Real estate agents may at times act for both the buyer and the seller in a transaction, but if they’re not careful, their entire commission from the deal could be in jeopardy.
The Ontario Superior Court recently found the failure to disclose the dual agency constituted a material breach in the listing agreement. In Partners Realty Ltd. v. Morrow, the result was the loss of almost $18,000 in commission.
“It’s sort of the classic case of you can’t always rely on the client to pick up on things,” says Kerry Fox, a sole practitioner who focuses on real estate and family law in Nepean, Ont.
“You’ve got to sit down with the client and draw their attention to it.”
In Partners Realty, the broker went after the seller for the commission after she refused to close. The seller, Rosalind Morrow, charged that the broker was in breach of the agreement by failing to disclose that the agent was also representing the buyer. She alleged that, as a result, the Royal Lepage agent was in material breach.
She said it was only later, when the broker pursued her for the commission of $17,788.75, that she learned the agent had entered into a buyer agency agreement.
“There was no causal relationship between the vendor’s refusal to pay the real estate commission and the existence of this dual agency relationship,” says Fox.
“There was just this extra reason she latched onto to not pay the commission.”
The agent contacted Morrow, a corporate lawyer, several times during the previous year to get the listing for her home and show it to potential buyers. Right after showing the house, the agent announced she had an offer to purchase but wouldn’t provide details until Morrow agreed to give her the listing for the sale of the home. They entered into an agreement for a week.
Morrow said she hesitated because she wasn’t sure she wanted to sell the house. She had considered keeping it as an investment property when she moved out. She eventually refused to close.
When the broker insisted on payment of the agreed-upon commission, Morrow charged the agent owed her an obligation as her fiduciary to disclose and obtain her consent to act in the dual role.
She alleged the agent had breached that duty and the terms of the agreement by not notifying her in advance in writing and that she had failed to follow the standards laid out by the Real Estate Council of Ontario by neglecting to get her signed acknowledgment of the dual-agent status.
Had she known the agent was acting for the buyer, she said, she wouldn’t have signed with Royal Lepage.
But Royal Lepage maintained there was no breach and the agent had made it clear she had a relationship with the buyers. The broker suggested the agent had told the seller several times she had a buyer under contract with approved financing and a commitment to the purchase. She withheld nothing from Morrow, it argued.
The agent, according to the defendant, explained dual agency to the seller when she inspected the home and left a package for Morrow to read that included the listing agreement and agency brochure. The agent said she had explained the situation again when she presented the offer to purchase.
The judge, however, found otherwise.
“I find that Ms. Kara-George [the agent] did not review the dual agency provision of the agreement with Ms. Morrow. In her evidence-in-chief, she testified that she did, but in cross-examination she admitted that in her examination for discovery she testified that she did not specifically read over this dual agency clause with Ms. Morrow before the agreement was signed,” concluded Justice Andra Pollak.
“In any event, I further find that the evidence was that Ms. Kara-George did not inform Ms. Morrow in writing of the dual agency situation that was in existence prior to the offer to purchase being presented, as was specifically required by the agreement. . . . Ms. Morrow has the right to know the nature and the terms of the relationship she is entering into with Ms. Kara-George and Royal Lepage when she enters into the agreement. It is a very important and material term of the agreement,” she added.
Disclosure, then, was a key issue. “The question often is whether the agent can represent both sides of the deal equally,” says Jamie Spotswood, who has a litigation practice including real estate law at Lenczner Slaght Royce Smith Griffin LLP.
“A big issue in this case is how was it disclosed and the nature of the disclosure obligation.”
Ultimately, Spotswood feels a natural conflict arises for the dual agent. The situation makes the agent’s responsibility to fully disclose that position even more important because risks are inherent in situations of conflict.
In Partners Realty, the court found leaving behind a pamphlet and reviewing the dual agent status wasn’t enough to fulfil the disclosure obligation, particularly since it flows from the agent’s fiduciary duty. As a result, says Spotswood, the agent must be diligent with the disclosure and ensure the clients understand the situation.
“The simple rule is that an agent cannot serve two masters,” says lawyer Lisa Laredo.
“The exception to the rule is where the agent fully discloses the dual relationship and all material facts in her knowledge to both parties along with all facts and circumstances likely to affect the decision of the principals. In addition, the agent must show that the decision by the principal was taken after having received the information and having agreed to accept the agent’s recommendation.”
The basis of the rule, she says, is to avoid an appearance of a conflict of interest and the possibility of any hidden benefit to the agent one of the parties was unaware of.
Matt Maurer, who practises litigation and real estate law at Minden Gross LLP, wonders whether the judge would have taken such a strict view of the dual agency issue if the sale hadn’t fallen through. It wasn’t the status of the agent representing both sides that caused the deal to die. “The judge basically said, ‘That’s too bad. That’s a breach of the contract,’” he says.
“There was evidence from the seller that if she had known the agent was acting for both, she wouldn’t have signed the agreement.”
Maurer finds the concept of the dual agent to be intriguing. It’s in the interest of the agent to act for both the seller and the buyer because it avoids having to split the commission.
It’s an important issue given the frequency of bidding wars that have become particularly common in markets like Toronto. Maurer suspects the situation could lead to more questions in the future.
“It’s an interesting case for me . . . just because of how crazy the Toronto real estate market is right now,” he says. “What’s really going to come out in the next little bit, there’s not a lot of regulation, to my knowledge, on how the bidding war is conducted.
“What’s acceptable practice for getting the most you can for the seller?”