A lot has been written in the past two years about the ongoing dispute between the Philadelphia Family Courts and their real estate broker, Jeff Rottwitt, regarding the new Family Court building at 15th and Arch Streets in Center City Philadelphia. The Courts hired Jeff Rottwitt as their real estate broker to assist them in the development of a new Family Court building. Somewhere along the way, he also became their co-developer when he teamed up with Don Pulver, the owner of the chosen site. The Courts claim that Rottwitt’s dual role was never disclosed to them and that it created an irreconcilable conflict of interest. In essence they argue that Rottwitt could not properly represent their best interests because his economic interests, as their developer, were compromised and directly adverse to their economic interests as the potential tenant/buyer of the site (in other words, while they were looking to minimize their rent or purchase price, he, as the developer, would be looking to maximize the rent or the profit on sale and developer fees). Rottwitt, on the other hand, argues that the Courts knew of his dual roles and, at least implicitly, consented to them. Further, and I think this is the most important issue which has received little attention in the press, Rottwitt claims that once the Courts selected Pulver’s site at 15th and Arch, his job as broker was finished and, therefore, he was free to join Pulver as co-developer of the site.
I have no inside information about the facts of this case and my understanding of the issues comes solely from what has been written in the papers. I take no position as to who is right and who is wrong as that will ultimately come down to the facts. Regardless of the outcome of this litigation, a lot can be learned from this case about brokerage relationships.
At a minimum, there seems to be fundamental misunderstandings in this case between the broker and the client as to what Rottwitt’s scope of services was to include. Rottwitt appears to take the position that he was acting primarily as a space finder and that his seven figure fee was earned once a site was identified and selected. According to him, his brokerage role did not include fleshing out all of the details of the real estate transaction, representing the Courts on the actual documentation of such deal or advocating for the Courts’ interests should disputes arise with the developer during construction and through move in. Presumably he argues that these responsibilities belonged to the Courts’ attorneys. Because his job was completed once Pulver’s site was selected, there was no conflict of interest when he subsequently became the co-developer of the site. The Courts take the position that the engagement for his brokerage services continued beyond site selection and, therefore, he was still their advisor and advocate when he took on the role of co-developer. Thus, they argue, the conflict was irreconcilable. What is remarkable is that there could be such a fundamental misunderstanding about the scope of services on a deal of this magnitude.
The case highlights many of the pitfalls in brokerage and reveals the inherent conflicts of interest that can arise in many real estate transactions when people attempt to represent both sides in a transaction. Landlords and developers are smart people and are in the business of making money. Not surprisingly, they want to maximize rents, sale prices and fees. Tenants and buyers want to save money so they want low rents, cheap purchase prices and minimal landlord/developer fees. It’s usually a zero sum game as what benefits one party economically usually hurts the other. Nevertheless, brokers continue to try and convince clients that they can represent landlords (or, in the present case, actually be the landlord) and tenants at the same time.
What can we learn from the Family Court case? First, clients need to clearly spell out in writing the scope of services they expect their broker to perform including when the engagement will end. Does the client merely want his broker to find space for him and then get out of the way, or does he want someone who will be his advisor negotiating deal terms and otherwise advocating exclusively for his interests throughout the process until move in? These are two very different roles which raise very different potentials for conflicts. Whichever role the client requires should be spelled out in the contract and the fee should be reflective of those differing scopes of services. Second, as part of the engagement letter, the client should insist that (1) potential conflicts of interest be disclosed by their broker in writing as and when they arise and (2) before their broker (or his firm) accepts any engagement with a landlord or developer who may be bidding on their requirement, the client should have a right to approve same.
While conflicts of interest happen all the time in real estate, they don’t have to. Clients should carefully spell out their expectations in the engagement letter with their broker and establish mechanisms for disclosing and preventing conflicts before they arise.
For more information contact Glenn Blumenfeld