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Why SMEs need to know about conflicts of interest in the commercial property industry

Are businesses getting the service they expect from commercial property agents?

SMEs deserve the full picture on “double dipping” (firms advising both landlords and tenants) and the implications this can have for securing a fair deal on office leases and licences. Increased awareness of the double dipping culture may help to prevent businesses getting shortchanged, while a greater understanding of the issues it raises could help to change the industry for the better.

Last year, DeVono Cresa commissioned academics from The University of Leeds to carry out an independent research study into this area. Drawing on the results, here’s why the issue of conflicts of interest within the industry should be on the radar of SMEs as they plan their next office move…

The starting point: a need for trusted advice…

For businesses of all sizes, property costs invariably rank at or close to the top of their list of financial commitments. Especially for smaller organisations, making the right decision and getting the right deal is business-critical. SMEs rely on third party input to be able to make sense of the market; and in an ideal world, a commercial property agent should be in a position to provide this assistance in an up-front and frank manner.

Typically, a small business will set out its needs in terms of preferred location, property type, size, timing and budget. A property agent should then be able to steer the business towards the options that best meet these needs. So businesses look to their agents for advice – and the natural assumption will be that the advice they are getting is in their best interests, in a similar way way that they would expect this from other types of advisors.

The reality in some quarters: the dual-agency model

Some of the biggest firms in the marketplace are ‘dual agents’. This means that as well as representing prospective tenants, they also represent landlords, which could mean helping developers find new sites, securing development partners, helping to market office space, identifying potential tenants and conducting negotiations on behalf of these landlords.

In this type of set-up, there’s a question mark over whether it’s really possible for the same firm to deliver a fair deal for both landlord and tenant.

In real life, if a dual agency is approached by an up-and-coming business looking for a fair deal on a property, and one of that agency’s longstanding clients happens to be a big developer, the big question is whose interests are going to take priority?

The safeguards: are they fit for purpose?

While there’s nothing to stop agencies taking on instructions from both landlords and tenants, all agencies are bound by the general legal duty to exercise reasonable care and skill in performing their duties under their contract with their client.

There are also broad minimum standards agents have to meet before a conflict of interest can be taken on. This means that the conflict has to be specifically referred to in the retainer (the contract between the client and the agent), or else the client has to give ‘informed consent’ to it.

In order to continue to act for both landlord and tenant while staying on the right side of the law, agencies tend to rely on ‘information barriers’ (‘Chinese walls’) between staff members  or departments acting for landlords and those representing tenants.

These measures aim to prevent the sharing of information within firms: thereby preventing the type of situation whereby firms use what they know about prospective tenants to get the best possible arrangements for landlords. But the research suggests that these walls are prone to being breached. What’s more, existing guidance from the RCIS on avoiding conflicts of interests was identified in the report as being in need of tightening.

ConflictsImgaeWhy smaller businesses are especially vulnerable

The research highlights a simple commercial truth: where there are conflicts of interest that are not properly managed, those conflicts are more likely to be resolved against the party who has the least value (in terms of profit) to the firm. In practical terms, this invariably means the small business looking to lease rather than the landlord with a valuable portfolio to manage.

It’s not the first time this has been raised. The Leeds University study also references earlier research published by the Federation of Small Businesses which highlighted the disadvantages smaller organisations are faced with in terms of bargaining power and suggested that they require a similar level of protection as that afforded to consumers.

DeVono Cresa hopes that the research will make a useful contribution to the industry-wide debate on conflicts of interest: a debate which we hope will eventually usher in greater transparency and fairer outcomes for businesses trying to negotiate the commercial property market.

In the meantime, business decision makers are invited to access the University of Leeds research with a view to gaining a better understanding of the market and to help them avoid the risk of ending up with less than optimum deals.

For a completely transparent service from an agency that only acts for commercial tenants, find your next property at DeVono Cresa.