This is part 2 of a two-part series of insights on the problem of systemic conflict of interests in the advice and representation provided to commercial tenants and what they can do to combat the impact of an industry structure that promotes conflicted advice.
"Never take the advice of someone who has not had your kind of trouble.” - Sydney J. Harris
Countering conflict of interests in the advice to commercial occupiers
"Savers receiving conflicted advice earn returns roughly 1 percentage point lower each year." - Extract from 2015 report of ‘The Effects of Conflicted Investment Advice'
This quotation is from a study that quantified the negative impact on retirement earnings that savers experienced when receiving advice from advisors who had a conflict of interest when recommending a retirement product. Although the retirement industry is unrelated to the tenant representation industry, the same principle applies that the recipient of conflicted advice will be disadvantaged when the motivation for the recommended leasing arrangement is underpinned by conflict. Also, as leases are long-term commitments, this disadvantage will become more impactful over time. Here are some practical steps that commercial tenants can take to reverse the growing impact of conflicted advisors on leasing arrangements:
Due diligence to ascertain sources of conflict: Advisor due diligence can be updated to discover sources of conflict. Queries relating to the percentage of the parent company's revenue that comes from landlord-linked services will provide a tenant with an insight into the organisation's revenue drivers, as will queries relating to the percentage of the workforce deployed to provide landlord-related services. Additional due diligence can be directed at discovering whether the organisation is a leader in challenging long-standing lease norms that disadvantage the tenant and at requiring evidence that demonstrates past lease negotiations have resulted in de-risked lease arrangements that optimally support the tenant.
Disclosure and guarantees: Due diligence activities are more valuable when combined with strengthened disclosure and guarantees that mitigate the risk of conflicted advice and related harm to the tenant. Disclosure is essential prior to advisor appointment and during subsequent lease negotiations. The intent is to highlight any related party influences prior to the recommendation and ensure substantiated justification for the recommendation. Guarantees are stronger than disclosure and aim to ensure that recommendations are in the tenant’s best interests.
Ensure advisor fee arrangements work for the tenant: It is increasingly common for landlord reimbursements to remunerate the tenant advisor for their services. To mitigate the potential for an advisor's recommendation to be motivated by self-interest, it is necessary to ensure the advisor fee arrangement is based on a market benchmark and that the fee arrangement is structured to align the interests of the tenant and the advisor. To this end, capped fee arrangements can be useful for mitigating the potential for conflicted advice when fees are tied to the rent or square metres.
Pre-defining the intended outcomes: While it is important that an advisor is free of any conflict of interests that may prejudice their advice and tenant representation, it is essential that the advisor, in addition to being conflict-free, has the competence, commitment, character, conviction, and courage that are required to negotiate a lease arrangement that best supports the business into the future. This type of advisor will work with the tenant to pre-define the intended outcomes relating to location, premises, and commercial terms and will implement a lease negotiation process that systemically delivers the required outcome.
Coopetition: The preceding pointers are aimed at minimising the potential for an impaired tenant outcome due to advisor conflict of interests for a particular transaction. At an industry sector level, the call for conflict-free advice and advisors needs to be elevated, and coopetition is helpful in this regard. As all commercial occupiers benefit from a structural shift in lease norms towards more flexible lease arrangements with increased risk sharing by landlords, it is in the best interests of all occupiers to collaborate to this end. One way this can be achieved is by increasing the tenant voice via associations, trade councils, chambers and media to jointly call for lease norms that are more supportive of tenant enterprise in good and bad times.
Concluding comment
"It only takes one voice, at the right pitch, to start an avalanche." - Dianna Hardy
Existing lease norms favour landlords due to the industry's structure which affords landlords greater influence over lease norms and lease outcomes. Every lease negotiation undertaken by a conflicted advisor reaffirms existing lease norms. Changing the rule of the game to better support tenants requires a short-term focus on eliminating the potential for conflicted advice per transaction and long-term tenant collaboration and coopetition aimed at long-term structural change to lease norms to better support tenant enterprise in an environment when business cycles are getting shorter and brick and mortar requirements are subject to change.
Who is LPC, and how do we help futureproof accommodation arrangements?
LPC is a conflict-free advisor to commercial tenants across Australia and New Zealand. We facilitate strategic review of accommodation strategies, represent occupiers to secure best-fit accommodation arrangements, provide lease management services to multi-site occupiers, and oversee client fit-out and relocation.
Contact us to help with your accommodation strategy review.
