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How increased awareness of conflicts of interest can help the commercial property industry

Reputations are built on trust – and for the commercial property industry to retain the trust of businesses, it must be seen to deliver a fair deal to landlords and tenants alike.

On the controversial issue of agencies acting for both landlords and tenants, considerable faith is placed in market discipline: the idea that if agents fail to represent tenants effectively, businesses will take their custom elsewhere and the reputational stock of those agencies will shrink.

New research highlights the problems with this approach. If the market is to provide a safeguard to root out poor practice, clients themselves need to be armed with the information necessary to make informed choices and to spot a problem if it arises. The research, conducted by academics from The University of Leeds, concludes that market forces alone do not guarantee that high standards of conduct are met.

Greater awareness is key: if the industry is intent on allowing market forces to regulate the conduct of agencies, it’s in the industry’s best interests to ensure clients are alive to the issues.

Market forces: the traditional argument

Responsible firms succeed on the basis of their reputation in the market. Clients form a view about whether they feel they have been represented effectively. Poor service is punished by clients going elsewhere, while potential clients are influenced by word of mouth (or so the argument runs).

As the researchers highlighted, market forces have an important role to play – but at the moment, that role is hampered. If the industry is serious about promoting best practice without additional and potentially costly regulation, clients need to be able to better judge whether the service they are receiving is adequate.

The market forces argument weakens when users are unfamiliar with the market

From the research, it seems that conflict of interests is quite simply not on the radar of most businesses. But this is hardly surprising. For a business to make informed choices, it has to be familiar with the market, yet for most tenants, transactions conducted through commercial property agents tend to be one-off events. The average length of a lease is 6.8 years, so a typical business is hardly dipping into the market on a regular basis. This is unfamiliar territory for most occupiers.

Conflict management policies can be difficult to decipher

If clients themselves are going to have a role in policing the market, they need to be able to place individual firms under the spotlight: to measure, compare and contrast the policies and practices in place for managing conflicts of interest. For time-pressed businesses with little experience or expertise in the market, this is a tall order.

What’s more, as the researchers pointed out, finding and making sense of dual agencies’ conflict management policies can be tough. These policies are often set out in the vaguest of terms, making it difficult for clients to work out what concrete measures are in place to ensure they get a fair deal if the agency is acting for both parties.

How can clients spot an unfair deal?

Was the outcome the best that we could have expected? When tenants ask themselves this question, the research interviews suggested that clients have little to go on other than the word of their agent.

To scan the market, it’s possible to sign up to online market information providers that give information on agreed headline rents, but these are of limited value – not least because ‘extras’ included to seal the deal are missing from the data. Deals are reached on the basis of negotiation, and even the lawyers interviewed as part of the study agreed that it is very difficult to define an ‘optimal’ bargain in individual cases. If a tenant’s position has been subtly undermined because of the existence of a conflict, it’s likely that the tenant is going to be unaware of this fact.

Find out more…

The research suggests that much more could be done by dual agencies to set out clear information to promote informed choices over conflicts issues. This includes making conflict management policies more prominent on firms’ websites. Download the full of summary report to find out more.

Looking for conflict-free advice from an agency that only represents occupiers? Search the market with DeVono Cresa.