DATE:
JUNE 2014
ALERT: REAL ESTATE AGENTS – WHAT SHOULD I
DISCLOSE TO PURCHASERS AND VENDORS?
Fact Scenario
Imagine you are contracted to sell Greenacre, a piece of rural real estate in the Shire
of Murray on behalf of Mr Green. Mr Green is aware that Main Roads of Western
Australia has recently sent surveyors out to Greenacre to conduct surveys for the
purpose of realigning a main road in the district through Greenacre. Furthermore,
obscured from view behind a large shed is a large diesel tank that is old and in need
of repair; it cannot be seen from the property access adjacent road, but can be seen
on inspection of the land. Further, at least 30-40 years ago, the property was used
as a waste dump site for inorganic material; however, there are no visible signs of it
having existed.
Introduction
The law regarding selling agents' duty of disclosure of information about a property
requires agents to understand the relationship between the Real Estate and
Business Agents Act 1978 (WA) 1 the Real Estate and Business Agents(General)
Regulations 1979 (WA) 2 and how they enshrine the Code of Conduct for Agents and
Sales Representatives 2011 3 into law.
It further requires selling agents to
understand provisions of Schedule 2 of the Competition and Consumer Act 2010
(Cth) 4, more commonly referred to as the Australian Consumer Law and the relevant
common law authorities that interpret and define those provisions.
Real Estate and Business Agents Act 1978 (WA)
Real Estate and Business Agents (General) Regulations 1979 (WA)
3 Real Estate and Business Agents Act 1978 (WA)
Code of Conduct for Agents and Sale Representatives 2011
4 Competition and Consumer Act 2010 (Cth)
1
2
The Western Australian Legislation
The Real Estate and Business Agents Act 1978 (WA) prescribes:-
s.101. Codes of conduct
The Commissioner may from time to time prescribe, and publish in the manner
prescribed by the regulations:(a)
a code of conduct for agents; and
(b)
a code of conduct for sales representatives.
The Real Estate and Business Agents (General) Regulations 1979 (WA) prescribes:-
r.13. Codes of conduct prescribed to be published (Act s. 101)
Any code of conduct that the Commissioner may from time to time prescribe
pursuant to section 101 of the Act shall be published in the Government Gazette.
The Government Gazette published the Code of Conduct for Agents and Sales
Representatives 2011. This is the most recent Code of Conduct published and it has
the force of law given to it by the regulations. Failure to comply with the Code of
Conduct will be a breach of regulation 13 and hence a breach of section 101 of the
Act.
The following regulations are particularly pertinent to duty of disclosure.
7. Duty to behave fairly
(1)
An agent must act fairly and honestly.
(2)
An agent must not knowingly mislead or deceive any parties in negotiations or
a transaction.
(3)
An agent must not engage in harsh or unconscionable conduct.
2
s.9. Standard of service
An agent must exercise due skill, care and diligence.
s.10. Duties as to details of the transaction
(1)
Prior to the execution by the agent’s principal of any contract relating to the
sale or lease of any real estate or business the agent must make all
reasonable efforts to ascertain or verify the facts which are material to that
transaction which a prudent agent would have ascertained.
(2)
If an agent ascertains a fact which is material to a transaction in which the
agent’s principal is involved the agent must promptly communicate that fact to
any person who may be affected by it unless it is clear that person was
already aware of that fact.
s.13. Confidentiality
An agent must not at any time use or disclose any confidential information obtained
while acting on behalf of his or her principal, except for information that an agent is
required by law to disclose.
s.18. Disclosure required when recommending
(1)
An agent who recommends to a party to a transaction, a settlement agent,
finance broker or any other supplier of goods or services must make a written
disclosure to the party of any significant relationship, connection or affinity
between the agents and the supplier.
(2)
Where the relationship, connection or affinity between the agent and the
supplier is capable of producing a conflict between the interests of the party to
the transaction and the agent, the agent shall include in such written
disclosure an explanation of the nature of the potential conflict.
3
The Commonwealth Legislation
In 2010 the Commonwealth Parliament enacted the Competition and Consumer Act
2010 (Cth). This replaced the former Trade Practices Act 1974 (Cth) 5 and also
brought state legislation into line with the new regime. The operative provisions
containing consumer protection and fair trading laws are found in Schedule 2 of the
Act and referred to as the Australian Consumer Law (ACL).
These provisions
encompass the old misleading and deceptive provisions from the Commonwealth
Trade Practices Act and state Fair Trading Act 6. It targets and prohibitss a person
from making specific false or misleading representations including in connection with
the sale or grant of an interest in land. These are those provisions:-
s.18 Misleading or deceptive conduct
(1)
A person must not, in trade or commerce, engage in conduct that is
misleading or deceptive or is likely to mislead or deceive.
s.30 False or misleading representations about sale etc. of land
(1)
A person must not, in trade or commerce, in connection with the sale or grant,
or the possible sale or grant, of an interest in land or in connection with the
promotion by any means of the sale or grant of an interest in land:(a)
make a false or misleading representation that the person making the
representation has a sponsorship, approval or affiliation; or
(b)
make a false or misleading representation concerning the nature of the
interest in the land; or
(c)
make a false or misleading representation concerning the price payable
for the land; or
(d)
make a false or misleading representation concerning the location of the
land; or
(e)
make
a
false
or
misleading
representation
concerning
the
characteristics of the land; or
5
6
Trade Practices Act 1974 (Cth)
Fair Trading Act 1987 (WA)
4
(f)
make a false or misleading representation concerning the use to which
the land is capable of being put or may lawfully be put; or
(g)
make a false or misleading representation concerning the existence or
availability of facilities associated with the land.
Note: A pecuniary penalty may be imposed for a contravention of this subsection.
These provisions form the basis of the law regarding a duty to disclose information to
purchasers and vendors.
A person is defined in the Act as both a natural entity and a corporation.
Case Law
Are omissions considered misleading or deceptive? The following case provides an
example of how the judiciary view omissions and the relevant provisions of the law
mentioned.
In Whitaker v Paxad Pty Ltd [2009] WASC 47 7, a real estate agent was found liable
for misleading and deceptive conduct under section 10 of the Fair Trading Act 1987
(WA) and section 52 of the Trade Practices Act 1974 (Cth). The real estate agent
failed to disclose to the buyer of the property that the fourth bedroom and the garage
were subject to water problems and therefore could not be used as a fourth bedroom
and an office. There was moss growing on the floor slab and walls prior to the house
being listed.
The issue before the court was whether the agent was aware that the property was
subject to water problems at the time it was sold. If this was the case, the conduct of
the agent, with regards to the fourth bedroom and the garage, was misleading or
deceptive.
The agent pleaded that he was unaware of the current water problem and was only
aware of a previous water problem which he believed had been remedied.
7
Whitaker v Paxad Pty Ltd [2009] WASC 47
5
The court held that the agent was fully aware of the water problems at the time the
property was sold to the plaintiffs and therefore his conduct, regarding to the fourth
bedroom and garage, was misleading or deceptive.
The court held that the agent had a duty to disclose the water problems to the
plaintiffs. Therefore it was reasonable for the plaintiffs to expect that if the garage
was not suitable for use as an office, the agent would have informed them.
The plaintiffs were awarded damages in the amount of $154,612.04.
In this case, Blaxell J held at 93:[whether the defendant's conduct was misleading or deceptive] is a question
of fact which is to be determined objectively, having regard to the particular
positions of
the parties,
their knowledge and experience,
all the
circumstances of their communications and the particular characteristics of
the person to whom the conduct was directed.
In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) CLR 191, 198 8, the
court held that conduct will be characterised as misleading or deceptive if it induces
or is capable of inducing error.
Furthermore, in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No. 1)
(1988) 79 ALR 83, 95 9, the court held that silence in circumstances where there is a
clear duty to disclose material facts may constitute misleading or deceptive conduct.
This is further explained by Hill J in Winterton Constructions Pty Ltd v Hambros
Australia Ltd (1992) 111 ALR 649, 66 10 where he stated:-
Parkdale Custom Built Furniture Pty Ltd v Paxu Pty Ltd (1982) CLR 191, 198
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No. 1)(1988) 79 ALR 83, 95
10 Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649, 66
8
9
6
"Obviously, it is difficult to see how a mere silence could, of itself, constitute
conduct which is misleading or deceptive. … However, if the circumstances
are such that a person is entitled to believe that a relevant matter affecting
him or her would, if it existed, be communicated, then the failure to
communicate it may constitute conduct which is misleading or deceptive
because the person who ultimately may act to his or her detriment is entitled
to infer from the silence that no danger or detriment existed. Put another
way, silence or nondisclosure can be misleading or deceptive where the
circumstances give rise to a reasonable expectation that if some relevant fact
existed it would be disclosed."
Blaxell J took notice of this ruling in Whitaker v Paxad Pty Ltd [2009] WASC 47
where he stated, "…the circumstances to be considered in determining whether there
was a reasonable expectation of disclosure include the defendants true knowledge of
the facts."
Blaxell J clearly believed the defendant real estate agent not only had a duty to
disclose the information he knew about the property, but his failure to disclose that
information was misleading or deceptive.
Not only does the example highlight breaches of the ACL, which can result in
pecuniary penalties, but it also shows a breach of section 7 of the Code of Conduct
and hence the Real Estate and Business Agents Act 1978 (WA). As such, agents in
breach are open to disciplinary action available to the Commissioner under this Act
as well as the judgment sum.
In Hinton and Ors v Commissioner for Fair Trading [2006] NSWADT 257 11, the
Administrative Decisions Tribunal had to consider a case where an agent had sold a
property to a purchaser, but failed to mention it was the site of a gruesome family
murder.
11
Hinton and Ors v Commissioner for Fair Trading [2006] NSWADT 257
7
Notwithstanding the evidence of the agent and sales representative, that they had
advised all prospective purchasers that the property was a deceased estate. The
tribunal found that they had not disclosed the murders to the purchasers and did not
believe the sales representative's evidence of doing so. The dispute between the
purchasers and the agent was settled and the proceedings before the tribunal were
to establish the disciplinary findings against the agent.
It was held that the agent had failed to act fairly and honestly and had misled and
deceived the purchasers. The tribunal also held that the evidence of crime scene
paraphernalia, such as finger print dust was not enough for the purchaser to infer
that a crime had occurred at the property.
Disclosure to the Vendor
Notwithstanding the usual disclosures to be made to a client vendor, an interesting
area of law has been developing in New Zealand regarding the relationship between
an agent and a purchaser in relation to the fiduciary obligations the agent has to the
vendor.
When a real estate agent is engaged by a party, the real estate agent enters into a
fiduciary relationship with that party (the principal).
As part of the fiduciary
relationship, the real estate agent must act in good faith and in the best interests of
its principal.
In a recent case in New Zealand, Mark Moncrieff Stevens and Others v Premium
Real Estate Ltd SC 23/2008 [2009] NZSC 15 12, a real estate agent was found to be
in breach of its fiduciary duty of loyalty due to its failure to disclose to its principal, the
seller, its relationship with the buyer.
The agent had a long standing relationship with the purchaser who had a history of
purchasing property under the guise of needing a new family home.
12
Mark Moncrieff Stevens v Premium Real Estate Ltd SC 23/2008 [2009] NZSC 15
8
The purchaser would renovate the newly acquired property and resell it through the
same agent.
In this case, the vendor was expecting approximately 3 million dollars for the sale,
however, could not get offers above 2.5 million.
During negotiations with the
purchaser the vendor asked the agent what they knew about the purchaser. The
agent responded by advising that the purchaser was seeking a new family home due
to work commitments. The agent failed to disclose to the vendor that: the purchaser
had a history of trading properties, and more specifically, that the purchaser often
purchased properties on the pretence they would be for his family home and then
resell shortly afterwards, often at a substantial profit. The agent had also previously
been involved in a number of these deals, both on the sale and resale. In addition,
the agent's daughter worked for the purchaser as his personal assistant.
The vendor sold the property to the purchaser for 2.5 million dollars. A short time
after settlement, the new owner relisted the house through the same agent and sold
it for 3.5 million.
The issues before the court were:-
whether the agent had breached her fiduciary duty of loyalty when they failed
to inform the vendors that the purchaser was a person who frequently bought
residential properties and then resold them shortly afterwards at a profit;
whether the agent's conduct was misleading and deceptive under section 9 of
the Fair Trading Act 1986 (New Zealand) 13;
The Supreme Court, held, that the agent had deliberately misled the vendor by failing
to disclose the purchaser's purpose for acquiring the property. In doing so was in
breach of their fiduciary duty to the vendor. That the agent should pay damages to
the vendor for the difference in the sale price and estimated market value of the
property, both net of commission.
13
Fair Trading Act 1986 (NZ)
9
Whilst this authority is from a foreign jurisdiction, it is noteworthy that New Zealand's
misleading and deceptive provisions legislation is a very close mirror to those in
Australia and may be considered by the judiciary should a similar case arise here.
Consider Code of Conduct section 13. An agent must not at any time use or disclose
any confidential information obtained while acting on behalf of his or her principal,
except for information that an agent is required by law to disclose.
The information regarding the purchaser may have been considered as confidential
and certainly that of the agent's daughter and who she works for. However, in this
case an argument could be mounted that these details are required by law to be
disclosed, and hence not covered by contractual non disclosure or a common law
duty of confidence.
Furthermore, Code of Conduct section 18 states:-
(1)
An agent who recommends to a party to a transaction, a settlement agent,
finance broker or any other supplier of goods or services must make a written
disclosure to the party of any significant relationship, connection or affinity
between the agents and the supplier.
(2)
Where the relationship, connection or affinity between the agent and the
supplier is capable of producing a conflict between the interests of the party to
the transaction and the agent, the agent shall include in such written
disclosure an explanation of the nature of the potential conflict.
These provisions require disclosure via written notification of any potential conflicts of
interest. This will impact agents with any sort of pre existing relationship to the
purchaser, whether that be professional and or personal. It is reasonable to draw the
conclusion that when selling a property to a party with which a pre existing
relationship exists it is proper to advise the vendor in writing of that relationship.
10
Knowledge
In Whitaker v Paxad Pty Ltd [2009] WASC 47 the agent pleaded that he was not
aware of the water damage. However, in Hinton and Ors v Commissioner for Fair
Trading [2006] NSWADT 257 the agent pleaded they did have knowledge of the
murders.
When can an agent plead they were unaware of a material fact?
In Sargent v ASL Developments Ltd (1974) 131 CLR 634 14, the court held that a
Principal in an agency agreement was to have had imputed or constructive notice of
facts that they had received or would have received had they made proper enquiries.
This case raise an interesting proposition in that, lack of actual knowledge is not
enough to assert they did not know of a material fact.
The court held that a
reasonable person in that position would have made all reasonable enquiries to
receive that knowledge.
In Hinton and Ors v Commissioner for Fair Trading [2006] NSWADT 257 the agent
pleaded that they had actual knowledge of the fact and disclosed to all parties that
enquired, however, in Whitaker v Paxad Pty Ltd [2009] WASC 47, the agent pleaded
he did not have the knowledge. Whilst the court did not address the question of
imputed or constructive knowledge in this case, preferring to give little weight to the
credulity of his evidence, it would be difficult to understand how the agent did not
make all proper inquiries considering the physical appearance of the house.
The natural corollary to this would be that a reasonable real estate agent or sales
representative would make themselves aware of all reasonable facts by making
proper enquiries about the real estate they are selling.
Section 10 of the Code of Conduct requires agents to make all reasonable efforts to
ascertain or verify the facts which are material to that transaction which a prudent
agent would have ascertained.
14
Sargent v ASL Developments Ltd (1974) 131 CLR 634
11
Notwithstanding, certificate of title searches, Landgate also provide other material
information regarding properties via a Property Interest Report. Interests such as
Building Permits, Aboriginal Heritage Implications, Carbon Rights and Contaminated
Sites reports to name only a few are included in this report.
Whilst the court had not ruled that a search of these interests would be warranted, it
would appear to be a reasonable and proper enquiry pursuant to the obligations in
section 10.
Back to Greenacre
Returning focus to Greenacre an examination in light of the information above would
support an assertion that a proper reasonable real estate agent would conduct all
proper enquiries including an interest report regarding the property prior to
representing it for sale.
It is the requirement under Code of Conduct section 10.
Therefore, a reasonable inspection of Greenacre would have uncovered the old
diesel tank in poor condition. This appears to be a material fact that a prospective
purchaser should know.
If the tank is in disrepair there may be a chance that it has leaked and hence
contaminated the site. A reasonable agent would observe this and make further
enquiries as to the condition of the tank and the potential of any leak from it.
Furthermore, section 10 would also require a search of the Property Interest Report
which may show a Main Roads interest regarding the realignment of the main road
through Greenacre.
However, if the vendor advises you that the surveyors have attended the property or
it can be adduced that you already had knowledge of this, and the report was silent
to the matter, further investigation would be warranted for agents to exercise their
obligations under section 10 of the Code of Conduct.
12
Section 10(2) of the Code of Conduct makes the disclosure obligation optional if you
can show the person to be informed already knows the material fact to be disclosed.
Consider the pleading in Hinton: that the fingerprint dust was evident at the property
and hence should be enough to inform the potential purchaser of the crime. This
failed and care should be exercised when assuming that the purchaser has
knowledge of a material fact that an agent would otherwise disclose.
In addition, the question regarding the possible contamination of Greenacre, in light
of the discussion raises an interesting point. How far does an agent go to discover
potential material facts. Would a reasonable real estate agent query the former use
of the property with the owner? Is it a question of investigation with neighbours?
Remembering client confidentiality. If searches reveal nothing and the owner has
nothing to advise regarding the matter; coupled with the agent's actual ignorance to a
waste site having possibly been there and no physical sign of it existing, can an
agent be liable for any future evidence that reveals it did exist? Are there any further
investigations that could be reasonably conducted?
It would appear that even
imputed knowledge does not extend this far.
Conclusion
In conclusion, the duty of an agent to disclose all material facts is well established at
law. The provisions within the WA state legislation, Regulations and Code are clear
regarding the obligations.
These legislative requirements are bolstered in the
Australian Consumer Law and appear to be common to other common law
jurisdictions.
Furthermore, the courts have set high standards when interpreting these provisions
so disclosure of all relevant material facts is mandatory and enforceable.
Real estate agents and their sales representatives should be mindful of these
obligations and possibly err on the side of caution. If it may affect the way a party
views the purchase of the property then disclose it, regardless of whether it would
affect the agent's personal views. Failure to do so may result in misleading and
deceptive conduct or a breach of fiduciary duty.
13
If you would like to discuss any aspect of the matter, please contact us
CONTACT
Kim Valenti
Principal
(08) 9224 6222
[email protected]
This Alert provides a summary of the subject matter covered.
It does not render any legal advice. You should first obtain
professional legal advice prior to taking any action
on the basis of any information contained in this Alert.
This article is copyright. For permission to reproduce
this article please email Kim Valenti:
[email protected]
Liability limited by a scheme approved under Professional Standards Legislation.
14