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PLEASE NOTE: This article was published on the date listed below and may now contain information that has since been updated or changed. We have retained this article as it may still contain helpful comments. However, we advise you to make an appointment to see us for the most up to date information on this topic.

March 2010

New Rules for Real Estate Agents

Implications for Vendors

Introduction

As many readers will be aware from publicity in the media, the legislation governing the way in which real estate agents operate has been overhauled in recent years with the enactment of the Real Estate Agents Act 2008 (“the Act”) and Real Estate Agents Act (Professional Conduct and Client Care) Rules (“the Rules”).  Whilst these changes have significant implications for the real estate industry itself, the implications extend beyond the industry itself and have potentially significant implications for those dealing with real estate agents.  In many ways, the new legislation and the rules represent a fundamental change in the nature of the relationship between real estate agents, vendors and purchasers.

The Previous Position

Prior to the enactment of the Act and the Rules, the relationship between real estate agents was essentially governed by the law of agency.  Accordingly real estate agents were the agents of the vendor who appointed them to sell their property, not the purchaser.  As such, real estate agents were required to act in accordance with the instructions and best interests of the vendor, not those of the purchaser.  Whilst there were some practical limitations to this, such as the fact that agents could still be liable for breaches of the Fair Trading Act and the like, essentially such exceptions did not have any fundamental impact on the nature of the relationship, namely that the agent was the agent of the vendor.

In practical terms, this meant that the agent was not required to or indeed able to advise the purchaser of defects in the property, even if they were known to the agent, without the express instructions or authority of the vendor.  Similarly, agents were not generally liable to purchasers if they simply conveyed information about the property that had been given to the agent by the vendors, even if they suspected that information may not have been correct, provided they did not in some way adopt the information concerned as their own.  As such, agents were often able to successfully rely on the argument that they were a mere conduit of information to avoid liability under the Fair Trading Act.

Furthermore, not only was the agent of the vendor by virtue of the law of agency, the legal doctrine of “caveat emptor” (or buyer beware) applied.  In general terms, this means that the buyer was expected to satisfy themselves from their own enquiries as to the condition of the property and its suitability for them and, if they failed to do so, they would essentially be regarded as having chosen to proceed at their risk.

In our experience, the fundamental nature of this relationship was often misunderstood, particularly by purchasers but also by vendors and sometimes even the agents themselves.  For example:

  • Purchasers speaking with agents disclosing information that they do not necessarily wish to have passed onto the vendors without realising that the agent was obliged to pass such information on to the vendors.
  • Agents disclosing information about the vendors’ circumstances and/or the property concerned either without the consent of or in breach of the vendor’s instructions.
  • Agents failing to recognise conflicts of interest when they arose.

These misunderstandings as to the fundamental nature of the agent’s relationship resulted in wide-spread criticism in the media after several high-profile instances of rouge agents committing serious breaches of their duties.  As a result, the previous legislation was replaced with the Act and the Rules which not only affect the real estate industry (which was largely self-regulated) but also, as mentioned above, fundamentally affect the relationship between the agents, vendors, purchasers and prospective purchasers.

The Rules

The Rules impose obligations on agents that considerably broaden the scope of their duties and in large measure turn the doctrine of caveat emptor on its head.  In particular, no longer do agents only owe a duty of care to the vendor as their principal, the effect of the Rules is that the agents must now consider the interests of the purchaser and prospective purchasers.

Rule 6.4 provides that an agent must not mislead a customer or client, nor provide false information, nor withhold information that “should by law or fairness” be provided to a customer or client.  “Client” is defined in the Act as being the vendor in most instances and the Rules provide that “Customer” means a person who is a buyer or potential buyer.  As such, not only must agents not mislead or withhold information from the vendors who appoint them, but they must act similarly in relation to purchasers and prospective purchasers.  The reference to information that “should by law or fairness” be disclosed leaves considerable scope for uncertainty, but is seems reasonably clear that it is going to considerably widen the scope of information that an agent is required to give to purchasers and potential purchasers.  It is also likely to lead to more frequent conflicts of interest, particularly in view of other provisions set out in the Rules.

Rule 6.5 goes on to provide that whilst an agent is not required to discover hidden or underlying defects in a property, they must disclose known defects to a customer, who as noted above, is defined to mean a buyer or potential buyer.  In addition, where it appears likely, based on the agents own knowledge and experience in the market, that land may be subject to hidden or underlying defects, the agent must seek confirmation from the vendor that the land in question is not subject to such defects or ensure that the customer concerned is informed of any significant potential risk.  A footnote to the Rules refers to houses constructed within a particular period of time and of particular materials are likely to be at risk of weathertightness problems and that the agent could be reasonably be expected to know of this risk irrespective of whether or not there are any weathertightness problems with the particular dwelling or whether any such problems are disclosed to the agent by the vendor.  This is but one example of the type of situation that could arise.  The scope of this particular clause is extraordinarily wide and is nevertheless going to difficult to apply in practice involving as it does a subjective element.

Furthermore, Rule 6.6 directs that in the event that the vendor directs that information of this type be withheld, the agent must cease to act for that vendor.  This is likely to create significant difficulties for vendors of dwellings that were built during the time when most dwellings with weathertightness issues were constructed, even if their dwelling has never exhibited any signs of having weathertightness issues.

There is also a wide range of provisions in Section 9 of the Rules dealing with matters such as not placing “undue or unfair” pressure on a client, prospective client or customer.  Rule 9.9 specifically provides that before an agency agreement or sale and purchase agreement or other contractual document is signed, an agent must ensure that a prospective client, client, and/or customer (as applicable) is aware that they are able to and may need to seek legal, technical or other advice and allow the client, prospective client, and/or customer a reasonable opportunity to do so.

Practical Implications

Whilst the objective of the Rules, which is no doubt intended to “clean up” an industry seen as being in need of a clean up, largely as a result of the activities of a relatively small proportion of unscrupulous agents is worthy, the new Rules are likely to lead to widespread confusion for agents and with conflicts of interest occurring on regular basis.  We have learned that in an effort to ameliorate the difficulties created by the new Rules, some agents are seeking wide-ranging indemnities from vendors in their listing agreement.  Whilst it seems doubtful that such indemnities will be effective in preventing disciplinary action being taken in respect of a breach of the Rules, nevertheless such provisions could have consequences for vendors in the event that a purchaser were to subsequently bring a claim in relation to some defect in the property.  Accordingly, we would strongly recommend that vendors carefully review the provisions of listing agreement and seek legal advice prior to signing listing agreements or agreements for sale and purchase.  Similarly, purchasers should seek legal advice prior to signing any agreement for sale and purchase.  As solicitors, we act only in the interests of our client, whether they be a purchaser or a vendor.