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An awful lot has been written recently about conflicts of interest so I thought it was about time that I nailed my colours to the mast on this contentious subject.

My own niche real estate business McCalmont-Woods Real Estate LLP guarantees to provide unconflicted advice. How is this possible? Well the answer is quite simple: since we only ever act on behalf of occupiers a conflict of interest can never arise!

I can understand why the larger (and often global) surveying firms wish to act for both landlords and tenants. The fee income to be derived from operating a dual service agency is huge; borne out by a senior executive in one of the UK’s largest surveying practices confirming that approximately one third of its turnover is now derived from handling occupier work. Let’s face it, who in their right minds would want to walk away from 30% of revenue?

How are conflicts of interests managed?

When I started my long career in London offices back in 1984, I spent four years working in Jones Lang Wootton’s City of London Rent Review and Tax department before transferring to JLW’s City Offices Agency team in 1987 where I spent another twelve years learning how the property industry operated in the real world.

On occasion it was possible for rent review conflicts of interest to be resolved by the landlord and tenant devolving complete responsibility for agreement of the new rent to a chartered surveyor operating as an ‘honest broker’ on behalf of both parties. This was, however, a rare occurrence and more often than not it would be necessary to step back from advising one client in favour of the other. In this scenario most firms will as a default choose to advise the landlord since the landlord is likely to be responsible for a greater proportion and diversity of the firm’s fee income than the tenant. This remains the case today.

On one particular rent review in which I was involved my old employer represented both the landlord, an established UK pension fund, and also the tenant in occupation, a Japanese bank, on a 30,000 sq ft City office building – a classic conflict of interest. An ‘old school’ solution to this perennial problem ensured that a telephone call was made to a competitor firm with the request that they should ‘babysit’ the bank during the rent review and then ‘hand-back’ the tenant client when the negotiations were concluded which they agreed to do, but then this was the 1980s and firms behave very differently nowadays.

Today I suspect that few, if any, professional services firms would be willing to ask a rival to help them out of a conflict of interest situation for fear of jeopardising their client relationship in the longer term, irrespective of the fact that it might actually be in their clients’ best interests to do so!

More formal Chinese walls were required whenever a potential conflict of interest became apparent as a result of the Firm acting for two parties or organisations with potentially conflicting or competing interests in the office agency arena. With clients’ agreement a mechanism would be put in place to prevent the flow of confidential information between specific individuals who were “in the know” on each side of the wall. Such arrangements could extend to keeping files and staff physically separated with electronic access restricted but often this just involved a tacit agreement not to discuss the conflict with colleagues internally. Needless to say such agreements were fraught with difficulty and were often perceived by both practitioners and clients alike as inefficient and ineffective, especially since there was a real and present danger of the wall being breached at the next Agency Team meeting!

So what changed?

In the UK, Chartered Surveyors used to charge fees according to the RICS’s authorised schedules of professional charges or scale fees. However, these were withdrawn in stages (the last as at February 2000) after a 1977 Monopolies and Mergers Commission report considered RICS fee-setting to be anti-competitive and operating against the public interest. This meant that all property advisors were free to negotiate their own fee levels and I can’t help wondering whether this was the point in time when professional ethics were sacrificed on the altar of Mammon. As ‘Gordon Gekko’ said in Oliver Stone’s film Wall Street (1987) “the point is, ladies and gentlemen, that greed – for lack of a better word – is good”.

Matt Taibbi in his now famous Rolling Stone magazine article in 2009 chose to differ, referring to Goldman Sachs, the world’s most powerful investment bank as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells of money”.

While this analogy might be considered a bit strong for the property industry, let’s be honest and recognise that the tenant advisory group (‘TAG’) teams operating today were not created out of any altruistic intent; they were formed to allow the larger surveying firms in particular to hang on to their occupier clients and the fee income which they generated by enabling the firms to operate in a 200% market (since UK firms are typically paid separately by both landlord and tenant clients for the advice they give). Apparently, greed is indeed good ladies and gentlemen!

Of course the inherent flaws in the Chinese walls procedure are apparent for all to see from the financial mess now impacting the banking industry across the globe.

From a property perspective you may believe that such conflicts of interest are few and far between today but you’d be wrong. Conflicts of interest are endemic in the property industry in both the rent review and office agency arenas. In March of this year a University of Leeds report on conflicts of interest in property raised serious doubts over the industry’s ability to effectively self-regulate dual agency firms and said there were ‘clear risks’ in relying on the use of ‘ad hoc’ Chinese walls.

In the US various tenant representation firms have published reports, backed up with case studies, to illustrate how conflicts of interest can work to the financial detriment of tenants. The question is then ‘why are conflicts of interest tolerated and does anyone really care enough about them?’ Also let’s not forget that it’s the client who ultimately decides how to procure its property advice and for the most part clients are pretty sophisticated and experienced in outlook. As such we can either conclude that clients are either ambivalent at best or perhaps they are just too preoccupied with other matters to worry about conflicts of interest. For some clients, however, even the appearance of a potential conflict is to be avoided!

Consequently I believe that more needs to be done to engage with occupiers to persuade them of the benefits of engaging independent advice from exclusive tenant representation advisors. Invariably such tenant-rep advisors will be somewhat smaller in size than the handful of big firms who now dominate the global property industry. Whilst this may seem counter–intuitive to some given that the world we live in is becoming (or so we are told) increasingly more globalised, one only needs to look to the accountancy and banking sectors to see the obvious parallels with the property industry.

In 2011 The European Commission unveiled proposals to force the UK’s ‘big four’ accountancy firms to separate their auditing services from their consultancy work in an attempt to restore the credibility of European auditing firms after “considerable failures” around the 2008 financial crisis. And in response to new rules laid down by the Bank of England, Britain’s biggest banks now have to run their retail banking operations as independent banks, almost entirely separate from their investment and overseas banking arms. Presumably it is only a matter of time before we see a similar split within the property sector with landlords and tenants being advised independently.

The RICS has tasked a working group to undertake a review of its guidance on conflicts of interest but as the University of Leeds report warned, until such time as there are robust rules in place to curtail ‘double-dipping’ the property industry remains at risk of serious reputational damage.

The obvious solution to conflicts of interest is to avoid them. However, this strategy is likely to be deemed costly and therefore unpalatable to those dual service agencies that benefit from operating on both sides of the Chinese wall. So to paraphrase Her Majesty The Queen, let’s just hope that in future occupiers will take the time to “think very carefully” before making their next property procurement decision!