High-Stakes Legal Battle Has D.C.’s Office Brokers ‘On Edge,’ With Millions In Commissions At Risk
Office brokers in the nation's capital were sent scrambling earlier this year after a judge made the first ruling on a 25-year-old D.C. real estate law — stripping away a nearly $800K commission from JLL because it didn’t properly disclose that it was representing both sides of the deal.
U.S. District Court Judge Florence Pan's decision could have enormous ramifications if an appeals court upholds the ruling, legal experts say, with millions in commissions at risk of being challenged.
Pan’s ruling centered on a local law that dictates how exactly brokers must disclose dual representation, a practice that has become increasingly common as the brokerage industry has consolidated over the last decade and the same few firms handle the lion’s share of commercial listings.
Many of those large firms have spent the time since Pan’s March decision — in which she ruled JLL can’t collect a $781K commission — consulting legal experts and educating their brokers to ensure they are in compliance with the law, sources said.
If the appeals court upholds the ruling, experts said any leasing agreement that didn’t comply with the law could be deemed unenforceable, and landlords could withhold commissions or potentially even recover ones they already paid.
“It wouldn’t surprise me at all to see a proliferation of those types of cases being filed,” said D.C. real estate attorney Aaron Sokolow, a partner at Battino & Sokolow PLLC.
The law requires the disclosure of dual representation to stand out from the rest of the contract, such as “in bold lettering, all capitals, underlined, or within a separate box.” In JLL’s case, it disclosed that it was representing both sides of the lease, but because it didn’t stand out from the rest of the text, Pan ruled the leasing agreement was unenforceable.
The brokerage firm appealed the ruling and is awaiting a hearing in the U.S. Court of Appeals for the D.C. Circuit. The outcome of that appeal will determine not only whether JLL can collect its commission but whether a new precedent will be established that could call into question other leases that didn’t comply with the requirement.
While the law has been on the books since 1996, this year was the first time a judge has ruled on a case involving disclosure of dual representation in D.C., according to a source involved in the case and multiple outside legal experts. The ruling in favor of the landlord has spooked the D.C. brokerage industry.
“Everyone is more on edge in this market, and you wonder if it’s a systemic type of issue that everybody needs to pay close attention to,” said Stream Realty Partners Executive Vice President Kyle Luby, who leads the D.C. office for the full-service brokerage firm.
Another lawsuit has already been filed since the JLL ruling that uses the dual representation law for one of its primary claims. Investor 601W Cos. sued CBRE in June over a deal involving the now-shuttered Whittle School in Northwest D.C. The case differs from JLL’s in that rather than arguing over the correct interpretation of the law, CBRE argues that the law isn’t applicable. It said it didn’t represent the landlord in the deal, that it only served as the property manager.
CBRE said in a statement to Bisnow that the suit should be dismissed for that reason, but it declined to comment further on the dual representation law. JLL declined to comment for this story.
Jeffrey Kirks, whose Kirks Institute holds courses in D.C. to educate commercial real estate brokers on how to “stay legal,” said he received a call in mid-July from Ryan Miller, the head of Cushman & Wakefield’s D.C. office. According to Kirks, Miller asked him to review the firm’s dual representation disclosure language to make sure it complied with the law. Cushman & Wakefield and Miller declined to comment.
Kirks said a JLL tenant broker in his class last month asked him to detail the exact language that needs to be used to properly disclose dual representation.
“Nothing gets their attention faster than a court case,” Kirks said.
A D.C. broker at one of the large national firms said their company held a training session this summer with its internal lawyers educating brokers “to make sure everyone is fully up to speed on exactly what the law is.”
“We’re definitely talking about it more,” said the source, who was granted anonymity to discuss sensitive internal conversations.
Luby said Stream Realty’s brokers were always aware that D.C. required disclosure of dual representation, but the two cases have led the firm to pay much closer attention to the specifics of the law.
“Prior to that, we had a general understanding of what the requirements were when we got ourselves into situations and did what we felt was appropriate,” Luby said. “Since seeing those headlines, we at Stream are certainly more in tune going forward to covering ourselves and our clients when we find ourselves in a dual agency situation.”
He said Stream hasn’t held internal training sessions on dual representation disclosure, but it is handling the matter on a case-by-case basis.
“When we find ourselves in these situations, we need to pause, we need to discuss it at the leadership level and seek counsel,” he said.
‘The Law Is The Law’
This legal drama could have two vastly different endings: either the appeals court will overturn the ruling, leading brokers to breathe a sigh of relief knowing that their commissions are safe, or it will uphold the ruling, opening the door for more lawsuits against brokers.
Which outcome the industry sees will depend on how a three-judge panel interprets the 600-word statute that dictates how brokers must disclose dual representation.
The statute went into effect as part of The Real Estate Licensure Amendment Act of 1996. Sponsored by then-Council Member Jack Evans, the bill was unanimously passed by the D.C. Council on Dec. 11, 1996, and signed by then-Mayor Marion Barry two weeks later on Christmas Eve. A quarter century passed before a judge unwrapped the language of the law.
The law begins by stating that a licensed real estate agent may act as a dual representative only with the written consent of all clients to the transaction. It provides a sample disclosure form that brokers can have the clients sign to satisfy the requirement, but that isn’t the only way to meet the law’s requirement. It also says that the disclosure can be included in combination with other information or separate disclosures, but if so, the disclosure must be made “conspicuous,” such as by using bold lettering, all capitals, underlining or a separate box within the document.
“You want to make it distinct and separate,” said Kirks, who teaches students in his classes about the law. “I guess it would just remove the argument that ‘I didn’t see it.’”
Kirks said he has been involved with one other case involving the disclosure of dual representation that didn’t go to trial, but this was the first time he saw a judge issue a ruling on how exactly that disclosure must be written.
“It usually comes up in large transactions,” Jarvis said. “I’ve been involved in assignments where a seller forgot to sign all pages of a contract, so could you void that contract? Sure. Or is it the right thing to say, ‘Oh, you forgot to sign Page 15 or initial some paragraph’? It’s that kind of accidental omission.”
The case that brought this law to the forefront of the industry’s minds involved a 51K SF lease signed in 2018.
The deal was signed between affiliates of coworking brand Spaces and S.C. Herman & Associates, the owner of 1441 L St. NW. JLL’s Nathan Beach, Evan Behr, Doug Mueller and Seth Bernard represented the landlord in the deal, while JLL’s Kevin Brant represented the tenant.
Under the terms of the leasing agreement, S.C. Herman agreed to pay JLL a 2% commission on the deal, equating to roughly $781K, according to court filings.
The Spaces location closed in 2020 as the pandemic upended the coworking industry. At the time of the closure, the landlord hadn’t yet paid JLL the agreed-upon commission, and JLL filed a lawsuit in December 2020 seeking to recover the unpaid fee, plus about $52K in interest.
The landlord’s attorney, Alexander Laughlin of Odin Feldman & Pittleman PC, raised the issue of dual representation disclosure in October 2021 as part of a motion for summary judgment. He argued the court can’t force the landlord to pay the commission because the leasing agreement didn’t comply with the disclosure law, making it unenforceable.
The judge agreed with Laughlin. Pan found that while the disclosure was included within the text of the lease, it wasn’t displayed prominently in any of the ways the law suggests. Additionally, the leasing agreement included a copy of the sample disclosure form that the law provides, but the judge noted that none of the parties signed the form.
JLL argued that it provided the necessary disclosure and received consent when the parties signed the lease, adding that the parties were sophisticated real estate entities and understood the nature of the dual representation. Pan acknowledged that the parties were on “actual notice” of the dual representation but decided that wasn’t enough to meet the law’s requirements.
“Indeed, it appears that 1441 L is taking advantage of JLL's technical non-compliance with the law to avoid paying a commission that JLL rightfully earned,” Pan’s opinion said. “Nevertheless, the Brokerage Act requires adherence to the strict disclosure-and-consent provisions related to dual representation.”
Pan’s opinion added that the legislature intentionally created these strict requirements because dual representation arrangements are “inherently suspect, due to the broker’s inescapable conflict of interest in representing opposing parties to a transaction.”
D.C. real estate attorney Michael Tucci, a partner at Stinson LLP who isn’t involved in the case but has followed it, said he agreed with the judge’s interpretation.
“The District Court judge’s opinion is pretty solid,” he said. “For what she analyzed and the way she came out on it, the analysis is correct.”
Sokolow, another outside attorney who has followed the case, said he thinks the law was intended to protect smaller, less-experienced real estate players who may not be aware that their broker is representing both sides. But he said the law doesn’t carve out any exceptions for large firms.
“We’re talking about these very sophisticated business entities,” he said. “It might be less of an issue there, but you can still see in that case how it’s applicable. There’s the notion of, ‘Well, is that law meant to protect unsophisticated parties, and is it being used to save bucks by sophisticated parties?’ Perhaps, but the law is the law.”
JLL hopes the appeals court will interpret the law differently, and it has brought in a new legal team to help persuade the panel.
In the initial suit, it was represented by Matthew Fogleman with the Rockville, Maryland-based Law Offices of Ronald Canter LLC. In the ongoing appeals court case, it is being represented by Laura McNally and Michael Kennealy of Morgan Lewis, one of the nation’s 10 largest law firms.
The Morgan Lewis attorneys, in a 51-page filing on Aug. 15, laid out two central arguments: that JLL satisfied the law’s disclosure requirements and that even if the requirements weren’t satisfied, the law doesn’t say that should invalidate a broker’s right to a commission.
The attorneys wrote that while the law provides examples of how brokers can disclose dual representation to obtain a client’s consent, it doesn’t explicitly say those are the only ways to satisfy the disclosure requirement. It focuses on the law’s requirement that the disclosure “must be conspicuous,” citing definitions of that word from Webster’s and Oxford dictionaries to argue that JLL’s disclosure met that standard.
McNally and Kennealy wrote that other parts of D.C.’s brokerage law explicitly say that forfeiture of commissions should be the remedy for a violation, but the dual representation disclosure section doesn’t include that as the remedy.
“A mere 'technical' violation of [the law], as the District Court characterized it, cannot justify requiring JLL to forfeit its entire benefit from a fully performed contract,” the attorneys said in the filing.
The Aug. 15 filing was the latest submission in the case, and the court hasn’t yet scheduled a hearing. The only court above the appeals court is the U.S. Supreme Court, and Tucci said it is unlikely the high court would hear an appeal of the decision in this case.
“This should be the final decision,” he said. “I can’t imagine there would be Supreme Court interest in something like this."
If the appeals court rules against JLL, it would set a legal precedent that would allow other parties to sue brokers over technical noncompliance with the dual representation disclosure statute to avoid paying commissions. At that point, it would be up to the owners of D.C. properties to decide whether they want to pick a legal fight with their own brokers.
An Industry On Edge
If the court rules in favor of the landlord, the number of similar disputes that would follow likely depends on two factors: the number of dual representation deals in which the language didn’t meet the law’s standards and the willingness of the parties in those deals to use the technical noncompliance as a reason to withhold or try to recover a commission from a broker.
Most leasing contracts aren’t made public, so there is no way to know how many agreements didn’t follow the requirements of the disclosure law. But the dual representation situations that require the disclosure have become a frequent occurrence.
“It’s extremely common,” Stream Realty’s Luby said. “It happens a lot, particularly as our industry has become more consolidated among bigger shops.”
Brokers and attorneys predicted that most landlords, especially ones with large portfolios, wouldn’t want to tarnish their relationships with brokers by refusing to pay commissions or suing to claw them back based on a legal technicality.
“If landlords do that, they develop reputations of not treating brokers fairly,” Jarvis said. “If you want to chastise or challenge the brokerage industry, does that help you lease your asset?”
But for some, the money they save could make the fight worth it. And landlords are under pressure to save money, given the doubts about future demand for office space. One study estimated that office buildings nationally could lose $500B in value by 2029.
“Everybody’s looking to cut costs and identify savings where they can, which may lead a landlord to look for loopholes in agreements in order to avoid payment, such as a commission,” said tenant broker Jon Glass, a corporate managing director with Savills.
He added that he doesn’t think most landlords would do this, given the harm to their reputation with brokers.
These disputes are most likely to arise in situations like the Spaces and Whittle School leases where the tenant has stopped paying rent, experts said. The lingering effects of the pandemic and additional economic volatility caused by inflation and rising interest rates this year could lead more tenants to stop paying. Luby said there is concern in the industry that more of these cases could arise.
“Given current market conditions and everything we’ve gone through in the pandemic, it’s been a really challenging time for the brokerage community as a whole,” Luby said. “This sort of pressure becomes more intense when you’re facing those market challenges.”
The office market pain may create situations that could make these cases more common: bankruptcies. If an office building goes into bankruptcy and a trustee is charged with recovering as much money as possible for creditors, the trustee could try to claw back commissions on deals where dual representation wasn’t properly disclosed.
“The trustee doesn’t have much interest in maintaining relationships with the brokerage community, so they’d probably go after it because it’s a potential asset of the estate,” Tucci said. “It could very well be required by the trustee. If the court affirms the decision and this is an avenue, it would almost be incumbent on the trustee to file that lawsuit if it had the right facts.”
The legal battle has also had the effect of bringing more attention to the issue of dual representation, a common practice that Pan wrote is “inherently suspect.” Tenant representation firms like Cresa have long seized on the potential conflicts of interest involved in dual representation deals as a way to convince tenants to work with them rather than the full-service firms.
“The conflicts run much deeper than just disclosure,” Cresa President Tom Birnbach said. “I think these two cases are shining a light on an issue within the commercial real estate industry that has existed forever.”