Agent’s Obligation to Disclose the Relationship to the Prospect

By Brian Madigan LL.B.

The Ontario Real Estate Association (OREA) has recently commented upon the obligation to disclose the relationship whether it be client or customer with a prospect.

Here’s an excerpt:

Disclose, disclose, disclose

“Section 10 of the Code is clear on the requirement to provide the buyer or seller with certain information regarding their potential relationship. It requires all REALTORS®, including Commercial REALTORS®, to disclose in writing the nature of the services you are providing, and encourages you to make that disclosure as early as possible in the relationship. It also encourages you to get acknowledgement, in writing, of that disclosure.

In a commercial scenario, consider an individual who has contacted you to help him or her find office space to lease, or for that matter, a commercial or investment property for purchase. Under the provisions of Section 10 it is mandatory to ensure that the individual understand the ramifications of entering into a business relationship with you. In order to accommodate the requirements as set out in the Code it is necessary to develop a system whereby you are disclosing all the different relationships possible.

It’s also important to understand that the conduct of a salesperson or broker is sufficient to create an agency relationship. The definition of agency recognizes that fact. The consumer brochures entitled “Working with a REALTOR®” and “Working with a Commercial REALTOR®” identify the various arrangements possible. The last page of the brochure allows for written acknowledgement of the disclosure.

Unlike a residential real estate transaction where you are usually dealing with a buyer and a seller, a commercial transaction may include a buyer, a seller, a landlord and/or a tenant. It’s important to set out the procedure for working with a client under the requirements of the REBBA Code of Ethics, and the laws of agency while still maintaining a practical approach.

The process begins with a meeting and discussion with a prospective seller, buyer, landlord or tenant. As soon as possible, it is necessary to establish the relationship in writing. If your prospect is a seller then you require a representation agreement (e.g. listing). If the prospect is a buyer or tenant who wishes to be a client, a representation agreement is also required. If you are representing the buyer and you do not want to enter into a representation agreement with the seller, (i.e. the seller is to be a customer) then a Seller Customer Service Agreement would be the way to go. Finally, if the prospective buyer or tenant wishes to be a customer, then a Buyer Customer Service Agreement is required.”

COMMENT

You will notice that the commentary published by OREA was in large measure directed to commercial real estate agents. That’s because they are the most likely to overlook the proper documentation.

I’m not quite sure what OREA means when it refers to “disclosing all the different relationships possible” and “identify the various arrangements possible”.

There are two categories that must be identified:

1) clients, to whom fiduciary legal obligations are owed by reason of agency, and

2) customers, to whom other, lesser obligations are owed, but without fiduciary legal obligations since there is no agency relationship.

If you are offering both of these categories as options for the prospect, then the prospect should select one of them. If you are only offering customer status, you should draw to the attention of the prospect that another agent might offer client status.

The "Working with a Realtor” forms for residential and commercial purposes offer an inadequate explanation in my view of the agency and non-agency options. While the documents might at least serve as some evidence that the matter was discussed with the prospect, it falls short of the “informed consent” necessary to convince a Court that you provided an adequate explanation in all of the circumstances.


Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

The Accidental Client

By Brian Madigan LL.B.

The Ontario Real Estate Association (OREA) has recently commented upon the distinction between clients and customers. Here is an excerpt:

Client or Customer

”Many real estate salespeople and brokers assume that if the person they are working with is not a client then the obligations to that person in large part disappear. Alternately, some incorrectly suggest that they have fiduciary responsibilities to their customer. While there is no fiduciary responsibility owed to a customer there are still professional, ethical and contractual expectations, such as:

• acting fairly, honestly and with integrity

• demonstrating reasonable knowledge, skill, judgement, and competence

• disclosing any fact that would affect a reasonable persons decision to buy or sell an interest in real estate

• not knowingly making an inaccurate representation about services.
As well as other obligations to customers set out in REBBA 2002 and the REBBA Code of Ethics.

An area of difference between customers and clients and one that poses potential difficulty is providing information and not advice. For commercial REALTORS®, a good example of this might be where someone has requested you assist him in finding office space. During the process this individual refuses to enter into a client relationship with you. As a result, when suitable space is finally found, and an Offer to Lease is being prepared, difficulty may arise. When asked what they wish to offer as a rent, this person asks your advice as to what would be an appropriate amount. If you respond to this question by offering a figure, you have begun to treat him as a client.

The consumer comes to the real estate salesperson or broker for their expertise. If the consumer chooses to be a customer then your ability to assist is limited. If you suggest specific amounts in this scenario, you are offering advice and that then translates into a client relationship.”

COMMENT

You will notice how “tricky” the situation has become. Is the prospect a client or customer? The note correctly indicates that the agency relationship may occur through implication or discussion. In that regard, this is also quite true, since Courts have frequently “upgraded” the relationship in order to impose liability.

The difficulty is the reply to a simple question. How much to offer? Surely, that reply alone can’t place the entire relationship in jeopardy? Or, of course, if it does, it was probably in jeopardy already. There is no reason why a prospect must agree to be a client in order to get “advice”. Why can’t they bargain for customer status and advice at the same time?

Now, in similar situations, lawyers and doctors have clients and patients. Both are “agents” and subject to the usual and ordinary rules of agency. They don’t have customers. Lawyers don’t have a category for “second class clients”, and doctors don’t have a category for “second class patients”. That being said, the real estate industry does. There are two categories:

1) clients, to whom fiduciary legal obligations are owed by reason of agency, and

2) customers, to whom other, lesser obligations are owed, but without fiduciary legal obligations since there is no agency relationship.

This all seems very peculiar. Both the medical community and the legal community view themselves as being part of a “profession”. The real estate community is just an “industry” and not a “profession” until it adopts one set of rules for everybody. The two classes of citizens just doesn’t fly!

One must be ultra cautious since the Courts are apt to impose liability. So, answer one question, and now you’re liable! That doesn’t make much sense, nor do the basic two classes in the first place.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

Error by Fiduciary ~ Not Always Fiduciary Breach

By Brian Madigan LL.B.

Fiduciary duties have long been subject to discussion by the Courts. More recently, it would appear that just about any error made in a transaction where a fiduciary is involved is alleged to have been a breach of fiduciary duties.

The Court of Appeal in England has clarified the law on this point. In Bristol and West Building Society v. Mothew, the Court ruled that not every breach by a fiduciary was necessarily a breach of a fiduciary duty. This is important because the test for liability, that is, the threshold is lower in the case of fiduciary duties.

The case involved an action for damages against the defendant law firm. The lawyers acted for both the mortgagors and the mortgagees in the same transaction. Inherently, that is a conflict of interest. The mortgagee required confirmation that the borrowers were indeed the source of the balance of the funds. This turned out not to be the case.

The solicitors were in error. In fact, part of the funds were being advanced by another party and were to be secured by a loan.

Subsequently, the buyers defaulted and there were insufficient funds to pay the first mortgage, The solicitors were sued for breach of trust.

The Court of Appeal stated:

• The term fiduciary is flung around now as if it applied to all breaches of duty by solicitors, directors of companies and so forth

• A lawyer can commit a breach of the special fiduciary duty by entering into a contract with the client without full disclosure

• Simple carelessness is perversion of words (not being a fiduciary breach)

• Breach of fiduciary duty connotes disloyalty or infidelity

• Mere incompetence is not enough

• A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of breach of fiduciary duty.

If there has been a failure to disclose by a fiduciary, the Court will carefully examine the circumstances, but an inadvertent oversight is not a demonstration of a lack of fidelity.

A trustee, or other person who is charged with fiduciary responsibilities and obligations, may still be liable for ordinary errors, and ordinary negligence, and as such the procedural rules that apply to simple contracts and negligence will apply in those situations. This will simplify the case for the trustee or person who holds the position of a fiduciary. From the perspective of the clients, the cases will be somewhat more difficult to prove. There is no reverse onus in these circumstances.

This is helpful news for real estate agents who are frequently involved in conflicts of interest.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

Oklahoma Offer in Real Estate Explanation

By Brian Madigan LL.B.

What is an Oklahoma Offer!

Actually, it’s a simple form of real estate fraud. There are variations depending upon how many parties are involved and who is the intended victim.

So, let’s look at two examples, in the first the victim is the vendor and in the second, the mortgage company is the intended victim.


Vendor as Victim

In this case, the purchaser and his agent seek to defraud the vendor.

An Oklahoma Offer may be defined briefly as any Offer whereby the vendor takes back a mortgage that is unsecured by the value of the property.

Let’s assume Bill wants to purchase Dominic’s house which is valued at $250,000. The problem is that Bill doesn’t have any money.

Bill intends a first going on at $200,000 and expects Dominic to take back a $50,000 second. The problem is that the vendor doesn’t really realize how large the first is going to be.

The usual and correct words in an Offer should be "the purchaser agrees to arrange a first mortgage of not more than $200,000".

However, in the Oklahoma Offer it says "the purchaser agrees to arrange a first mortgage of not less than $200,000".

The trick is to catch the unsuspecting vendor who is not paying attention. Here, the purchaser might arrange a $225,000 first. The vendor, Dominic takes back a $50,000 second, but really needs the property to be worth $275,000 if his mortgage is to be secured.

In all situations, the first and the second will add up to more than the value of the property.

So, if the purchaser defaults, the first mortgagee is OK, but the vendor, Dominic (second mortgagee) is not.

Mortgage Company as Victim

This next situation is a slight variation on the same scheme. This time, Bill needs to work along with Dominic. They agree to say that the sale price is higher than the actual sale price. So, the mortgage company will lend more money at favourable rates. In the case of a standard first mortgage, the mortgage would not exceed 75% of the value of the property. Or, they might try to simply circumvent the CMHC high ratio insurance fees. In any event, the intended victim would be the mortgage company.

The Criminal Code

Section 362 of the Criminal Code makes it an offence punishable by up to 10 years in prison to obtain credit by a false pretence or fraud. A mortgage is considered as credit under the Criminal Code. Anyone who knowingly assists in the misrepresentation is a party to the offence and subject to the same penalty.

So, in the latter case, both Bill and Dominic (and their agents) would be liable.
In the first case, just Bill and his agent would be liable. Dominic was just an innocent party.

The Reality

In my experience, the Oklahoma Offer is a thing of the past. I have been involved in thousands of real estate transactions and the last actual Oklahoma Offer (subject to litigation in the late 1970’s) was negotiated between the parties in 1972. Since then, too many professional are aware of the scam, and none of these deals actually close.

The second variation, perhaps better known as an Oklahoma swindle is plain and simple mortgage fraud. And, it is as common today as it ever was. However, sophisticated mortgagees are increasingly using their own (and reliable) appraisal firms. This approach catches most cases ahead of time.

The first situation is more important for real estate students and agents since it is always in the real estate courses, even if it doesn’t occur frequently in practice.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty Inc. 905-796-8888
www.OntarioRealEstateSource.com

Canada’s Recession is Over

By Brian Madigan LL.B.

Officially, Canada’s recession is over. Canada’s economy as measured by its gross domestic product actually grew in the third quarter of 2009.

Now, it only takes two consecutive downward quarters to start a recession, but only one upward quarter to break the trend.

Statistics Canada confirmed the September GDP figure, which showed an increase of 0.4 per cent. For Canada, this was the first quarterly gain since the third quarter of 2008.

Here are the figures:

Third quarter 2009

% change from previous quarter

+0.1

% change annualized

+0.4

% change year-over-year

-3.2

So, all in all, the economy is still down from this time last year. And, the increase was 1/10th of one per cent, which certainly isn’t that great an endorsement. If you assume that it will stay the same, then you have 0.4% annually. But, that figure is guesswork. It’s just a pure mathematical projection. It didn’t really happen.

The United States has already reported a 2.8% increase in GDP in its third quarter.

The Bank of Canada had expected a 2% annualized increase by now, so the economic recovery is somewhat slower than anticipated.

The result is that in all likelihood, interest rates will remain the same, and the Bank of Canada will continue its prime rate at 0.25% until 30 June 2010 as promised.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

Maintain Excellent Financial Books

By Brian Madigan

If you are in business you should keep good financial records. It just makes sense, but so many small businesses neglect this tedious and somewhat time-consuming task. Careful records take time. And, if you don’t really have the time yourself then you should retain a bookkeeper and an accountant.

Why? It will simply pay big dividends in the future. I’m not really talking about all the tax deductions that you don’t miss because you have proper receipts, or even the warranty claims that you can present because (again) you have receipts. What I’m talking about is much more significant.

It’s the sale of the business, the accumulated wealth of your lifetime of work. Is there any value to it? What is your business really worth? Who will buy it? And, most importantly, what will they pay for it.

In most industries, there is some kind of a “rule of thumb”. Businesses are worth a certain multiple of their net profits. Oftentimes, this ranges from three to seven times the net profits. But, how are you going to prove your “net profits” if you don’t have good financial records. They need to demonstrate some stability. Basically, that means at least three solid years. Also, they should illustrate increasing profits. The more you pay in income tax the better. If you’re generating profits and paying income tax and GST, then this must be a worthwhile business.

The Real Estate and Business Brokers Act calls for the production of financial statements in all cases. However, there is a specific exception under the Act. If the purchaser agrees, the vendor can simply provide a list of assets (equipment and chattels) included, and another that sets out what is excluded, as well as particulars of the possession or occupation of the business premises. Far too many vendors take advantage of this opportunity. The problem is that they often only receive a tenth of the true value of the businesses (or even less).

If you are planning to sell your business in the next three years, the first item on the agenda should be to retain an accountant. The second item should be to drive the net profits as high as possible and in fact pay a significant amount of income tax.

A business generating $100,000/year in profits from an industry that sells for seven times earnings would be worth $700,000. Without proper financial records, this same business will likely sell for less than one year’s profits or the value of its assets (chattels and equipment). The difference is substantial in all cases. Purchasers will pay for good businesses with well-documented financial statements.

So, keep excellent records, if not for yourself, for your purchaser!


Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

Should You Buy Real Estate Now or Wait?

Don't wait to buy real estate; buy real estate and wait!

That is a much better strategy. It is the long term that is important. Look to the next 10 years. Don't look at the situation, month to month. If you do you will always find enough reasons to justify waiting a few more months.

Then you will reach a certain point when you conclude that the market has passed you buy.

So, better safe than sorry, be active, be diligent and be ready to invest!

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com