By: Nick Pipitone
In 2018, an office lease in Washington, D.C. was brokered by JLL. The deal was rather unextraordinary. It was the type of deal that may have garnered a few headlines here and there, ending up in weekly transaction columns, but nothing that would draw any special interest. But, four years later, what happened between JLL, the tenant, and the landlord is at the center of a huge legal battle, one that many major real estate brokerages and professionals are paying close attention to.
An affiliate of S.C. Herman & Associates was looking for a new tenant at its downtown Washington, D.C., Class A office at 1441 L St. NW in 2016. The landlord had just lost its anchor tenant, the Bureau of Economic Analysis, so they entered into an exclusive leasing agreement with JLL to fill the space. S.C. Herman invested about $36 million to upgrade the 1967-built office, adding two new floors, a new penthouse, several amenities, and renovations to the lobby.
By 2018, JLL secured a lease for the building with co-working operator Regus for 51,000 square feet. Everything about the deal seemed standard until what happened next. JLL claimed S.C. Herman didn’t pay the brokerage the $781,000 commission it was owed because of a law known as the D.C. Brokerage Act. The landlord said JLL didn’t follow the proper protocols for disclosing dual representation, since the firm represented both the tenant and the landlord and didn’t call proper attention to it in lease documents.
JLL sued in December 2020, saying the landlord owed the brokers $832,000 in commission and interest on late payments. But JLL won’t be getting that money, for now, at least. A U.S. District Court judge ruled in March 2022 that JLL’s improper disclosure of dual representation made the leasing agreement unenforceable, so the landlord wasn’t required to pay the commission the brokerage says it’s owed. JLL has already filed an appeal with the U.S. Court of Appeals for the District of Columbia Circuit Court.
The case hinges on the D.C. Brokerage Act, a 1996 law that requires dual representation disclosure to be conspicuously identified in lease documents with emphases like bold lettering and all capital letters. The law also requires the disclosure to clarify that brokers won’t share confidential information between parties. While the D.C. Brokerage Act has been around for 25 years, the dispute involving JLL is the first court case that involves it.
The lease documents for the transaction did mention JLL’s dual representation, but they didn’t include any emphasis, confidential information language, or client signatures. The judge said that all parties in the transaction knew JLL was representing both the tenant and landlord and consented to the agreement. The judge admitted that the landlord appeared to be taking advantage of a legal technicality. But the law is the law, and according to the judge, the act was violated. The judge also wrote that dual representation is “inherently suspect due to the broker’s inescapable conflict of interest in representing opposing parties to a transaction.”
The JLL lawsuit isn’t the only one in D.C. involving dual representation. 601W Comoaies sued CBRE in the summer over a leasing deal involving the now-closed Whittle School. CBRE argues the law isn’t applicable in the case, saying it didn’t represent the landlord in the deal and only served as the property manager. Both cases have real estate brokers on edge in D.C., and the rulings could signify a more litigious environment for deals where representing both tenants and landlords is common.
Common but controversial
Dual representation in commercial real estate has been around forever. Though it presents conflicts of interest, it has generally been an accepted practice. In recent years, though, dual agency has come under increasing scrutiny, especially as top brokerages like JLL, Cushman & Wakefield, and CBRE continue to grow and command such a large share of transactions. The way it typically works is major brokerages have tenant and agency reps, so there are two people or teams working both sides of the deal from the same company. This results in a higher payoff for a brokerage since they’re collecting commissions from both sides.
Many state and municipal real estate laws require disclosure of dual representation upfront. Some say the practice can lead to unethical moves sometimes from brokers. If brokerages have a fiduciary duty to both sides, then who are they really representing? Critics of dual agency say tenants can be harmed because the landlord pays the commission and usually draws the most loyalty. Landlords are the biggest clients of major commercial real estate brokerages, so they’re sometimes able to exert their influence to get the best deals at the expense of the tenant. Dual agency also means brokers are more inclined to show tenants space where their company represents and controls it.
Some tenants don’t care, and sometimes it actually helps a deal. With dual agency, the leasing process is streamlined by a middleman and can move faster. If everything is transparent, both sides are usually happy. But sometimes, it’s hard for tenants to know what’s happening and if they’re getting the best deal. The real estate industry is divided about whether dual representation is even that big of a problem. Major brokerages say they have specific internal controls to prevent conflicts of interest. They also say any perception of foul play would risk an unnecessary hit to their reputations.
Others in the industry have called for the total abolition of the practice. Various states and cities have attempted to ban dual representation, but it usually faces staunch opposition from real estate trade groups. A Washington state bill in 2013 tried to prohibit dual agency in certain transactions, but it was ultimately shot down. The local chapter of the Building Owners and Managers Association said at the time that consumers of commercial brokerage services had “raised no concerns over dual agency.”
California’s legislature passed a law in 2015 that required disclosures for dual-agency deals. The law states that if a real estate company handles both sides of the agreement, the managing broker must make a disclosure. A big proponent of the law was Jason Hughes, co-founder of Hughes Marino, a San Diego-based tenant representation company. Hughes said he’s seen years of abuse of dual agency in real estate and that “it was just wrong.” Hughes fought to outlaw the practice in California altogether, but the bid was unsuccessful. He faced opposition from several real estate associations like AirCRE.
While laws prohibiting dual agency haven’t gone far in the U.S., the practice is all but banned in the United Kingdom. The UK Royal Institute of Chartered Surveyors sets standards for many land, property, and construction firms, and it banned dual agency for its members in 2018. The organization made the move after finding in a research report that “property agencies that act for both tenants and landlords often don’t have a sufficient separation between the departments.”
Dual representation also happens in residential real estate, and it can sometimes be used in an unethical way. A lawsuit against Houlihan Lawrence in 2018 alleged “predatory behavior” in how the residential brokerage handled its dual agency practices. The lawsuit claimed that dual agency was a fundamental part of the company’s business, and they obscured their agents’ roles. The company provided less disclosure than other brokerages about dual representation and allegedly represented both sides of the deal in 9 out of 10 of its biggest Westchester, New York, home sales. In some cases, it’s alleged that home buyers were unfairly pressured into bidding wars for properties that they ultimately purchased well over the asking price.
A Westchester Supreme Court judge certified the case as a class action lawsuit earlier this year. Houlihan Lawrence has defended its business practices, saying it disagrees with the ruling and that it intends to appeal. The case is one example of where dual representation can go wrong.
A technical knockout
How the JLL dual agency lawsuit plays out in Washington, D.C., will be watched closely by the commercial real estate industry. And it will also lead to brokerages being much more careful about how they handle the practice, not just in D.C., but possibly in other markets where they operate. There may not be many more lawsuits like the ones JLL and CBRE are facing because brokerages have so much at stake, they would risk a ton of money by not being overly cautious.
What’s interesting about the case involving JLL is that they seemingly lost on a technicality. According to one industry insider, the judge in the case was a “real stickler,” and the landlord seemed to be pulling a quick one. The law had been on the books since 1996, had never been used in a case, and everyone seemed to know JLL was representing both sides, yet the landlord withheld the commission anyway. In sensitive budgetary times, some landlords might seek to take advantage of the law to recoup costs. But the real estate industry is a small community, and if you’re a landlord and keep pulling this, there’s a chance you could struggle to find top brokers to represent you in subsequent deals. Legal conflicts like this get forgiven over time, but winning lawsuits and withholding big commissions on technicalities could make a lot of enemies.
The attention to dual agency has many top brokerages on high alert. The D.C. Brokerage Act and other laws like it will be something real estate law schools will focus on more now. There are already many reports that brokerages are holding more training about dual representation laws and ensuring they know the exact legal language and what the law requires. Of course, the outcome of the JLL lawsuit is undecided for now, as the appeals court could overturn the ruling and rule in favor of the brokerage.
JLL has brought on a new legal team from Morgan Lewis, one of the nation’s most prominent law firms, to represent them in the appeal. The law firm sent a filing in the case on August 15th, and one of its main arguments is that a mere technical violation of the law shouldn’t force JLL to forfeit its commission. JLL could try to go to the U.S. Supreme Court if they lose the appeal, though it’s unlikely the nation’s highest court would take this case. The appeals court ruling will probably be the final decision.
If JLL loses the appeal, it will set a legal precedent that allows tenants and landlords in D.C. to sue over technical noncompliance with dual agency disclosure and withhold commissions. Still, it would be up to real estate owners if they want to pick that battle with a brokerage. Many property owners with large portfolios probably wouldn’t want to tarnish their reputations by clawing back big commissions on a legal technicality. It’s not a good look.
No matter what happens in the legal case, it has drawn more attention to the practice of dual representation. Opinions about the ethics of dual agency vary widely in the real estate industry. For example, real estate firm Cresa, which only represents occupiers, has long railed against the practice, and they’ve used it to convince tenants to work with them instead of full-service firms. Depending on the outcome of the JLL case, it could lead to similar legal actions. But what’s more likely is that brokers will be more cautious than ever in following the letter of the law to reduce liability.
Dual representation has been happening in commercial real estate for a long time, and most sophisticated industry professionals know that. The D.C. law is more so designed to protect less experienced real estate professionals. Most industry folks say it’s usually not a big deal if everyone knows what’s happening. But rest assured, brokers in Washington, D.C., and maybe even elsewhere in the U.S. have been spooked enough by the JLL lawsuit that dual representation may be a more scrutinized part of real estate deals in the years ahead.