dual agency, which concept was accepted by 1441 when it signed the listing agreement. The language, while reiterating the statute, was apparently not set forth in a bold or conspicuous manner as required by the statute. A different JLL broker (not on the listing team), represented and procured the tenant. In Washington D.C., this is dual agency. The lease apparently disclosed the dual agency of JLL and with the parties’ signature implied their consent, though not using the language which the Washington D.C. statute required for disclosure and consent of dual agency. The landlord—represented by counsel—signed the lease. JLL invoiced for its commission of approximately $780,518.35. The landlord refused to pay the fee, JLL sued, and the landlord sought and obtained summary judgment stating that the fee was not owed, because JLL failed to comply with the statute and therefore did not obtain informed consent of the landlord to its dual agency. The landlord asserted that the listing agreement was therefore unenforceable, and the judge agreed. The judge’s statement in the opinion was telling: “Indeed, it appears that 1441 L is taking advantage of JLL’s technical non-compliance with the law to avoid paying a commission that JLL rightfully earned.” Lack of strict compliance has, at least at the trial court level, cost JLL a commission of $780,000+. I am not taking a position on the merits of this decision, which has been appealed by JLL. I am simply pointing out that where there is a technical failure that relates to dual agency disclosure, that technical failure can be exploited and therefore became expensive to the broker.

Our colleagues at CBRE worked on a substantial office sublease transaction of property owned by the federal government, leased to SL 4000 Connecticut LLC and BL 4000 CT LLC. These entities then subleased the entire building to the Whittle School, a private school. The final sublease was signed in August 2018. We all know the pandemic turned our world upside down in Q1 of 2020, for a period of years. Schools were impacted as much or more than the business world. One might surmise that the pandemic could have impacted the subtenant’s ability to comply with its sublease obligations going forward, but to go farther than that would be to speculate; and I want to stay close to what is alleged in the pleadings in that case. It is alleged that CBRE had several roles with respect to this property, serving as property manager for the owner, as well as construction manager during the sublease buildout, and as agent for the school—the subtenant—but NOT as agent for the sublessor. The sublessor was, per the sublease, represented by a different broker. In this litigation which is still (at press time) pending in the state trial court in New York City, the sublessor sought a declaration that no commission was due as a result of the dual agency, and the sublessor sought return of the first half of the fee which was paid (in excess of $11 million), and sought a declaration that the second half in a like amount was not due or payable. This sublessor points to facts surrounding the deal which occurred after execution of the sublease, relating to the sublessee’s non-performance, CBRE’s failure to disclose financial weakness of its sublessee client, and some form of dual agency related to CBRE’s various roles with the property—as property manager, construction manager, and the tenant’s broker. These facts are a bit more complicated, alleging a conflict of interest in CBRE’s many roles; but dual agency on the sublease seems, on these facts, a stretch, at best, since the sublessor was represented by a different broker on the sublease, Cushman & Wakefield.  

“Don’t let this happen to you. Understand what applicable law requires in the world of agency disclosure and recognize that we all have that Achilles heel.”

From a distance, and even after reading court filed pleadings, it is possible to think that landlords are using a stringent agency disclosure statute to avoid liability for substantial lease commissions, which is just another type of commissionectomy. From my pro-broker perspective, I can certainly see that view. From my more professorial perspective, we have a teaching moment here. If the license act applies—and it almost always does—and if there is a potential dual agency—or even a perception of conflict of interest—or if the fee is just large, we need to comply with the statute and expect that somewhere along the line, a party not wishing to pay a full fee will use the statute and lack of statutory compliance as a defense or bargaining tool to reduce commission liability.

Whether these claims are settled or adjudicated to finality remains to be seen, but the message is clear: Achilles was not invulnerable, the arrow in the heel killed him. We brokers are not invulnerable, we are not excused from strict statutory compliance in dual agency, we may not be protected from clients who just don’t want to write that big check and who will find a way to avoid commission liability. It happens, but if you are vigilant and disclose agency timely, properly, and in strict compliance with applicable law, you may lessen the chance that the battles being fought by JLL and CBRE would be your battle too. The larger the fee, the more likely that a landlord will get writer’s cramp before stroking that commission check. Landlords with writer’s cramp have lawyers. Lawyers read statutes.


Media Contact
Alexis Fermanis SIOR Director of Communications
James Hochman
James Hochman
Schain Banks Kenny & Schwartz

Jim Hochman is a partner at Schain Banks Kenny & Schwartz law firm and freelance writer. Contact him at jhochman@scheinbanks.com.