Real Estate Agents – Are You Breaking The Law?

By Evelyn Marcou, Senior Associate, MST Lawyers

It has long been a debated topic whether or not estate agents are legally permitted to draft special conditions for a Contract of Sale. This is a matter that should not be taken lightly, particularly given that the maximum penalty for contravening the law is two years imprisonment.

 What Does The Legislation Say?

 Section 10(1) of Chapter 2, Part 2.1 of The Legal Profession Uniform Law (Victoria) 2014  (“Uniform Law”) provides that a person (entity) must not engage in legal practice unless the person qualifies as an Australian legal practitioner.  The maximum penalty for breaching this section is imprisonment for two years or 250 penalty units amounting to approximately $39,000, or both. 

Subsection (1) does not apply to an entity or class of entities declared by the Uniform Rules to be exempt from the operation of subsection (1), but only to the extent (if any) specified in the declaration, which applies to:

“a land agent performing work in respect of instruments the person is entitled to draw, fill up or prepare and to charge for, under a law of a jurisdiction or of the Commonwealth.”

Section 53A of the Estate Agents Act 1980 (“EA Act”) provides that:

    (1)     An agent or agent’s representative is not guilty of an offence against section 10 of the Legal Profession Uniform Law (Victoria) only because he or she fills out—

        (a)     a standard form contract—

              (i)     permitted by the regulations; or

              (ii)     approved by the Victorian Legal Services Commissioner or a local professional association within the meaning of the Legal Profession Uniform Law Application Act 2014 ; or

        (b)     a contract prepared by—

              (i)     an Australian legal practitioner; or

              (ii)     a licensee within the meaning of the Conveyancers Act 2006.

    (2)     This does not apply if the agent or agent’s representative fills up the form for, or in expectation of, any direct or indirect fee, gain or reward other than the appropriate commission.

In summary, the EA Act permits an estate agent to “fill up” a standard form of contract permitted by the regulations, namely, a contract note or a contract prepared by an Australian legal practitioner. 

What Is “Fill Up”?

 Estate agents are permitted to do no more than fill in the blanks of standard form documents.  They are not allowed to write any additional terms or conditions into any contract. Only the lawyer is permitted to perform all of the legal work associated with real estate transactions.

We understand that sometimes both the vendor and purchaser of a property may be unrepresented.  This means that the estate agent uses the REIV prescribed Contract of Sale.  In such cases, section 53A of the EA Act allows the estate agent to use this standard form Contract of Sale by filling in the blank spaces.  However, again, it is critical to note that estate agents are permitted to do no more than fill in the blank spaces of the prepared document.

While the phrase “fill up” in section 53A of the EA Act has not been defined, and there have been no court cases directly linked to this point, the High Court has had to consider the role of the estate agent. The High Court has found that the use of the term “agent” in describing an estate agent is misleading; ruling that agents do not have general authority to act on behalf of the vendor in relation to the contract.

Furthermore, the REIV Exclusive Sale Authority (“ESA”) sets out the services provided by the estate agent.  The ESA does not appoint the estate agent as a full agent of the vendor client and confirms that the services offered by the estate agent are of an “introductory” nature only.  Also, the ESA does not appoint the estate agent as an “agent” of the vendor in a full principal and agent capacity, but only in the limited capacity set out in the ESA.

A lawyer, on the other hand, is a true agent for the vendor because the lawyer represents the vendor, a role that extends well beyond a simple introduction.

Need Convincing That You Shouldn’t Draft Special Conditions?

 If an estate agent is found guilty of engaging in unqualified legal practice by drafting special conditions, the maximum penalty for breaching the Uniform Rules is two years imprisonment and/or a  fine of approximately $39,000.

But if this is not convincing enough, please consider the potential personal exposure.  I set out two common examples for consideration:

Example 1:

 An estate agent drafts a special condition making the sale of a property “subject to building inspection by the purchaser“.   The special condition is poorly prepared and does not define or restrict the grounds on which the purchaser can end the contract of sale as a result of the building inspection.  For some reason, the purchaser then decides they no longer wish to proceed with the purchase of the house (they may have found a better house or had a change of heart). The purchaser relies on the poor drafting of this special condition to end the contract of sale, and a legal battle begins between the vendor’s and the purchaser’s solicitors.  The vendor’s solicitor, who was not involved in the drafting of the contract of sale, ultimately advises the vendor that due to the poor drafting of this special condition there is nothing the vendor can do.  The vendor then sues the estate agent for damages.

Example 2:

 An estate agent is acting on behalf of a vendor in relation to the sale of vacant land wrongly assumes that given it is just vacant land, the transaction is relatively straightforward.  The agent elects to complete a Contract Note for the sale of the property rather than recommend to the vendor that they seek legal advice and have their lawyer draft a Contract Of Sale.  The estate agent notes the sale price of $1,000,000.00 and assumes that there is no GST payable.  Later, this assumption is found to be wrong, and the GST amount was payable leaving the Vendor out of pocket by $90,909.00.  Who will the Vendor sue to recover the shortfall?

Further, if an estate agent in their capacity as the an employee goes outside the scope of their employment (i.e. drafting special conditions contrary to the EA Act and Uniform Law) and is sued, the employer’s professional indemnity insurance will not cover the conduct, and the estate agent be personally exposed.

How Does The Above Apply To Leases?

The general principles pertaining to drafting special conditions also apply to estate agent’s drafting and negotiating the legal terms of a lease.

Time and time again we have come across situations where landlords, looking to save on legal costs, have requested that their managing agents prepare the lease. In these circumstances, the managing agent has used the pro forma REIV Commercial Lease.  This document has a blank schedule to be completed by the (agent).

Again, drawing on the application of section 10(1) of the Uniform Law and section 53A of the EA Act, the estate agent is exempted from section 10(1) only if the estate agent “fills up” the REIV Lease.   This authority would limit the agents only to complete the schedule.  An estate agent is not permitted to draft special conditions.  Furthermore, an estate agent should not be involved in negotiating the legal terms as this would be considered as engaging in legal practice, contrary to the Uniform Law.

 Conclusion

In summary, estate agents must take the provisions of the Uniform Law and EA Act seriously and in all circumstances, refrain from engaging in legal work.  The penalties are severe and significant, and the personal exposure is real.

Estate agents should always advise clients, whether they are vendors or purchasers, or landlords or tenants, to seek legal advice and have their lawyers draft and negotiate the terms of the relevant contract.  Lawyers are not only skilled drafters, but also have the legal knowledge required.  Section 10(1) of the Uniform Law exists for a reason to ensure that the right people do the right job.  Just like only an estate agent should sell a house, only a lawyer should engage in legal practice and draft special conditions.

For further information, please contact our Property & Leasing team by email or by phone +61 3 8540 0200.