Agent Fails to Verify Utilities for Buyer (RECO Discipline)
An investment property was for sale. It was a “student rental”. Victor Chandra, a real estate agent had a very interested Buyer, Bob Smith.
One of the key issues in any commercial property is the net income. And, by net income, I mean the NET income. I appreciate that you know what that means, but Victor got it all mixed up. Who pays for the utilities: the landlord or the tenant? Whose name is on the bill that arrives from the utility company? If the Landlord’s name is on it, it still may be sent on to the tenant for reimbursement.
In response to Victor’s inquiry, the Listing agent texted him:
“I believe he has 3 students now and come January he has house leased for about 1000 plus”.
Representations About the Lease
Later, Victor sent an email to Bob, the Buyer:
“Here’s the listing I mentioned. Again, $1000 per month (referring to the rent payable by the current tenants) with tenants paying their own Utilities.”
The Actual Terms of the Lease
The Agreement to Lease:
1) term was one year at a rent of $1000 per month.
2) landlord was responsible for paying the cost of gas, oil, electricity, the hot water heater rental, and water and sewage charges (the “Utilities”).
Offer to Purchase
The Offer contained the following term:
“The Seller agree’s [sic] to provide a current rent roll and details of any tenancy agreements current or upcoming for the property upon acceptance. The Seller agree’s [sic] to provide copies of any utility bills or rental agreements that the Seller is responsible for under the current rental agreement.”
Post Agreement, Before Closing
Before the requisition date and the amended completion date Bob Smith forwarded to Victor an email from his Solicitor that stated:
“…It will be necessary for you to arrange for the utilities to be put into your names. You can do this directly or through your property manager…“
Victor did not, at any time thereafter, ponder the implications of the Solicitor’s email or make inquiries as to how the responsibility for paying the Utilities was apportioned as between landlord and tenant under the terms of the Lease.
Post Closing- Utilities were Shut Down
Smith’s tenants advised him that the heat to the Property was no longer functioning because the gas or oil supply to the house had been cut off for non-payment of the account. Bob had not paid any bills for the Utilities since he was under the impression, on the basis of information that Victor provided to him, that the tenant was responsible for the Utilities.
As a result of Victor’s failure to ascertain:
- who was responsible for paying the Utilities was that the Complainant,
- who had relied on Victor’s representation that the tenant was responsible for paying the Utilities account in determining what his income stream from the Property would be,
- received less income from renting the Property than he had anticipated.
Here is a copy of the decision by RECO:
Victor acted unprofessionally when he:
1. Failed to insert a condition or conditions in the APS that would have made the transaction conditional on the Smith’s satisfaction with the terms of the Lease or any related information or documents, thereby contravening section 4, 5, 38 and 39 of the Code of Ethics.
2. Failed to:
a) Make further inquiries to determine what Registrant Barney meant by “$1000 plus”, i.e. to determine which utilities accounts were the responsibility of the landlord under the terms of the Lease, and thereby to determine an accurate estimate of the net monthly income that the Complainant could reasonably expect to realize from the property if he were to purchase it;
b) Carefully review the Solicitor’s email of February 27, 2013 and to inquire why it was necessary for the Complainant to put the utilities for the Property into his name; thereby contravening sections 4, 5, 38 and 39 of the Code of Ethics.
3. Erroneously represented to the Complainant that the tenants were responsible for paying all utilities accounts under the terms of the Lease, without making independent inquiries to verify this representation and further failed to make inquiries as to the obligations of the landlord for the Utilities accounts under the terms of the Lease, thereby contravening sections 4, 5, 38 and 39 of the Code of Ethics.
It is agreed that Victor breached the following sections of REBBA Code of Ethics:
4. A registrant shall promote and protect the best interests of the registrant’s clients.
CONSCIENTIOUS AND COMPETENT SERVICE, ETC.
5. A registrant shall provide conscientious service to the registrant’s clients and customers and shall demonstrate reasonable knowledge, skill, judgment and competence in providing those services.
ERROR, MISREPRESENTATION, FRAUD, ETC.
38. A registrant shall use the registrant’s best efforts to prevent error, misrepresentation, fraud or any unethical practice in respect of a trade in real estate.
UNPROFESSIONAL CONDUCT, ETC.
39. A registrant shall not, in the course of trading in real estate, engage in any act or omission that, having regard to all of the circumstances, would reasonably be regarded as disgraceful, dishonourable, unprofessional or unbecoming a registrant.
Victor Chandra was ordered to pay a penalty of $6,000.00 on or before March 31, 2015.
So, it all seems very simple. The Landlord pays the utilities. So, if the utilities amount to $200.00, then that comes out of the $1,000.00 per month that you are receiving. This means that your net rent is $800.00. There’s nothing complicated about that. Victor just needed to check. He failed to do so. The Offer to closing went for several months. This was not a rush job.
The Offer was conditional upon financing and inspection. Those conditions were met. But, there should have been something more, namely a condition to review the Lease. There was a term, but not a condition.
One more item, the solicitor’s letter. That letter could have gone either way. It indicated the change to Bob’s name. That might still have not have been a “trigger” because the student tenants may have dealt with the utilities by reimbursement. But, that leaves the matter up to Bob.
The obligation was for Victor to step up to the plate and figure it out. Who pays what? When and how? Had those questions been asked, then we wouldn’t have a problem now.
And, what about looking at the Lease? Where was Victor? It was still a term in the Agreement of purchase and Sale.
Note: As a rule, I use fictitious names. The actual case is published on RECO’s website and is available to the public. For educational purposes, the names of the parties really don’t have any bearing. If you need to quote the case, you will have to obtain the proper legal citation.
Brian Madigan LL.B., Broker