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Commercial Brokers Must Disclose Agency

by / Monday, 01 September 2014 / Published in Articles

Commercial Brokers Must Disclose Agency

By: Bryan Mashian

New law requires California commercial real estate brokers, like their residential counterparts, to disclose which party they represent in a transaction. The source of payment of the broker’s commission does not necessarily determine the principal that the broker represents. Brokers often agree to share the commission between themselves as independent contractors, and a broker may be the exclusive agent of one party despite receiving compensation that was paid by the other party. To clarify the parties’ relationships, commercial brokers will be required to disclose in writing potential agency relationships at the outset of the transaction and confirm the actual agency relationship when created.

This new law, which becomes effective January 1, 2015, requires disclosure of an agency relationship in a purchase and sale transaction, in an exchange, or a lease the term of which exceeds one year. The disclosure is not required in loan transactions. In addition to single family and one to four dwelling unit residential transactions which the law previously covered, the new law requires agency disclosure in office, industrial, retail and multi-family property deals.

The agency disclosure must state whether the agent represents only the buyer/tenant, only the seller/landlord, or both sides to the deal. The statutorily-required disclosure form states that from the outset the principal should understand what type of agency relationship the principal wishes to have with the agent. Although the law appears to permit the agent to unilaterally determine which party the agent chooses to represent, the creation of an agency requires consent of both the principal and the agent. Presumably, the agent should discuss and explain the ramifications of the agency election so that the principal can make the choice with an understanding of its effects. So, if an agent elects to represent a party in the transaction, the principal can refuse to confirm that choice if the election is objectionable.

Also, the parties can modify an agency relationship any time before completion of the object of the agency, such as close of escrow. For example, during the course of a sale, the listing (or seller’s) broker may also become the selling (or buyer’s) broker and thereby a dual agent. But, a listing broker is not allowed to only represent the buyer/tenant.

The required disclosure form explains the duties of the agent and has to be signed by the broker’s client before representation by the broker may proceed. So, the listing agent must give a copy of the agency disclosure form to the seller before the seller signs the listing agreement. The selling agent must give a copy to each party as soon as practicable; the buyer must receive it before signing the offer to purchase, and the seller must receive it before the offer is presented.

But, the disclosure form need not be given to a prospective buyer/tenant who is “casual or transitory,” such as a person who views an open house. However, the disclosure should be given when it becomes apparent that the prospective buyer/tenant is seriously considering the transaction.

Dual agency is still permitted, if disclosed to and in writing consented by both parties. The dual agent owes fiduciary duties to both sides, including the duty of disclosure of all facts that materially affect the value or desirability of the property. The law explicitly states that the dual agent is not obligated to reveal to either party any confidential information obtained from the other party that does not involve such affirmative duty.

A dual agent is barred from supplying any confidential information between the two parties unless the dual agent has written consent from both parties to do so. So, a dual agent cannot disclose to the buyer that the seller is willing to sell the property at a price less than the listing price, without the express written consent of the seller. Conversely, a dual agent cannot disclose to the seller that the buyer is willing to pay a price greater than the offering price, without the express written consent of the buyer.

The failure of a dual agent to give the seller the agency disclosure form before the listing is signed permits the seller to rescind the listing agreement, or to recover damages from the agent if the principal can prove monetary losses from the agent’s breach of duty. Also, the seller would not be liable for a commission if an offer by the buyer within the terms of the listing is rejected.

In sum, the new law will clarify which party a broker represents. The disclosure is especially helpful when a dual agency may arise of which the parties may not readily be aware, such as when two salespersons from one brokerage firm represent different parties.

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