Misguided Discipline Decision Thwarts Fiduciary Duties and Contract Law
A rather interesting Discipline Decision was recently released by RECO. Obviously, the Regulator wants everyone to “play nice in the sandbox”, after all we are “Canadians”.
The only problem is that the Agent would have to breach their fiduciary duties to their own client. Well, that’s OK, what’s the problem with that!
The other problem is that the Agent would have to encourage their own client to take a pass on their legal rights. Any issues you see here?
Briefly, the Listing Agent negotiated an Agreement of Purchase and Sale. It was conditional upon 1) financing, and 2) home inspection.
Then a back-up Offer arrived during the conditional period. The Sellers specifically instructed the Listing Agent:
“do not tell”.
The reason is that quite frequently, the back-up Offer will be for a lot more money. In this case, the actual facts are not available in the discipline decision, but let’s assume for argument’s sake, that it was $100,000.00 more.
The first purchaser has the contractual right to waive those two conditions and complete the purchase as provided in the Agreement. Did that happen? No!
Instead the Buyer’s Agent wanted to amend the deal. Change it up. Lower the purchase price. Have a new deal which included a reduced purchase price. Also, the commissions were in play for a reduction.
The other aspect of this case is that the Listing Agent was acting for Buyer #2 in the back-up Offer. This entailed a reduced commission of 1% to the Sellers.
Had this second Offer been presented in a multiple Offer situation, then the Listing Agent would have to disclose three facts:
- There was a second Offer,
- She was acting for Buyer #2,
There was a 1% reduction in commission.
The reason for that, would be to provide the other party, Buyer #1 with the opportunity to raise their bid and compete with Buyer #2.
Now, of course, Buyer #1 has the property, under contract, with full and complete control over their own destiny. The negotiating is supposed to be over, not beginning once again.
So, what do we have?
We have a rather strange Discipline Decision by RECO censuring the Listing Agent, requiring the Listing Agent to disclose the existence of the back-up Offer when it happened and advising of the 1% reduction. If that took place, then the Listing Agent would not have breached the Code of Ethics in terms of “fairness and honesty”.
Now, that does seem to be somewhat “nice”, but that’s not reflective of the law in Canada. Both the Ontario Court of Appeal and the Supreme Court of Canada have confirmed that the Sellers had the right to keep this information confidential and act in their own best interests throughout the performance of the contract.
Apparently, RECO’s position would be otherwise. RECO would say that it’s fair for the extra $100,000.00 that was on the table to go to Buyer #1. Who else should get it?
Here’s what Buyer #1 could do:
- Secure the deal,
Assign the Contract to Buyer #2, thereby keeping the $100,000 profit.
The Sellers, having lived in the house for 10 years, 20 years, 30 years (we don’t know) thought perhaps that they should have that extra $100,000. So, they said to their Agent: Do not tell. The agent was then under a fiduciary obligation to follow their client’s instructions. That’s been the case for thousands of years; it’s not new.
It’s also interesting that RECO did not deal with the issue of “competing Offers” as part of its decision, but simply concluded that the Listing Agent had to tell in order to comply with the duty of “fairness and honesty”. What happened to confidentiality and acting in the client’s best interests?
In order to avoid the problem, the Listing Agent should have recommended at the time of the back-up Offer that:
- She be dismissed as the Sellers’ Agent, and that
- The Sellers become FSBO’s (no representation), or that
They retain a solicitor to act for them in the transaction.
By the way, neither the solicitor nor the Sellers are subject to the Code of Ethics which applies to real estate agents. And, the lawyer although subject to a Code of Ethics by the Law Society of Ontario is going to act for their own client first and foremost. This isn’t playschool!
What follows is a summary of the case which I have amended in part to reduce the length, but all of the relevant wording is intact:
"FINDINGS: In violation of Section 3 of the REBBA 2002 Code of Ethics.
ORDER: Fine of $5,000.00 payable to RECO on or before April 5, 2019.
This matter proceeded on the basis of an Agreed Statement of Facts and Penalty and Waiver of Hearing, pursuant to Rule 4.02 of the Rules of Practice (REBBA 2002).
The Agreed Statement of Facts and Penalty read:
AGREED STATEMENT OF FACTS AND PENALTY
1. Celine Deeon is a registered salesperson, employed with in Brokerage ABC.
2. July 6, 2016, a listing agreement was entered into between Brokerage ABC and Seller Fred and Seller Wilma Flintstone (the “Sellers”), who were the owners of a property located at 1 Main Street. Deeon was the listing salesperson acting on behalf of Brokerage ABC.
3. July 25, 2016, the Sellers accepted an offer from Buyer Angela. Buyer A was represented in the transaction by her daughter, Representative Annie, who is a salesperson employed with Brokerage XYZ.
This offer (the “First Offer”) was conditional on financing and obtaining a satisfactory home inspection.
4. July 27, 2016, the Sellers accepted another offer for their property, from Buyer Bonnie. Buyer Bonnie was represented by Deeon in this transaction.
this offer (the “Back-up Offer”) was conditional on the conditions contained in the First Offer not being waived.
The Sellers instructed Deeon not to inform Representative A about the Back-up offer, as it was not a competing offer.
5. Buyer Bonnie was represented by Deeon in the Back-up Offer, thus double-ending the transaction should it come to fruition.
Deeon also had a commission advantage in respect of the Back-up Offer, wherein instead of the 4.5% total payable under the listing agreement, if the Back-up Offer came into force, the commission payable to Brokerage ABC would be only 3.5%.
6. Neither of the facts mentioned in paragraph 5 above, were disclosed to Representative Annie.
7. August 4, 2016, Representative Annie:
- sent an amendment to the First Offer (instead of a Waiver of Condition), removing the conditions,
- reducing her commission to zero and
- reducing the sale price from $648,000.00 to $635,400.00.
This amendment was not accepted by the Sellers, and the First Offer expired.
8. August 6, 2016, at 9:50 a.m., Deeon sent Representative Annie
- a mutual release for the First Offer.
Representative Annie responded at 9:58 a.m. that her client would not sign the mutual release.
9. On August 6, 2016, on or about 11:50 a.m., Bixby advised that the Sellers had decided to go with another offer. Bixby did not mention that this was a Back-up Offer, or that it had been accepted shortly after Representative A’s First Offer was accepted.
10. On or about 3:19 p.m. that same day, Representative Annie emailed
- the signed Mutual Release and
a new offer from her client (the “Second Offer”).
11. Deeon responded later that day, wherein she confirmed that the Sellers had decided to go with another offer (the Back-up Offer).
12. It is RECO’s position that Deeon
- failed to treat Representative A with honesty
- by failing to disclose that a Back-up Offer
- had been conditionally accepted,
contemporaneous to that event occurring.
It is RECO’s position that this conduct is in violation of Section 3 of the Code of Ethics.
13. Further, by failing to disclose the fact that the Back-up Offer was a double-end for Deeon/Brokerage ABC and the fact of the commission reduction contained therein, Deeon failed to treat Representative Annie honestly and transparently in their dealings on this property.
This conduct is a violation of Section 3 of the Code of Ethics.
It is agreed that Deeon breached the following Sections of the Code of Ethics:
Fairness, honesty, etc.
3. A registrant shall treat every person the registrant deals with in the course of a trade in real estate fairly, honestly and with integrity.
Celine Deeon, the Respondent, be ordered to pay a penalty of $5,000.00 on or before April 5, 2019."
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