BOO! New Law Spooks Brokers

October 2014

On January 1, 2015, a new California law will require commercial real estate brokers and agents to disclose to their clients which party they represent in a lease or purchase transaction. This new law will require brokers to provide to their clients a statutorily prescribed disclosure form that tells the client whether the broker (or the brokerage firm, through different salespersons) represents only the buyer/tenant, only the seller/landlord, or both sides of the deal as a dual agent. In particular, the new law will require the broker to explain his or her duties and responsibilities in the representation, and to disclose any potential conflicts of interest or prior business relationships the broker has had with the other parties to the transaction. The new disclosure requirement, which is currently in effect for residential brokers in the sale of property with four or fewer dwelling units, will apply to a purchase and sale transaction, an exchange, or a lease in any office, industrial, retail, or multi-family property that has a term of more than one year.

As noted above, this new disclosure requirement will also apply to the brokerage firm—not just to the individual broker handling the deal. Brokers will be required to disclose to their potential clients whether a different salesperson at their brokerage firm represents another party in the transaction. Ultimately, brokers will be required to disclose all facts that would reasonably affect the decision of the potential client on whether to proceed with the representation.

The rationale for this new law is that while there may be certain circumstances in which it is appropriate for the same broker to represent both buyer/tenant and seller/landlord, in many cases this kind of dual agency creates a conflict of interest as the broker attempts to serve the best interest of both parties simultaneously. As a result, there is the potential for a party to a commercial property transaction to be at a distinct bargaining disadvantage if their broker also has a relationship with the other party.