Prompted by the 2016 landmark ruling in the California Supreme Court Case Horiike v. Coldwell Banker, California Assembly members have introduced Assembly Bill 1059 (“AB 1059”) and Assembly Bill 1626 (“AB 1626”). AB 1626 and 1059 oppose each other and are scheduled for review on April 25th and May 2nd respectively. These bills would change broker regulations surrounding dual agency in commercial transactions, including purchases and leasing. Current law in California permits the existence of dual agency in real estate transactions (Civil Code §2079.16), however the legality and requirements in the commercial industry may change if either of these bills pass.
AB 1059 would prohibit a brokerage firm, broker or any of the broker’s or brokerage’s licensees from acting as a dual agent in a commercial property transaction. AB 1059 furthers the trend of legislators moving towards a complete ban on dual agency. Colorado, Kansas, Florida and Wyoming specifically prohibit dual agency, while dozens of others are moving towards a total ban. Awareness of the conflicts of interest involved and duties owed to a client illustrated in Horiike may have led to the proposal of AB 1059 by legislators.
AB 1626 would add to the disclosure requirements in commercial transactions, rather than prohibit it all together. This would maintain the status quo, but also provide parties with more information regarding the existence of a dual agency, and the fiduciary duties owed by the agents to both sides. Senate Bill 1171 (“SB 1171”), a previous bill passed in early 2015, requires that agents disclose to clients the existence of dual agency in commercial property transactions, not what specific duties are owed to them. Legislators argue that AB 1626 would be less abrasive than AB 1059, and would implement what the court in Horiike intended concerning dual agency in real estate transactions.
In Horiike, the court ruled that both real estate agents in a transaction owe a fiduciary duty to both parties when the agents work under the same broker’s license. Furthermore, the court reiterated that dual agents have a duty to disclose all facts materially affecting the value or desirability of a property to both parties to the transaction. The seller’s agent in Horiike owed the same duty to the buyer as he owed to his own client, based on the fact that both agents were from the same Coldwell brokerage firm. As you can imagine, this potentially creates a conflict of interest and limits the tactics and strategy an agent can use in executing a sale.
Horiike has had a ripple effect on the real estate market, affecting consumers and real estate brokerages alike. Some have argued that the ruling highlighted the risks involved with dual agency and has made consumers more wary of engaging in such activity. In an amicus brief filed by the California Association of Realtors (“CAR”) concerning Horiike, CAR argued that the ruling limit’s consumer’s choices in purchasing and leasing property, reasoning that because a buyer/lessee working with a broker doesn’t know what property they will ultimately pick, there’s no way to anticipate whether the seller/landlord will be represented by the same firm. This could be a substantial issue in very small towns where there is potentially only one brokerage. This split in opinion is evidenced by the proposal of AB 1059 and 1626, with the passing of either one implementing major changes in the commercial real estate market.
If passed, AB 1059 takes Horiike a step further, completely eliminating dual agency in commercial transactions. Legislators are constantly trying to stay on the forefront of legal changes, and the passing of AB 1059 may be a change that is inevitable given the current trend around the country. In almost every other fiduciary profession, this type of dual agency relationship is illegal, except in certain emergency situations. AB 1059 would move commercial real estate in line with these other fiduciary professions, getting rid of dual agency all together. This includes dual agency relationships in both commercial property purchases and leasing. Many people in the industry believe that commercial tenants’ interests have historically been misrepresented due to the use of dual agency, and the elimination of such would provide thousands of businesses with more effective representation. See: http://www.costar.com/News/Article/CA-Legislator-Introduces-Bill-Banning-Dual-Agency-Representation-in-CRE-Transactions/189991
While it is required that parties to commercial property transactions are made aware of dual representation, it is unclear if they actually understand the risks involved and the likelihood of a conflict of interest. The passing of AB 1626 would help fix that and more clearly define dual agency and the fiduciary disclosure requirements for commercial agents. AB 1626 would also allow consumers the freedom of selecting whichever brokerage they prefer, even if the opposing party’s agent is from the same brokerage.
Although it is unclear how each bill will do upon review, one thing is certain; the commercial real estate industry is evolving and changing. The passing of either bill affects thousands of property and business owners around the state, with the potential of changing how business is done in the industry. Stay tuned to see just how much of an effect Horiike has had on legislators concerning commercial transactions.