We talked last week about multiple representation, and how some people out there believe it is unreasonable, or impossible, for a real estate agent to work on behalf of both the buyer and seller in a transaction.
I mentioned how once upon a time, ALL agents were expected to work in the best interests of the seller, regardless of whom they were actually representing.
I mentioned a court case that “changed real estate forever,” and established the need for buyer agents.
This court case from 1991, which dealt with a real estate transaction from 1979-80, was the first to finally distinguish between the listing agent and the “selling” or buyer agent…
Some of you will find this incredibly interesting, and might suggest that this is the most insightful, informative blog I have ever posted.
Others will bore after reading the first few lines. Maybe some of you have already stopped reading.
But as I said at the onset, once upon a time, believe it or not, every licensed real estate agent, at least in theory, had a fiduciary duty to the seller.
Can you think of the implications?
If you, as a buyer, told the real estate agent that you hired, that you wanted to offer $1,400,000, but you would be willing to pay $1,500,000, then technically speaking, the real estate agent had a duty to inform the seller that you would pay more.
Can you imagine?
Before Knoch Estate vs. Jon Picken, every court case involving real estate held that the agent’s fiduciary duty was to the seller.
“Knock’nPicken,” as it’s referred to in real estate law, was the first to finally suggest that a “selling agent,” which is what we call a buyer agent or cooperating agent today, does not owe the same duty to the seller/vendor as the purchaser/buyer.
If you want to read the entire case from the Canadian Legible Information Institute, click HERE.
The following is a copy of the summary, and keep in mind that they use “selling agent” to reference a “buyer agent”:
Zadorozny and Faught, executors of Knoch Estate
v. Jon Picken Ltd., Royal Trust Corp. of Canada,
A. Mantella & Sons Ltd., American Invesco Ltd.,
Caterpillar of Canada Ltd., Jenkins, Picken, and Mantella
Indexed as: Knoch Estate v. Jon Picken Ltd.
(C.A.)
4 O.R. (3d) 385
[1991] O.J. No. 1394
Action No. 30/89
ONTARIO
Court of Appeal for Ontario
Finlayson, Griffiths and Doherty JJ.A.
August 20, 1991
In August 1979, Guaranty Trust, the administrator of the estate of K, listed a property in Mississauga for sale with Royal Trust under a multiple listing at a listing price of $2,250,000.
The listing agreement provided: that any sale was subject to court approval; that the listing was to be distributed to members of the Real Estate Board as sub-brokers; and that the listing agent shall pay the sub-broker’s commission.
In mid-September, J, an employee of P Ltd., a real estate brokerage, learned about the listing.
At this time, J had already been retained by C Ltd., a manufacturer, to find sites to relocate its plant for which retainer C Ltd. had agreed that P Ltd. would be paid out of the commissions generated by a purchase.
J did not advise C Ltd. about the Mississauga property but instead brought the property to the attention of M, a developer, more likely to purchase immediately.
J helped prepare an offer from M Ltd.
The offer was delivered to Guaranty Trust on September 27, 1979.
J never had any direct contact with Guaranty Trust nor did he advise Guaranty Trust on any aspect of the sale.
On October 1, 1979, J wrote C Ltd. about the Mississauga property but did not identify the vendor.
On October 31, 1979, Guaranty Trust and M Ltd. signed an agreement subject to court approval. The selling price was $2,102,100.
Under this agreement, Guaranty Trust was entitled to continue to list the property until November 14, 1979. During this period, J did not advise C Ltd. that it could submit an offer directly to Guaranty Trust.
In late November, C Ltd. decided to purchase the Mississauga property.
On December 6, 1979, the court approved the sale to M Ltd. Later in December, C Ltd. met with P, the principal of P Ltd., and J to complete the terms of an offer.
Simultaneously, P and J were obtaining their own interest in the property from M Ltd. On March 18, 1980, one day before the closing of the sale by Guaranty Trust, M Ltd. agreed to resell the property to C Ltd. at a price of $3,475,000.
After both transactions closed, Guaranty Trust sued J for breach of fiduciary duty for failing to inform it or Royal Trust of the potential interest of C Ltd. in purchasing the Mississauga property.
The trial judge drew a distinction between listing agents and selling agents.
He found that M and J were not attempting to conceal anything from Guaranty Trust; rather, they were attempting to keep C Ltd. in the dark.
The trial judge found that J had breached no duty owed to Guaranty Trust and dismissed the action.
The successors of Guaranty Trust appealed.
Held, the appeal should be dismissed.
–
Per Griffiths J.A.: It is a question of fact in each case whether a fiduciary relationship exists.
The word “fiduciary” is derived from the Latin “fiducia” meaning “trust” so that, in general, the fiduciary relationship arises where one party places a trust or confidence in another or is dependent on the other in some significant way.
While listing agents are, generally speaking, fiduciaries owing the highest duty to the vendor, and under the multiple listing arrangement J was an agent of the listing agent and the recipient of a commission, this did not put J, a selling agent, into the position of a fiduciary.
The mere fact that a person is an agent does not subject him or her to fiduciary duties toward his or her principal.
While a selling agent may be the agent of the vendor for limited purposes and be obliged not to deceive or mislead the vendor, in the absence of a true fiduciary relationship, the selling agent will not be required to do more.
In some circumstances it will be a fine line whether a fiduciary relationship exists, and the facts of each case must be examined carefully.
Here, there was no evidence that Guaranty Trust relied upon or reposed confidence or trust in J.
Having submitted a binding agreement from one purchaser, J, as a selling agent, was not obliged to disclose to the vendor the potential interest of someone else.
–
Per Griffiths J.A. (Finlayson and Doherty JJ.A. concurring): J, M and M Ltd. were not liable on the theory that in conspiring to deceive C Ltd. they were also liable to Guaranty Trust.
This cause of action was not pleaded at trial and in any event was without merit.
The tort of conspiracy requires the conduct to be unlawful towards the plaintiff. Here the alleged conspirators never turned their minds to Guaranty Trust, let alone conspired to injure it.
Finally, this action could have been dismissed on the basis that the plaintiffs did not prove any damages. Assuming that there had been disclosure of C Ltd.’ s interest, it is unrealistic to think that C Ltd. would have offered more than the amount at which the property was listed.
Further, even if the interest of C Ltd. had been disclosed, it is probable that the sale to M would not have been denied court approval simply because of C Ltd.’s potential interest.
The appeal should be dismissed.
Per Finlayson J.A.: On the facts of this case, it was unnecessary to draw a distinction between listing agents and selling agents and their duty to the vendor.
In this case, J was the agent for the ultimate purchaser, C Ltd., with a duty to obtain the property at the lowest possible price. He failed miserably in the performance of that duty, but it makes no sense 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.
The character of J’s agency with C Ltd. cannot be changed by an act in furtherance of that agency.
The agency relationship with C Ltd. did not cease to exist simply because the multiple listing agreement treated all members of the real estate board as sub-brokers of the vendor.
The correct agency law analysis is that in any given real estate transaction, there can be an agent for the purchaser and an agent for the vendor, although it is possible that the court may find that a particular agent has become agent for both vendor and purchaser.
It is, however, not correct that all agents are always agents for the vendor.
Any practice, custom or understanding in the real estate industry to this effect cannot overcome the correct legal principles.
Moreover, even if this analysis of the principal and agent relations was wrong and J was an agent to Guaranty Trust, it did not follow that a fiduciary relationship was established.
J could not be the fiduciary for both the vendor and the purchaser and here the recognized indicia of a fiduciary relationship were not present.
Accordingly, the appeal should be dismissed.
Per Doherty J.A.: The evidence does not establish a fiduciary relationship between the selling agent, J, and the vendor.
It follows that J was not obliged to make the disclosures relied upon by the appellants to support their claim.
Accordingly, the appeal should be dismissed.
This was not an appropriate case in which to attempt an exhaustive statement of the obligations owed by a selling agent to the vendor or to determine whether a selling broker can be properly characterized as the agent for the vendor.
APPEAL from the judgment of the High Court of Justice (1988), 5 R.P.R. (2d) 207 in favour of the defendants.
Do you see the irony in this?
The seller is attempting to sue the buyer agent for not getting them more money.
It sounds crazy now, but back then, it was the norm.
“C” is Caterpillar Ltd., by the way. If anything, they should have sued “J” for not only plotting to resell the property to them for a higher price than they could have obtained it later on, but also for taking a piece of the ownership. This could easily be a case about disclosure.
But the most important part of this case is the eighth line from the top:
“J never had any direct contact with Guaranty Trust nor did he advise Guaranty Trust on any aspect of the sale.”
How can the seller sue the buyer agent when the seller never had any contact with that agent?
And then the most important line in the analysis of the judges involved:
“It is, however, not correct that all agents are always agents for the vendor.”
That’s when the real estate world changed forever.
But can you even believe what it was like before this case?
Or how many cases were argued, to opposite results, before this one?
Without Knoch & Picken, what would the real estate industry look like today?
Mike
at 11:58 am
Interesting, thanks for posting that.
If the real estate data held by MLS is ever opened up to the public, I think you’ll start to see the elimination of Buyer Representation. Websites will build models that will allow regular users to filter and analyze the information and lawyers will charge a flat fee for preparing offers. Pretty soon, the only advantage to using an agent when purchasing will be access to properties. Even then, I’m seeing more and more listings with “listing agents must be present at all showings”, so if that trend continues buying agents won’t even be needed for that.
Once buying agents are mitigated, you’ll see commission rates drop. As the fee to sell houses drops agents will start to undercut and Sellers will end up paying for services rendered based on a menu.
david (Not the David who runs this website)
at 1:34 pm
Mike, good points. With all the web tech innovations going on, I wonder if we will ever see the day where real estate agents won’t be needed. Sellers would just enter their data directly into the MLS site, which would then be checked over by special legal software before it’s released to the public. I’m sure that the software could even check the land register for things like liens, and easements.
Buyers would then submit their offers along with a small fee. The offer would then be checked by legal software before it’s sent to the sellers. You’d only need a lawyer at the end to release the buyer’s deposit and to give the keys to the buyer once the deal closes. I’ve read that the legal profession has automated a lot of their routine work, so I don’t think that it’s far fetched to wonder if this scenario could happen.
With this scenario, there would be no worries about multiple representation and wrong doing. The whole process would be more or less automated and paying commissions on the transaction would be a thing of the past.
David, what do you think about that idea? I’m not trying to kill off the real estate profession, just wondering if this could happen. I’m probably over simplifying things, but who knows…
Long Time Realtor
at 2:06 pm
@david (Not the David who runs this website):
I’m not sure you’ve thought this one through my friend. In the absence of Realtors, who will operate and maintain the MLS site to which you refer?
david (Not the David who runs this website)
at 3:40 pm
Long Time Realtor, I’m not in the real estate industry, so yes, you’re right. However, instead of realtors operating the MLS system, maybe RECO could do it or is that just another over simplification?
Long Time Realtor
at 5:20 pm
@david:
RECO exists to regulate the real estate industry, which is governed under provincial legislation known as the Real Estate and Business Brokers Act (REBBA), it does not sell or promote real estate. In any case, I think you may be missing the point.
Mike
at 7:30 pm
The Other David
The land registry system is already online. Lawyers use to have to search through files upon files, now it happens at the click of a button. Contracts are pretty much standard. Lawyers are already offering real estate closings for less than a hundred bucks. It’s happening.
Anyone who doesn’t see the democratisation of information spells the end for Realtors only needs to talk to a floor trader from a securities exchange. “Sure you can do it yourself they all said, but you’ll never be as good”, they all said.
As for LTR’s concerns:
CREA members would operate the system and charge a fee much the same as TSX does with it’s information. The information is also available through other sources so I’m sure there will be competitors to the CREA members which will drive the price down.
Taking The Other David to task for getting RECO and CREA confused is a dick move. Maybe he, like 99% of the population, doesn’t know the difference between TREB, OREA, CREA and RECO, nor does he care. This would have been a great opportunity for your to prove the worth as a Realtor by explaining the differences, but you took the low road.
Kyle
at 10:15 am
Everything is so simple and easy with the internet. Who need experts anymore. Cause let’s face it all those “experts” with their training and experience are all just hiding behind their knowledge, but once the internet reveals that knowledge in simple 5 minute tutorials, even people with zero experience can outperform the pros. Just think of the applications – Now that we have WebMD, we don’t need doctors, except in the most extreme cases. In fact anyone whose taken Tylenol, cut a ribbon, sewn a button and used a microwave can now do their own vasectomies! And why pay a mechanic $100/hr to do your brake work when you can buy a $40 socket set and learn the secrets of how it’s done on Youtube? And come one only a fool would pay all sorts of money to buy exotic mushrooms, next time you make a risotto, just go to a forest and forage your own. Don’t worry the internet will tell you which ones are poisonous…
jeff316
at 2:47 pm
And, while you’re at it, make america great again!!!
Mike
at 2:56 pm
Kyle,
I don’t see anything wrong with doing your own brake work, it’s actually quite simple. Do I do my own brakes anymore? No, it’s more efficient to take it into the shop where the $100/hour (let me know the name of your mechanic that’s a steal) has all the equipment and tools. It’s a rather simple process and I’m sure if you watched a video on Youtube, you’d agree with me.
I’m not sure your feelings on the matter but cutting into my own scrotum would fall under the extreme category that you described going to a doctor about. If I sprained my ankle or noticed a new mole, I’m sure I’d look it up on the internet to see how to proceed.
As for the mushrooms, why wouldn’t you trust the internet on which ones to forage? Would you feel more comfortable if you read it in a book? If so maybe you’re also worried about these newfangled mechanical looms?
The point I was making and you seem to have also been making is that information from a trusted source puts the power in the hands of the consumers.
If Real Estate Agents considered themselves “experts” they wouldn’t be spending millions of dollars in legal fees fighting the Competition Bureau to protect access to previous sales information.
david (Not the David who runs this website)
at 3:56 pm
Kyle, good point about YouTube. I’d never do my own auto mechanical work but I have watched some excellent videos that gave me a good idea what was wrong with my car before I took it to a mechanic. Believe it or not, the mechanic forgot to re-install parts of my engine, which I would have missed had I not viewed those videos. So there is some merit to YouTube.
Kyle
at 5:00 pm
“The point I was making and you seem to have also been making is that information from a trusted source puts the power in the hands of the consumers.”
Dead wrong…Yet again. The point i was making is that superficial knowledge and information (the type you like to flaunt) is NO WHERE NEAR ENOUGH to put power in the hands of consumers when the stakes are high. That’s why smart people use professionals.
LOL, i can just picture a buyer showing up at a bidding war with an offer he typed up himself, after having lost out on previous homes. Sweating, flushed, telegraphing every emotion and desperately trying to cover up his discomfort and anxiousness. There’s no doubt in my mind that any of the Agents i’ve used in the past would produce better results than that “empowered” buyer.
david (Not the David who runs this website)
at 3:49 pm
I do know the difference between TREB, OREA, CREA and RECO. RECO seemed like a logical choice to run MLS, since they have the buyer’s and seller’s best interests, or at least they are supposed to. The others represent the realtors in different ways.
So why couldn’t this scenario work out – sellers would pay RECO a fee to list their property on MLS. Buyers could browser the listings and then pay RECO a fee to submit an offer. All the information entered would be checked and verified by software and the MLS system could be linked to the land registry and municipal data bases. So why would anyone need realtors if this was possible?
Long Time Realtor
at 2:36 pm
@ Mike:
The notion that organized real estate opening up the kimono and revealing MLS information is a game-changer, is greatly exaggerated and misunderstood.
The scenario regarding open MLS data you’ve described already exists in the U.S. and has been thoroughly exploited for a decade by the likes of Zillow, Trulia, Yahoo and others. Interestingly according to industry giant Zillow (which purchased Trulia in 2014, for $3.5B), the result has been an overall increase in the number of U.S. real estate transactions involving Realtors. As well, the number one advertisers on their website are, you guessed it – Realtors.
It turns out that the raw data was not the be-all and end-all, after all.
david (Not the David who runs this website)
at 3:42 pm
That’s great news for realtors then 🙂
Mike
at 7:12 pm
LTR
I like it, twenty years of historical information that backs a point, I like it.
You’re losing site of the fact that there are two main generations in our world, the Boomers and the Echos (AKA millennials). The Boomers are either in retirement or heading into retirement, the Echos are just hitting their stride. Boomers took taxis, Echo’s take Uber and Lyft. Boomers bought their first suit in a store, Echo bought a custom fit suit online for half the price. Boomer kept their money in a bank account earning interest until they had enough to invest in the stock market, Echo uses a website that invests in ETF for free.
See where I’m going here? The next generation is all about technology, convenience and low price. They’re disrupting the way business where run, they’re disrupters. They watch TV when they want to, they can reach their friends wherever they are, they can express every moment to the world at the touch of a button. They share cars, houses and their lives with the World. They’ve gown up with technology and information and know how to use it, the future is the future.
Dismissing their use of technology because technology hasn’t been used that way in the past will ensure that you soon will be known as a “”former” long time realtor”.
Kyle
at 9:18 am
Buyers do not pay for their representation. Any serious, qualified, realistic, non-difficult to work with (perhaps i’ve answered my own question) buyer can literally have their pick of any of the top Agents in this city…FOR FREE! So why wouldn’t you work with a Buyer Agent?
If you want to pay to get a P&A form from your Lawyer, assume all kinds of risk in filling it in yourself and then go spend your own time registering, presenting and negotiating that offer yourself, fill your boots. Me, i’m going to hire the best Agent i can find to do all that for me at zero cost to me.
Kyle
at 9:49 am
Meant PSA (Purchase & Sale Agreement)
Mike
at 3:13 pm
Kyle,
Do you honestly think that someone who is not paid by you to represent you is going to represent your best interest?
Please name me one other industry where the advice you receive is paid for by the opposing party? Do you have any idea how easy divorces would be if one party was to pay for the other party’s lawyer?
As for your other reasons:
PSA- You should be asking your lawyer to review your PSA prior to submitting it so why not just have them draft it? Since the OREA has copies of the standard offer on their website, its as simple as filling in some blanks and would take less than ten minutes. So maybe that will run you a hundred bucks (though you were going to have the lawyer review it anyways if the REA prepared it).
Registering- You can do that via phone or email, might take you all of 5 minutes depending on the person working at the reception desk.
Presenting- Take your choice, you can email it or fax it where it will be sent to the other party via email. Heck, your lawyer might just do you a solid and email it in for you.
Negotiating- News flash, you’re doing the negotiating now. You’re agent is just the messenger but you’re the one doing the negotiating. There are three elements to a real estate offer, price, closing and conditions. You’re agent, now matter how great they are can’t negotiate any of them on your behalf, it’s against the law. So you’re spending the time negotiating anyways, then you send the revised contract back to your lawyer for their blessing (might cost you another hundred bucks).
So you’re a few hundred bucks in on a lawyer but your lawyer doesn’t have an incentive to see you go over budget the same way a REA does.
Libertarian
at 5:06 pm
About who pays for the advice – I was referring to this in my other comment. Yes, the seller pays the 5% commission. But where does the seller get that money from? The buyer. So to me, the buyer pays both the selling and buying agents. Both agents should have a fiduciary duty to the buyer, not the seller. Opposite of the lawsuit David describes. (Kidding!)
Most Canadians say we have free healthcare. But we pay taxes.
Financial advisors who have their clients buy mutual funds say that the client doesn’t pay any fees or commissions – the fund companies do. But where do the fund companies get the money? From the client.
It’s all a shell game.
The question for me is: Would the price of real estate come down if some of the process were automated? My guess is yes. As I wrote in my other comment, I’d much rather pay $950,000 than $1 million. Who wouldn’t want to keep $50,000 in their pocket as opposed to paying the selling agent’s commission?
Kyle
at 5:19 pm
Wow Mike that’s great explanation on how things work, excellent show of superficial knowledge, but not the question i asked. The question is why in the hell would you want to?
And if your conclusion is that no Agent can ever be trusted, than you need to stop taking the hearsay as Gospel and start talking to people who’ve actually transacted in real estate with an Agent before, since clearly you yourself never have.
Appraiser
at 5:47 pm
Not to worry Kyle, Mike is nothing but a poseur who likely lives in his mom’s attic dreaming of one day buying something – anything.
Clearly he has an axe to grind.
It appears to gives him some measure of twisted psychological solace to troll this site picking fights with anyone and everyone associated with real estate.
Kyle
at 10:10 am
You’re 100% right Appraiser. In fact, after some consideration i realize all three of us are 100% right (even Mike).
I realize now that Mike is 100% right because for someone like him who rejects reality and things that have been proven over and over, and instead embraces hyptheticals that he pulls out of his rectum, a professional is not going to add any value to him, because he would never let them.
You are 100% right. My trying to enlighten him is beyond a lost cause. You are also 100% and that he will never ever succeed at buying for the exact reason stated above, so he bitterly sits in his Mom’s lonely attic arguing with anyone he can provoke.
I am 100% right that using a buyer’s Agent is a no-brainer, unless you’re a know-nothing-know-it-all like Mike. Contrary to his baseless assertions, i have yet to encounter a Realtor pressuring me to buy a property, in fact i’ve found the exact opposite on more than a few occasions, my Agent has wisely dissuaded me from buying certain properties. In the example he uses where he again incorrectly asserts David is “pressuring” his client. What David is doing is providing valuable intel for the buyer to make a more informed decision (funny how providing information is empowering a buyer when it suits his argument, but it’s pressuring the buyer when it doesn’t). Anyone who is in that situation would kill for the rough odds of success per $5k improvement, that’s information only an experienced Agent who has been on both sides of the table could have. And is another example of the value an experienced Agent brings. A reader named Duncan once wrote a truly excellent comment on all the intangibles that a good Agent handles. I won’t rehash them, but those are things that no amount of superficial “how-to” knowledge is ever going to replace.
Mike
at 6:26 pm
Kyle,
Why wouldn’t someone use an agent? Because they’re free from pressure.
I prime example is David’s post a few weeks ago about submitting a second bid. It’s hard for people making such a large purchase to not get caught up and pay too much when the person “advising” them is telling them they need to improve their offer.
Libertarian
at 10:41 am
I think that agents will continue to exist in the future, but I agree with Mike that the typical 5% commission will likely decrease because there will be so much more competition and automation of the process. As long as buyers and sellers think that they can keep more money in their pockets by avoiding the full–service, 5% agents, there will be entrepreneurs out there trying to get those people’s business. Even buyers could be attracted to that. Yes, buyers don’t technically pay for the buyer agent, but if you ask any buyer, would you rather pay $1 million (with full-service agents) for a property or $950,000 or even $900,000 (with any system that comes along in the future), I’m sure buyers would take the lower price and keep the difference in their pockets
Condodweller
at 11:12 am
I agree there is a need for agents, however, IMHO two things need to change going forward.
1. Rules need to be put in place to protect both buyers and sellers from greedy unscrupulous agents.
2. The compensation structure needs to change to realistic levels.
#1 was discussed in recent posts #2 is not something David is going to do a blog on. I could be wrong but I don’t see him doing a blog titled “Are Real Estate Agents Compensated Fairly?”. If he did, I bet it would exceed 100 responses!
I agree with what Mike is saying in principle however he is oversimplifying it a bit which is why Kyle and company are all over him with their personal attacks.
Regarding who pays the commission is just semantics. Of course, technically the seller pays for it after the sale but guess what, when the time comes for the buyer to sell down the road he becomes the seller. This is what most people can’t wrap their head around and you have people like Kyle say why would a buyer not use an agent when it’s free. Yes, it may be free today, but it won’t be free when the time comes to sell.
Condodweller
at 1:59 pm
I just reread my comment and realized it can be misinterpreted. On #1 I didn’t mean to imply that all agents are unscrupulous.