While the smoke hasn’t cleared on a lot of the intricacies of the new regulations brought about by the Real Estate Superintendent’s office, the direction is clear.
Rightly or wrongly, the new regulations are intended to ensure rigorous standards of ‘agency’ in the truest meaning of the concept. In short, it means that a licensed agent (licensee) must always act solely in the best interests of their client and hold those interests above their own.
Therefore, limited dual agency will no longer be permitted as of March 15, 2018, since it amounts to a conflict of interest. This will mean the break up of full service teams representing both parties to a transaction, including investment sales & lease transaction in commercial real estate.
Licensees will also have to watch out for the interest of unrepresented parties in a transaction by disclosing that the licensee is the agent for one party, that the unrepresented party should seek independent representation and note the pitfalls of not being represented. The licensee then must have the unrepresented party sign what amounts to a waiver, should that party wish to continue discussions while not being represented; or terminate the discussion while the party seeks independent representation.
So what does this mean in practical terms?
Full service teams will cease to exist, as noted earlier.
Licensees must know when they are providing simple “factual information to general questions” when dealing with unrepresented parties. I’ve asked the Real Estate Council to define what is factual information and general questions, but have yet to receive a reply. The issue is that if the licensee inadvertently provides an opinion during the discussion, that could be interpreted as de facto agency with the other party and run afoul of the dual agency prohibition.
Different licensees within the same office may each have agency with either the buyer or seller, in most cases. This is problematic when it comes to small brokerages and may mean that the brokerage itself is prohibited from representing one of the two parties.
In some cases, where the motivations of each party are known to the licensee, the Real Estate Council suggests the agent give up representing both and refer them to two different licensees.
However, if different licensees in the same brokerage can represent both parties there must be a physical and knowledge separation between the licensees. This could mean they are placed in separate parts of the building, a forceful ‘closed door’ policy so conversations cannot be overheard by the other licensee, and separation of databases, CRM contacts and files. There cannot be shared staff either, such as financial analysts and administrative support to the two licensees. The idea is to create a cone of silence around each licensee. Managing Brokers will be tasked to ensure this separation exists.
During the negotiation, the licensee must take extra care not to relate any information that may detract from their client’s negotiating power. As a result, this may shift the office atmosphere to being more closed and less communicative.
There could be significant impact on the commercial leasing industry, particularly when it comes to entrepreneurial lessees. It is estimated that up to 80% of all lease transactions involving small to medium businesses are conducted between the landlord’s representative and the entrepreneur directly, where a real estate agent does not represent the businessperson.
Landlord representatives, if they are licensed Realtors, will have to make the appropriate disclosures and potentially terminate the lease discussion until the prospective lessee has signed the waiver or obtained representation, just as a residential Realtor would have to do the same at, say, an Open House.
This presents a few practical problems concerning the lease negotiation. The licensee will have to be very careful to know when they are simply providing “factual answers to general questions” and when the negotiation actually starts. It appears the best way to deal with this, is to ask the question of representation up front and get waivers and disclosure documents signed at the very beginning.
There is also a competitiveness issue. While licensees are required to counsel unrepresented parties about the potential pitfalls of self-representation and have them sign a waiver, the same requirements are not imposed on unlicensed, in-house leasing agents for large landlords and developers.
There is a cascading effect to the new regulations that must also be carefully managed. For example, if a licensee represents the purchaser of a commercial property, the licensee may become aware of the new owners motivations and interests. To uphold the concept of agency that licensee may provide representation to the new owner in lease transactions but would be forever barred from representing lessees while that owner owned the property. The reason is that the licensee now has inside knowledge of the landlord. That prohibition would end once the property was sold again – unless the license was involved in the new transaction; or the licensee has ‘inside’ information about the new owner’s motivations and interests from working for the purchaser in another transaction (past or present). Anything gleaned from the general marketplace and research is fair game however.
On the plus side, while up to 80% of small to medium sized business owners lease without representation currently; the new disclosure requirements suggesting the party obtain licensed representation should mean more lessees will engage a licensed agent to assist them. This should translate into more business for commercial licensees.
Copyright 2018 P.D. Morris