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Real Estate Agent Franchises: A Hidden Liability

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By Jack Newton, Lawyer, MST Lawyers

Of the large number of real estate industry franchise systems, very few are aware of a significant hidden liability that exists for participants in real estate industry franchise systems.

A little-known provision in the Estate Agents Act 1980 (the Act) imposes several obligations on franchising estate agents.

First, it imposes an obligation on an estate agent to notify the Business Licensing Authority (now part of Consumer Affairs Victoria) of the agent’s entry into a franchise agreement.

Second, and more importantly, where an estate agent carries on its business under a franchise agreement, the following apply:

  • each party to the agreement is jointly and severally liable for any defalcation by the estate agent;

Defalcation is defined to mean any theft embezzlement failure to account fraudulent misappropriation or other act punishable by imprisonment of or in relation to any money or other property.

  • each party to the agreement is jointly and severally liable for any liability incurred by the estate agent as a result of negligence by:
    • the estate agent; or
    • an employee or servant of the estate agent,

in the performance of the duties of an estate agent.

  • ¬†each party to the agreement is jointly and severally liable for any costs or fines arising out of any proceedings instituted in respect of that defalcation or negligence.

A contravention of this section of the Act is a criminal offence.

These obligations apply to:

  • licensed estate agents (including any person whose licence has expired or has been cancelled);
  • directors and officers of corporations that are licensed estate agents; and
  • directors and officers corporations that were licensed estate agents but whose licences have expired or have been cancelled).

There has recently been significant media coverage of the issues relating to the one real estate franchise system. That coverage serves as a reminder to all real estate industry franchise system participants (meaning franchisors, franchisees and guarantors) that if you are a party to a franchise agreement; you are jointly and severally liable for negligence and defalcation by the estate agent.

Whilst some parties may take comfort in either contractual indemnities (for example of a franchisor by the franchisee and guarantors) or perhaps indemnity insurances, those two things alone may not be sufficient to protect your position.

Given the issues covered by this section of the Act impose criminal liability on parties, typically criminal liability is not covered by insurance policies, and some courts have gone as far as directing that fines be paid by individuals without reimbursement by their company or organisation.

Similarly, some insurance policies will exclude any “contractually assumed liabilities” and therefore any contractual indemnities provided by that party will not be covered by the party’s insurance policies.

It is critical to ensure that you are aware of this, and that your indemnity clauses are drafted to provide as much protection as the law permits.

Finally, it is important to remember that guarantors are parties to the franchise agreement and therefore, any personal assets held by the guarantors are at risk.

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.