LEASE DISCLOSURES
By Zachary Herbert*, Law Clerk
August 2008

After signing a commercial lease but before the tenant takes possession, does a broker representing the tenant have a duty to inform a landlord regarding the financial condition of tenant?  A recent California Court of Appeals case (“Blickman” Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal. App. 4th 858) has the answer – No.

In the Blickman case, the lease provided that the landlord would build an office building to suit the needs of the tenant.  Concurrent with the commencement of the build out by the landlord and shortly after lease execution, the tenant told its broker (there was no dual agency representation) that it was having financial trouble.  Tenant’s broker did not inform the landlord or its broker of its client’s financial woes.  Thereafter, and just prior to taking possession, the tenant informed the landlord that it was unable to pay rent, and negotiated a termination of the lease.  The landlord subsequently sued the tenant’s broker, claiming that the broker had a duty to inform the landlord of the tenant’s financial status.

California law is clear that a tenant’s broker’s fiduciary duty is to the tenant.  Can one extend tenant’s broker’s duty to the landlord or landlord’s broker and after lease execution?  In Blickman, the Court analyzed two issues: does the relationship between tenant’s broker and landlord create a duty to disclose material information and the event (learning of tenant’s financial problems) triggering the possible duty to disclose arose after lease execution.

The Court said that because the broker had a contractual relationship to the tenant and no contractual relationship with landlord, it had no duty to landlord and there was no requirement to disclose.  The Court went as far as saying that disclosing the financial condition of the tenant may be deemed a breach of the broker’s fiduciary duties to the tenant.

In determining tenant’s broker’s duty to disclose, the Blickman Court looked to the fact that the material information of the tenant’s financial firm’s litigation client, through escrow, demanded the funds for the replacement property, the 1031 Exchange Accommodator informed the escrow company that it had poorly invested the client’s funds and could not release any money.  The client lost $1,000,000 and other victims of this particular 1031 Exchange Accommodator lost collectively approximately $40,000,000.  There is no governing body that regulates 1031 Exchange Accommodators and therefore it is prudent upon the property owner wishing to take advantage of a 1031 Exchange to only utilize reputable and well-known 1031 Exchange Accommodators.

*Zachary Herbert was a law clerk at the firm in 2008. He is a third-year student at Pepperdine University School of Law.