Who Represents Whom: The New Law Of Real Estate Agency And Commercial Brokerage

BY KEVIN GROSSMAN and RICHARD HESIK
Yates Wood & MacDonald

The commercial real estate market is hot. Vacancies are at 20-year lows in every sector, lease rates are up, investment properties sell at the lowest cap rates in 15 years.

Not only is the financial part of commercial real estate changing, but the new Washington State Law of Real Estate Agency is dramatically changing the relationship dynamics between brokers, buyers, tenants, sellers and landlords. The question of who represents whom will become increasingly central to real estate dealings.

On Jan. 1 the new law became effective. It changes the rules under which agents and buyers and sellers relate to each other in commercial real estate dealings. Under the former law of agency, agents were presumed to represent sellers and landlords under convoluted rules of agency and sub agency. The law did not reflect actual practice in the brokerage business wherein agents "represented" tenants and buyers irrespective of how the law might have treated the relationship.

The new law creates a presumption that agents represent buyers and tenants unless certain conditions apply. The primary condition is in the case of an agent working for a seller/landlord under a written listing agreement or when the agent is an owner of the property in question. This represents a 180-degree change from the former law.

Under the new law, an agent must inform a buyer/tenant by giving them a lengthy brochure summarizing the new law and stating that the agent represents them. The agent, however, is free to show properties in which the buyer/tenant is interested to other buyers/tenants without breaching any duty to the original buyer/tenant. Furthermore, the agent need not show properties to the buyer/tenant for which there is no written agreement to pay compensation to the agent.

Buyers and tenants will need to take a close look at their relationships with brokers.

Finally, the agent is specifically excused from seeking further properties for the buyer/tenant if the buyer/ tenant is a party to an existing contract to purchase or lease.

The practical effect of the tightening commercial real estate market and the new agency rules is to force buyers/tenants to more carefully examine their real estate broker relationship to ensure that they are getting the service they expect.

This examination may lead to a wider use of exclusive agency agreements with agent, with agent compensation being paid by the buyer/tenant. These fee arrangements will have the effect of eliminating confusion over who represents whom, and will provide a higher degree of agent loyalty to buyer/tenant than that envisioned in the new agency law.

For example, a buyer/tenant agreement might provide that the agent will show properties only to the buyer/tenant and may not show them to other prospects unless and until the client has decided not to consider the property. The agreement might also provide that the agent must show all properties to the buyer/tenant that might be appropriate even if the owners refuse to pay a real estate commission. In those cases the buyer/tenant agrees to compensate the agent.

We expect that there will be an increase in the use of buyer/tenant exclusive agreements with agents as the implications of the new law become clearer. The agreements will take many forms, but the primary focus will remain similar: in exchange for agent loyalty and diligent work, the buyer/tenant will work exclusively with their designated agent.

The compensation may take the form of a shared commission, a fixed amount retainer, an hourly consulting fee, a "success" fee based on performance, or a combination of these. The key is for the compensation structure to fit the client's objectives, ensuring the best outcome.

We also expect to see the brokerage industry divide itself even more distinctly into buyer/tenant (selling) agents and seller/landlord (listing) agents. Because the new law eliminates the fiction of subagency within an office, each brokerage house could continue to represent both buyers and sellers and landlords and tenants. However, each individual agent will need to make a decision about how they want to run his or her business -- as listing agents or selling agents.

As agents we have had professional experience with many types of agency and fee arrangements with buyer/tenants.

For example, we represented a buyer who wanted to buy a particular type of property in a well defined geographic area. No properties were listed for sale. We executed a representation agreement with the buyer which provided that if we were successful in locating and closing the sale of a property that she would pay us at closing.

With this agreement in hand we canvassed the neighborhood and found a seller who was willing to discuss the sale of a building but would not pay a real estate fee. Armed with our agreement with the buyer, we negotiated vigorously on her behalf and closed the transaction to everyone's satisfaction. Because of our agreement with the buyer there never was any misunderstanding about who represented whom or when, how much, and by whom we were to be paid.

In another case we represented a tenant and had shown him several listed proprieties which did not fit his requirement. We then came upon a property which was not listed and on which the owner was not willing to pay a commission. Because of our exclusive agreement, we were able to handle the lease negotiations successfully without any of the parties being confused over where our loyalties lay.

With each client our duties are spelled out in detail in a representation agreement. The duties go far beyond the minimal "scope of work" laid out in the new agency law, i.e. "to make a good faith and continuous effort to find a property for the buyer."

Even this minimum statutory requirement of proactivity is still more than what is required of an agent in the Commercial Brokers Association "Retainer Agreement to Locate Real Property." That document requires the agent merely "to locate real property . . . ."

We expect that as the use of buyer/tenant representation agreements increases, the description of duties will be expanded to provide in detail what the agent will do -- mailing, phone solicitations, property research, market evaluations, performance analyses -- and when and how the agent will do it. The specifics will be tailored to the client's objectives to ensure the process is successful.

We expect that the relationship between agents and clients will take longer to develop and that there will be significantly more discussion and negotiation up front between the parties before agents commence any research and touring of properties. This will be to the benefit of both clients and agents and should generate stronger, more lasting relationships for agents and their principals

Kevin Grossman, MBA, and Richard Hesik, JD, CCIM, are associate brokers at Yates Wood & MacDonald, Inc., specializing in purchases and leasing of commercial properties in the greater Seattle area.