What new thinking this episode introduces: Laws for consumer representation by DRE brokers need consistency. Litigation will pull in the courts to definitively establish the conduct required of tenant brokers to earn and collect a fee. In the meantime, brokers need to do everything in their power to protect the fee they and their agents expect to earn.

The prior episode dramatizes the ambidextrous nature of a commercial tenant looking for space to occupy.

Further, this new tenant representation material has been added to our Certified Buyer Agent (CBA)™ Training available to current and future firsttuesday students without charge.

The spirit of California public policy

The Department of Real Estate (DRE) has jurisdiction only to police buyer representation and broker fee compliance on a transaction involving fee ownership. Thus, the written representation and broker fee arrangements to locate space for a tenant to lease are not, as of yet, enumerated for DRE enforcement.

The inclusion in the antitrust code of a broker’s need for a tenant representation agreement for acquisition of a leasehold interest will eventually be legislated. Laws for consumer representation by DRE brokers need consistency, as has taken place with the agency disclosure rules.

However, it is more likely a broker is sued by a tenant-client after a lease is entered into. Litigation pulls in the courts to unequivocally answer this legislative shortfall and establish the conduct required of tenant brokers to earn and collect a fee.

Let’s examine the code scheme directly related to representation agreements.

Civil Code §2079.13(p) for agency relationships and disclosures states:

“buyer-broker representation agreement” means a written contract between a buyer of real property and a buyer’s agent by which the buyer’s agent has been authorized by the buyer to provide services set forth in subdivision (a) of Section 10131 of the Business and Professions Code for or on behalf of the buyer for which a real estate license is required pursuant to the terms of the contract.”

The referenced subdivision (a) of the Business and Professions Code (Bus & PC) defines the activities of a real estate broker, specifically mentioning the sale or purchase of real property. Thus, partial application of fee-fixing antitrust rules for brokers is limited to buyers of a real property interest.

And just what is “real property” — the fee, the leasehold or both?

Further, CC §2079.13(b) defines “buyer” very broadly to include lessees (and vendees) of interests in real property. The civil code wording, addressing the representations brokers engage in, states tenants who seek to purchase a leasehold interest by entering into a lease agreement are treated as “buyers” for agency disclosure law — a general application to all broker activity (and their agents by extension) rendering licensed services.

Inclusion of the representation of tenants under the legal scheme for agencies conforms to the spirit of California public policy for licensee relationships with consumers of their services. Exclusion does not.

The intent behind the agency law is to ensure tenants are afforded the same protections and duties as buyers in transactions conveying fee simple ownerships. From a public policy perspective, the buyer representation law is intended to end single-fee, price-fixing activities of real estate licensees.

The objective is to legislatively decouple the two sets of brokers from collaborating to set fees for each other in a transaction. Here, tenants need to receive the same level of protection as buyers.

Whether a user of property is buying a freehold or leasehold interest, the new standards of representation apply — as a matter of real estate agency law disclosure mandated to all buyers and those tenants entering into leases for more than one year.

But at this point, the courts have not yet had the occasion to weigh in — though they inevitably will. You just read the arguments generally well-known today.

Editor’s note — To consider the evolution of legislative activity in a public policy situation, compare today’s relatively new buyer representation rules to the Agency Law Disclosure discussed above.

When initially mandated for use in 1988, nearly four decades ago, the transactions targeted for agency disclosure to clients were limited to those involving one-to-four-unit residential properties. However, as the years went on, the agency law was updated to establish a level playing field for all agency relationships of real estate brokers and their agents. The agency disclosure target expanded to include all types of clients and all types of real estate. Expect the buyer representation rules to undergo a similar expansion in the years to come. This trend is what a price-fixer calls the “slippery path” toward ending the game. [See RPI Form 305]

In the meantime, it is best for brokers to do everything within their power to protect the fee they and their agents expect to earn.

Also, to avoid being in a class action suit for antitrust violation, or, worse, a complaint filed with the DRE, do not agree to split fees the owner has agreed to pay their broker as the source of your fee on a transaction without first negotiating a written buyer or tenant representation agreement with your client authorizing you to collect a fee when earned.

In recessions, tenants in financial distress — bankruptcy — often seek to claw back the fee from their broker when documentation with the client does not exist. [See RPI Form 105.1 and 105.2]

Just like the representation of a buyer purchasing a freehold interest, brokers need their agents representing tenants seeking to acquire either a leasehold or fee interest to enter into a tenant representation agreement. And do so as soon as possible on determining they are to represent the tenant as a client to earn, collect and retain a fee on the transaction.

Editor’s note – This material has been added to our Certified Buyer Agent (CBA)™ Training, designed to support a long-delayed enhancement in consumer protection. The CBA Training is available to current and future firsttuesday students without charge, or available à la carte outside of an enrollment for $35.

The CBA™ Training is a multimedia powerhouse, consisting of:

  • digital text written by our on-staff team of California real estate licensees;
  • scripted and fully-acted video which makes the concepts easily understandable and engaging;
  • 100% compliant buyer representation forms to use with buyer-clients, one for individuals and one for entities;
  • audio definitions to help cement the concepts in your memory;
  • interactive Knowledge Check questions to help to test your level of comprehension (and have some fun);
  • marketing materials for client assistance to help you respond fully to buyer-client questions with clarity and confidence; and
  • a full-color companion e-book which pulls all our related writings together in one place. [See RPI e-book Certified Buyer Agent™ Training: Directly Negotiated Representation]