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Taking the Bait

Why commercial real estate tenant poaching could be the next property management E&O trend

September 19, 2022 Photo

With the anticipation of companies encouraging return to office space this year, commercial real estate executives (CREs) have a reason to feel bullish. City ghost towns will once again be populated, even with hybrid models of working remaining commonplace as a way to retain talent. Commercial property management, as the connection between corporate tenants and building ownership, has become even more integral to luring occupants into rentable space.

Seventy-five percent of CREs responding to a survey from the Deloitte Center for Financial Services, the results of which were included in the consultancy’s “2022 Commercial Real Estate Outlook,” said they expected a continued increase in deal volume in the U.S. Headwinds stemming from pandemic-related financial concerns including rent debt are anticipated, thus creating greater urgency to focus on attracting and retaining corporate tenants.

CBRE’s “2021 U.S. Occupier Sentiment Survey” indicated that the average U.S. office employee will spend 24% less time working in the office, and that 87% of large companies plan to adopt a hybrid work approach. Commercial pricing misalignment—or when prices in the commercial real estate market deviate from those implied by economic fundamentals—as a result of the pandemic do not appear to stem from excessive leverage buildup, but rather from a sharp drop in both operating revenues and the overall demand for commercial real estate, according to an article from the World Economic Forum entitled, “IMF: This Is the Impact of COVID-19 on Commercial Real Estate.”

The shift to hybrid working environments will likely keep commercial property vacancy rates higher, thus increasing competition for tenants. Conflicts may arise, however, when building property management also owns commercial property in the same market. Because of the access property management has to highly sought-after corporate tenants, allegations of poaching are an emerging risk for property management errors and omissions carriers. When a property manager is not the same as the building owner but becomes the owner’s representative, loyalties may shift.

Is it a breach of the property manager’s fiduciary duty owed to independent building ownership when an existing tenant leaves for commercial space owned by the property manager? The first look should be to the property management agreement entered into between the parties. That contract establishes fiduciary agency and the scope of services provided by the property management company, including collection of rents, oversight of maintenance, and handling of the leasing agreements. A standard of care, whether spelled out as part of the contract or that is acceptable in the marketplace, provides additional guidance to management.

What is not contemplated is the common law fiduciary duty to the building owner not to markup or unjustly manage the financial transactions involved in day-to-day property management. If the needs of a commercial tenant have changed as a result of a labor market shift to hybrid, shouldn’t the tenant be permitted to make a move? Common with rent abatement of commercial leased spaces are lease agreements that lengthen the tenancy time commitment. Depending on the size and relationship of the corporate tenant, pursuit of lost rents by building ownership may not be advisable.

What may happen, however, is that if property management appears to have been involved in the decision for the breaking of a commercial lease, allegations of breach of fiduciary duty may arise. Fuel is poured on the fire when the property manager is also a property owner competitor with the previous building ownership. Because commercial real estate is so relationship driven, the types of disputes anticipated may feel a little more personal. The anticipated result includes high monetary demands and, if not settled, protracted litigation to recover prospective damages.

Property management errors and omissions policies respond to claims that stem from tenant losses, especially if the liability sits with the property manager. It is the same breach of fiduciary duty to fail to keep tenants by not maintaining premises as it is when a tenant leaves for a new space owned by the property manager. The optics, particularly where the property manager is profiting from a building owner’s loss, are not good. Certainly not for the property manager’s professional liability insurer. 

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About The Authors
Sarah Abrams

Sarah Abrams, Esq., is head of professional liability claims at Bowhead Specialty Underwriters, Inc.  sabrams@bowheadspecialty.com

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