Conflict of interest in dual representation – lawsuit filed against CBRE over a private school lease in Washington D.C.
A lawsuit filed by affiliates of 601W Cos, centers around a 600K SF sublease for private school Whittle School & Studios at 400 Wisconsin Ave. NW in Washington D.C.
The issue, claims the Managing Director Principle of 601W, Mark Karascik, is that CBRE represented both parties and “wore too many hats in the same transaction”, as a result 601W Cos suffered. Whittle School’s major financial issues led it to default on rent payments in April 2022. Rent hasn’t been paid since and it is now in default for over $27M, according to the suit.
601W commissioned CBRE to sublease the building at 400 Wisconsin Ave. NW and paid the brokerage firm $11.6M in fees when the sublease was signed in 2018, which was half of the total agreed commission. 601W is now withholding the second half and demanding the return of $11.6M, as it claims CBRE acted wrongly.
In its suit, 601W claims that their agreement with CBRE should be deemed unenforceable because CBRE didn’t comply with a local D.C. brokerage law. The law requires brokers to disclose dual representation and clearly identify it in lease documents. The same law which lost JLL its case to recover $800k commission after failing to properly disclose it represented both sides in a deal to lease an office building in Downtown D.C.
According to the suit, CBRE provided descriptions of the Whittle School’s finances, which proved to be “false and misleading in critical respects.” It further claims that CBRE, as a representative for Whittle School, was motivated to continue to substantiate the School’s financial strength as they were hired to identify many more locations for further expansions of the School. The suit reads “This created an inherent additional conflict of interest for CBRE since it was in a position to make much more money in commissions from Whittle School’s leasing of additional locations, despite the dampening effect on the Whittle School’s liquidity and ability to continue operations at its planned school in Washington, D.C.”
CBRE has yet to file an official response since the suit was lodged on 30th June, 2022.
Conflict of interest in dual representation
As the lawsuit demonstrates, it’s difficult to be objective when representing both sides of the transactions. The motivation to substantiate Whittle’s Schools financial health, according to information presented in the suit, has led the broker to fail in its duty to ensure a good deal for the landlord. As a result both the tenant and landlord ultimately suffered as the private school was unable to pay rent and 601W Cos was forced to terminate Whittle School’s sublease and file for eviction proceedings.
Tenant representation matters because a tenant-rep advisor will keep only your interests in mind and be fervent in pursuing those interests in the leasing process. On the other hand, those also working with both parties – while required to provide a good standard of care – will be incentivized to get the represented parties to sign a deal that mostly benefits the brokerage, as best interest of the landlord and tenant are very often conflicting and cannot be both satisfied.
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