Commission Protection for Real Estate Agents

Explanation of Commission Protection for Real Estate Agents

Ontario Real Estate Source

By Brian Madigan LL.B.

The Real Estate Council of Ontario (RECO) has mandated the participation of all of its registrants in an insurance program that includes among other coverages, a "Commission Protection Insurance Policy".

This policy is designed to safeguard registrants in the event of the theft, confiscation or mismanagement of their commission in a real estate transaction. So, if a commission is to be paid to a registrant, then it is protected under the insurance policy.

The policy arises out of a desire to protect registrants from the bankruptcy of brokerages. This occurred in the late 1980's and early 1990's when a significant number of brokerages went bankrupt. The creditors stepped in and took the money owed to other brokerages, and their own agents as well as the brokerages' own money. These funds were shared pro rata among all the creditors, and the registrants simply ranked as unsecured creditors.

On the other hand, the deposit itself was held in trust for a particular party in a transaction. Because it was trust money, it was protected from other creditors. But, the moment the deal went through, the deposit became the funds of the brokerage and were to be distributed to the co-operating brokerage and its own sales representatives. The only problem, of course, was that this was the ideal time for the creditors to step in and share in the distribution.

The commission protection insurance policy is designed to respond to a claim only if the commission is protected under a commission protection trust arrangement. So, the insurer here will only pay if the commission was held in trust. What that means is the trust arrangement must be satisfied just like the deposit before payment. In most cases, the funds will rank as trust funds in a bankruptcy, and eventually when distribution is made, these funds will be forwarded to the insurer.

There are some additional limitations and requirements under the policy before a claim will be paid. The limits of liability are $100,000 for each claim and $1,000,000 for each occurrence. There is a $250 deductible.

Let's have a look at some of the insuring agreements under the policy. First, there must be a loss of commission. Here, the insurer agrees:· "to make payment on behalf of the insured

· the amount of any claim for loss

· sustained by a claimant

· in a trade in real estate

· in the Province of Ontario

· arising out of an occurrence

· discovered during the policy period"

And, "payment shall only be made for the benefit of a claimant".

The actual "named insured" in the policy is RECO. There is an extended definition of insured which includes:

1) RECO,
2) An employee, director or officer of RECO,
3) A registrant.

Loss is defined in the policy means:

· "loss of commission

· which has been entrusted to or received by

· one registrant in his/her professional capacity

· but is owed to another registrant

· in his/her professional capacity"

Consequently, the commission must be held by one registrant for another. The commission must actually exist. It cannot be a simple entitlement by way of contract to obtain a commission in the future. This is real money paid to a registrant which is later to be paid to another registrant. The usual arrangement would be a deposit on a real estate transaction, which following successful closing is to be utilized to pay commissions to the co-operating brokerage and the participating sales representative.

Trade is defined in the Real Estate and Business Brokers Act, 2002. It basically means a disposition or acquisition of real estate, including both offers and attempts to acquire or dispose of real estate. Consequently, any kind of advance payment on account of an opinion, or any other collateral issue would not be covered. Such activities are not considered to be "trades", even though money may have been paid to the brokerage. This would apply to both partial payments on account, as well as the final payment.

The appropriate remedy here would be to have the brokerage agree to hold the money in trust, and although the insurance would not apply, the common law rules related to trust property would.

The entitlement to the claim is an occurrence which is defined in the policy as follows:

· "....the insolvency of a registrant

· or the theft, fraud, misappropriation or wrongful conversion

· directly or indirectly by a registrant

· or present or former employee, director, officer, or manager of a registrant

· of moneys or other property

· entrusted to or received by the registrant

· in the registrant's professional capacity"

There is also an expanded explanation in respect to “occurrence”:

“Regardless the number of such incidents of insolvency or the number of such acts of theft, fraud, misappropriation or wrongful conversion, they will be grouped together as and amount to only one Occurrence regardless the number of Claimants who suffer a Loss.”

That provision has been recently added to the policy. The wording may indeed be rather awkward but nevertheless the meaning is clear. The insurer will only payout a maximum of $1,000,000 no matter what.

So, the intent here is to cover all moneys advanced to a registrant in the course of trading in real estate at such time as there is an obligation to hold such funds for another registrant. It applies to trust money (entrusted) and also money that was supposed to be held in trust but was not (received).

Clearly, it is the second part which may cause delay in investigation and settlement of any claims. Moneys placed in trust and removed without authorization can be traced. These are known transactions. Moneys which were delivered to the brokerage but never placed in trust may be elsewhere and present a much more challenging task for investigators. They are covered too.

Delays in processing settlements can easily arise where:

1)     claims are not presented in a timely fashion, and

2)     funds intended to be placed in trust, were deposited elsewhere. 

There is another RECO insurance policy called the Consumer Deposit Insurance Policy which protects the consumer. This policy only responds to the commission aspect of those same funds.

There are some important exclusions in the policy. Let's say ABC Realty is in difficulty and has been reported to RECO. The commission protection policy will not cover claims against ABC Realty. If that took place before the policy began, then there is no coverage. If the report to RECO takes place after the policy commences, then it will protect other registrants against loss of the commission through ABC Realty. Only RECO would be aware of any problem registrants. This situation is not that likely to arise in practice. The program has been in operation for several years and this exclusion is designed to protect the insurer and limit its exposure to just the claims within its policy period.

But, here is something that every sales representative needs to watch out for. The policy does not apply to any claim:· By a salesperson

· Employed or contracted to a brokerage

· Where the brokerage fails to set up a commission trust account

· Unless the salesperson has used his/her best efforts

· To determine that the brokerage has set up

· And maintained a commission trust account

This refers, of course, to the salesperson's own brokerage. There is a due diligence requirement. The salesperson must determine: is there a commission trust account? Is that account specified in writing under my contract of employment or my independent contractor's agreement? Am I being paid out of that account? So, take a copy of all commission cheques, and photocopy them. Don't just keep the stubs! This will show that the commission trust account has been "maintained". It's not enough simply to say that when I joined the company 5 years ago, it had a commission trust account. Did you appreciate that your last trade was paid out of the general account? At that point, you were at risk, and you didn't notice, so, the problem is that once that payment was made, that was the "red light" that should have alerted you to a problem. The failure to recognize that problem precludes entitlement to benefit from insurance on your next deal.

A claim is deemed to have been reported to the insurer on the date that RECO becomes aware of evidence of an occurrence. RECO will then give notice to the insurer as soon as practicable, but no later than 36 months after the discovery.

RECO has a period of 5 years to investigate the claim. It is RECO's obligation to submit a detailed proof of loss.

This policy of insurance is "second payor". That means that if there is any other insurance policy or other indemnity available to satisfy this loss, then, this policy will only come into pay the excess leftover (if any) after the first policy of insurance has paid out.

The insurance company is subrogated to the rights of the insured. Subrogation is an insurance term referring to an "automatic assignment". The insurer once it pays out under a policy has the right to sue in the name of the insured any party who might otherwise be responsible for the loss. So, the person who caused the loss doesn't necessarily get off the hook. The insurance company makes a business decision as to whether it is feasible to commence litigation and recover the loss from the offending party. This, of course, includes any registrant whose dishonesty may have lead to the loss.

Remember that the policy said that payment can only be made for the benefit of a claimant, who is defined as a brokerage, broker or salesperson or their estates who has sustained a loss provided that such brokerage, broker or salesperson was not responsible for the loss. 

There are several additional defined terms under the policy: commission, commission trust, and commission trust account:

a) commission - is the remuneration owing to, to be paid to, or earned by a registrant for a trade in real estate in Ontario. 

The obvious exclusions would be fees, appraisals, and opinions. Referrals from out of Province transactions would not be covered.

b) commission trust - means a constituted trust where all deposits and other monies received by or due to a brokerage directed to satisfy commission payable or damages or other compensation in lieu of commission and applicable HST on any trade and real estate are received and held by the brokerage in trust.

The provision goes on to confirm that the beneficiaries of the trust shall be the listing brokerage, co-operating brokerage, the listing salesperson and the co-operating salesperson. You will find this particular document contained in the standard form agreement of purchase and sale. If it is not signed, then there is no commission trust established. And, if there is no commission trust, then the policy of insurance will not respond to the loss.

c) commission trust account - means a trust account maintained at a Canadian chartered bank or trust company and designated as a "commission trust account". The commission trust account shall be used only for the receipt and disbursement of commission trust funds, and kept separate and apart from the statutory trust account that a brokerage is required to maintain for customer funds.

This provision is important because the salesperson is obligated to ensure that such account is both established and maintained. These two matters are both conditions precedent to recovery under the insurance policy

If the commission is over $100,000, only the first $100,000 is covered. Also, there is a $1,000,000 limitation upon the total amount of the insurance coverage per occurrence. 

If XYZ Realty holds 10 deposits in trust in the total amount of $2,000,000 and steals all the money, then pro ration applies. The maximum liability for the theft (occurrence) by XYZ Realty is $1,000,000 under the policy. No matter how many actual thefts, there is just one occurrence, so the $1,000,000 overall cap applies.

Upon the assumption that there is one occurrence, or one single theft, at one time, then the claimants will share equally in the $1,000,000. That means that they would each only receive one half of their actual claims.

This creates a potential problem. If XYZ Realty goes under, and was spending the trust money, a $1,000,000 limit is not very high. If the average deposit is $25,000 on a $400,000 house deal, then XYZ Realty only needs 40 deals to reach the limit. Many successful brokerages would have over 100 transactions where deposits are held for sellers in mid June each year.

In my view, the upside limit for coverage is quite insufficient. The limit should easily be 5 times the present policy limits, in order to reach an adequate limit for insurance purposes. The purpose of insurance is "risk management" and the risk of commission loss through theft is still there.

So, if you are anxious to protect your commission:

1) Consider having your brokerage hold the deposit (knowing that your brokerage is under the $1,000,000 limit

2) Having the seller's brokerage confirm that they do not and will not hold more than $1,000,000 in trust for all potential registrants entitled to share in commissions

3) Specify that the deposit in the real estate transaction is to be paid to the seller's solicitor, in trust

4) Specify that the deposit in the real estate transaction is to be paid to the buyer's solicitor, in trust

5) Specify that some other stakeholder, third party hold the deposit in the real estate transaction, in trust

From a risk management perspective, 3, 4, and 5 place the funds beyond the reach of the brokerages. They reduce the risk but do not afford protection under the commission protection insurance policy. Items 1 and 2, lower the risk but still permit recovery under the policy.

The best protection is to ensure that you are employed by an established, reliable, trustworthy brokerage with a proven track-record.

So, please beware that all commissions aren't necessarily insured.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.
www.OntarioRealEstateSource.com

False Claims in SPIS fall under Protection of Homeowners' Policy

Insurer Must Back Up False Statements Made by Seller

Ontario Real Estate Source

By Brian Madigan LL.B.

In Aiken v. Unifund Assurance Co. the Superior Court in Ontario had to consider whether there was a duty to defend under a homeowners’ policy, where the claim arose as a result of a false Seller Property Information Statement.

A purchaser sued a vendor claiming misrepresentation and fraudulent concealment. The purchaser later amended the claim presented to include negligence. That is an unintentional tort and might be covered under an insurance policy.

In the Amended Statement of Claim, it is alleged that the Applicants:

1.     falsely, knowingly, carelessly or negligently failed to disclose or misrepresented a number of facts about the property in the SPIS,

2.     that they consciously omitted to disclose material information relating to the subject property:

a)     with knowledge that the omissions would mislead the Plaintiff or

b)    were careless as to whether such omissions would mislead the Plaintiff;

3.     that they deliberately failed to disclose information about the subject property; and

4.     that they were negligent in relation to information and renovations relating to the subject property.

The Court commented on the duty to defend as follows:

“An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim.  Similarly, where a claim raises the possibility of indemnity by the insurer, the insurer must defend the action on behalf of their insured.  The recent Supreme Court of Canada decision in Progressive Homes Ltd. V. Lombard General Insurance Co. of Canada found:

                        It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy.”

So, the Court is saying that the duty to defend does not depend upon the merits of the plaintiff’s lawsuit. Whether it would ultimately be successful is not relevant. The insurer must come to the rescue and pay the defence costs. That’s the point of having insurance in the first place.

The Court also reviewed with approval another recent case:

“The case of Poplawski v. McGrimmon involved a similar fact situation to the one at issue.  In Poplawski, home owners were sued by the purchasers after the sale of their home for alleged misrepresentations and negligence as it related to a SPIS.  The homeowner’s insurer refused to provide coverage and claimed an exclusion under the policy applied which placed the claim outside the coverage of the policy and therefore resulted in no duty to defend or to indemnify.  Mr. Justice C. McKinnon disagreed and found the exclusion did not apply and held there was a duty to defend.  His reasons and findings were upheld by the Ontario Court of Appeal.”

Both cases involved an interpretation of the insurance contract, being a limitation to prevent a homeowner from claiming under the policy themselves. In this case, as well as Poplawski, the Court felt that that principle was still intact, since the homeowners had sold their properties.

Comment

If there is insurance, then there will be more claims. Also, why allege fraud, if fraud is not covered under the insurance policy. Just allege negligent behaviour and then the insurance company must come to the rescue.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.
www.OntarioRealEstateSource.com

Should Condo Property Managers be Regulated?

Should Condo Property Managers be Regulated?  ~ $ 20 million Fraud

Ontario Real Estate Source                                 

By Brian Madigan LL.B.

The question following a $20 million fraud of at least 7 condominium corporations is whether or not the Ontario Government should take steps to regulate property managers.

Manzoor Khan as the principal of Channel Property Management is alleged to have defrauded lenders and condominiums out of millions by falsely registering mortgages against the titles.

The essential reason is that the board of directors in many residential condominiums are simple, average, unsophisticated homeowners who may have the time to devote to the board but don’t have the necessary qualifications, education or experience for the position.

Retail and commercial owners can fend for themselves. It is the smaller, lower end condo corporation which is vulnerable. As the building gets older and the residents age and lack new sources of income, they become more and more vulnerable to rogue property managers.

I should, of course, point out that there is not a growing trend of rogue property managers, but I suppose one is enough, based upon the damage that one person can do.

It can have a severe impact when millions of dollars are pledged in a series of fraudulent transactions against a condominium.

In one case, a condo unit was purchased for $152,000 but can’t be sold for $70,000 just a few months later. In some cases, it is the working poor who suffer. Many families have immigrated and are often dependent upon a single wage earner in a low end position. There’s not much room left for saving. Others have second and third jobs, and they are the lucky ones, while others on welfare have no other source of income and may eventually face eviction.

If the industry were regulated:

1)     training and education would be provided,

2)     a code of ethics would be followed,

3)     mandatory spot audits would operate as a deterrent, and

4)     basic insurance would be mandatory.

In this case, with respect to insurance I’m referring to bonding the individuals involved with money and having insurance to back up fraud and defalcation.

So, who pays? The condo corporation of the lenders! They were probably both negligent in the handling of the situation. It sounds more like tort liability than contract.
So, who gets paid? Obviously, the lawyers and the auditors!

As a society, we have failed to protect some of our most vulnerable. We have encouraged them to buy, but we have not provided the basic tools to allow them to protect themselves. The condos that were victimized were not the high end expensive downtown condos owned by lawyers, doctors, stock brokers and the like. They were the lower end, poorer condos catering to the working class new Canadians. What a great way to invest in your new country!

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Be careful About Condo Fraud in Toronto and the GTA

Is it Safe to Buy a Condo ~ $ 20 million Fraud

Ontario Real Estate Source

By Brian Madigan LL.B.

Channel Property Management operated in Toronto for years under Manzoor Khan of Brampton, Ontario.

Channel specialized in condominium management and gained the confidence in many cases of immigrants who identified with him from his native Bangladesh , where he has now returned.

It appears that Manzoor looked after about 15 residential condominium buildings.

While it does not really seem that sophisticated, here is what he did:

1)     Manzoor had his employees pose as senior officers of the condominium corporation,

2)    As President and Secretary, they could issue certified copies of the by-laws of the company,

3)    They certified a new banking by-law and/or borrowing by-law authorizing certain loans to be negotiated,

4)    The proceeds of the loans were placed in bank accounts over which Manzoor Khan had signing authority,

5)    The total borrowed appears to be about $20 million and such loans are secured against about 7 properties.

The arrangement is simple enough. The fraud is clear and the man has fled the country.

But, are the owners of the residential condominiums at risk? They might be!

The lenders are innocent and the homeowners are innocent. Both were duped by the same person. Hopefully, they all had insurance bonds as against Manzoor and his company. If they did, then they will be compensated.

This may not be just the fault of the lender. At the outset, it will be necessary to determine whether the board of directors might be liable. There may be directors and officers liability insurance. That would be helpful too.

However, the fundamental question for the courts is going to be whether these mortgages were valid.

This is an extremely costly undertaking. And, it could be that one or more of the residential condominium corporations do not have insurance and is therefore at risk of liability.

In the meantime, if you were a purchaser about to close a deal, you would want a very large holdback and if you were looking for a condo to purchase, you would probably avoid these buildings until the issues are resolved.

With all this uncertainty, homeowners will just have to put their lives on hold. And, this could go on for years!

Make sure you see and understand the financial statements of the condominium before you buy. Ask yourself whether the property manager is reputable and whether the board members are sophisticated. Get professional assistance right from the beginning.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com