DAVID v. GOLIATH: How the Replacement of a Commercial Real Estate Agent's Common Law Duty of Undivided Loyalty with Washington State's More-Limited Statutory Obligations Advantages Landlords to the Detriment of Commercial Tenants
As the fastest-growing urban area in the United States—and due to its emerging national influence in commercial real estate development and leasing through transformational transactions such as Amazon’s recently completed national HQ2 search—the City of Seattle and related Washington State laws addressing the use of dual agency in commercial transactions present a unique backdrop for examining the findings and recommendations from a 2014 commercial real estate conflicts of interest research study and attendant report, described below, more than four years after its publication. In November 2014, a published research study report made a number of key observations about the existence of adverse legal and transactional consequences from conflicts of interest in the representation of commercial tenants by full-service brokerage firms engaged in the commercial real estate services (CRES) sector actively engaged in the practice of “dual agency.” That report, published by the Center for Real Estate and Urban Analysis (CREUA) at The George Washington University School of Business in Washington, D.C., also offered a series of key recommendations for mitigating or eliminating entirely these adverse consequences. In the intervening years since the mid-November 2014 publication of the conflicts of interest research report, the CRES sector has not taken any steps, in the form of industry self-regulation or otherwise, to address—much less ameliorate—these legal issues and the attendant, adverse transactional consequences for commercial tenants. Further, over the same period, (1) there has been increasing consolidation among the five largest CRES full-service brokerage firms (i.e., collectively they represent a larger share of the market for leasing commercial property than in 2014, when the CREUA conflicts of interest research report was conducted); and (2) those firms have gained traction in numerous domestic commercial property markets by taking equity positions in a substantial amount of commercial space available for lease in major markets. These market developments further exacerbate the negative consequences for tenants seeking independent, objective, and professional representation in commercial real estate transactions because they present the prospect that, in a dual agency scenario, the tenant representative may be acting as an undisclosed principal. And even in cases where the tenant representative discloses the existence of a conflict where their firm is a principal in the transaction, the tenant may not be adequately equipped with the knowledge necessary to understand the significance and consequence of the self-dealing present in this transaction. As a consequence, the problems associated with dual agency have become more acute and more pervasive in the world of commercial real estate generally, and in commercial leasing transactions in particular. Under the common law, an agent would owe the following duties to its principal: o Unbroken service and loyalty (the “duty of undivided loyalty”); o Confidentiality; o Full disclosure of information necessary for the principal for to make well-informed decisions; o Acting in the best interest of the principal; o Reasonable care and diligence; and o Accountability to the principal. However, in Washington State, the legislature in 1996 replaced the common law duties agents owe to principals under state common law—such as the duty of undivided loyalty—with a statutory scheme that, at best, causes confusion about the duties an agent owes its principal, particularly in the context of a dual agency representation of the tenant and the landlord in the same transaction.
Peter Smirniotopoulos and Ryan Mathisen, DAVID v. GOLIATH: How the Replacement of a Commercial Real Estate Agent's Common Law Duty of Undivided Loyalty with Washington State's More-Limited Statutory Obligations Advantages Landlords to the Detriment of Commercial Tenants, 43 SEATTLE U. L. REV. 169 (2019).