Judge: JLL Can't Collect $800K Commission After Failing To Properly Disclose It Repped Both Sides
The issue of dual representation, when a brokerage firm represents both sides in a deal, has taken center stage in a legal dispute between JLL and a D.C. office building owner.
A U.S. District Court judge ruled last month that JLL didn't properly disclose that it was representing both tenant and landlord in a 2018 lease with coworking operator Spaces for 51K SF at 1441 L St. NW. The judge deemed that improper disclosure made the exclusive leasing agreement unenforceable and that the landlord wouldn't be required to pay JLL the hefty commission it claims it was owed.
The ruling came after JLL sued the landlord, an affiliate of S.C. Herman & Associates, in December 2020. JLL claimed S.C. Herman didn't pay the firm the $781K commission on the deal, and that it owed the brokers $832K, including interest on the late payments.
JLL entered into an exclusive leasing agreement with S.C. Herman in June 2016 to lease the office building after the landlord lost its previous anchor tenant, the Bureau of Economic Analysis. S.C. Herman invested $36M to reposition the property, adding two floors and a new penthouse and upgrading the building's lobby and amenities. JLL's Nathan Beach, Evan Behr, Doug Mueller and Seth Bernard were the brokers the landlord retained to lease the building.
Spaces, a subsidiary of flexible workspace company Regus, signed a lease in July 2018 to occupy the top three floors in the building, totaling 51K SF. JLL's Kevin Brant represented the tenant in the deal.
The brokerage firm didn't follow the proper protocol for disclosing dual representation under a local law known as the D.C. Brokerage Act, according to Judge Florence Pan's ruling.
The law requires this disclosure to be clearly identified in lease documents with emphasis such as bold lettering, all capital letters, underlined text or in a separate box, according to the judge's ruling. The law also requires the disclosure to make clear that the brokers may not share confidential information given by the clients, and it provides a sample disclosure form that is intended to be signed by the brokerage firm's clients.
The Spaces lease mentioned JLL's dual representation on page 51 of 65, but it didn't include any emphasis, and it didn't include the confidential information language or the client signatures, Pan wrote in finding that the failure to comply with the requirements of the D.C. Brokerage Act made the exclusive leasing agreement unenforceable, and that JLL therefore can't recover the commission it claims it was owed.
Pan noted that S.C. Herman should have known about JLL's dual representation and that it was apparently "taking advantage" of a legal technicality.
"The record does reflect that the parties to the Regus Lease were on actual notice of JLL's dual representation, and that they consented to the arrangement," Pan wrote. "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."
"Nevertheless, the Brokerage Act requires adherence to the strict disclosure-and-consent provisions related to dual representation," Pan added. "And JLL admits that it, too, is a sophisticated and experienced real estate broker ... JLL should have been aware of its obligations under the Brokerage Act."
The judge's ruling provided additional commentary on why the D.C. Brokerage Act's requirements around disclosing dual representation are so "detailed and exacting."
"This reflects a recognition by lawmakers that dual representation is inherently suspect, due to the broker's inescapable conflict of interest in representing opposing parties to a transaction," Pan wrote in the ruling.
Following the District Court ruling, which was issued March 23, JLL filed a notice of appeal Friday with the U.S. Court of Appeals for the District of Columbia Circuit. The notice doesn't provide an explanation from JLL or its attorneys for the basis of the appeal, but the court ordered Friday that JLL must submit a series of additional documents by May 23.
“We disagree with and are appealing the ruling of the United States District Court for the District of Columbia," A JLL spokesperson said in a written statement to Bisnow. "We are hopeful that the facts will prevail and we will be compensated by the landlord for our work at this property.”
UPDATE, APRIL 25, 4 P.M. ET: This story has been updated to include a statement from JLL.
CORRECTION, APRIL 25, 4:40 P.M. ET: A previous version of this story incorrectly stated that the judge ruled that Spaces’ lease was unenforceable. The exclusive leasing agreement between JLL and the building owner was the document at issue, not the lease. This story has been updated.