Commercial real estate agents - duties and obligations

In brief - Sound internal protocols and financial due diligence are key factors in discharging duties and ensuring compliance

In part 2 of our series, we continue this conversation with Partner Rhett Oliver about the commercial property market in 2021. This is an extract from a recent webinar. 

What fiduciary duties and legal obligations do commercial real estate agents have to protect their clients, whether they're in property management or selling?

Real estate agents have fiduciary duties under the common law, and statutory duties enshrined in each state and territory's relevant legislation that applies to agents and licensing, which generally includes prescribed conduct obligations, and then there are the actual terms of the contract of appointment authority completed by the client and the agent.

The types of fiduciary duties that most agents would be familiar with are things like the duty to act in the best interest of the client, conveying and disclosing higher offers and conflict scenarios, and not making secret commissions. 

In the context of dealing with phoenix or zombie companies, two agent duties are important when it comes to protecting landlords' interests or clients' interests. The first is the fiduciary duty to act in the best interest of the client or principal. The second is the statutory duty for the agent to exercise due care, skill and diligence in performing their functions, and not to make misrepresentations. 

In some jurisdictions, there is a further statutory duty that requires agents to take reasonable steps to verify or ascertain facts material to the sale of the lease of the property. That leads to what steps the agent can take to discharge those duties.

The repercussions are very serious for real estate agents who don't comply. They can be exposed to orders for damages, fines, and compensation, as well as disciplinary action under the relevant state or territory legislation, which might extend to fines, restricted conditions imposed on the license, suspension, or even cancellation of or disqualification from holding a licence. 

It is not necessarily difficult for agents to discharge those duties and do their best to ensure compliance. It's about putting in place some good internal protocols and following them. It comes down to good financial due diligence. 

To run through a few examples, in a new tenant scenario an agent, as a starting point, would probably request the corporate structure diagram of that tenant. Most tenants have some sort of taxational structuring advice before they enter into a lease and set up a special purpose vehicle trading entity. Getting that corporate structure diagram will give you a better picture of the substance to this tenant or the group within which this tenant sits.

The agent would then undertake searches. ASIC has the usual company abstract with the details on the directorship and shareholdings of these companies. But there are quite a few other search providers out there that provide far more detailed search results on these entities and that provide a fair history of any current or prior legal proceedings that those entities are a party to. 

Finally, depending on the outcome of those searches, the agent might request financial information from the tenant that would ordinarily be sorted by a landlord from an assignee under an assignment of a lease or as part of a rent relief or rent waiver request, similar to the things that we've seen during the pandemic. Things like future cashflow projections, balance sheets, profit and loss statements, financial statements, all signed off by an accountant.

The same probably applies for a sale of property, perhaps adding advice to the client to undertake some sort of vendor due diligence on their tenant to make sure that they're still okay before going to the market, and being careful not to use representations like "blue chip" tenants, which are pretty frequent these days.

The best thing an agent can do is monitor a tenant's compliance with the lease, and particularly areas that may not be so obvious like repair and maintenance obligations. They're paying the rent but these other areas might be slipping slowly.

It's also worth considering the tenants' industries, as some industries such as education, hospitality and tourism have been hit harder by the pandemic than others. They may potentially struggle to pay rent, which impacts the space they occupy.

Read [part 1] in our series about the risks and opportunities for the commercial property market in 2021.