In the March, 2022 case, Jones Lang LaSalle Brokerage, Inc. v. 1441 L Associates., LLC, (the “JLL Case”), the United States District Court for the District of Columbia voided a brokerage commission to Jones Lang LaSalle (“JLL”) because JLL represented both the landlord and tenant on the same lease transaction without complying with the disclosures, waivers and covenants required by D.C. Code Section 42-1701 (the “Brokerage Act”).
Case Background
The Brokerage Act was passed by the legislature to “protect the public against incompetence, fraud and deception in real estate transactions” and provides specific protections and requirements regarding dual representation (i.e., when a broker attempts to represent both the landlord and tenant in a lease transaction). In reviewing the intent of the Brokerage Act, the District Court pointed out that other courts have been “especially wary of brokers acting as dual representatives because of the obvious conflict of interest that such arrangement entails” and “where a broker attempts to act for both sides, ‘he is confronted with the impossible task of securing for each the most advantageous bargain possible’.” {emphasis added).
The Brokerage Act requires that brokers representing the landlord and tenant in a lease transaction must (A) obtain the written consent of both parties to this dual representation and (B) ensure that, if a separate disclosure on the statutory form is not used, the disclosure of this dual representation be conspicuous, printed in bold lettering and in all capitals, underlined or contained within a separate box. The statutory form of consent requires, among other things, that the broker covenants not to disclose to either client any information given to it by the other client. Because the legislature believed that dual representation creates significant conflicts of interest for the broker, any consent to this arrangement by the principals to the transaction must be fully informed and intentional.
In the JLL Case, both the Lease document between the landlord and tenant, and the Exclusive Listing Agreement between JLL and the landlord, contained language about JLL’s dual representation; however, these disclosures were buried within the lengthy bodies of the documents, the disclosure language was not properly highlighted, and the specific disclosures weren’t signed by both parties. As a result, the Court voided the listing contract and denied payment of the commission to JLL.
General Applicability of the Case
While the JLL case hinged on the Brokerage Act which is specific to the District of Columbia (other jurisdictions have similar laws), the case provides valuable insights into the dangers of dual representation that are applicable to transactions in all jurisdictions.
Here is some of relevant language from the decision (including other cases and treatises cited by the District Court) that tenants should think about before allowing their brokerage firm also to represent their landlord:
- “As a general rule, a broker does not act in a dual capacity as the representative of both sides to a negotiation because a broker must act solely for the benefit of the principal… and may not undertake to represent an adverse interest.” (emphasis added).
- “Because a broker is charged with protecting and advancing the principal’s interests, a broker may not serve both parties to a transaction unless, under certain circumstances, the parties fully and freely have consented to the dual representation.” (emphasis added)
- “[The statutory notice requirement] reflects a recognition by lawmakers that dual representation is inherently suspect, due to the broker’s inescapable conflict of interest in representing opposing parties to a transaction. A “licensee [is] engaged by a landlord [to]…[p]romote the interests of the landlord” and a “licensee [is] engaged by a tenant [to] … [p]romote the interests of the tenant.” (emphasis added)
Takeaway
Many brokerage firms attempt to represent both the landlords and tenants in the same lease transaction. This arrangement works out remarkably well for the brokerage firm because it makes two commissions on the lease transaction instead of just one. Unfortunately, the same cannot be said for the brokerage firm’s clients in the transaction; especially the smaller client who provides a lot less business to the brokerage firm—the tenant. While this type of dual representation may be legal — provided the broker complies with applicable disclosure and client consent requirements—it does not mean that this type of arrangement is good for the tenant; it is not.
The fact that legislatures are requiring landlords and tenants to be hit over the head with the existence of a conflict of interests before consenting to it is telling us something: dual representation arrangements are very problematic and a fully informed person who had other options probably would not agree to it.