Update required to policy when licensee buying property

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Agents and licensees will be surprised to learn that their policy about buying property when the agency has been engaged to sell a property do not comply with legal requirements.

The internal policy should state that the purchase must be negotiated by the listing salesperson or if they are the same person as the proposed buyer, then the listing office branch manager.

Dealing with conflicts to satisfy an agent’s obligations proves difficult for both agents and lawyers. The Court of Appeal has recently clarified the obligations of agents when acting in a conflict situation and the nature of “informed consent”.

Agents will be familiar with the requirement that the vendor’s consent and an independent valuation is required – s 134-137 of the Act. The Real Estate Agents Authority (REAA), High Court and Court of Appeal decided more than compliance with these sections is required.

Barfoots existing policy said:

…When a salesperson licensee wishes to purchase a property that is owned by a current client of the Company Licensee, those licensees are instructed that they should contact the client directly to ascertain the current situation with the property. The licensees are then authorised to commence and control all negotiations between themselves and the client provided that the provisions of section 134 to 137 of the Act have been complied with.

The REAA committee found:

…there is an obvious conflict of interest if an employee of the agent becomes privy to this information and is able to use that knowledge for their own personal benefit. This is compounded where, as a result of the Company’s policy, an employee is afforded direct access to the client prior to commencing negotiations and thereafter has the ability to negotiate the terms of an agreement where they wish to purchase the property for themselves. The second and related matter common in both cases was the lack of access to advice or counsel from the Complainant’s agent during negotiations.

Barfoot appealed the decision of the REAA. The High Court found, for a different reason than the REAA, that a client must be provided with sufficient information to understand the nature and implications of a conflict. The Judge did not consider the prescribed form in the Schedule to the Regulations adequately explained the risks. The Court said:

B&T’s policy proceeds on the wrong assumption that compliance with ss 134-137 will be adequate to obtain true consent to licensees being relieved of their usual fiduciary obligations. It does not address the obligation on licensees to explain to the client the nature of the conflict and the consequences of giving consent. As a result, compliance with the internal policy, without more, puts both licensees and clients at risk.

The Court of Appeal agreed with the High Court and the REAA that the conflict had not been handled properly:

B&T’s policy amounts to an abdication of its primary responsibility as the holder of the listing to act in the best interests of its vendor client.

Instead, the policy leaves the client in the hands of a licensee whose objective as would-be purchaser necessarily conflicts with the best interests of the client as vendor.

The Court of Appeal case is Barfoot & Thompson v REAA [2016] NZCA 105, decided on 8 April 2016.

The Court concluded that conflict could be substantially reduced by updating the policies so that they also said that such purchases must be negotiated by the listing salesperson or if they are the same person as the proposed buyer then the listing office branch manager.

If agents or licensees require assistance with compliance with these requirements, please contact our property law team for advice.

Our thanks to Tony Savage for writing this article