by Peter Mericka B.A., LL.B
Real Estate Lawyer
In the absence of evidence to the contrary, we must assume that Richard Wood Solicitors and Barry Plant Real Estate have done everything the law requires of them in relation to gifts offered to estate agents in return for client referrals. But does it make sense for a lawyer or conveyancer to offer gifts to estate agents if legal compliance makes the whole exercise a waste of time and money?
The value of “word-of- mouth” referrals
It is common knowledge that “word of mouth” referrals are the best form of advertising. This is because a word of mount referral is usually generated when a person receives good service, and wants to assist another to person to enjoy a similar experience. The referral is a favour to the person referred, and a reward to the professional who provided the service.
But what happens when a word of mouth referral is motivated by a gift or reward? A gift or reward is likely to taint the referral, changing it from being an expression of genuine gratitude and helpful advice to a commission.
Gift or commission?
A gift is usually unexpected; given in gratitude and received with humility and appreciation. Usually, a gift is an expression of thanks for better-than-expected service. A commission, on the other hand, is payment expected or demanded in return for something. It is a business arrangement. Something is being sold.
When an estate agent expects to be paid for referring clients, and when the lawyer or conveyancer making the payment for the referral knows that the payment is the reason for the referral, there are no favours being done. The client is simply being sold.
The buying and selling of clients in this manner may be unsavoury, but it is not illegal if the client is aware that he or she is being treated as a commodity. This is because the client is aware of what is going on, and can make a decision as to the value or otherwise of the referral.
But it all becomes rather grubby, and quite illegal, when the client is not made aware of the commission. A client who believes that she is being referred for reasons other than the payment of a commission may feel tricked and cheated if she later discovers that the the referring estate agent received a gift in return for ushering her in the direction of the gift-giving lawyer or conveyancer.
What is a secret commission
Section 179 of the Crimes Act 1958 states:
179. Gift or receipt of secret commission in return for advice given
(1) Whenever any advice is given by one person to another and such advice is in any way intended to induce or influence the person advised…to enter into a contract with any third person…and any valuable consideration is given by such third person to the person giving the advice without the assent of the person advised the gift or receipt of the valuable consideration shall be an indictable offence…
So, if an estate agent gives a client a word-of-mouth referral to a conveyancer in order to have that client enter into a contract with the conveyancer to become the conveyancer’s client, and the estate agent receives a gift for that referral without the client’s knowledge, then both the estate agent and the conveyancer commit a serious criminal offence.
In other words, the client must be told that he is being bought and sold by the estate agent and the conveyancer.
Disclosure reduces the value of the referral
Imagine that you have just closed a deal to buy a home through an estate agent, and the estate agent hands you a card and says,
“This is the business card of a local lawyer who will help you with your conveyancing.”
The average consumer would probably assume that the estate agent and the lawyer have a good working relationship, that the estate agent has faith in the lawyer’s ability to represent and assist the consumer, and that the consumer is benefitting from the knowledge and experience of the estate agent. In short, the consunmer would appreciate the assistance of the estate agent.
But what if the estate agent, holding out the lawyer’s business card, were to say,
“This is the business card of a lawyer who gives me gift every time I send her a client.”
The average consumer would probably become suspicious, and wonder:
Why does the lawyer have to pay for referrals?
Why doesn’t the lawyer attract me by giving gift to me rather than to the estate agent?
How much has the lawyer invested in gifts to the estate agent?
How supportive with the lawyer be if I have a dispute with the estate agent?
Secret commissions are more likely to be effective because they suggest that the referral is being made for noble reasons when in fact they are simply a business transaction.
Disclosure exposes the referral as a desperate attempt to buy business, and consumers tend to find this offensive.