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Going, Going, Gone: Real Estate Agent Franchisor’s Liability Downsized

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By Eleanor DeMarzi, Lawyer, MST Lawyers

A Century 21 real estate agent sub-franchisor was recently held not to be jointly and severally liable for its franchisee’s misconduct in causing over $100,000 in financial loss to clients.  The Court found that the franchise agreement did not fall within the joint and several liability provisions of the Estate Agents Act 1980 (Vic).  That is, the name under which the franchisee was authorised to operate, “Century 21 Complete Properties”, was not identical to that of the sub-franchisor, “Century 21 Australasia”.

Real estate franchisees commonly trade under their franchisor’s name together with a unique identifier such as a territory.  Although consumers may still identify franchisees with their franchisors’ brand name, this case narrows the focus for attributing liability onto the specific trading name used by the franchisee under the franchise agreement.  This is the first case to consider “franchising agreements” under the Act.  The Act illustrates the need for careful drafting and indemnification of franchise documentation.  It also emphasises that franchisors must monitor franchisees to prevent malpractice particularly, given the recent publicity of real estate franchise fraud and under quoting.

THE FRANCHISE AGREEMENT

In 1990, Century 21 Australia Pty Ltd (“Century 21 Australia”), the sub-franchisor, entered into a Head Franchise Agreement with Century 21 International, the head franchisor incorporated in the United States.  The Head Franchise Agreement granted Century 21 Australia the right to franchise the use of the Century 21 trade marks and system to licensed real estate brokers in Australia.  Century 21 Australia was not itself an estate agent.

In 2009, Century 21 Australia entered into a Franchise Agreement with Victorian Realty Group Pty Ltd (“VRG”), a licensed real estate agent.  The Franchise Agreement granted VRG a franchise to operate a real estate business in Craigieburn under the trading name “Century 21 Complete Properties”.  This business would use the Century 21 trade marks and system in return for a franchise fee being a percentage of gross revenue.

Between 2011 and 2012, VRG committed a number of defalcations that caused financial loss to clients. “Defalcation” refers to theft, embezzlement, failure to account, fraudulent misappropriation, or other act punishable by imprisonment, of or in relation to any money or other property (s 71 of the Act).

The clients were compensated over $100,000 in total from the Victorian Property Fund administered under the Act by the State Government.  The State sought recovery of that amount from Century 21 Australia on the basis of joint and several liability. 

WAS THE FRANCHISE AGREEMENT A “FRANCHISING AGREEMENT”?

If a real estate agent carries on business pursuant to a “franchising agreement”, each party to that agreement is jointly and severally liable for defalcations or negligence committed by the agent (s 43(3) of the Estate Agents Act 1980 (Vic)).  A “franchising agreement” is:

an agreement whereby an estate agent is authorised to carry on business under any name in consideration of any other person entitled to carry on business under that name receiving any consideration whether by way of a share in the profits of the estate agent’s business or otherwise (s 43(5)).

Two issues are relevant in determining whether a “franchising agreement” exists under the Act:

  1. The estate agent’s authority under the franchise agreement to carry on business under a particular name (which may be a trade mark) for consideration; and
  2. The franchisor’s entitlement to carry on business under that same name.

The name under which the franchisee is authorised to carry on business must be precisely, and not merely partly, the same as the name under which the franchisor is entitled to carry on business. It is not sufficient if the name partly overlaps, even if it has commercial value. 

In the interests of certainty, the Court rejected a flexible interpretation of “franchising agreement”.  Only contractual documents including, operations manuals, are relevant and not evidence of how the franchisee actually carried on its business.

On the facts, VRG was authorised to operate only under “Century 21 Complete Properties” and not “Century 21” or any other name.  Century 21 Australia was only entitled to carry on business under “Century 21 Australasia” and not “Century 21 Complete Properties” or “Century 21”.  It was not sufficient that VRG operated under a name which included “Century 21”.  Accordingly, there was no “franchising agreement” within the meaning of the Act.

Although the commercial benefit of the franchise lay in the name “Century 21” and the public would associate “Century 21 Complete Properties” with the “Century 21” network, because of prominent signage and advertising, this did not influence the Court’s conclusion.

RISK MANAGEMENT FOR FRANCHISORS

The impact of the defence upheld in this case is extensive.  For example, there are 250 Century 21 franchisees across Australia operating under similar franchise agreements. 

To mitigate the effect of the joint and several liability provisions on legal liability, financial status and brand reputation, franchisors should consider structuring all franchise agreements so that franchisees operate and publicly advertise under their franchisor’s name plus distinctive identifiers or geographical locations.  Franchisors should also require strict guarantees and indemnities from their franchisees and related parties thereof.  Oversight, control and training of franchisees is essential; as is ongoing reviews of financial records and trust accounts.  Further, it must be remembered that real estate agent franchisors are subject to both the Act and the Franchising Code of Conduct.

The Act was designed to extend liability to franchisors who make their names available for use by franchisees who fraudulently or negligently cause loss to clients.  Given that Consumer Affairs Victoria is currently reviewing the Act, there is a possibility that it will be amended in future to strengthen franchisor liability.

In the meantime, if this decision is not appealed or distinguished, victims of misconduct by real estate agent franchisees may be left to pursue their claims against the franchisee. Deep-pocketed franchisors may not be liable under the Act and victims may only be able to pursue common law or consumer protection remedies.  

Real Estate Agent Franchises: A Hidden Liability” by Jack Newton, Lawyer, MST Lawyers, provides more information on this matter.

For more information please contact one of our Franchise Law team by email franchise@mst.com.au or by telephone on +61 3 8540 0200.