Senate Bill 1171 is a new California law that will require commercial real estate brokers to disclose any conflicts of interest when dealing with a property transaction. The commercial real estate law will ensure that the broker makes any business dealing with landlords or tenants known to both parties. The new law will take effect January 1, 2015.

Role of SB 1171 in Commercial Real Estate

Existing California law requires for residential real estate agents to provide a disclosure form detailing relationships to the sellers and buyers of residential property. Commercial properties were not included in the law due to a prior court ruling that stated that there were established duties to the buyer and the seller in commercial sales.

The new commercial real estate law details that:

• Real estate brokers will provide written disclosure on whether they represent the buyer, the seller, or both parties;
• Written consent must be obtained before representing both the buyer and the seller; and
• Real estate brokers that represent both parties must obtain written consent before sharing confidential information between the parties.

Oftentimes, real estate brokers have long-standing relationships with a landlord or seller, and as a result, provide biased services towards the landlord. Landlords will use the broker's services multiple times as they negotiate leases, and as a result, increases funding to the broker's company. Those buying commercial real estate may think they their agent has their best interests in mind while the broker is extremely conflicted.

Issues with Dual Agency

The law came about after systemic abuses of commercial real estate agents were discovered. These agents will work for a company that represents both the landlord and tenant in a real estate transaction, called dual agency. Without the law, the agent does not need to disclose the relationship with either party in writing, only orally. This can be worded in a confusing manner and does not hold up when challenged.

Dual agency means that the real estate company is working in the best interests of two opposing sides. As representatives of the company, individual real estate brokers may not be able to have their client's best interest in mind since their company has a relationship with the opposite party. California law requires that a real estate broker work with their client with undivided service and loyalty, since they are hired to provide counsel and guidance in the real estate process.

This puts dual agents in a tricky place, since providing unwavering loyalty to the best interests of opposing sides in a real estate transaction may be extremely difficult. For example, part of the job of a real estate broker is to negotiate an acceptable price for the seller and the buyer. For the seller, they would be seeking the highest possible price while also attempting to provide the buyer with an affordable outcome.

Real estate companies that represent the buyer and the seller can place an unfair advantage on the needs of the seller. Moving forward, this new law will work to even the playing field for California buyers.