Report from Council, February 2005

While acting as a dual agent is not prohibited by law, a licensee who wishes to act in this capacity must first receive the informed consent of both parties to the trade in real estate before doing so.

In this context, informed means that the licensee must disclose to both parties, in a timely manner, ·the nature of the conflict of interest that would arise if the licensee were to represent both parties, ·what is being proposed by the licensee, and ·the implications of giving their consent. The timing of this disclosure is important. It must be done when it has some meaning; that is before the licensee begins to act as a dual agent, and before any potential of conflict of interest has arisen.

Consent means that, on the basis of the above information, both parties agree to the licensee acting in this capacity. The dual agency relationship requires that the licensee act in a neutral, impartial, and objective manner.

The licensee cannot advise or advocate on behalf of either party where doing so would enhance the interests of one party over the other. This means there are certain situations where it is virtually impossible for a licensee to act as a dual agent because of the relationship they have already developed with one of the parties.

For example, if a licensee has developed a relationship with a developer and is marketing a project on behalf of that developer, should that licensee offer any form of agency to a buyer who is interested in acquiring one of the developer’s offerings? Is the licensee able to remain neutral, impartial, and objective when he or she has such a close relationship with the developer? That buyer should either be treated as a customer rather than a client, or given the opportunity to seek his or her own representation.

Another example of where it is not proper to offer agency representation to a party is where a licensee is acting on behalf of a close family member or business associate who becomes interested in acquiring real estate from that other party. Can a licensee be neutral, impartial, and objective when his or her spouse is offering to buy real estate? The same logic applies if a close family member or business associate is offering real estate for sale. If a licensee is providing real estate services to their spouse by listing a property owned by that spouse for sale, that licensee should not be offering any form of agency representation to a potential buyer. Further, if licensees are acting on their own behalf in acquiring or disposing of an interest in real estate, they should not be offering any form of agency representation to the other party in that trade.

Some licensees continue to believe that the only way they can ‘double end’ a deal is to act as a dual agent. This is not the case. A licensee can act as an agent for one party, treat the other party as a customer, and receive the total commission payable. This is often exactly what the parties expect. In the example above where the licensee is the agent for the developer, a buyer who walks into the project without an agent undoubtedly knows that this licensee is the agent for the developer. Far better that the licensee confirm this with the buyer and explain the types of services he or she can provide to the buyer as a customer while acting as agent for the seller only. This scenario is well explained in the Working with a Real Estate Agent brochure published by the British Columbia Real Estate Association under the heading “Where There is no Agency Relationship.”

Licensees should discuss with their managing broker any potential conflicts that may arise before entering into a dual agency relationship. Wherever possible, it is best to avoid these types of conflicts. Further information on agency related issues is located in the Licensee Practice Manual starting at page 198.

Earlier this month, you would have received a 2nd Special Report to Licensees detailing the requirements of the Council’s Rules. I would urge you to read that Report and to keep it handy for future reference. That Report and the 1st Special Report are posted on the Council’s website at www.recbc.ca. Also posted on the Council’s website are the Real Estate Services Act, Real Estate Services Regulation, Council Rules and Bylaws. You will note that this Report contains a number of articles dealing with agency, including information on section 5-11 of the Council Rules. This section deals with the disclosure of licensee remuneration and contains important background information on the history of this rule. Finally, as we are only two months into having a new Real Estate Services Act, your continued understanding and support is appreciated as we work together to ensure the effective roll-out of the new legislation.

On behalf of Council,

Rosemary Barnes, Chair

In order to assist licensees in providing increased protection for their clients, the following clauses regarding illegal use of real estate have been approved by the Council. These clauses were originally created by the Ontario Real Estate Association and now form part of the BC Real Estate Association’s online course on grow operations. The first clause can be used in situations where the seller is confirming that the property has not been used to grow or manufacture illegal substances and the second clause may be used when the buyer is acknowledging that the property has been used for such purposes.

No Growth or Manufacture of Illegal Substances

The seller represents and warrants that during the time the seller has owned the property, the use of the property and the buildings and structures thereon has not been for the growth or manufacture of any illegal substances and that to the best of the seller’s knowledge and belief, the use of the property and the buildings and structures thereon has never been for the growth or manufacture of illegal substances. This warranty shall survive and not merge on the completion of this transaction.

Growth or Manufacture of Illegal Substances

The buyer acknowledges that the use of the property in buildings and structures thereon may have been for the growth or manufacture of illegal substances and acknowledges that the seller makes no representations and/or warranties with respect to the state of repair of the premises and the buyer accepts the property and the buildings and structures thereon in their present state and in an “as is” condition.

Licensees with questions about either of these clauses may contact the Council office at 604-683-9664 or toll-free 1- 877-683-9664 or email info@recbc.ca

After 15 years in its current location, the office of the Financial Institutions Commission (“FICOM”) is moving to Central City in Surrey, B.C. Effective Tuesday, April 5, 2005, the new address and contact numbers for FICOM and the Superintendent of Real Estate will be: 1200 – 13450 102nd Avenue Phone: 604-953-5300 Surrey, B.C. V3T 5X3 Fax: 604-953-5301

Section 5-11 of the Council’s Rules states: 5-11 Disclosure of additional remuneration (1) This section applies if a licensee receives or anticipates receiving, directly or indirectly, (a) remuneration as a result of providing real estate services to or on behalf of a client, other than remuneration paid directly by the client, (b) remuneration as a result of recommending (i) a home inspector, mortgage broker, notary public, lawyer or savings institution, or (ii) any other person providing real estate related products or services to a client, or (c) remuneration as a result of recommending a client to a person referred to in paragraph (b) (i) or (ii). (2) The licensee must promptly disclose to the client, and to the licensee’s related brokerage, (a) the source of the remuneration, (b) the amount of the remuneration or, if the amount of the remuneration is unknown, the likely amount of the remuneration or the method of calculation of the remuneration, and (c) all other relevant facts relating to the remuneration.

Section 5-8 of the Council’s Rules requires that disclosures under section 5-11 must be in writing and separate from any agreement giving effect to a trade in real estate (e.g. separate from the Contract of Purchase and Sale).

The requirements of section 5-11 are a reflection of the common law of agency, and a reworking of a similar requirement contained in both sections 36 and 9.06 of Regulation 75/61 under the previous Real Estate Act. Similar disclosure requirements are found in the real estate legislation of other jurisdictions such as Alberta, Saskatchewan, Ontario, and Nova Scotia.

The following quotation extracted from the research paper Agency Law and Real Estate Brokerage: Current Issues (A Review of the Case Law and some Industry Practices) prepared by William Foster, Faculty of Law, McGill University expresses the law with respect to such disclosures.

“Brokers, when acting as fiduciaries, are prohibited from making any secret profits or, indeed, receiving any form of remuneration or reward from anyone but their clients in the absence of the fully informed consent of their clients to the receipt of such payment. This prohibition extends to the receipt of: ·commissions from the other party to a transaction, a situation which creates potential difficulties for brokers in buyer agency and dual agency relationships;1 ·referral fees or gifts from third parties (contractors, lending institutions, other brokers, lawyers and the like) for referring clients to them for particular purposes.2

It would appear that the prohibition on secret profits extends to payments received from third parties:

• whose services are necessary for the satisfactory consummation of the transaction itself (e.g. lenders, appraisers, building inspectors, lawyers, etc.); and
• who provide what may be described as incidental services (e.g. building contractors, landscapers, interior decorators, moving companies, etc.).

It is suggested that the acid test for determining what constitutes a secret profit is: would the payment have been earned by the broker but for the existence of the broker-client relationship in the circumstances of the case? If the answer is no, then the payment is likely to be considered a secret profit for which the broker is accountable to the client.”

Section 5-11 requires this disclosure to be made to the client ‘promptly’. The common law requires that such disclosures must be timely, occur before any potential conflict of interest has arisen, and when it has some meaning.

For example, consider what would be timely and effective disclosure by a licensee, acting as a buyer’s agent, who anticipates receiving remuneration by way of the amount offered to cooperating brokerages by the listing brokerage. This is not remuneration that will be paid directly by the buyer/client, and therefore the disclosure requirements of section 5-11 apply.

To begin the process of disclosure, licensees should have a general discussion about remuneration with a prospective buyer/ client at the same time as the licensee is describing the services to be provided. The last two paragraphs on the first page of the Working with a Realtor brochure describe the source of remuneration for cooperating brokerages (buyer’s agents) in many cases. In these cases, providing a buyer/client with this brochure would satisfy the requirement to disclose in writing the source of remuneration not being paid directly by the buyer/client.

There remains the obligation to disclose the amount (or the likely amount, or the method of calculating the amount). One effective way would be to provide a buyer/ client with a copy of the MLS® information respecting properties under consideration that includes the remuneration being offered to a cooperating brokerage. This would constitute effective disclosure so long as the full amount or method of calculation of the full amount is clear (i.e. any bonus or additional amount being offered is included in the information). Having the buyer/client initial that information would be a useful acknowledgment. Obviously, some other method of disclosure would be necessary if a property being considered was not listed on MLS®.

With respect to timing, in order to satisfy the common law requirement that disclosure be made when it has meaning, the very latest time would be before an offer is to be written.

The above only addresses a buyer’s agent’s remuneration with respect to the actual trade in real estate that is not to be paid directly by the buyer. The requirements of subsections 5-11(b) and (c) to disclose remuneration as a result of recommending other service providers, or a client to another service provider, are not typically connected to the writing of an offer; nor are they limited to buyer’s agents. However, the requirement that disclosure be ‘prompt’ also exists in those instances. Again, this means that it must be made before any conflict of interest arises (e.g. if you use that mortgage broker I will receive some benefit) and when it has meaning (i.e. at a time when the information can be used in considering whether to use the service provider to whom they have been referred).

While this requirement for an agent to disclose to a client any remuneration that is not to be paid directly by the client has long been a matter of law, the requirement under section 5-8 of the Council’s Rules that it be in writing and separate from any agreement giving effect to the trade in real estate is new. For that reason, a transitional period has been allowed to enable licensees to develop practices to comply with this ‘in writing’ aspect. The transition Rule (section 10-4) states that licensees are required to comply with the ‘in writing’ aspect as soon as practicable, but in any event by no later than July 1, 2005. The ‘in writing’ requirement is to ensure there is evidence that the disclosure has been made.

The Council is in the process of considering whether it should develop a form for use by licensees. Regardless of the document used to make this disclosure, licensees are required to give a copy of the disclosure to the client, to their brokerage, and to keep a copy with their own records.

Finally, it is important to note that such disclosures are required to be made to clients. There is no requirement for this disclosure to customers. Therefore, for example, a listing brokerage acting solely as an agent for a seller has no obligation to disclose remuneration to a buyer who is either unrepresented or represented by another brokerage.

1 Cross Creek Timber Traders Inc. v. St. John Terminals Ltd., [2002] N.B.J. No. 77 (Q.B.). 2 Re/Max Loyalist Realty Ltd. v. Spence (c.o.b. Robert Spence Construction), [1993] O.J. No. 1539 (Gen. Div.); Klingspon v. Royal LePage Real Estate Services Ltd., [1993] O.J. No. 1439 (Gen. Div.).

As reported in the March 2004 Report from Council, the Canadian Regulators Group (being the real estate regulatory bodies from across Canada and known as the “CRG”) formed an Agency Task Force to examine the issue of agency, the application of agency laws and the development of a common or “best practices” approach, and related recommendations for the CRG to consider.

The CRG Agency Task Force Report (the “Report”) is available and can be found on the CRG website at www.canadianregulators.ca under “ATF”. In addition, the three research documents prepared by Professor William Foster of McGill University, which play an integral role in the conclusions and recommendations of the CRG Agency Task Force, are also available (under “Publications”) for licensees to read.

Following completion of the Report, last fall the Council participated in a video conference call with other real estate regulatory bodies from across Canada dealing with the concepts and recommendations of the Report. In addition, the Report was presented to representatives of the real estate industry at meetings of the Canadian Real Estate Association in October in Montreal.

The Council is now in the process of considering the Report’s recommendations and has appointed a Task Force, chaired by Council Member Michael Ziegler. The Council’s Task Force met on December 14, 2004 and undertook an extensive review of the Key Points, Conclusions, and Guiding Principles, as well as several of the sample agreements contained in the Report. Following review and discussion, the Council’s Task Force then adopted a motion agreeing, in principle, with the recommendations of the Report. The Council’s Task Force noted the need for further discussion and consultation with the industry, particularly with respect to the proposed models and forms contained in the Report, as well as any possible implementation and related education issues.

The Council will not be dealing with the Report’s recommendations until such time as the consultation process with industry is completed. In that regard, the Council has been advised that several real estate boards and the British Columbia Real Estate Association have appointed their own task forces to review the Report’s recommendations. The Council looks forward to receiving the industry’s view of the Report, following which the Council will consider the Report’s recommendations.

It should be noted that each real estate regulatory body across Canada will be independently considering the Report’s recommendations. They will report on their progress to-date at a meeting scheduled to take place during the last week of May 2005.

Should there be consensus amongst the participants at that time (or at a later date if some jurisdictions have not yet dealt with the Report’s recommendations), the next step for the CRG would be to develop a unified approach to implementing the Report’s recommendations. Should you wish to provide comments about the Report, please contact Robert O. Fawcett, Executive Officer (rfawcett@recbc.ca) or Larry Buttress, Manager, Industry Practice (lbuttress@recbc.ca).