Court Rejects Ethical Agency Obligations for Real Estate Agents
The Ontario Court of Appeal considered the testimony of several real estate expert witnesses, all of whom indicated that the selling agent had fiduciary obligations to the vendor in a real estate transaction, in Knoch v. Jon Picken Real Estate on 20 August 1981.
This took place at a time when “sub-agency” was commonplace. The Vendor listed the property for sale. Through the MLS system all other Brokerages were made the sub-agents of the Listing Brokerage in order to receive a commission. Subsequently, there have been some changes, particularly with the introduction of “Buyer Agency”.
Charlotte Knoch had acquired a rather substantial estate consisting of farms and acreage just outside of the GTA. She worked as a housekeeper for some priests at a Parish in downtown Toronto. While she could not afford a Toronto property she did acquire some rather significant holdings in Mississauga, Brampton and Caledon. The properties were quite suitable for development. She passed away leaving her estate to charity. Most notably, a substantial farm in Brampton was developed into what is now known as Heart Lake Village in Brampton. Her estate is likely to have been in the range of about $40 million.
Her Executors enlisted the assistance of Guaranty Trust to assist them with the sale and disposition of the properties. Guaranty Trust signed a listing agreement with Royal Trust to market a property. It became the subject of a flip for a higher price to a developer and the real estate agent before transfer to the ultimate Purchaser.
The lawsuit here was by the Estate as plaintiff against the Selling Brokerage who acted for the first Buyer. The contention was that the Selling Brokerage was an agent of the Vendor (Estate) and owed fiduciary duties to the Estate.
The trial Judge was upset with the conduct of Jenkins, but concluded that he had breached his fiduciary duties to his own client Caterpillar, and Caterpillar was not a party to the lawsuit. Obviously, any claim Caterpillar would have would be up to them.
Here are the parties:
Vendor: Estate of Charlotte Knoch
Listing Brokerage: Royal Trust
Selling Brokerage: Jon Picken (through its agent Jenkins)
Listing Price: $2,250,000.00
Selling Price: $2.102,100.00
Flip Price: $3,478,475.00
Buyer 1 Mantella a develope
Buyer 2 by Assignment American Invesco, Mantella 80% and Jon Picken 20%
Buyer 3 Caterpillar
It is noteworthy that the common practice to remunerate the selling brokerage through the MLS system was sub-agency, at that time. Real estate Expert Witnesses testified that the selling agent was still the legal agent of the Vendor, even though they acted for the Purchaser. Ultimately, the Ontario Court of Appeal decided that that was simply not true, in law.
There was rather egregious conduct by Jenkins. However, the Court concluded that didn’t make him an “agent” of the Vendor.
Mr. Justice Griffiths quoting the trial Judge Carruthers, stated:
“In the result, Jenkins made a handsome profit. As Carruthers J. said in his reasons:
The result of all this, from Jenkins' point-of-view, at least, was that
- he obtained his share of the commission generated by the sale from Guaranty Trust to Mantella Limited,
- his share of the commission generated on the sale by Mantella Limited to Caterpillar,
- his share of the commission generated by Caterpillar's purchase of other lands in conjunction with that of the subject land, and
his share of the profits earned by American Invesco.
Jenkins had to agree that the way things turned out he made a lot of money, and his original prospect with respect to the land became a reality.
There is no question in my mind that at the time he first saw the subject land Jenkins knew they were under- valued, and that they then presented to him a golden opportunity to make the money which I have just noted he, in fact, made.”
Justice Griffiths on behalf of the Court referred to the Wypych v.McDowell case as follows:
“I know that Mrs. Simpson said that the London and St. Thomas Real Estate Board, of which she is a member, takes the position that each member of the Board (including the selling agent as well as the listing agent) is the agent of the vendor and must make full disclosure. Her lawyer took the same position.
This may be a belief held by the Real Estate Board but it surely cannot be the law. It makes no sense.”
“I fail to appreciate the plaintiffs' argument that Simpson was the agent of the (vendors) and had a duty of disclosure to them. Mrs. Simpson was the (purchasers') agent. The vendors had their own agent ...”
“The McDowells retained Mrs. Simpson to help them find a home and to represent them in negotiating its purchase. They settled on the vendors' home.
If Simpson then becomes the agent of the vendors, who then represents the McDowells' interest? No one.
What we would then have are two agents working against the McDowells in the interests of the vendors; and they must so work because, as agents of the vendors, they owe the utmost loyalty to the vendors.
The McDowells are thus left to hang in the breeze. Surely, this is not the law. It must be the case that since the McDowells retained Simpson to act on their behalf she is their agent and no one else's. She cannot at the same time be the agent of the Wypychs.
It would defy both law and logic if she were.”
Mr. Justice Griffiths concluded:
“I agree with the conclusion that an agent in the position of Jenkins, as the selling agent, may be the agent of the vendor for limited purposes, which include
- authorization to present an offer to purchase, and
- to receive notices to the vendor,
- as well as, to make representations binding on the vendor.
I would also agree that the selling agent is obliged not to deceive or mislead the vendor.
But, in the absence of the characteristics of a true fiduciary relationship between the vendor and the selling agent, I do not think the law requires more of a selling agent than indicated above.”
“The essential ingredients which generally give rise to a fiduciary duty owed by Jenkins as selling agent were not present in this case.
However, that is not to say that the "selling agent" may never be exposed to liability as a fiduciary.
Where a selling agent has direct dealings with the vendor or renders advice with respect to an offer to purchase, he or she may create a situation wherein the vendor reposes trust and confidence in the selling agent to such an extent as to put the agent in the position of a fiduciary. Those circumstances were not present here.”
Griffiths also commented:
“Jenkins, by implication at least, was an agent of Guaranty Trust for the purpose of procuring and presenting an offer to purchase according to the terms of the listing agreement, even though Jenkins was not a party to the listing agreement.
The fact that Jenkins was an agent of the vendor for some purposes and was entitled to a commission for his services does not end the matter.
In my view, the mere fact that a person wears the badge of an "agent" does not automatically subject him or her to fiduciary duties towards his or her principal. This point is made in Bowstead on Agency, 15th ed. (London:
Sweet & Maxwell, 1985), at pp. 157-58 where the author says:
... not every person who can be described by the word "agent" is subject to fiduciary duties; and that an agent may owe them in some respects and not in others. Hence it is said that there may be a "non-fiduciary agent"….”.
Justice Finlayson also sitting on the three Panel Court in this case stated as follows:
“The appellant called two expert witnesses to testify as to the customs and usage of the trade. Clifford Tooth had been in industrial real estate sales since 1967 and was an associate vice-president with Royal LePage Real Estate Services Limited. He is the past president of the central Canadian chapter of the Society of Industrial Realtors and a fellow of the Real Estate Institute of Canada. In answer to hypothetical questions, he testified as to the following:
(a) All agents working on the property would be working on behalf of the vendor and both the listing agent and the sub- agent would have the responsibility to inform the vendor of any further interest in the property that came to their attention, particularly if the agreement of purchase and sale contained conditions (as it did in this case).
(b) The type of interest being demonstrated by Caterpillar in this case was interest that should have been disclosed to the existing owner.
(c) The obligation to disclose continued until two events occurred; the expiry of the listing agreement and the completion of the transaction.
(d) It is elementary in the real estate business that an agent has an obligation to deal fairly with all members of the public.
(e) The obligation of the sub-agent or selling broker is present whether the vendor expects it or not.
In dealing with the case at bar,
Tooth stated that the vendor was relying on the sub-agent and reposing trust and confidence in him. He testified:
The moment I sit in your office and look to you to pay me a commission I become your agent. And the moment that I receive an MLS listing I become a subagent to that vendor. It does not matter whether it's a listing contract or not. MLS rules are even more obligatory to make sure that your client's offer is presented and the vendor understands what you are offering.
The other expert witness was John Shorthill.
He has been engaged in the sale of industrial and commercial real estate for the last 17 years and has held a number of positions in the industry including acting as president of the Toronto Real Estate Board in 1979/80. He was chairman of the Industrial Commercial and Investment Division of the Toronto Real Estate Board in 1972/73. In answer to hypothetical questions, he testified to the following:
(a) The obligation of an agent to his principal includes notification of any other interest in purchasing the subject property even past the date of any waiver of conditions in an agreement of purchase and sale and up until the closing takes place. This is a "clear obligation of an agent to his vendor".
(b) It made no difference whether the interest came to the attention of the listing agent or an M.L.S. sub-agent.
(c) The above duties are "fundamental" and "the first rule you would learn in business".
(d) The main duty of the sub-agent in this case was to the vendor because he was paying the commission to the sub-agent.
(e) If an agent had an interest in the property, he was required to make full disclosure of that interest to a vendor and "without question" to a purchaser as well.
With great respect to the two witnesses, I am not prepared to accept all of the above as a correct statement of the law, and I might add that, to the extent that it purports to set forth a standard of ethical behaviour for the industry, it is not helpful.
The conduct of Jenkins, in the case under appeal, was so egregious that I am afraid that it has blinded those who have come in contact with the matter to the true relationship that Jenkins had with the vendor.
The trial judge did not accept the evidence of these two experts to the extent that they testified that there was a continuing duty on the part of Jenkins to make full disclosure to the appellant estate of his interest in the subject property and that of Caterpillar.
However, he did accept that Jenkins was an agent of the appellant estate. He then proceeded to draw a distinction between a "listing agent" and a "selling agent" and attributed different fiduciary duties to both. In my opinion, this was quite unnecessary on the facts of this case.
In this case, Jenkins was clearly the agent for the ultimate purchaser.”
“Obviously, he failed miserably in the performance of that duty to the purchaser, but it makes no sense at all to suggest that he became the agent of the vendor by the act of submitting an offer to purchase to the agent of the vendor.
Leaving aside the demonstrated abuse of Jenkins' duty to Caterpillar, and treating him for the purpose of this exercise as being a bona fide agent of Caterpillar, how can it be suggested that he had an obligation to the vendor to disclose that he acted for an undisclosed principal who was prepared to make an offer significantly higher than the vendor's asking price?
The suggestion by the two experts that there was an immediate change in the nature of the agency and the duties that flowed therefrom is totally destructive of the basic precepts of principal and agent.
The character of the agency cannot change ipso facto when the agent for the purchaser does an act that is in furtherance of his contract with his principal.
Picken and Jenkins were retained by Caterpillar prior to Guaranty Trust executing the M.L.S. agreement.
I cannot accept that the principal/agent relationship could no longer exist simply because the M.L.S. agreement on the subject property treated all members of the Toronto Real Estate Board as sub-brokers of the vendor.”
Finlayson, quoting with approval a provision in a textbook authored by Barry Reiter:
“Barry J. Reiter, R.C.B. Risk and Bradley N. McLellan in their work, Real Estate Law, 3rd. ed. (Toronto: Emond-Montgomery, 1986), question the appropriateness of such a characterization. In a passage referred to by both the trial judge and Griffiths J.A., the authors state at p. 106:
The standard forms of agreement of purchase and sale describe the agent as agent of the vendor. This description accords with general understanding and with the facts, when a vendor engages an agent to seek out purchasers. However, this unusual arrangement is sometimes qualified. Although an agent may list the vendor's property (the "listing agent"), another agent, originally contacted by the purchaser, and who has had extensive dealings with the purchaser may be the "selling agent" ... Is it appropriate to regard a selling agent as a fiduciary of the vendor when the agent has spent much time with the purchaser showing the purchaser many properties, and when he sees the vendor only (essentially) once when the purchaser is directed to this MLS listing and decides to buy the property? Is it appropriate to treat the agent as the vendor's fiduciary where the agent has been engaged by a prospective purchaser to "assemble" property? ... To characterize the vendor-agent-purchaser relationship in this way seems a perversion of fact. The agent, if a "close and trusted associate" of anyone, is that of the purchaser.”
Finlayson said further:
“In my opinion, it is much easier and more accurate to acknowledge that in any given real estate transaction, there can be an agent for the purchaser and an agent for the vendor.
This is not to say that in many instances the court should not find that a particular agent has become the agent for both the vendor and the purchaser. In that circumstance, where problems arise, it may be appropriate to explore the duties that arise and determine to whom the agent's primary duty lies.
However, I am satisfied that there is no basis in law for the proposition that all agents are agents for the vendor. I do not think the practice of having all agents paid out of the proceeds of sale has the effect of bringing about such a radical change in the traditional relationship between a principal and his agent.”
“No agent who has accepted an employment from one principal can in law accept an engagement inconsistent with his duty to the first principal ... unless he makes the fullest disclosure to each principal of his interest, and obtains the consent of each principal to the double employment.
The principle is expressed in this way in Bowstead on Agency, 13th ed., p. 144:
... he may not act for both parties to a transaction unless he ensures that he fully discloses all the material facts to both parties and obtains their informed consent to his so acting ... Any custom to the contrary will not be upheld.”
“ On the facts, there was no suggestion that Jenkins was acting for the vendor. He had nothing to do with the vendor. He dealt only with the agent of the vendor, Royal Trust.
I am not prepared to accept that any practice or usage in the industry can override the facts and convert Jenkins into the agent of the estate unless
- there is clear evidence that both parties, vendor and purchaser,
- understood this to be the custom and
- accepted it as binding upon them.”
“The leading authority on what constitutes a fiduciary relationship is Lac Minerals Ltd. v. International Corona Resources Ltd. All members of the Supreme Court of Canada accepted that the enumerated features of a fiduciary relationship were as set out by Wilson J. in Frame v. Smith, They are quoted with approval by Sopinka J.:
(1) The fiduciary has scope for the exercise of some discretion or power.
(2) The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary's legal or practical interests.
(3) The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.
None of these characteristics is evident in the case on appeal so far as the relationship of Picken or Jenkins to the appellant is concerned. The fiduciary of the appellant was Royal Trust and no one else.”
So, that’s the law of agency when it comes to real estate relationships. Following this case, there were many changes in the law, culminating with role of the Buyer’s Agent in the early 1990’s. Nevertheless, many of these basic principles remain today.
It is important to note that Real Estate Expert Witnesses had testified along these lines for years, but, it was not correct. The conclusions they had drawn was based upon what they had seen, and what they reasonably believed to be their ethical duties, however, see the comment above:
“and I might add that, to the extent that it purports to set forth a standard of ethical behaviour for the industry, it is not helpful.”
The law is the law. Ethics have nothing to do with it. Fiduciary duties follow in certain cases of agency, and not in others.
To automatically conclude, as many people do, that “doing the right thing” ethically, must be the law, is simply incorrect.
Note: I acted at the time on behalf of one of the charitable institutions which was a major beneficiary of the Estate.
Brian Madigan LL.B., Broker