Conveyancing Consumer Alert - Beware of the Sneaky Stamp!

OPINION
by Peter Mericka B.A., LL.B
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd

Real estate agents have no automatic right to lodge a caveat over a client's property to secure the payment of commission. So some cunning real estate agents are adding a clause to the agency contract by which the client gives the real estate agent permission to lodge a caveat. If a real estate agent adds a caveat clause, the client may be able to argue that the conduct of the real estate agent is misleading and deceptive. Even more so if the clause is inserted into the contract in a manner that makes it downright sneaky!

Bell Real Estate Belgrave is a real estate agency in the Dandenong Ranges, east of Melbourne. My firm was completing the conveyancing for a vendor client who had been a long-standing client of Bell Real Estate, and who had sold his property through that agency. He had always paid his accounts on time and without dispute, and there was never any suggestion that he would not pay Bell Real Estate their commission on this occasion. Thus, my client had a history of paying Bell its proper commissions. So, it came as quite a shock when the real estate agent telephoned our office on the Friday and told us that settlement would not be allowed to proceed on the following Monday because Bell Real Estate were concerned about the payment of their commission.

Commission Rage

Commission rage is a common phenomenon in the real estate industry, and it is often the cause of desperate behaviour on the part of real estate agents who fear the loss of commission. It is particularly prevalent in lean times, and the real estate industry is experiencing lean times at present.

Commission rage may well have been a factor in this case, because when Glen Chandler of Bell Real Estate Belgrave telephoned my office to complain that he did not have enough deposit money in the Bell Real Estate trust account to cover the commission, I could sense that he was both anxious and angry. Chandler called our office and asked if the vendor had instructed our firm to draw a cheque for commission payable to Bell Real Estate Belgrave, and when he was told that we had not been instructed to make any of our client's funds payable to his office, he was put through to me. Chandler demanded that we arrange for a cheque to be made payable to Bell Real Estate Belgrave, as he had not been able to get in touch with the vendor and he did not want settlement to proceed before he had been paid.

The staff member handling the file informed me that she had spoken with the purchaser's conveyancer, but it was too late to have the settlement cheques changed. (Ordinarily the cheques delivered at settlement are payable to the vendor's mortgagee and the vendor, not to the real estate agent. It is usual for the real estate agent to deduct commission from the deposit held by the real estate agent, and to invoice the vendor for any amount outstanding. But these are tough times for real estate agents, and this may be encouraging some to grant themselves another privilege.)

It was Friday afternoon, the cheques had been ordered for settlement on the Monday, and the purchaser's lender had confirmed that it was not possible to change them. There was nothing further that could be done to have the cheques changed at such short notice, and so close to settlement.

I explained to Chandler that the commission would have to be paid after settlement had taken place, as the vendor would be relying on the settlement proceeds to pay it. Chandler was furious. He screamed into the phone, demanding that the commission be paid before settlement, otherwise settlement would not proceed at all. I asked Chandler if the vendor had given any indication at all that he couldn't or wouldn't pay the commission, and he admitted that the only reason he was so concerned was that the vendor may change his mind after settlement and decide not to pay. When I suggested to Chandler that perhaps he was being a little unreasonable, he screamed again, adding that Bell Real Estate would lodge a caveat over the vendor's property so that settlement couldn't take place at all.

Knowing that a debt of commission does not give rise to a caveatable interest in a client's property, I explained to Chandler that he was being rather extreme and that he really wasn't entitled to lodge a caveat over his client's property. In any case, lodging a caveat would be self-defeating, ensuring that the commission would not be paid, because the proceeds of the sale were needed for this purpose. In other words, by stopping the settlement, Chandler would also be stopping the payment of his own commission - a rather silly strategy.

Chandler would have none of it. He was in a heightened state of anger and he screamed into the phone again, "No cheque, no settlement, we'll slap a caveat on that place right now, we've got a clause in the sale authority that says we can!"

The "Sneaky Stamp" - how it was applied to the agency agreement

I found it hard to believe that any vendor would allow a real estate agent to insert a clause into the Exclusive Sale Authority that would allow the lodging of a caveat over the property being sold. Few lawyers would recommend their clients accept such a clause for the reason that it gives the real estate agent power to veto not just the transaction but future transactions if the current transaction falls through. Further, a mere debt is not a caveatable interest. Such a clause gives a real estate agent a special privilege, a quasi security. How is such a privilege deserved? It would certainly damage the relationship between the real estate agent and the vendor for reasons I refer to below.

I asked Chandler if such a clause had actually been inserted into the sale authority signed by my client. Chandler replied, "Yes, we've got a stamp and we hit every authority with it." Still not convinced, I asked Chandler to fax a copy of the sale authority and the caveat clause to me, which he did.

I was horrified. The stamp used on my client's agency agreement was about the size of the side of a matchbox, contained over 70 words, and was so small that it could not be read at normal distance by someone with average eyesight. To make things worse, the stamp was placed sideways in the margin of the sale authority document, and looked like a copyright notice or something similar. It certainly didn't have the appearance of a critical contract clause that allowed the real estate agent to lodge a caveat over his own client's property!

A later telephone conversation with my client revealed that he was totally unaware of that the stamp had been used. He had not noticed it, and certainly had not read it or realised its significance. In fact, the client was not even sure that the stamp actually appeared on his copy of the Exclusive Sale Authority, and had to check to see if his copy had been stamped.

This is the sneaky stamp, enlarged from the Exclusive Sale Authority faxed to me by the real estate agent:

Doubts about the effectiveness of the "sneaky stamp"

My understanding was that the stamp had been applied to the Exclusive Sale Authority document in circumstances that could be described as underhanded, or sneaky. The client was not alerted to it. He was not aware of it. He was not told a significant fact - that of all the conventional things that could go wrong in the transaction a new one had now been added: his own real estate agent could block the transaction. On top this, the font was small rather than in normal letters, contrary to the normal convention for warnings in consumer contracts. At the very least, the real estate agent should have drawn attention to the sneaky stamp and ensured that the client was given the opportunity to obtain legal advice on it from his own lawyer.

Furthermore, it is my view as a lawyer that the real estate agent use of the sneaky stamp was unconscionable, because it is unnecessary to protect the rights of the real estate agent and is considerably more than is necessary to protect a mere debt.

Remember, the real estate knew precisely what the sneaky stamp contained and what it meant, and it was with this knowledge that he applied it to the otherwise standard form document. Sharing his knowledge with his client was not only ethical, it was compulsory in the interests of fairness, and as part of the real estate agent's fiduciary duty to his own client. I am not suggesting that the real estate should have offered his client legal advice, but he should have made sure that his client knew that the sneaky stamp was being applied so that the real estate agent could lodge a caveat over the client's property, and that this would give the real estate agent enormous power over the client and his property that would not otherwise be available.

After reading through the content of the sneaky stamp I concluded that it would be difficult, if not impossible, for the real estate agent to enforce and that it certainly did not give the real estate agent any genuine right to lodge a caveat over my client's property. Remember, the real estate agent had no reason to doubt the client's honesty or integrity, the real estate agent had not told the vendor that he required payment of the commission prior to settlement, and it was highly debatable that a state of indebtedness existed between the real estate agent and the client before settlement of the matter had taken place.

The real estate agent's lawyer

One of the problems with conveyancing transactions is that a dispute is often determined on the basis of one party's ability to bully and bluff the other. I really did not believe that Chandler would carry through with his threat to "crash" settlement - after all, the consequences of a crashed settlement can be expensive for all concerned, not least Chandler himself as no settlement meant no money to pay Chandler his commission.

Then we received a fax from the real estate agent's lawyer, Mr. John Wallis of Armstrong Ross Barristers & Solicitors, Belgrave.

I have known John Wallis for some years, and always found him to be a friendly and knowledgeable lawyer. The fax stated as follows:

"We advise that we act on behalf of Bell Real Estate Olinda Pty Ltd.

We have an Exclusive Sale Authority signed by (the vendors)..., which includes a charging provision to secure the agent's commission.

There is a balance of commission outstanding...and unless we receive a (sic) undertaking by 4 pm today that a cheque will be collected at settlement in this amount payable to our client, we will prepare and lodge, first thing on Monday, a caveat protecting our client's interests which as you would be aware, will prevent settlement taking place."

My initial reaction to this fax was that it was a silly bluff. After all, every lawyer knows that a lawyer cannot provide an undertaking to ensure that another person will do the thing required by the undertaking, and preventing settlement from taking place would mean that there would be no money paid on the Monday to anyone at all, and the real estate agent could not be paid anyway.

I then noticed that the letter had also been faxed to the purchaser's conveyancer. Why? How was the purchaser involved in the dispute between the real estate agent and the vendor? Only Mr. Wallis can answer these questions, but I do know the effect that the situation had on the purchaser and their conveyancer (see further below).

In my view, the purchaser was not a party to the real estate agent's behaviour, and should never have been involved in the dispute the real estate agent had generated. I was disgusted, not only with the behaviour of the real estate agent, but also with the lawyer. I decided to telephone him to find out what he was hoping to achieve.

The lawyer admits his involvement in the use of the "sneaky stamp"

I contacted Mr. Wallis, and asked him if he was serious about lodging a caveat over the property. When he confirmed that he most definitely would lodge a caveat I put it to him that he knew that causing settlement to fail, when there had never been any indication that the real estate agent would not be paid, was extremely unfair to the vendor and even more unfair to the purchaser. Mr. Wallis was unconcerned.

I told Mr. Wallis that I felt that the real estate agent's use of the "sneaky stamp" was disgraceful, that it was typical of the way real estate agents were treating consumers these days and that he was allowing himself to become caught up in the nastiness of the real estate industry by threatening to enforce the terms of the "sneaky stamp". Imagine my surprise when Mr. Wallis told me that he had actually advised the real estate agent to use the "sneaky stamp".

According to Mr. Wallis, "It was done to a client of mine some time ago by a real estate agent in Heidelberg, and I thought 'that's a beaut little idea', and so I adopted it."

To ensure that Mr. Wallis knew precisely what I thought of his "beaut little idea", I sent him a fax as follows:

"As you are aware, I am quite disgusted with the way this matter has been handled by your client, and I am most disappointed with you and your involvement.  I am preparing a “Consumer Alert” blog posting about this incident, and I require your response to the following by close of business today.

I put it to you that:

• a stamp, which I refer to as “the sneaky stamp” was recommended by you to Bell Real Estate Belgrave as a means by which that real estate agency could claim the right to lodge a caveat over a vendor client’s property to secure the payment of commission.
• the “sneaky stamp” has been created in such a way that it is barely legible, using a font size that no reasonable person would expect to be used for the purposes of creating a contract condition.
• the “sneaky stamp” is positioned sideways on the page, so that it does not appear to be directly related to the content of the document to which it is applied;
• the “sneaky stamp” is meant to be applied to the standard form Exclusive Sale Authority by the real estate agent shortly before the document is presented to the vendor to sign, so that the vendor has little opportunity to notice it, or to question its inclusion in the document;
• the strategy behind the “sneaky stamp” is one of taking the vendor by surprise, insofar as the vendor is not alerted to it unless and until the real estate agent decides to act upon it;
• the “sneaky stamp” strategy is unethical, unconscionable and illegal, insofar as it renders the Exclusive Sale Authority an unfair contract pursuant to Competition and Consumer Act 2010;
• the “sneaky stamp” strategy also relies on the tactic of “bluff and bully”, calculated to force the vendor to use whatever means may be available to the vendor to pay the real estate agent, rather than to test the validity of the real estate agent’s claim in court.
• you became aware of the “sneaky stamp” strategy when it was used on a client of yours;
• you saw the effect that the “sneaky stamp” strategy had on your own client, and realised that it could be used effectively by real estate agent clients of your own;
• you advised Bell Real Estate Belgrave that the “sneaky stamp” strategy is a legitimate means by which a real estate agent may force a vendor to pay a full commission prior to settlement taking place; and
• your recommending the use of the “sneaky stamp” to Bell Real Estate Belgrave reflects poorly upon you, your firm and the legal industry."

Mr. Wallis' response did not address the matters put to him.

Settlement day - a telephone call from Bell Real Estate Belgrave

On the Monday morning I received a telephone call from Mr. Trevor Bell, the Principal of Bell Real Estate Belgrave.

Mr. Bell told me that he was aware of what was going on with Glenn Chandler and that, as Principal of Bell Real Estate Belgrave, he wanted to make sure that everything was OK. For a moment I felt relieved. It seemed that someone with authority, experience and commonsense was taking over from Glenn Chandler.

My hopes were shattered when Mr. Bell said, "I just want to confirm that you are holding a bank cheque payable to Bell Real Estate for our commission."

I asked Mr. Bell if Glenn Chandler had explained the situation in full, but Mr. Bell cut in to say that he understood perfectly well that there was not enough money held as deposit to cover the commission, and that settlement would not proceed unless Bell Real Estate Belgrave was paid its commission in full prior to settlement.

I gave Mr. Bell the same information as I had given Glenn Chandler on the Friday, and told him that he could be paid after settlement. Mr. Bell insisted that he would have a caveat lodged immediately.

I then suggested to Mr. Bell that he or Glenn Chandler could attend at settlement, collect the cheque payable to the vendor, and walk with the vendor to the vendor's bank and wait while the cheque was converted to two cheques - one payable to the vendor, and one payable to Bell Real Estate.

Mr. Bell would have none of it, and ended the conversation by confirming that a caveat would be lodged.

Lodging of the caveat

A few hours before settlement a title search confirmed that a caveat had been lodged over the property. Settlement would now fail, unless the purchaser was able to do something about changing the settlement cheques.

The effect on the purchaser and her conveyancer

It must be stated from the outset that neither the purchaser, nor her conveyancer should have been involved in the dispute engineered by the real estate agent over the payment of commission by the vendor. The purchaser was entitled to complete her purchase without being embroiled in a dispute created by the vendor's real estate agent. Nonetheless, when the purchaser's conveyancer received a copy of the demand from the real estate agent's lawyer both the purchaser and her conveyancer we placed in an invidious position.

Whenever a lawyer or conveyancer is forced to inform their client that settlement is likely to crash there is a strong reaction from the client (see our page on Conveyancing Settlement for more information on this), usually involving a combination of panic, anger and distress. As all lawyers and conveyancers know, panic can cause a client to become hostile, and to hold their own lawyer or conveyancer responsible for what is happening. Thus, the purchaser's conveyancer was dragged into the dispute.

In the circumstances, the purchaser's conveyancer had little option but to advise the purchaser that in order to save settlement she would have to do something about having the settlement cheques changed.

Purchaser saves settlement

I am not sure what the purchaser had to do in order to have the settlement cheques changed, but somehow she managed to obtain a bank cheque payable to Bell Real Estate for the amount of the commission. We were informed of this by way of a fax, received 3 hours before settlement was scheduled to take place. The fax also stated the following,

"We confirm that a Withdrawal of Caveat together with cheque payable to Land Titles Office for $71.00 will be handed over at settlement of this matter today to our clients' Mortgagee...Should the above not be handed over at settlement then we will require re-settlement fees and cancellation fees together with our costs to be payable by your client when settlement is effected. Our clients rights are reserved in all respects and a Notice of Rescission may be served if the above terms are not met."

Thus, the vendor and purchaser were now in dispute and the threat of a Rescission Notice was hanging over the matter.

Of course, the purchaser was entitled to demand a Withdrawal of Caveat and the costs associated with lodging it. This meant that the real estate agent's lawyer would have to be represented at settlement in order to ensure that the commission cheque was delivered in return for the Withdrawal of Caveat and lodging costs.

Real estate agent refuses to pay the costs on his Withdrawal of Caveat

Having lodged a caveat against his own client's property in dubious circumstances, the real estate agent now refused to pay the cost of having the caveat removed!

A fax from Mr. John Wallis of Armstrong Ross Barristers & Solicitors, Belgrave stated the real estate agent's position as follows:

"We refer to the above matter and advise that our client's representative will be attending at settlement to collect our client's cheque. You will need to organise payment of the $71.00. Our client is not seeking reimbursement of our costs or its costs associated with the Titles Office fee on the caveat."

As it turned out, this was just another "try on". The real estate agent's representative had been given instructions to pay the costs at settlement, but to accept payment from the vendor if the vendor had offered to pay it. The agent's representative did not force the issue, and simply pulled the cash from his pocket to cover the cost.

Conclusion

This is just one example of what's wrong in the real estate industry, and I will let readers draw their own conclusions about the use of the "sneaky stamp", the behaviours generated by commission rage and the Exclusive Sale Authority.

The more pressing problem arising from this example is the readiness of some in the industry to use dubious measures to achieve their ends, regardless of the consequences for others. In this case, the purchaser and her conveyancer were bullied into taking action to assist the vendor in his dispute with a commission-hungry real estate agent. This behaviour alone brings the real estate industry and the legal industry into disrepute.

Finally, for those lawyers, conveyancers and real estate agents who think that the "sneaky stamp" is a "beaut little idea" please think again. However, if you're a "sneaky stamp" supporter, please feel free to add your comments to this posting.

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