Real Estate Regulators - No Fault With Real Estate Agent's Caveat Clause

OPINION
by Tim O'Dwyer M.A., LL.B
Solicitor
Consumer Advocate
watchdog@argonautlegal.com.au

Not only had the buyers purported to “charge” the property with the seller’s agent’s commission liability while consequently consenting to the agent’s lodgement of an instrument-stopping caveat over the title, but also the seller had “irrevocably” authorized and directed the buyers’ solicitor to pay this commission at settlement.

After reading Peter Mericka’s excellent blog post, Conveyancing Consumer alert- Beware of the Sneaky Stamp, I was reminded of a fairly recent, not quite as sensational but equally disturbing experience I had involving a real estate agent’s “caveat clause” here in Queensland.   But first I will try to explain simply what a caveat is and does.  Essentially a caveat is a powerful legal document which, once lodged with the Registrar of Titles in respect of a particular property, has the immediate effect of preventing the registration on the title to that property  any legal instrument (such as a transfer from seller to buyer).  A lodged caveat will continue by law to prevent the registration of instruments until it lapses or is cancelled, rejected, removed or withdrawn.  Hence a caveat lodged immediately before or shortly after the settlement date of a property sale will cause chaos for all parties to the contract - as well as to their solicitors and lenders as Peter Mericka has reported.

Back to my real estate agent’s “Caveat clause” story:  I was acting for a single lady selling a Gold Coast property.  Like most agent- trusting real estate consumers she had signed the sale contract (prepared by her First National agent) without first seeking any legal advice.  When the fully-signed contract landed on my desk, I was horrified to see in special condition 3.4 of the contract these words:

Upon signing this contract … both parties hereby charge the subject property and consent to the agent lodging a caveat over the property, pending receipt by the agent of payment of the commission owing.

This obnoxious “condition”, the likes of which I had never seen in a real estate contract in my 30-plus years of legal practice, was preceded by special condition 3.4 - a no less obnoxious but quite common agent-protective proviso:

If at settlement the Agent … does not, as the Deposit Holder, hold sufficient money to satisfy payment of the commission in full, the Seller irrevocably authorizes and directs the Seller’s Solicitor, the Buyer and the Buyer’s solicitor to pay the commission or the balance of it to the Agent at settlement out of the proceedings (sic) of the sale.

Just pause a minute, dear readers, to reflect on this bizarre and extraordinary agent-orchestrated scenario:  Not only had the buyers purported to “charge” the property with the seller’s agent’s commission liability while consequently consenting to the agent’s lodgement of an instrument-stopping caveat over the title, but also the seller had “irrevocably” authorized and directed the buyers’ solicitor to pay this commission at settlement. 
Incidentally, special condition 3.1 provided that the commission would be:

… at the rate agreed between the Seller and the Agent, or in the absence of any agreement, at the maximum rate prescribed by the Queensland Auctioneers & Agents Act.

(No matter that the Auctioneers and Agents Act had been repealed years earlier by the Property Agents & Motor Dealers Act 2000.)
For good measure, special condition 3.2 consisted of this equally agent-protective and arguably unconscionable stipulation (which also had no place at all  in a real estate sales contract):

If this Contract is not completed due to the default of the Buyer and the deposit moneys are forfeited to the Seller, or if the Seller agrees to release the Buyer from this Contract, the commission and any outstanding advertising and marketing costs shall be paid to the Agent either upon forfeiture of the Deposit to the Seller or within seven (7) days of a written request by the Agent to the Seller to do so, as the case may be.

As it happened, my client’s buyer could not secure finance so the sale did not proceed and no caveat needed to be lodged by the agent – unlike in Peter Mericka’s horror story.

My client later told me that her agent had made no comment or explanation about this special condition.  Of course she had consequently signed the contract without reading the condition or appreciating the particularly disturbing significance of both parties’ charging the property and consenting to the agent’s lodging of a caveat.

Later, with my client’s approval, I lodged a complaint with Queensland’s Office of Fair Trading (OFT) about the agent’s outrageously reprehensible conduct in inserting such a self-serving, unconscionable and completely inappropriate condition in the contract without presumably drawing its import to the attention of either party or in any way particularly alerting the buyers and their client to the potentially dire consequences for them of any pre-or-post-settlement caveat lodgement.  My letter to OFT said in part:

“Apparently neither the seller nor the buyers fully appreciated the significance of this condition which would not have been inserted at either the request of the buyer or the seller.  Clearly, it was the agent’s clause.”

 I helpfully drew OFT’s attention to several (misleading, deceptive and unconscionable conduct) sections of the Property Agents & Motor Dealers Act 2000 which would, in my opinion, have been breached as well as to several relevant and likely breached sections of  Queensland’s Real Estate Agency Practice Code of Conduct.  Finally I asked OFT to investigate whether this was an isolated incident, or whether the agent was regularly inserting this scandalously repugnant condition into sale contracts.  (Much later I would discover that the agent had been merrily adding this condition for some ten years!)
Anyhow, this encouraging reply eventually came from OFT:

Your concern regarding the licensee making reference to the repealed Queensland Auctioneers and Agents Act in the property contract was noted.

The matter has been investigated and sufficient evidence exists to substantiate a breach of the Property Agents and Motor Dealers (Real Estate Agency Practice Code of conduct) Regulation 2001, Section 8, for failing to exhibit reasonable skill, care and diligence in the conduct of a real estate agency practice.  As a consequence, enforcement action in accordance with the Department’s Compliance and Enforcement framework has been taken against the agent.

Thank you for bringing this matter to our attention.

However, when I requested details of OFT’s “enforcement action”, the Principal Investigations Officer of OFT’s Gold Coast office provided this less-than-satisfactory response:

I can advise that enforcement action has been taken against the licensee and that it falls within the provisions of the Department’s Compliance Framework Policy and Standards.

I can further advise that the matter did not result in a conviction (either criminal or disciplinary) and as such, is not in the public domain.  Accordingly, under the provisions of the Privacy Act, there is no entitlement for the information to be released.

That’s right, folks.  The regulator was refusing to disclose to me, the complainant, on behalf of a client, any details of its “enforcement action” against the licensed agent.   So I promptly lodged a complaint about  OFT with Queensland’s Ombudsman.
The Ombudsman soon wrote advising that he required me first to raise my complaint at a “senior level” of OFT, and suggested I direct my concerns to the Commissioner for Fair Trading.  The Ombudsman’s letter continued:

If, after receiving a reply you remain dissatisfied, you may write to this office again, providing copies of the correspondence exchanged and any other relevant documents.  You should also explain why you consider the decision is wrong or unreasonable and specify the outcome you are seeking.  This office will then assess your complaint and determine what, if any action, can be taken.

I dutifully wrote to the Commissioner for Fair Trading, and asked why I had been refused details of its “enforcement action”.  I also queried whether OFT had adequately investigated my complaint.  (The agent’s failing under the Code of Conduct to “exhibit reasonable skill, care and diligence” seemed a pretty soft offence.)

This initial reply came, not from the Commissioner, but from the Executive Director of Fair Trading Operations:

“I have initiated immediate action to have the case reviewed by an independent officer and I will advise you of the outcome when available.”

After some time this breathtakingly disappointing advice arrived from the Executive Director:

The investigation of this matter has been reviewed by an independent senior officer.  The review found that the matter was adequately investigated and the enforcement action was appropriate in the circumstances.

The reply continued:

In relation to the inclusion of the special condition in the contract of sale, the investigation found there was insufficient evidence to substantiate a breach of the misleading and deceptive conduct provisions or any other aspect of Fair Trading legislation.  Based on the available evidence, it is determined that this matter was contractual in nature and both parties to the contract had the opportunity to seek independent legal advice prior to execution of the contract.

This meant obviously that, no matter what unconscionable, self-serving, dangerous, devious or gobbledegook conditions an agent might add to a contract, OFT would not care a fig if the parties had signed the contract after having the opportunity to obtain independent legal advice.  (Never mind that OFT had not bothered to investigate whether this agent actually gave the parties any “genuine opportunity” to obtain such advice as he was legally obliged to under the Code of Conduct!)

But then, a little ray of sunshine:

I can advise that the enforcement action taken was in relation to an ancillary matter considered during the course of the investigation, namely the inappropriate reference in the contract to the repealed Auctioneers & Agents Act.

As I had also questioned whether there had been unlawful “misrepresentation by silence”, the Executive Director continued:

“Bearing in mind your client signed the contract with the special conditions and, following the subsequent review of the investigation, OFT is satisfied the agent did not make any misrepresentation by way of silence.  No further enforcement action is warranted in this instance.”

As to OFT’s refusal to provide more details of its enforcement action (other than the Code of Conduct breached by the agent’s reference  to a repealed Act) I was served this crock of bureaucratic codswallop:

While there is a recognized public interest in complainants being provided with information to allow them to understand how a regulatory authority has handled their complaint and the outcome, Privacy legislation obliges (regulatory) agencies to manage personal information in accordance with information privacy principles, one of which prohibits the disclosure of personal information to persons or entities outside the (regulatory) agency unless certain limited exceptions apply.

The Freedom of Information process provides a recognized statutory process by which the competing interests of parties to a matter can be reconciled, including rights of review for applicants who may be dissatisfied with an agency decision.  It obliges (regulatory) agencies to consult with third parties who may be concerned by the release of information and provides third parties with equivalent rights of review.  Accordingly, should you wish to seek further details about the investigation and findings, the appropriate course of action would be to lodge a Freedom of Information access application.

 I promptly sent all my fruitless correspondence with OFT to the Ombudsman and suggested  he might wonder, as I did, whether OFT had still “strained at the gnat of  an inappropriate reference to a repealed Act” while “swallowing the multi-humped camel (of outrageous misleading/deceptive/unconscionable conduct)”.  I quoted at length the various sections of the Code of Conduct and the Property Agents and Motor Dealers Act which I felt the agent breached here, and particularly queried OFT’s apparent failure to investigate the significance of the agent’s failure to disclose how his caveat might, if lodged, have affected the buyers’ and seller’s legal interests.  I mentioned the “obvious risks arising”.

I also queried whether OFT investigated what measures, if any, were taken by the agent to ensure that the buyers understood the nature and implications of their charging the property with his commission while consenting to a caveat if the commission was not paid.   Finally, I asked again whether OFT investigated whether this clearly reprehensible conduct on the part of the agent was not an isolated incident.

I subsequently wrote to the Ombudsman to let him know that I had recently come upon a similar “caveat clause” in an L.J. Hooker sale contract for another Gold Coast property.  I also pointed out that Section 24 of South Australia’s Statutes Amendments (Real Estate Industry Reform) Act now prohibited (wonder why?)  estate agents in that State from lodging caveats to secure payment of commission debts.   God bless our switched-on South Australian law-makers!
Six months later I received a letter from the Acting Executive Director of Fair Trading Operations - clearly in response to enquiries made at his office by the Ombudsman.

OFT still stood by its decision that the insertion of the special condition was a “contractual matter” and did not breach any of the laws referred to by me.  While less-than-accurately describing special condition 3.4 as “an option for the agent to register a Caveat over the property”, this letter continued with this cop-out explanation:

Providing a real estate licencee has been properly appointed …. and does not charge the client excess commission … Fair Trading does not have legislative authority to intervene in a contractual arrangement between an agent  and the agent’s client regarding the agent’s civil entitlement to commission.

The Acting Executive Director also blandly advised me  that the condition in question “may be immaterial” as an agent “could still register a caveat over a property if the agent could demonstrate to a court that they have an interest in the property”.  But wait, there was more of the same legal (and grammatical) nonsense:

In summary it may be argued that the inclusion of the special condition only highlighted the options available to the agent to retain or recover commission on defaulted contracts of sale.

(OFT still missed the blindingly obvious point that the agent had given himself the right to lodge a caveat after settlement which could potentially frustrate the buyers’ obtaining title to the property they had just legally purchased!)   And yes, dear patient readers, there was more.  After assuring me that OFT “tries to assist buyers and sellers in achieving fair and equitable terms and conditions on contracts”, the Acting Executive Director concluded:

In this particular case I am pleased to report that following discussions with OFT, the agent has now removed Special Condition clauses 3.2 and 3.4 on standard contracts in relation to the agent’s entitlement to commission and the option to place caveats over properties.  It may be noted that the agent voluntarily removed these clauses.  The agent is aware that, if required, he may initiate his own civil action with respect to recovering commission.

This sounded like the agent, after his “discussions” with OFT, had finally taken some sound legal advice and acted on it to remove his offensive clauses.  The agent had even helpfully provided OFT with a copy of his now “amended standard contract of sale”.  The agent had “also alleged” that the special condition was drafted by his (prevous?) lawyer over 10 years ago.  Finally I was told:  “The agent maintains during this time his agency  has never enforced the provisions of Special Condition Clauses 3.2 and 3.4.”  Why, I wonder, was I the first lawyer ever to be so alarmed about this condition to draw it to OFT’s attention?  If anyone did, perhaps he or she copped a similar gormless “this matter was contractual in nature” response.

I immediately informed the Ombudsman of this letter and pointedly remarked:

You may agree with me that OFT has still not apparently appreciated what incredible mischief might be caused if an agent lodged a caveat on a title after settlement of a sale.

I also suggested that the Ombudsman might agree that much of OFT’s explanation was little more than gobbledegook.  I could not imagine when a real estate agent would ordinarily, in the absence of any written agreement with his client, have a caveatable interest in a  client’s property.
Almost two years after first writing to OFT I was eventually informed in a five-page letter from the Ombudsman that his investigation into my complaint about OFT was complete.  His officers had met with OFT officers and also “obtained relevant OFT files”.

Interestingly, one early OFT file note disclosed this scandalously less-than-respectful and how-to-avoid-the-issue attitude within OFT to solicitors’ complaints such as mine:

If a complaint has not been received by one of the parties to the contract, it may be an appropriate exercise of discretion not to investigate further the matters raised by the solicitor.

More interestingly, the same note revealed a seemingly cozy relationship between OFT and the Real Estate Institute of Queensland (REIQ).  OFT intended to discuss with the REIQ the use of such a special condition in real estate contracts “with a view to establishing whether its use is endorsed by the REIQ …”  No doubt OFT did not intend to have a similar discussion with the Queensland Law Society.

The next gob-smacking and long overdue revelation was that OFT’s disciplinary action had consisted merely of “an official warning” to the agent.  Talk about toothless tigers!

Finally the Ombudsman was closing his file because his principle recommendation that OFT explain itself better to me had already been followed in the letter referred to above.  The Ombudsman’s investigation effectively excused  OFT’s failure to find anything untoward in the agent’s conduct here other than his dumb reference to a out-of-date Act.

I could conclude only that no-one with legal qualifications within either organization, OFT or the Ombudsman’s Office, had played any part in investigating my complaint.  No-one grasped how this agent’s “caveat clause” patently prejudiced the legal rights of both the buyers and the seller.    No-one could appreciate even that a contract between a seller and buyers was no place for the agent to purportedly agree with his client on the rate of  commission and when it would be payable. Nor had anyone understood the nature and import of the fundamental and long-established fiduciary duties owed by estate agents to their clients.   These duties had been clearly and blatantly breached here!

Nevertheless, I may have put a corrective cat among OFT’s investigative pidgeons insofar as the Ombudsman mentioned other recommendations to OFT:

We also advise that following our consideration of the OFT investigation, we also made other recommendations to OFT relating to systemic issues.  The remaining recommendations relate to OFT record keeping and investigative practices.  The recommendations have been accepted by OFT and we are working with it concerning implementation.  We do not expect it will be necessary to further communicate with you about those matters.

This was part of my final bullet to the Ombudsman:

You will be pleased to know that I do not intend to take this matter any further.  Frankly the whole exercise has been very disappointing. The only good news here for real estate consumers (and OFT) may be the advent of the Unfair Contracts Leglislation (Trade Practices Amendment) Australian Consumer Law Act (NO. 1) 2010 on 1st July, 2010.  The essential effect of this reform is to render void any unfair term in a standard form consumer contract.

Needless to say, next time I see any clause such as the one in question here my complaint may be to the ACCC.  Let’s just hope ACCC doesn’t flick it onto OFT.

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