Agents Beware!! Is going to jail really worth it?

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 of real estate. 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 2.2.2 (1) of the Legal Profession Act 2004 (Vic) (“LPA Act”) provides that a person must not engage in legal practice unless the person is an Australian legal practitioner.  The maximum penalty for breaching this section is imprisonment for two years.  The notes to this clause specifically say that section 53A of the Estate Agents Act 1980 (Vic) (“EA Act”) provides an exemption from subsection (1) for persons who do certain things under the EA Act.

Referring to section 53A of the EA Act, this section 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.  This clause does not, however, 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.

What is meant by “fill up”?

Estate agents are permitted to do no more than fill in the blanks of specified documents.  They are not permitted to write any additional terms or conditions into any contract. Only a 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 no contract has been prepared.  In such cases, section 53A of the EA Act allows the estate agent to use a standard form contract of sale and fill in the blank spaces.  However, again, it is critical to note that estate agents are permitted to do no more that fill in the blank spaces of the prepared document.

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

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

A lawyer, on the other hand, is a true agent for the vendor because the lawyer actually 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 section 2.2.2 (1) of the EA Act is two years imprisonment.

But if this is not enough to convince you, how about your potential personal exposure.  We set out two common examples for you to consider:

Example 1:

Estate agent drafts a special condition making the sale of a property “subject to building inspection by purchaser“.   The special condition is poorly drafted 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.  The purchaser, for whatever reason (eg.  finds a better house, has a change of heart) decides they no longer wish to proceed with the purchase of the house. 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 solicitor and purchaser’s solicitor.  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:

Estate agent acting on behalf of vendor in relation to sale of vacant land wrongly assumes that given it is just vacant land, the sale is fairly straight forward and 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.  It is later discovered that there is GST payable and the Vendor is out of pocket $90,909.00.  Who do you think the Vendor will sue to recover the shortfall?

If you still need further convincing, remember that if in your capacity as employee you go outside the scope of your employment (ie. drafting special conditions contrary to the EA Act and LPA Act) and you are sued, you will not be covered by your employer’s professional indemnity insurance and will be personally exposed.

How does the above apply to Leases?

I would like to point out that the above general principles also apply to estate agents drafting and negotiating the legal terms of a lease.

Time and time again we have come across the situation where landlords, looking to save on legal costs, have requested that their managing agents prepare the lease. In these circumstances, the managing agent generally uses the pro forma REIV Commercial Lease which has a blank schedule which needs to be completed.

Again, drawing on the application of section 2.2.2 (1) of the LP Act and section 53A of the EA Act, the estate agent is exempted from section 2.2.2 (1) if the LP Act only if the estate agent “fills up” the REIV Lease.   This authority would limit the agent to complete the schedule only.  The agent is not permitted to draft special conditions.  Furthermore, the agent should not be involved in negotiating the legal terms of the lease as this would be considered as engaging in legal practice, contrary to section 2.2.2 (1) of the LP Act.

Conclusion

In summary, we strongly recommend that estate agents take the provisions of the LPA Act and EA Act seriously and in all circumstances, refrain from engaging in legal work.  The penalties are serious and the personal exposure is real.

You should always advise your 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 2.2.2(1) of the LPA Act exists for a reason and is there to ensure that the right people do the right job.  Just like only an estate agent can sell a house, you need to be a lawyer to engage in legal practice and draft special conditions.

For further information on drafting special conditions, please contact Evelyn Marcou of our Property and Leasing team on +61 3 8540 0200.