by Peter Mericka B.A., LL.B
Real Estate Lawyer
I have discussed the way in which payments to estate agents can become illegal secret commissions if they are not disclosed, and how the disclosure of payments tends to work against the purpose of the payments. In the absence of evidence to the contrary, I assume that any payments or gifts made by Richard Wood Solicitors to Barry Plant Real Estate’s estate agents, or any other estate agents, have been disclosed in full by both parties. But to whom should these disclosures be made?
When a solicitor or conveyancer pays an estate agent for referrals, the payment must be disclosed to the client. Failure by the estate agent or the solicitor to disclose the gift or payment would probably constitute a criminal offence as the payment of a secret commission.
Consideration would also have to be given to the fiduciary duty owed by the estate agent to the client. In the case of Phipps v Boardman  2 AC 46 Lord Russell said,
“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit in no way depends on fraud, or the absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his actions. The liability arises from the mere fact of the profit having, in the stated circumstances, being made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account.”
On this basis a failure to disclose could be construed as a theft from the client!
Tim O’Dwyer a Queensland lawyer, and regular contributor to this blog, makes the following observations:
“Real Estate agents who receive kickbacks over and above their sales commissions are said to obtain “secret commissions”; seller clients are being cheated, of course, while buyers are mostly being used.
True story: an agent, engaged to sell his client’s property, negotiated a sale to a buyer whom the agent had dealt with previously. After the sale settled and the agent got his commission, the seller discovered that the buyer had made a secret payment to the agent. The seller sued the agent and recovered from the agent not only the amount of the buyer’s bonus but also the full sale commission.
Basic rule: agents who secretly score kickbacks from buyers (or advertising media outlets, or referred solicitors, finance brokers, building/pest inspectors, insurers etc.) are liable not only to lose their commissions but also to account to their seller clients for what they collected on the side or, rather, on the sly.
Usually secret commissions are money but may be gifts or other benefits. Whatever, a greedy agent’s liability to forfeit commission and account for the kickback remains the same. Property owners who discover their agents taking secret commissions in the course of selling (or managing) a property may terminate their agency agreements. Sellers may also cancel sales contracts with buyers paying secret commissions.
But wait, there’s more. The Criminal Code creates offences when an agent (or any agent’s parent, spouse, child etc.) corruptly receives or solicits any “valuable consideration” in connection with his handling of his client’s affairs. “Valuable consideration” includes money, gifts, loans, commissions, rebates and discounts. Similarly, anyone who corruptly gives or offers an agent a kickback commits an offence.
When a seller civilly sues an agent on the make, there is no need to prove “corruptness” – only the “secretness” of the deal.”
The Australian Taxation Office
The estate agent must declare payments or gifts received from solicitors for taxation purposes. Failure to do so could result in a variety of criminal charges.
The solicitor who makes the payment will undoubtedly claim the payments made to the estate agent as a tax deduction. This would be likely to alert the ATO to the fact that the estate agent has been receiving the payments claimed, and the claim and income of the agent and solicitor could be cross-referenced.
The solicitor’s accountant would be told of the payments, because the accountant is responsible for monitoring the financial health of the solicitor’s business, and for preparing and submitting the solicitor’s taxation returns.
Similarly, the estate agent’s accountant will need to know about the payments received by the estate agent so that they can be included in the estate agent’s taxation assessment.
The professional indemnity insurers
Solicitors and estate agents carry compulsory professional indemnity insurance. The purpose of professional indemnity insurance is to cover a professional person where a client claims that the professional has been negligent in fulfilling his or her professional duties, causing the client loss.
The insurer is entitled to know of anything that could affect its decision to provide cover. The offering of payments in return for client referrals could seriously affect the solicitor/client relationship and the estate agent/client relationship, and increase the insurer’s exposure. Prudent solicitors and estate agents would certainly discuss a payment-for-referral arrangement with their professional indemnity insurer.
The professional bodies representing solicitors and estate agents would be interested to know about payment-for-referral arrangements, so that members could be warned of the associated dangers. The Australian Institute of Conveyancers (Victoria Division) is aware that there is a significant problem with the payment of secret commissions to estate agents, and provides the following warning to conveyancers as part of its “Startup Kit” for new members:
“When commencing your Business and establishing contacts you may consider paying Referral Fees. Whilst this is your decision you should remember that depending on how you conduct this, it may constitute an offence under the Crimes Act. It has been brought to the attention of the VCA that the Victoria Police Fraud Squad have been instructed by Consumer and Business Affairs to investigate any complaint made regarding this issue.”
It reflects poorly on a profession if rogue members draw unwanted attention. While AICVIC doesn’t go far enough to discourage the practice, credit must be given for its having acknowledged that it is a problem and that new members should be informed that it could involve the commission of criminal offences. I am unaware of any similar warnings being issued by the Law Institute of Victoria or the Real Estate Institute of Victoria.
The staff of the solicitors and the estate agents would have to be told about the payment-for-referrals arrangement, because such an arrangement has the potential to affect not only the integrity of the firm but also that of the staff. This is particularly so if a member of the staff should become an unsuspecting “mule” for the passing of gifts and the arranging of appointments.
The situation could be even more serious if staff members were to become parties to criminal behaviour.
Principles of fairness would dictate that staff be fully informed of the arrangements, encouraged to ask questions, and permitted to refuse to participate.
Paying for referrals necessitates disclosure to a wide range of parties, all of whom are likely to take a very dim view of a practice that smacks of desperation, and casts its participants as potentially shonky.
Full and proper disclosure is also an administrative nightmare, with potentially huge costs associated with legal compliance.
Operating a payment-for-referral scheme legitimately and with full disclosure may be profitable for some, but it is more likely to remain the refuge of those who are new to the industry, and those in the industry who are desperate and struggling.
On the other hand, operating such a scheme secretly and illegally could be highly lucrative.