Required Readings: Extra-Jurisdictional Licensing Program. The Real Estate Act

Transcription

1 Required Readings: Extra-Jurisdictional Licensing Program The Real Estate Act August 2008

2 Table of Contents Introduction... 4 Learning Outcomes... 5 Legislation Defined... 6 Real Estate Act... 6 Rules... 7 Bylaws... 8 Regulations... 9 Real Estate Council of Alberta Licences Exceptions to Licensing Requirements Unlicensed Activity Concerns and Penalties Classes of Industry Members Real Estate and Mortgage Industry Authorization Real Estate Industry Real Estate Broker Activities Mortgage Industry Mortgage Broker Activities Real Estate Appraisal Industry Real Estate Appraisal Activities Obtaining an Authorization Refusal/Restriction/Suspension/Cancellation of Authorization Renewal of Authorization Mandatory Professional Development Transferring to a New Brokerage Notice of Changes to Industry Member s Information Unlicensed Persons - Assistants/Brokerage Support Personnel Licence Search

3 Brokerage and Broker Responsibilities Brokerage Licence Requirements Brokerage Responsibilities Broker Responsibilities Industry Member General Responsibilities Industry Member Responsibilities to Clients Obligations of Clients Industry Member Disclosure Requirements Industry Member Responsibilities to Customers Industry Member Responsibilities to Brokerage Industry Member Responsibilities in Personal Trades Three Levels of Disclosure Commissions Incentives and Inducements Guaranteed Sale Agreements Advertising Requirements Avoiding Misleading Advertising Conduct Proceedings Compliance Audit Other Legislation Affecting Real Estate Summary

4 Introduction The nature of the real estate industry is entrepreneurial. Industry members are free to determine their own levels of success and to work toward reaching their own goals. The impression of autonomy in the industry can lead industry members to think of themselves as not accountable to anyone. On the contrary, the level of accountability is high for all industry members. An Alberta real estate industry member carries greater responsibilities and obligations than in many other businesses or occupations. First, industry members are registered to and accountable to a brokerage. Industry members are also responsible for complying with the legislation as determined by provincial statute and the Real Estate Council of Alberta (RECA). Most significantly, industry members are responsible to their clients. Alberta s real estate legislation guides an industry member s day-to-day practice; however, many areas of real estate business do not readily fit into precise rules. Therefore, an understanding of the correlation between legislation and practice is important to industry members and the consumers they serve. This section is concerned with introducing real estate legislation and providing practical guidelines for complying with it. While the provincial legislation applies to industry members from all industry sectors, this section will focus on the legislation applying to the real estate sector. Legislation that applies most directly to the day-to-day business of an industry member is reviewed here. The Real Estate Council of Alberta s website, will be your source of the most up-to-date information regarding licensing and legislation and legislation interpretation. Industry members are encouraged to visit the site regularly. Throughout this section you will find references to legislation. It will often be summarized for simplicity. To view the actual wording, refer to the legislation itself which is included at the end of this section. Disciplinary Actions will be referenced throughout to illustrate the consequences of failing to comply with the legislation. All are based on real cases and are taken from the case summaries in RECA s newsletter, The Regulator. Many more detailed case summaries can be viewed at 4

5 Learning Outcomes At the end of this section, you will be able to: 1. Discuss the role of the Real Estate Council of Alberta 2. Identify three industries regulated by the Real Estate Council of Alberta 3. Describe how trading in real estate is regulated in Alberta. 4. Identify licensing/registration requirements for real estate associates, associate brokers and brokers. 5. Describe the major responsibilities of the associate, the broker and the brokerage. 6. Describe activity that contravenes the provincial legislation. 7. Outline the Real Estate Council s disciplinary process for breaches of legislation. 8. Identify the provincial and federal legislation that have an impact on the trade of real estate. Important Note for Students The most current version of the Real Estate Act, Rules, Regulations and Bylaws can all be found on the RECA website, In preparing for the extra-jurisdictional exam you will want to focus your review. A solid knowledge of the legislation and statutory regulations that pertain to the real estate industry in Alberta is highly recommended. Particular attention should be paid to the Act and the Rules. The portions of the Act and Rules that apply to mortgage brokerage or appraisal will not be tested. To find the Real Estate Act, Rule, Regulations and Bylaws on the RECA website, go to Industry Standards and then legislation. If you wish to have an official copy of the Real Estate Act, it may be purchased through the Queen s Printer, 5

6 Legislation Defined "Morality cannot be legislated but behaviour can be regulated. Judicial decrees may not change the heart but they can restrain the heartless." Martin Luther King. In the simplest of terms, legislation is the law. Laws are written to govern conduct. Violations of laws lead to government action such as imprisonment or fine, or private legal actions against the law breaker taken by the injured party. In Alberta the legislation most directly affecting the real estate industry is the Real Estate Act, and its Rules, Bylaws and Regulations. Copies of the legislation can be found in the Appendix, however, to ensure you are referencing the most up-to-date legislation, visit the Real Estate Council of Alberta s website on a regular basis. Interpretations and Definitions The first part of the Act, Rules, Bylaws and Regulations is the Interpretation or Definition section. This is a useful reference because it gives you the meaning of the terminology used in the legislation. Example: In common usage, the word trade can mean business or commerce or the exchange of goods. The Act Interpretation section [Act 1(1)(x)], defines trade in the real estate context. The definition includes the types of transactions that are considered trades and the types of activities considered to be trade activities, such as advertising and negotiating. Real Estate Act The Real Estate Act (Act) is the provincial legislation that regulates real estate brokers, mortgage brokers and appraisers. Industry members must comply with the legislation made up of the Act, along with its Rules, Regulations and Bylaws. 6

7 The Act provides for the self-regulation of the real estate industry. This is similar to other professions such as lawyers, doctors, and accountants and includes the responsibility for consumer protection. The Act has six Parts of importance to industry members. Part 1 Real Estate Council of Alberta Deals specifically with the Real Estate Council its powers and purpose. Part 2 Regulation of Trading and Dealing Indicates that an authorization is required, discusses commissions and trust accounts and trading in real estate outside Alberta. Part 3 Conduct Proceedings Deals with the particulars of investigations, hearings and appeals regarding the conduct of industry members. Part 4 Real Estate Assurance Fund Provides for the Council s administration of the Real Estate Assurance Fund. Professionalism in any field includes programs designed to enhance consumer protection. The Fund acts as an insurance policy for the public against breach of trust or fraud relating to a real estate or mortgage broker transaction. The regulations for the administration of the Fund are detailed in the Ministerial Regulation (covered later in this section). Part 5 Alberta Real Estate Foundation Supports real estate initiatives for the benefit of the industry and the people of Alberta. The Foundation's revenue comes from the interest earned on public money, deposited in real estate brokerage trust accounts. (The Act does allow for trust monies to be held in a separate account for individuals who would like to have their interest paid to them rather than the Foundation.) The Act requires the Foundation to use these funds to: promote and undertake the education of related professionals and the public in respect of the real estate industry support law reform and research in respect of the real estate industry undertake other projects and activities to advance and improve the real estate industry For more information, visit Details for the administration of the Foundation are found in the Ministerial Regulation (covered later in this section). Part 6 General Provides guidelines on Council orders to cease business activities, periodic brokerage operational inspections by the executive director, service of documents, administrative penalties, Ministerial reviews, etc. Rules The Rules contain most of the requirements that affect industry members on a day-to-day basis. While all the legislation is important, industry members should be most familiar with the Rules. The Council has the authority to create or amend the Rules as considered necessary with regard to items addressed in Section 12 of the Act. This authority allows the Council to adapt quickly to changes or potential problems in the marketplace. The Rules are established by the Council and contain six parts: 7

8 Part 1 Authorizations, Licences and Registrations Contains 9 Divisions, with a focus on the qualifying procedures for becoming an industry member and maintaining an authorization. 1. Classes of licences 2. Authorizations 3. Licence eligibility 4. Licence requirements for individuals 5. Registration certificates 6. Licence requirements for brokerages 7. Refusal, suspension and cancellation of a licence or registration certificate 8. Review of executive director s decision 9. Information to be provided by industry members Part 2 Industry Standards of Practice This is likely the part of the Rules industry members will find most relevant to their day-to-day practice. This part consists of 4 divisions: 1. Standards of conduct for all industry members 2. Real estate brokerage standards 3. Mortgage brokerage standards 4. Real estate appraisal standards Part 3 Accounting, Records and Reporting Requirements This has four divisions especially pertinent to brokerage and appraiser operations. 1. Interpretation 2. Requirements for real estate brokers 3. Requirements for mortgage brokers 4. Real estate appraisers Part 4 Errors and Omissions Insurance This part deals with the requirement for real estate industry members to carry errors and omissions insurance. Professionalism in any field usually requires the practitioner to participate in a program to provide consumer protection. The Alberta errors and omissions program is an insurance or indemnity plan offered through the Real Estate Insurance Exchange (REIX) for the benefit of its subscribers. This program is described in Section 5 of this course. Part 5 Prospectus Requirements Provides requirements for real estate developments which are located outside Alberta, but are marketed within Alberta. Part 6 Fees Fees are found in a schedule to the Rules and include the current licence and registration fees, Assurance Fund Levies, Prospectus and General fees. Part 7 Coming into Force This part gives the effective date of the Rules. Bylaws The RECA Bylaws are, for the most part, a set of administrative guidelines that specify how the Real Estate Council of Alberta operates on a daily basis. The Bylaws are established by the Council and contain six parts: 8

9 Part 1 and 2 Council Members and Council Proceedings These parts focus on Council members and their meeting and voting protocol, including: how appointments to Council are made duties of Council members election and duties of officers (Chair and Vice-chair) meeting and voting guidelines establishing standing or special Committees Part 3 Administration and Organization This deals with Council organization and the administrative policies it follows. This includes the appointment of the executive director and the duties of that role, administration of the Council and authorization of its documents. Part 4 Financial Administration Provides the framework for the financial administration of the Council, including fiscal year, operating and capital budgets, expenditures, etc. Part 5 Administrative Penalties Deals with administrative penalties, which are monetary fees charged by the Council to industry members for specific contraventions of the Act, Rules, Bylaws or Regulations. (Reference Bylaws, Schedule 1.) Part 6 Practice and Procedure of Hearing and Appeal Panels Allows the Council to approve the procedural guidelines for the Hearing Panel and Appeal Panel. Part 7 Real Estate Assurance Fund Grants Council authority to establish practices and procedures for the fund s administration and the executive director s administration of the fund under Council s direction. The financial administration of the fund is also provided for. Regulations There are two Regulations: Exemption Regulation Real Estate (Ministerial) Regulation Exemption Regulation This Regulation grants exemption from the Act to certain persons. With regard to acting as a real estate broker, the following are exempt: an on-site manager of a residential property a person who is licensed under the Retail Home Sales Business Licensing Regulation a non-profit organization With respect to acting as a mortgage broker, the following are exempt: a corporation, where mortgages are given to it as part of an arrangement to provide housing for its own employees a corporation, where mortgages are given to it by its dealers, brokers or lessees Federated Co-operatives Limited Netherlands Emigration Board Western Builders Capital Limited Agriculture Financial Services Corporation 9

10 With regard to acting as a real estate appraiser, the following are exempt: a person who appraises a business that has no premises or other interests in land an accredited municipal assessor of Alberta Real Estate (Ministerial) Regulation This Regulation sets policy with regard to the organization and administration of the Alberta Real Estate Foundation and the operation of the Real Estate Assurance Fund. Real Estate Council of Alberta Role of the Real Estate Council The Real Estate Act establishes the Real Estate Council of Alberta (RECA) [Act 3] which is mandated to protect consumers and to provide services that enhance and improve the industry and the business of industry professionals. RECA creates consumer confidence and trust in the industry professional by: setting and enforcing standards of conduct and professional development requirements for the industry to protect the consumer providing services that enhance and improve the industry promoting the integrity of the industry To fulfill this mandate, RECA is responsible to: set out duties for its members and officers, and deal with matters pertaining to the business and affairs of RECA, including services provided and fees levied on industry members set the Rules that govern industry members set requirements for authorizations of industry members including education, errors and omissions insurance coverage and professional development conduct hearings and appeals arising from complaints of improper conduct by industry members protect against, investigate, detect and suppress mortgage fraud as it relates to the industry review prospectuses with respect to trade in property located outside of Alberta administer the Real Estate Assurance Fund appoint an Executive Director set the philosophy, direction and policies for the Council and staff submit an Annual Report to the Minister responsible for the Act The Act [6(1)] establishes the appointment of the 12 members to Council 10

11 Role of the Executive Director The Council appoints an executive director who acts as the chief administrative officer of the council [Act 8(1)]. This position is responsible for carrying out the powers, duties or responsibilities assigned by the Real Estate Act and those delegated by the Council. The executive director provides leadership and direction to ensure effective and consistent application of Council s self-regulatory responsibilities and ensures the Council policies are implemented by administration. The organizational structure of RECA has the executive director overseeing the activities of several departments: 11

12 Role of the Provincial Government The Ministry of Service Alberta represents the provincial government in matters related to the Real Estate Act. Because the Real Estate Council is established as a corporation and is not an agent of the Crown, the Minister has no direct involvement in the ongoing operations of the Council. The primary role of the Minister is to amend the legislation or regulations as required, generally monitor the Council and any matter relating to the Assurance Fund. However, a requirement of the Act, 16(1) is that the Council must send a copy of its Annual Report to the Minister. RECA s annual report is posted on Licences The Real Estate Act delegates responsibility to the RECA to issue licences in three areas real estate brokerage, mortgage brokerage and real estate appraisals. RECA s Industry Standards department is responsible for administering the licensing function. Who requires a licence? In Alberta, when a person acts on behalf of another person in a trade in real estate, deal in mortgage or in the provision of real estate appraisal services, the appropriate category of licence is required. In each industry sector, the preliminary factors in determining whether a person s activities require a licence are: Is the person performing a real estate, mortgage or appraisal activity or service for someone else? Is the person being compensated for providing these activities or services? The Real Estate Act, s. 17, states that no person shall trade in real estate as a real estate broker, deal as a mortgage broker or act as a real estate appraiser without authorization of the Real Estate Council. An individual may hold a licence in more than one industry sector governed by RECA. For example, a person may be authorized as a mortgage associate, a real estate associate and an appraiser. The criteria required to qualify for a licence in any particular category is discussed later in this section. Exceptions to Licensing Requirements Consumers, institutions or corporations selling real estate owned by them, with or without a real estate broker do not require a licence. An appraiser who is an employee of a corporation who performs real estate appraisals for that corporation does not require a licence. Lenders, whether individuals or institutions, who lend their own money directly to borrowers do not require a licence. Employees of these exempted individuals or corporations, who act on behalf of their employer in these activities, do not require a licence. (Reference Act 2(1) and Exemption Regulation). Substantial Interest Exemption The Act indicates an exemption exists when a person has a substantial interest in a property [Act 2(1)(c)(ii)]. RECA has determined that an ownership interest of 33 1/3% or above constitutes substantial interest. This means when a person (including a corporation) owns real estate with others, the person is exempt from requiring a licence in respect to that property if the person holds a minimum of 33 1/3% interest in the property. A co-owner of a property who does not have substantial interest in the property will require a real estate licence to conduct trade activities in connection with that real estate. 12

13 Unlicensed Activity Concerns and Penalties Consumers who have real estate, mortgage or real estate appraisal services performed for them by unlicensed practitioners are not protected under the Real Estate Act. The Real Estate Council s primary concerns about unlicensed activity are: 1. Public Protection: When a consumer is represented by an individual holding a licence, the following provisions of the Real Estate Act apply to the industry member and work toward the public interest: Knowledge and Ongoing Education: Alberta Industry members must complete prelicensing education and some sectors of the industry are required to complete ongoing professional development. Assurance Fund: The Fund protects the financial position of consumers who have been the victim of a fraud or breach of trust committed against them by a licensed industry member (appraisers are not included). The fund is not available to consumers dealing with unlicensed individuals. Complaints and Discipline: Licensed Alberta industry members are held to a standard of practice. If a consumer complains about an unlicensed person, RECA can only investigate whether or not the person conducted an activity that requires a licence not how badly the activity was performed or how greatly the consumer was disadvantaged. Insurance Indemnity Plan: Licensed real estate industry members are required to participate in such a plan, while unlicensed persons are not. 2. Integrity of the Industry: Members of the public may not recognize the difference between licensed and unlicensed individuals. When an unlicensed person, unlawfully acting as a real estate broker, mortgage broker or real estate appraiser, does a poor job of representing a consumer s interests, it can jeopardize the integrity of the licensed industry members in the public eye. Penalties The consequences to an unlicensed practitioner can be severe. A person involved in unlicensed activities could be liable for administrative penalties issued by the Executive Director of the Real Estate Council, or a fine of up to $25,000 issued by a Court. Further, all remuneration earned during the unlicensed period may be required to be returned [Act 81]. Industry Sectors Requiring Licensing Industry Member The Real Estate Act governs the following areas that participate in the real estate industry real estate brokerage, mortgage brokerage and real estate appraisals. The Act and the Real Estate Council of Alberta use the term industry member when referring to a person who holds an authorization in one of these areas of the industry [Act 1(1)(n-o)]. Throughout this program you will see references to other terms to describe those working in the real estate industry broker, associate, associate broker, mortgage broker, appraiser, etc. While these will accurately describe a licence category, each of these categories also falls under the general term of industry member. 13

14 Classes of Industry Members The Rules, sections 2, 3, 4 provide for the following categories of industry members: Brokerage A brokerage is licensed by the Council and authorized to trade in real estate or deal in mortgages. Broker A broker holds broker qualifications, is registered with and authorized to operate a brokerage and to trade in real estate or deal in mortgages on behalf of that brokerage Associate broker An associate broker in the real estate sector, holds the qualifications of a real estate broker, but is not authorized to operate a brokerage. An associate broker is registered with a real estate brokerage and authorized to trade in real estate on its behalf. (There is no equivalent class in the mortgage sector.) Associate An associate holds associate qualifications, is registered with a brokerage and authorized to trade in real estate or deal in mortgages on its behalf. Appraiser An appraiser is a person who estimates the defined value of an interest in real estate and who signs the appraisal report and is responsible for the report, whether prepared by the appraiser or another person. An appraiser has met the educational qualifications required by the appraisal association in which he or she is a member. Candidate A candidate classification applies to a person who has not completed the educational requirements of the appraisal association in which he or she is a member. A candidate must be supervised by a licensed appraiser. The educational qualifications must be completed within five years of the date the candidate licence is first issued. Real Estate and Mortgage Industry Authorization In order for an individual to act as an industry member in any of the three industry sectors real estate, mortgage or appraisal, the person must first be authorized as an industry member by the Real Estate Council [Rules Division 2 Authorizations] [Act 17]. Authorization is the combination of a licence and a registration certificate. Obtaining an associate authorization is a two step process. First, a person seeking to become authorized as a real estate or mortgage industry member must meet the qualifications to obtain a licence. Then, he or she must be employed by or associated with a licensed brokerage. The brokerage will submit an application to RECA, along with the appropriate fees. The combination of the licence and the registration certificate issued by Council constitutes the authorization required by the Act [Rules 6 and 8]. Therefore: Licence + Registration Certificate = Authorization 14

15 1 Pre-requisites Must be 18 years of age or older Must have a Canadian high school diploma or equivalent 2 Pre-licensing Course Complete the Real Estate Associates Program or Mortgage Associates Program. 3 Provincial Qualifying Exam Score 70% or higher 4 Obtain Employment Offer With Brokerage The broker will apply for your registration with the Real Estate Council of Alberta 5 Authorization From the Real Estate Council of Alberta Broker Authorization Broker applicants must: complete the broker licensing educational requirements for real estate brokers, be authorized as an associate for a minimum of two years in the last five years for mortgage brokers, be authorized as an associate for two years. be employed by or associated with a brokerage Appraiser and Candidate Authorization: A person must become an active member in good standing in one of three professional appraisers associations prior to becoming licensed as an appraiser in Alberta. These associations are the Alberta Association of the Appraisal Institute of Canada, the Alberta Assessors Association, and the Canadian National Real Estate Appraisers Association [Rules 1(1)(b)]. Each association sets minimum standards of education and training required for full and active membership. Once these requirements are met applicants may apply to the Real Estate Council of Alberta to conduct real estate appraisals as a candidate or as an appraiser depending on the authorization given by the professional association. An appraiser or candidate licence issued by Council is the authorization required under the Act. 1. Education requirements 2. Active member in good standing of professional association 3. First time applicants must provide a certified Criminal Record Check 4. Authorization from the Real Estate Council of Alberta A person may not trade in real estate, deal in mortgages or perform appraisals until they have been issued a registration certificate, which serves as their authorization to practice as an industry member. Each registration certificate expires on September 30, unless it is terminated or cancelled prior to that date. [Rules 24, 25, 26] 15

16 SAMPLE REGISTRATION CERTIFICATE Real Estate Industry A person (which includes a corporation) requires a licence to conduct trade activities in real estate for another person and for compensation. Real Estate Act Definitions Real estate The Act [1(1)(u)] defines real estate as: real property leasehold property a business a property user s licence a portable dwelling used as a residence (other than a holiday trailer or recreational vehicle) Trade The Act [1(1)(x)] defines a trade as: a transaction in real estate by sale, purchase, agreement for sale, exchange, option, lease rental or otherwise an offer to list real estate for such transactions assisting or an offer to assist a person in a transaction in real estate collecting, offering to collect, or attempting to collect on behalf of a property owner, rent money or contributions for the management of the owner s property any act, advertisement, conduct or negotiation, directly or indirectly, to effect a transaction 16

17 Real estate broker The Act [1(1)(v)] defines a real estate broker as: a person who, for others and for compensation trades in real estate a person who holds out that they are a real estate broker The definition of real estate broker is not reliant on how people refer to themselves, but on the activities they perform. One example of holding out is someone who calls himself a real estate auctioneer, rental agent, real estate consultant, real estate assistant, relocation consultant, property manager, etc., may in fact be acting as a real estate broker and in so doing may require a licence. Four Classes of Real Estate Brokers [Rules 2): 1. brokerage 2. broker 3. associate broker 4. associate The brokerage is the licensed entity authorized to trade in real estate. It must employ a broker who is responsible for the operation of the brokerage. Associate brokers and associates are employed by the brokerage to act on behalf of the brokerage and may not act independently of the brokerage. When referring back to the definitions of real estate and trade, it is evident that the definitions cover a range of activities and types of real estate. Conducting trade activities in any area of real estate requires a real estate licence. Real Estate Broker Activities The definitions of real estate, real estate broker and trade discussed above indicate that when a person performs activities to further a trade in real estate for another person and for compensation the person is required to hold a class of real estate broker licence. Most are familiar with the standard real estate transaction where a seller and a buyer or a landlord and tenant enter into an agreement for a trade for a particular parcel of real estate. The following are examples of other activities that will require a real estate licence when the activities are conducted for another person and for a fee. Property Management Activities Property management describes a real estate brokerage acting on behalf of a property owner, tenant or both. These are considered trade activities and therefore require one of the classes of real estate broker licence listed above. Some brokerages specialize in property management services, while others only become involved occasionally as part of their usual real estate practice. Property management trade activities include: Collecting and/or holding funds in trust for a property owner Making disbursements from a trust account held for a property owner for the maintenance of the property Managing a property owner s investment real estate by soliciting tenants, obtaining rental agreements and collecting rent Managing the business of a condominium corporation by collecting condo fees in trust, and making disbursements to maintain the property Advertising a property owner s rental units for lease Advising one or more parties to a lease negotiation 17

18 Property management companies, who only maintain the physical aspects of property, do not require a licence. Property management is covered extensively in Section 8 of this course. Business Brokerage Activities The Act [1(1)(u)] includes a business in the definition of real estate: real estate means (iii) a business, whether with or without premises, and the fixtures, stock-intrade, goods or chattels in connection with the operation of the business [REA 1(1)(u)(iii)]. Business brokerage is one of the least known sectors of real estate brokerage and includes the following: Entering into a brokerage contract to list a business for sale Advertising a business owner s business for sale Showing a business owner s property, chattels, stock-in-trade, etc. to a potential buyer Negotiating a contract on behalf of one or both of the parties to a transaction The sale of a business typically includes a financial aspect and often accountants become involved in evaluating a business or providing information on taxation considerations involved in the sale or purchase of a business. These activities are not considered trade activities, merely providing information. However, holding a Certified General Accountant (CGA), Certified Accountant (CA), or Certified Management Accountant (CMA) designation does not exempt a person from requiring a licence when involved in business brokerage trade activities. Relocation Services Corporate relocation is an area of real estate brokerage where the brokerage typically acts on behalf of a corporation in providing services to relocate its employees (and their families) to work in another location. When employees are transferred, they often must sell or lease their property in the current location and purchase or lease another in the new location. A major part of a relocation company s business is acting for the employer in the sale and purchase of these properties. When acting in this capacity, the relocation company and many of its employees are required to hold real estate licences, in order to conduct real estate trade activities in Alberta. These activities include: Acting for the employer in the guaranteed sale of a relocating employee s property Referring relocating employees to a real estate brokerage in the new community in exchange for a referral fee Negotiating real estate purchase contracts on behalf of the relocating employee Signing real estate transaction documents on behalf of the relocating employee (Note: a Power of Attorney is not sufficient to exempt a person from requiring a real estate licence in these situations). Relocation companies also offer services that do not require a licence, for example, they might administer the employer s relocation benefits package, spousal job search services, cost of living comparisons, moving services, etc. 18

19 Disciplinary Action 1 Trading in Real Estate without Authorization Issue: The Real Estate Council of Alberta investigated a complaint containing an allegation of trading in real estate without authorization. Facts: Company A was not licensed to trade in real estate. Company A entered into a contract with Corporation B, wherein Company A was to assist Corporation B in disposing of its real estate holdings. A term of the agreement stated: Corporation B authorizes Company A to act as our agent as it relates to the management and selling of properties. Company A s activities included: Making referrals to licensed real estate brokerages to list Corporation B s properties for sale, in return for a referral fee. As a result of these referrals, Company A received in excess of $17,000 in commissions. Company A s employees were not licensed to trade in real estate. However, Company A delegated its duties under its contract with Corporation B to its employees, making unlicensed Company A employees responsible to advise list prices and to sign trade documents on behalf of Corporation B. Company A held itself out as a real estate brokerage by the statement, Company A has the power and authority on behalf of Corporation B to sign a listing agreement for the sale of this property. Result: Company A was assessed a fine and costs totalling $12,500. Company A agreed to cease activities until becoming licensed. Subsequently, Company A became licensed as a brokerage and employed a broker to conduct trade activities on its behalf. Company A s employees were not penalized but were instructed to cease the trade activities they formerly conducted. Mortgage Industry Any person (including a corporation) who conducts a deal in mortgage for another person and for compensation will require a class of mortgage broker licence. Exemptions include private institutions or other lenders who lend mortgage money directly to a mortgagor without the services of a broker. This could include a bank lending its own mortgage money to a home buyer or a private individual advertising to lend money directly to prospective mortgagors. The definition of mortgage broker is not reliant on how people refer to themselves, but on the activities they perform. Therefore, someone who refers to themselves as a mortgage consultant, home equity loan manager, equity take-out lender, etc. may in fact be acting as a mortgage broker based on their activities. Real estate industry members must be careful not to arrange mortgage financing, or even offer to arrange mortgage financing, for clients unless they hold the appropriate licensing for this activity. The following will provide definitions from the Real Estate Act and will review the activities that require a licence. Real Estate Act Definitions 19

20 Mortgage The Act [1(1)(q)] defines mortgage as: a mortgage of real property a mortgage of a lease of real property or, any charge on real property or lease of real property for the purposes of securing repayment Dealing (in mortgages) The Act [1(1)(j)] defines dealing as: all or any of the activities of a mortgage broker referred to in clause (r), below: Mortgage broker The Act [1(1)(r)] defines a mortgage broker as a person who for others and for compensation: solicits a person to borrow or lend mortgage money negotiates a mortgage transaction collects mortgage payments or administers mortgages buys, sells, or exchanges mortgages or offers to do so or a person who holds out that they are a mortgage broker (i.e., an unlicensed person who deals in mortgages as a mortgage consultant ) Three Classes of Mortgage Brokers [Rules 3): In Alberta, there are 3 classes of mortgage brokers: 1. brokerage 2. broker 3. associate The brokerage is the licensed entity authorized to deal in mortgages. It must employ a broker who is responsible for the operation of the brokerage. Associates are employed by the brokerage to act for the brokerage in its mortgage transaction activities. A broker and associate may not act independently of the brokerage. Mortgage Broker Activities The Act s definition of mortgage broker lists the activities a person might perform in a mortgage transaction. If these activities are conducted for another person and for compensation, the person is required to hold a class of mortgage broker licence. As in the real estate industry, there are various areas of practice that apply to mortgage brokerage: mortgage administration specific types of mortgage (commercial, residential, agricultural) representation of certain types of lender clients (private or institutional) Examples of activities requiring a mortgage licence include the following: Soliciting lenders to lend money secured by a mortgage in exchange for a commission Seeking mortgage funds for a home buyer for a flat fee Offering a client advice on mortgage terms and rates Administering a mortgagee s mortgage agreement by collecting and disbursing the mortgage payments for a monthly fee Advertising on behalf of lenders to seek out potential borrowers Industry Application 20

21 Real Estate Practitioners and Mortgage Financing Assistance Real estate and mortgage industry members work so closely together to make a real estate transaction happen, their activities might overlap. In particular, real estate industry members might conduct mortgage broker activities, in their eagerness to put a deal together for their clients. If these activities are those requiring a mortgage broker licence, the real estate industry member would be acting as a mortgage broker without a licence. To prevent this, the Real Estate Council published an article, Real Estate Agents and Mortgage Brokering, which describes various scenarios and indicates which activities are mortgage broker activities. The following chart summarizes that article. What activity does the real estate industry member do? Is there Compensation? Is this mortgage brokering? 1. Advises client to use bank of the client s choice for their mortgage. 2. Gives client names of a few lenders who have served previous clients well. 3. Refers client to a licensed mortgage brokerage to seek financing options. (Mortgage broker may or may not be located on-site at the real estate brokerage.) 4. Refers client to specific lender. Tells client to inform lender that the associate has referred them to that lender. 5. Refers client to specific lender. Promotes the lender s services or rates. Tells client to inform lender that the associate has referred the client to that lender. 6. Refers client to specific lender. Promotes the lender s services or rates. Is directly involved in paperwork and/or in meetings between the client and the lender. 7. Refers client to specific lender whose representative works on-site at the real estate brokerage. Promotes this lender s special rates or bonuses for the brokerage s clients. 8. Refers client to specific lender who is affiliated with the real estate brokerage. Promotes this lender s special rates or bonuses for the brokerage s clients. No No Yes- Mortgage brokerage pays a referral fee to the real estate brokerage. Yes - Lender pays a referral fee. Yes - The lender pays a referral fee. Yes - The lender pays a referral fee. Yes - The lender pays a referral fee. Yes - The lender pays a referral fee. No - Client is not influenced and no compensation is paid. No - No undue influence on client. No compensation is paid. No- The mortgage brokerage performs the brokering activity. A referral fee between brokerages is permitted. Yes - The client is solicited to use lender. Compensation is both expected and received. Yes - The client is both solicited and encouraged to use lender. Compensation is both expected and received. Yes - The client is both solicited and encouraged to use lender. Real estate industry member is involved in the dealings. Compensation is both expected and received. Yes - The client is both solicited and encouraged to act by special deal. Compensation is both expected and received. Yes - The client is both solicited and encouraged to act by special deal. Compensation is both expected and received. A different perspective on RECA s role in mortgage industry regulation is described below: 21

22 The Toronto Dominion Bank vs. RECA In 2002, the Toronto Dominion Bank challenged the direction the Real Estate Council of Alberta (RECA) gave the real estate industry in an article it published. The article (summarized in the chart above) warned the real estate industry that when they refer clients seeking mortgage financing to a financial institution in exchange for a referral fee, they may be acting outside the scope of their real estate licence and conducting activities requiring a mortgage broker licence. The Toronto Dominion Bank did not challenge the Real Estate Act, rather it challenged RECA s interpretation of the legislation. As such, the Toronto Dominion Bank sought a declaration that a real estate industry member s participation in TD s Mortgage Referral Program did not contravene the Real Estate Act. The Court found that Section 17 of The Real Estate Act provides that only an authorized mortgage broker may solicit another person to borrow money secured by a mortgage, in return for compensation. The Court found RECA was correct to conclude that in certain circumstances, as described in the article, real estate industry members might act as mortgage brokers as defined under the Real Estate Act. Further, the Court found that RECA was justified in offering the advice to real estate industry members by its statutory obligation under the Real Estate Act. Toronto Dominion Bank v. Real Estate Council of Alberta, [2002] A.J. No. 75 (Q.B.). The case upheld RECA s position that a real estate industry member who receives compensation from a lender for the introduction of a borrower is acting as a mortgage broker. Unless that real estate industry member also holds a class of mortgage broker licence, this is unauthorized activity. Real Estate Appraisal Industry A real estate appraiser license is required in order for an individual to carry on the practice of a real estate appraiser, or to advertise or hold him or herself out as a real estate appraiser. Further, a person (which includes a corporation) will require a licence if they conduct real estate appraisal services for another person and for compensation. Real Estate Act Definitions Real estate appraiser A real estate appraiser is a person who, for consideration or other compensation [Act 1(1)(u.1)]: estimates the defined value of real estate signs and accepts responsibility for a real estate appraisal report that makes such an estimate that is prepared by another person provides real estate appraisal consulting services, or a person who holds himself or herself out as an appraiser [i.e., a real estate industry member who performs appraisals as opposed to Comparative Market Analyses (CMAs)] The Real Estate Act provides for certain exemptions [s. 3(4)(a d)], for example a person acting for their employer, a municipal assessor and a real estate licensee who estimates value for the purpose of a real estate trade do not require an appraiser s licence. Two Classes of Real Estate Appraiser Licences [Rule 4] In Alberta, there are 2 classes of real estate appraisers: 22

23 1. appraiser 2. candidate A candidate must be supervised by a licensed appraiser, who must sign the candidate s appraisal report, confirm the appraisal has been completed within the accepted standards and take responsibility for the correctness of the candidate s work. Real Estate Appraisal Activities An appraiser licensed in Alberta may lawfully complete any type of real estate appraisal, i.e. residential single family or condominium, agricultural, industrial, commercial, etc. Industry Application Comparative Market vs. Appraisal Comparative Market Analysis (CMA): The CMA is used by real estate industry members to estimate the market value of a property. Real estate industry members prepare a CMA by comparing the subject property to similar properties located in comparable neighbourhoods. Consideration is given to comparable properties currently for sale, recently sold or those that expired from listing without selling. The CMA is most commonly used by real estate industry members to assist their clients in determining a reasonable asking price or a probable selling price range for a property. While skill and experience in the marketplace will assist the real estate industry member in completing the CMA, it is a less complex procedure than an appraisal. The primary use of a CMA is to determine a reasonable estimate of market value for sellers and buyers. A real estate appraisal too may be used for estimating market value. Additionally it may be used for obtaining financing, determining a marital or inheritance settlement, litigation purposes, investment decisions, insurance claims, etc. Appraisal: To conduct an appraisal, the appraiser will first visit the site to determine the condition of the property. The time involved depends on the type of property being appraised. The real estate appraiser gathers information about comparable properties (as would the real estate industry member) and also collects information about the neighbourhood, any new construction, traffic patterns, road changes, commercial or industrial development, environmental issues, and so on. When the appraiser is satisfied that all relevant data is gathered, the information is validated and analyzed in conjunction with intangibles such as economic influences. In industrial, commercial and institutional (ICI) properties, information such as income stream, cash flow analysis, etc. will also be considered. The final real estate appraisal report will present the information in a clear and professional manner. The style of the report may differ depending on the purpose of the appraisal and the type of property appraised. The end result will detail the process taken, the information gathered and of course, the appraised value of the property. 23

24 Obtaining an Authorization To view the most up-to-date licence information, including policies, applications and fee schedules, visit RECA s website - Educational Requirements: A person intending to apply for an authorization must first complete the pre-licensing educational requirement available for real estate and mortgage sectors through the Alberta Real Estate Association (AREA). Appraisers and candidates must meet the requirements of their member association. [Rules16,18]. Exemptions from the Requirements: The executive director may grant an exemption from the educational requirements for the real estate and mortgage sectors if an applicant can demonstrate satisfactory experience and knowledge of the current real estate or mortgage broker practices in Alberta [Rule 16(3)]. Exemptions also apply under licence reciprocity agreements RECA has with several other jurisdictions. When an individual from a recognized jurisdiction has applicable qualifications and applies for an Alberta authorization, the executive director may grant an exemption from certain requirements. Application When an individual wishes to apply for a licence or to have an existing licence renewed, the brokerage will submit an application through the RECA On-line Licensing System. The application must be accompanied by the following [Rule 20]: fee as established by Council proof of identity (appraisers and candidates exempt) current and original certified criminal record check (appraisers and candidates exempt) for real estate the applicable Real Estate Insurance Exchange (REIX) premium for real estate and mortgage sectors, the applicable Assurance Fund levy other information or verification by affidavit as required by the executive director To protect the public interest and to promote integrity in the industry, applicants must provide information about themselves and their business interests and sign an affidavit indicating that the information provided is true. The types of questions asked on the application include: history of suspension, ban, withdrawal, etc. from a regulatory or professional organization disciplinary record with any real estate board, professional or regulatory body history of judgments against the applicant or the applicant s business interests in relation to real estate, mortgages or appraisal, fraud, breach of trust, etc. bankruptcy history convictions or proceedings pursuant to the Criminal Code of Canada All sections of the application must be completed and the information provided must be truthful. The application contains an affidavit section, where applicants are required to sign an affidavit stating that the information provided is truthful. An affidavit is a written statement of fact either sworn or affirmed by the person making it. Making a false statement on an affidavit is a criminal offence, punishable by law. If an applicant s affidavit contains false or misleading information, the application may be refused or if a licence is issued, it may be suspended or cancelled as a result of a false statement. 24

25 The RECA On-line licensing system processes on-line applications instantaneously and will issue a registration certificate which authorizes an individual to trade. However, if the applicant has answered yes to any of the questions on the application, the broker must contact RECA and processing will be delayed. An individual may not practice real estate until a registration certificate has been issued. Suitability Review If an individual is concerned that his or her background may cause a licence application to be rejected, the individual may request the executive to conduct a suitability review prior to enrolling in the educational program and/or applying for a licence. The review involves payment of a fee and may involve providing additional information. [Rule 19] Disciplinary Action 2 Licence refusal Issue: Facts: Licence refusal by executive director, upheld by Hearing Panel The Real Estate Council of Alberta received an application for registration as a mortgage broker. The application form disclosed that the applicant or a business he owned or participated in had been subject to receivership. The executive director reviewed the applicant s application and relevant background information that had been provided. The applicant was advised in writing that the licence application was denied. To arrive at this decision, the executive director considered the applicant s past court judgments, financial history, and discipline history with another regulatory body and determined it would not be in the public interest to issue a licence to the applicant. The applicant s application was refused. The Applicant made a formal request for a review of the executive director s decision to a Hearing Panel. Result: The Hearing Panel s written decision indicated that persons licensed in Alberta have ethical, legal and regulatory responsibilities and are expected to be competent and knowledgeable in dealing with the public. RECA must be satisfied that such persons to whom it issues licenses will know and understand their responsibilities and properly carry out the business they will conduct on behalf of the public. They must exhibit an unqualified support for the legal and ethical guidelines set by the regulatory body for the industry. The Hearing Panel found that the executive director was correct to refuse a licence to the applicant and they upheld the decision. Authorization: Refusal/Restriction/Suspension/Cancellation Refusal [Rule 14] The executive director is responsible for review and approval of all applications submitted to the Real Estate Council. This review is to ensure the issuance of a registration certificate would not be contrary to RECA s mandate to create consumer confidence in the industry, protect consumers, and promote the integrity of the industry. A person is not eligible to be licensed if the person has: not met the legislative requirements, including educational requirements not submitted a completed application or additional information as requested not submitted all fees or paid outstanding amounts payable to RECA 25

26 not repaid a payment made on the person s behalf from the Real Estate Assurance Fund failed to comply with terms or conditions imposed by a Hearing Panel, Appeal Panel or court failed to comply with licence terms, conditions or restrictions been approved to withdraw from the industry Under Rule 34, the executive director may refuse to issue a licence or recommend a Hearing Panel refuse to issue a licence, when: the person has provided false or misleading information the person has had a judgement obtained against him or her arising from certain activities of an industry member and has not made arrangements to satisfy it the person has failed to cooperate as required by the Act and Rules the issuance of a licence would not be in the public interest, would harm the integrity of the industry or bring the industry into disrepute When such a situation arises, the executive director may also request an investigation be conducted to evaluate the individual s suitability to be an industry member. Restrictions The executive director may make a licence subject to any restrictions, conditions, or terms considered appropriate [Rule 22]. This would most commonly occur as a result of a disciplinary decision of a hearing panel [Act 43]. Disciplinary Action 3 Licence conditions Case Result: A hearing panel heard a case involving a former real estate associate and her activities during the time she was authorized to trade as a real estate associate. The case involved multiple conduct issues including: failure to disclose previous discipline history to the executive director fiduciary duty breaches incompetence, etc. Because of the number and extent of the breaches, the panel ordered a fine be paid and an educational requirement be fulfilled should the person re-apply for licensing in the future. Additionally, the hearing panel ordered that, if a licence were to be issued in the future, it be subject to licensing conditions. Later, the person re-applied. A licence was issued but was conditional upon the broker meeting on a monthly basis with the associate to review her real estate trade activities. Rule 29 provides for other restrictions: an individual can only be registered to act for one brokerage for each area of the industry practiced in a real estate broker cannot be registered in another class of real estate licence with the same or another brokerage a mortgage broker cannot be registered as an associate with the same or another mortgage brokerage a broker may not transfer to another brokerage until arrangements made for trust monies are satisfactory to the executive director 26

27 Suspension/Cancellation A Hearing Panel may order a cancellation or suspension of an authorization as a result of a conduct proceeding [Act 43] or the Executive Director may cancel or suspend an authorization for the following reasons [Rules 35, 38]: if an industry member fails to file or submit required records or fails to make records available for RECA review if a brokerage or appraiser fails to fund a trust shortage when access is denied to a RECA auditor or investigator or they are otherwise prevented from carrying out duties when it is indicated that the broker is no longer suitable, the brokerage licence may be suspended when an industry member provides false or misleading information in a licence application if an industry member fails to provide subsequent information under Rules 21& 40 (see Changes to Industry Member s Information) regarding a bankruptcy, discipline, criminal offence, etc. or when the information is provided, but the executive director concludes it would be in the public interest to suspend or cancel when information comes forth to indicate the industry member s conduct is not in the public interest or would harm the integrity of the industry when an industry member fails to pay a required fee, penalty, fine, etc. or fails to comply with an order of a hearing or appeal panel or court of law when an industry member does not comply with a request for information made by the executive director or Council if an industry member contravenes a licence term or restriction. Appeal of Hearing Panel or Executive Director Decision A person who has had terms, restrictions or conditions imposed may appeal the decision of the executive director by requesting a review of the decision by an appeal panel [Rule 39] and/or appeal the decision of a hearing panel to an appeal panel [Act 48]. Renewal of Authorization Registration certificates for real estate and mortgage industry members expire on September 30 of each year [Rule 25]. Because a registration certificate is the document that authorizes the industry member s activity, the authorization expires at the same time. (Appraiser industry members are not issued a certificate). An application for renewal requires the real estate industry member to complete the required mandatory professional development course (below). Mandatory Professional Development Real estate industry members are required to obtain mandatory education through course(s) approved by RECA to renew their authorizations. RECA s role in professional development is to ensure the mandatory professional development course works toward fulfilling RECA s mandate and the course must be necessary, timely, and relevant to real estate industry members for protection of the public. Usual topics include legislation updates, legal issues, risk reduction, compliance and regulatory issues. The onus is on the real estate industry member to keep up-to-date on RECA s requirements [Rule 23] by visiting RECA s website. 27

28 RECA determines the topics, timing, and frequency of mandatory courses based on RECA s experience in the administration of the Real Estate Act and the feedback received from industry associations and advisory committees. In addition to the mandatory professional development course, industry members are encouraged to engage in other educational courses and seminars. Transferring to a New Brokerage An industry member may change from one brokerage to another. During the transfer, there will be a period of time when the person will be unauthorized - the period of time between when registration with the old brokerage is cancelled and before the industry member obtains a registration certificate at the new brokerage. During this period, the individual is not authorized to conduct real estate or mortgages transactions or perform appraisals and may not do so until RECA has issued a new registration certificate. Disciplinary Action 4 Unauthorized Activity During a Change in Brokerage Issue(s): Unauthorized activity; broker s responsibilities, brokerage s responsibilities Facts: During a period of time, an associate held herself out as a real estate associate without the appropriate authorization. The associate was transferring from one brokerage to another. An ad was placed in a newspaper welcoming the unauthorized person to a brokerage. The unauthorized person did not complete any transactions during the period in which she was not registered, however, she participated in a listing with her broker and submitted real estate ads at the broker s request which were put through the real estate board in her name. Results: The unauthorized associate was assessed with an Administrative Penalty in the amount of $1,000 for contravening Act 17(c). Also, the broker and brokerage were assessed with similar penalties as they had responsibilities to ensure no unauthorized activity occurred. Many associates and brokers have received fines as a result of unauthorized transactions during a transfer period. The potential penalties are severe depending on the circumstances. While RECA s online system normally processes applications and issues registration certificates directly, special circumstances, such as a yes answer on the affidavit section of the application will cause a delay. If it is determined that the applicant made a false statement on the affidavit, the application may be refused, or if a licence is issued prior to the false statement being revealed, it may be suspended or cancelled. Additionally, making a false statement on an affidavit is a criminal offence. Notice of Changes to Industry Member s Information All industry members must notify the Executive Director of any changes to the particulars of their original licence application [Rule 21] and in some cases, the industry member must immediately notify the executive director in writing and provide particulars [Rule 40]. Many of these circumstances are similar to those on the original licence application regarding the applicant s background and include when the industry member: 28

29 has a name change is disciplined by any real estate board, professional or regulatory body, etc. has a judgment in relation to providing goods or services to the public has a business interest which has a judgement rendered against it is subject to bankruptcy proceedings or has a business under bankruptcy proceedings has had proceedings pursuant to the Criminal Code commenced has been convicted of an offence (other than minor traffic offences) All licence applications contain an affidavit section where the applicant swears to information about these types of issues. The executive director considers the responses when deciding whether or not to issue a licence. Therefore, if any of the questions were previously answered no, but some recent occurrence would cause the question to be now answered yes, the industry member must notify the executive director in writing. Associate brokers and associates must also inform their brokers. Review of Notice When an industry member gives notice to the executive director that information previously given has now changed, the information will be reviewed by the executive director, who may choose one of the following options: take no further action and place the information on file open an investigation to determine whether the licensee has been involved in conduct deserving of sanction within the meaning of the Real Estate Act suspend or cancel the individual s license, if such action is in the public interest Failure to Give Notice RECA considers the failure to give notice a serious matter which could result in a disciplinary action against an industry member, including, in some cases, cancellation or suspension of the licence [Rule 38]. Other disciplinary actions may include an administrative penalty or referral to a hearing panel for consideration and determination of an appropriate penalty. Disciplinary Action 5 Failure to Notify of a Disciplinary Action Issue(s): Failure to inform the executive director of RECA with notice of discipline Facts: As a result of a consumer complaint to an associate s real estate board, the board undertook an investigation which resulted in the board conducting a hearing. The associate was found to be in violation of the board s standards of business practice, as well as its rules and regulations. A letter of notification of the findings was sent to the broker and the associate. The associate decided not to appeal and paid the fines as levied. RECA later found that the associate failed to notify the executive director of the above real estate board discipline as required by the Rules. Result: The associate was assessed with an Administrative Penalty of $1,000. Unlicensed Persons Assistants/ Brokerage Support Personnel Often, a real estate or mortgage industry member will have an assistant handle the crucial daily organizational details that consume an associate s valuable face-to-face client time. Other brokerage support personnel might also have direct contact with the brokerage s clients. 29

30 When these individuals are unlicensed, they are not authorized to trade in real estate or deal in mortgages and therefore do not come under RECA s jurisdiction, unless they unlawfully conduct such activities [Act 17]. Consumers who have dealings with an assistant or brokerage employee who is conducting trade activities that require authorization are not protected by the Real Estate Act. Therefore, RECA requires an industry member to ensure the public is informed of the unlicensed status and ensure assistants and support personnel are only assigned tasks they are competent to perform and to receive proper training and supervision. These individuals may not be assigned tasks requiring a licence [Rule 46]. Examples An assistant or brokerage employee... Unlicensed Assistant May May organize property showings and appointments for associates May take calls for the brokerage May write advertisements May obtain client leads for industry members May advise of an incoming offer May book an open house May prepare brokerage agreements/ documentation Unlicensed Assistant May Not May not conduct property showings May not offer advice to brokerage clients, customers or callers May not publish advertisements without the industry member s approval May not offer advice to the potential client May not conduct contract negotiations May not hold a public open houses May not sign contracts on behalf of the brokerage, etc. The following excerpt is from a letter sent by the executive director to an industry member as a result of an investigation into whether an assistant was properly identified as unlicensed: The Real Estate Council of Alberta has concluded an investigation of your conduct in relation to information on your website. The Real Estate Council considered whether or not you failed to clearly identify the unlicensed personnel on your team. The investigation noted that your website information had not properly identified your team members status, but has now been updated to clearly identify them as either licensed or unlicensed. For this reason, the matter is being addressed by this communication. I trust that in the future you will ensure compliance with the legislative requirements. An unlicensed assistant may become licensed and continue in the role of an assistant. Once licensed, RECA considers the person as an industry member regardless of the tasks they perform. The following excerpt is from a letter from the executive director to an industry member, resulting from an investigation into whether industry members were identified in an advertisement: The advertisement states that Ms. G. and Ms. H. are licensed assistants. The Real Estate Council does not licence assistants nor provide this designation. According to our records, Ms. G. and Ms. H. are associates registered to Brokerage XYZ. Therefore, Ms. G. and Ms. H. may not be identified in advertisements as licensed assistants and if their designation is referred to, it must be shown as associate. If you have any questions regarding what an unlicensed assistant may or may not do, please contact your brokerage. For further information see the RECA website article, Know What Your Assistant Can Do (March 2004). 30

31 Licensing Summary When unlicensed people carry out activities requiring a licence, the consumer is put at risk. Therefore, the administration of licensing industry members is a major responsibility of the Real Estate Council. To avoid the risk of dealing with an unlicensed person, RECA recommends consumers and industry members confirm the licence status of individuals to ensure they are properly authorized (see Licence Search, below). The following true stories involve consumers who suffered from their involvement with unlicensed people. These consumers could not apply to the Assurance Fund for recourse, leaving them with the options of taking legal action or simply accepting their losses. A Case of Stolen Identity: A young woman met a man who was introduced to her as a real estate associate; however, he was NOT licensed as she thought. The woman had no reason to believe the man was not a real estate associate because he gave her a real estate business card and answered her inquiries about buying a house as a real estate associate would. He offered to make inquires on her behalf about her ability to qualify for a mortgage. She agreed and gave him her personal and financial information. Soon afterward, he let her know that she could not qualify at this time. This was a lie. In fact, she could qualify and without her knowledge he placed a mortgage in her name on a property. The so called associate had fraudulently used the woman s personal and financial information to obtain a mortgage in her name. He made some mortgage payment, but soon let the mortgage go into default. The woman was now on the hook with the bank and they contacted her to make payments. It took the woman many months and much expense to straighten the situation out. As stated, this man was NOT licensed and should not have been entrusted with the woman s personal information. The business card was a fake and intended to mislead her. She could have checked RECA s website to confirm that this man was indeed licensed. A Case of Property Mis-Management: RECA s investigation of a brokerage found its activities in the management of rental properties to be so improper the brokerage s licence was suspended. RECA sent notices to all known owners and tenants and published a news release announcing the suspension, however not all of the owners and tenants saw it. The suspended broker quickly set up a new unlicensed company. He informed the owners of the new company, and instructed tenants to make their rent payments to the company. Tenants who had not seen the RECA notice paid the new company. Those who had seen the notice refused to pay, only to find themselves served with eviction notices! Some of the tenants who received eviction notices contacted their landlords directly. The owners were unaware of the eviction notices and that the new company was not licensed to legally collect rents. In other cases, when tenants moved out, the landlords were not informed of the vacancy. Security deposits were not returned to either the tenant or the owner. Had the owners checked to ensure the new company had a licence, they may have avoided the extreme distress and costly losses both they and their tenants experienced. Licence Search RECA s website provides a public service, allowing anyone to search Alberta industry members. This search provides information on the licence status of an individual or brokerage to determine whether or not a person or company is authorized to trade in real estate, deal in mortgages, or act as an appraiser in Alberta. 31

32 Brokerage and Broker Responsibilities Why should an associate be concerned about the role of the brokerage and broker? All brokers, associate brokers and associates are registered to a brokerage and may only trade in real estate or deal in mortgages for that brokerage. It is important for industry members who are not in a managerial or ownership role to understand the responsibilities of the brokerage and of the broker so their own dealings will support the lawful operations of the brokerage. Brokerage Licence Requirements A brokerage is a class of licence applicable to real estate and mortgage brokerages. A brokerage may not conduct real estate or mortgage transactions until it is licensed by the Real Estate Council and authorized to trade in real estate or deal in mortgages in Alberta. A brokerage must have the following: Broker [Rule 2(2)(b)] The brokerage must have a licensed broker who is responsible for the operation of the brokerage. The brokerage application must include confirmation of the employment of a broker on its application. Registered Business Office (Brokerage, Appraiser & Candidate) [Rule 13] The requirement to maintain a registered business office is mandated in the Rules to ensure an actual office exists as opposed to a mailbox or personal residence (unless the residence office complies with municipal guidelines for offices) and to ensure proper handling of brokerage documents. A registered business office means: an office location where brokerage business is conducted the broker has access and control over the premises required records are located there and made available for the purposes of a RECA review the office s address is the address of service for all industry members registered with the brokerage in a multiple branch brokerage, one office is designated as the registered business office broker manages the registered business office and any additional offices unless delegated to an authorized delegate the office must meet municipal requirements Trust Account [Rule 95] A brokerage must have a trust account for the deposit of funds received on behalf of its clients. One of the main responsibilities of the brokerage and its broker is to properly maintain the brokerage trust account. To do so, the broker must be familiar with the applicable legislation. The legislation applying to trust accounts includes the following: terms of trust must be established prior to receiving money [Act 18(2)] (See below) keep records, deposit funds within three (3) days from date of receipt or from the date which the offer to purchase was accepted (whichever is later), keep monies separate, disburse funds properly [Act 25(1)(a-d)] allow inspection by RECA s executive director [Act 74(2)] properly maintain electronic banking transactions [Rules 83, 84, 85] not make any unauthorized payments from trust account [Rule 96] prepare monthly reconciliation [Rule 86] prevent negative trust balance, however, when if this occurs, immediately fund the shortage [Rule 87, 88] 32

33 if undetermined shortage occurs or if brokerage cannot fund a trust shortage, report to the executive director [Rule 89] report annually to RECA on operation of trust accounts [Rule 90] Brokerage policy manuals should include specific details on how its industry members and other employees handle trust monies. Terms of Trust From the Trustee Act: nothing authorizes a trustee to do any thing that he is in express terms forbidden to do or omit to do any thing that he is in express terms directed to do by the instrument creating the trust. In real estate trades, the brokerage is often the trustee for money belonging to a party to the trade, for example, the brokerage may hold a tenant s security deposit for a landlord client or hold the deposit given by a buyer on a purchase contract. In all cases, these funds belong to another person, not the brokerage. Even though they have been entrusted to the brokerage, they may not be used for any unauthorized purpose. Therefore, whenever money is held in trust by a brokerage, the details of how the money will be handled must be agreed upon by the parties before the brokerage can accept any funds. These details are referred to as the terms of trust and provide express terms to the brokerage on handling the funds. Disputes are rare, especially when the parties understand the terms of trust and act in good faith in performing a contract. However, when a real estate trade fails and a trust deposit comes into dispute, the buyer and seller are: emotional have strong opinions (usually each believing the money belongs to them) question the integrity of the associate and brokerage may take legal action To establish the terms of trust before receiving money, industry members should ensure any contract that results in the brokerage holding trust funds contains details of how the funds are to be handled. For example, AREA s Real Estate Purchase Contract details the terms of trust in clause 3. In summary, these terms detail: when the funds will be paid who holds the funds when the funds will be deposited that there is no interest paid, unless otherwise agreed in writing how and when the funds are to be disbursed, i.e. to the buyer if the offer is not accepted or to the seller if the buyer fails to perform the contract how disputes are handled, i.e. the brokerage will review the circumstances to determine entitlement and pay the money to the entitled party what happens if a dispute is unresolved, i.e. if the brokerage cannot determine entitlement, it may pay the money into a lawyer's trust account Example: The following is based on a real transaction (names and exact details altered). It discusses a broker s decision about a disputed trust deposit and demonstrates the pitfalls of consumers failing to act in good faith. 33

34 Buyer Brad s Bad Decisions Buyer Brad made an offer on House #1 and told Andy, his real estate associate, to insert a condition allowing him time to obtain mortgage financing. Brad provided $4,000 as a deposit with his offer, payable to the seller s brokerage. The seller s brokerage followed the terms of trust in the purchase contract (similar to those listed above) and deposited the $4,000 in its trust account. Shortly afterward, Brad s parents saw the property and told him they did not like the house and would only give him the money they had promised if he bought another house (House #2) instead. Brad reported this to Associate Andy. Andy was surprised because Brad had told him he was buying the house himself and had not mentioned his parent s involvement. Brad now wanted to get out of the contract for House #1 and he stopped his application to get a mortgage on it. When the condition date expired, Brad thought he was in the clear and a few minutes later, he bought House #2. Brad asked the brokerage for House #1 to give back his $4,000 deposit. The broker, under the terms of trust, was responsible to decide whether Brad or the seller of House #1 was entitled to the deposit. The broker met with Brad to discuss his reasons for not meeting the financing condition. Brad told the broker he couldn t qualify for financing for House #1 because his income was too low. (Remember, he told Associate Andy his parents would not provide money unless he bought House #2.) The broker gathered other information from various sources, such as: Brad offered on House #2 within a few minutes of the financing condition on House #1 expiring. Brad s offer on House #2 was unconditional. (If his income was a concern, why would he not include a financing condition as he had on House #1?) Brad paid more money for House #2, than he offered for House #1. (If his income was too low to buy House #1, how could he afford to pay more for House #2?) Brad told Andy his parents would not provide the down payment not that his income was too low. His story had changed. The broker concluded that Brad s statement that he could not qualify for a mortgage was false and that Brad had not acted in good faith to make reasonable efforts to obtain financing on House #1. The broker paid the $4,000 deposit to the seller. Brad sued the brokerage for loss of his deposit. The judge ruled that the decision to pay the deposit to the sellers was correct as Brad had not acted in good faith in his dealings with the seller. The judge dismissed the charges against the brokerage. Brad lost his $4,000 deposit and his legal costs. Brad s story illustrates important concepts: Obligation of the parties to act in good faith in a contract A contract sets out legal obligations on the parties Brokers must follow terms of trust set out by the parties in their agreement Parties to a contract are legally obligated to do the things they say they will do including attempting to meet the terms of a condition. They must show good faith and not misuse a condition to get out of a contract. Brad was legally obligated to attempt to get financing on House #1, but he did not. Instead he simply let the time to meet the condition run out before he went on to buy House #2. Industry members should encourage clients to communicate openly about their requirements. This will assist you in protecting the client by drafting suitable terms and conditions in the contract. For example, if Brad had told Andy his parents had to approve his purchase, Andy could have included a condition allowing for this. If so, when his parents disapproved of House #1, Brad could have legitimately ended the contract. He would not have lost his $4,000 deposit. 34

35 Late Deposits Typically, the terms of trust on a real estate purchase contract allow the brokerage two banking days from the date of final signing to deposit the funds into a trust account, unless the parties to the contract agree in writing to some other time. A common mistake is the failure of a brokerage to deposit funds in accordance with the terms of trust. This might occur if an associate is late in delivering the cheque to the brokerage, when a brokerage does not make deposits on a regular basis, or some other delay. Whatever the reasons, a failure to deposit the funds on time is a breach of the Real Estate Act, section 25. If the parties have not otherwise agreed in writing, the time frame for money to be received in trust by a brokerage is three (3) days from date of receipt or from the date which the offer to purchase was accepted (whichever is later). Example: The following scenario illustrates the possible consequences of an associate failing to deliver funds to the brokerage so that the funds can be deposited in accordance with the terms of trust: Sunday Night Negotiations: Anna Agent of Bowser Brokerage acts as a seller s agent in a successful real estate negotiation. The contract directs Bowser Brokerage to hold the buyer s deposit in trust and to deposit the funds within two business days. Anna is happy with the deal negotiations went smoothly, the contract is unconditional and the buyers gave a certified deposit cheque. Anna decides she s earned a holiday and plans a week s ski trip. She drives to the slopes with the purchase contract and deposit cheque still in her briefcase, which is in her car. Anna calls her broker five days later from the ski hill. The broker is not pleased with this delay and its potentially serious consequences for the brokerage. Monday Night Inferno: Late Monday night, the seller s wood stove malfunctions and the property burns to the ground. The family is safe, but when the insurance company is called, they find their insurance lapsed months ago. The sellers can no longer complete the contract with the buyers and inform the broker early Tuesday morning. The broker calls the buyer with the news. They aren t too disappointed because they know of another house that will suit them, but the seller of that house will only accept offers until Tuesday noon, so they must act quickly. The terms of the contract indicate that the buyer s deposit will be returned to them if a failure of the contract was not their fault. The broker must tell the buyers the cheque has not been deposited and has not even been delivered to the brokerage. The buyers are frantic. Their cheque was certified; therefore their funds are tied up and unavailable to them to place a deposit on the second house. They try an offer anyway, but the seller chooses another buyer s offer because it DOES have a deposit accompanying it. The buyers have now lost two houses and are not happy. A visit to their lawyer results in a lawsuit against the first seller, Anna Agent, the broker and the brokerage. The buyers also complain to RECA and to the local real estate board. Possible Outcome: The RECA investigation could result in penalties or fines for Anna Agent, the broker and the brokerage. The real estate board may also assess penalties. Additionally, the buyer s lawsuit could result in damages and costs assessed to the seller, Anna, the broker and the brokerage. The seller might also launch a suit against Anna, the broker and the brokerage. All of this could have been avoided by making proper arrangements to have the cheque deposited on time. 35

36 Practice Tip: To do their part to help the broker fulfill the rules about trust accounts, every associate and associate broker must ensure all deposit funds get to the brokerage office in time for the brokerage staff to meet the two banking day deposit obligation (unless the contract provides otherwise). Ensure you follow any policy of your brokerage regarding deposits. Brokerage Responsibilities Although a brokerage is commonly thought of as a company or organization, it is defined as a person under Rule 2(2). As such, it must comply with the applicable legislation just as any industry member. In addition, the following responsibilities are specific to brokerages: Protection of Client Information Brokerage Name in Trade Activities Employment of Industry Members Commission Payments Payments to Unlicensed Persons Maintaining Trade Records Protection of Client Information [Rule 44(2)] A brokerage, real estate appraiser and candidate must establish adequate policies and procedures for the maintenance and protection of personal and confidential information ensure industry members registered with the brokerage and staff members know and adhere to the procedures Brokerage Name in Trade Activities [Rule 49] The brokerage must: clearly indicate the name of the brokerage in all transactions, including advertisements ensure the name of the brokerage is clearly indicated in the course of trading in real estate including any related advertisements Employment of Industry members [Rule 50(b)] The brokerage must not: allow a person registered to another brokerage to conduct transactions on its behalf employ a person to conduct transactions who is not authorized employ a person who does not meet the legislative requirements or who has not paid a fee, levy, etc. as required by RECA. Commission Payments [Rule 50(c)] A brokerage must follow the guidelines set out in the Rules regarding payment of commissions. A brokerage may not pay a commission or remuneration, except to: a broker, associate broker or associate employed by the brokerage or to not more than one corporation of which that broker, associate broker or associate, owns not less than fifty percent (50%) of the shares. (It is common in the industry for an industry member and/or spouse to own a company and have the industry member s commissions paid to that company.) another licensed brokerage (who will, in turn, pay the industry members registered to it) a qualified auctioneer, when involved in a real estate transaction as an auctioneer 36

37 Payments to Unlicensed Persons [Rule 50(d)(e)] A brokerage may pay a commission or referral fee to an unlicensed person, but may not pay a commission when it has knowledge that the person to be paid is required to be licensed and is not. A person is required to be licensed if they perform real estate trade activities as described in the Act, for example, perform any act, advertisement, conduct or negotiation, directly or indirectly in order to further a real estate transaction. To illustrate when such payments are acceptable and when they are not, see the following: Industry Application Payment of commission to unlicensed person Associate Aileen is starting her real estate career, although she has kept in touch with her former coworkers and markets her services to them. A former colleague, Ernie Eager, refers his brother to her. Aileen successfully completes a real estate transaction for Ernie s brother and she instructs the brokerage to provide $ from her commission to Ernie as a thank you for the referral. Ernie is happy about the reward and decides to earn even more by spending his summer soliciting referrals for Aileen. He begins a door knocking campaign, sends flyers to school board employees and places an ad in the local paper offering Real Estate Advice all potential sources of real estate leads for Aileen. When Ernie referred his brother, he merely introduced his brother to Aileen and did not perform trade activities. He is not required to be licensed for an introduction and the brokerage may pay the $ However, once Ernie begins soliciting real estate clients to refer to Aileen, he will be conducting trade activities which require a person to be licensed. The brokerage should not participate in Ernie s illegal activities by paying him a fee for referrals obtained through his summer solicitation efforts. Maintaining Trade Records [Rules 94, 95] The real estate brokerage is required to keep copies of all records pertaining to real estate trades in Alberta for a period of three years [Act 25(9)]. These documents may be hard copy or electronic. The broker is responsible for the operation of the brokerage and is therefore responsible to uphold this duty. Aside from the Rules, brokerages may have other document retention requirements, such as those needed to meet brokerage policy requirements or Canada Customs and Revenue Agency requirements. Rules 94 and 98 provides details of these documents, and what identifying information an agreement must contain. Rule 94 describes the details that must be contained in the trade or potential trade records for each trade and indicates the following must be maintained: service agreement purchase contract real estate management agreement property lease all records, accounts and supporting documentation What are all records? The industry often wrongly perceives records to be those documents that are directly related to contracts, such as a service agreement or purchase contract, a copy of the deposit cheque and maybe a feature sheet. However, the associate usually has many other documents copies of advertisements, open house sign-in sheets, call records, etc. All of these records should be given to the brokerage in a timely fashion so that the brokerage file will be complete. In the event of a client complaint, the brokerage will have all information it requires to attempt to resolve the dispute. 37

38 Since all trade activity by a broker, associate broker or associate is done on behalf of the brokerage; all records belong to the brokerage. To assist the brokerage in meeting its obligations, industry members should provide all documents to the brokerage for its file. Of course, industry members may copy any documents they wish to keep in their own working files provided they follow the brokerage s policies on protecting the client s confidential information. The documents that should be in the brokerage file include: brokerage, purchase or lease contracts, amendments, showing logs, contact phone numbers, advertisements, notes of telephone conversations, correspondence, photographs, square footage calculations, CMAs, and so on. These records must be kept for trades and potential trades. This means a file must also be maintained for purchase contracts that were unsuccessful, seller brokerage agreements for properties that did not sell and buyer brokerage agreements that didn t result in a purchase. Brokers might express a valid concern that all these documents cause storage problems and/or excess storage costs. However, there may be greater problems for a brokerage confronted by a client or former client s complaint or legal action without the documents necessary to defend its position. Electronic storage is one option allowed by the Rules (82-85), that can alleviate this concern. Broker Responsibilities Because a broker is authorized to trade in real estate, some responsibilities of a broker are the same as those of an associate and associate broker, as discussed under Industry Member General Responsibilities. However, the primary role of a broker is to comply with the Rules in upholding all the responsibilities of the brokerage. The main responsibilities of a broker are the: Management of the Brokerage Supervision of Industry Members and Brokerage Staff While a broker must maintain authority over the brokerage operations, some duties may be delegated. Management of the Brokerage [Rule 51] In order to effectively manage a brokerage, the person in control should be hands on, informed, and well organized as in any enterprise. Aside from the usual concerns in managing a business, the Rules set out specific areas where a broker must comply in the management of the brokerage. For example, the broker must ensure the brokerage s business is carried out competently and within the legislative guidelines. The broker must: ensure proper management and control of documents or records related to licensing, registrations and related regulatory requirements ensure all trade related documents are maintained or made available for a RECA review ensure the brokerage name is clearly indicated ensure all trust monies are properly maintained provide industry members and personnel of the brokerage with written policies and procedures provide industry members with brokerage policies and procedures for their personal trades Supervisory Capacity The broker must ensure adequate supervision over the industry members registered to the brokerage. The brokerage industry members conduct business on behalf of the brokerage; therefore it is crucial that the broker ensures their work is done properly. To ensure that it is, a broker must review all real estate agreements the brokerage industry members create on behalf of brokerage clients, such as seller/buyer brokerage agreements and purchase agreements. 38

39 In fact, the broker will be held accountable for the conduct of brokerage industry members and employees when the broker: was not actively involved in managing the brokerage failed to ensure adequate supervision was wilfully blind to the conduct of brokerage industry members and employees participated in the misconduct had knowledge or became aware of misconduct but failed to take steps to stop it failed to notify the executive director of misconduct involving fraud, deception, theft or other unlawful activities on the part of an associate broker, associate, or employee This accountability reinforces the need for brokerage policies and procedures with which the industry members and employees are expected to comply. A broker cannot always monitor the activities of all the industry members and employees. A good policy manual can speak for the broker and is effective only when everyone in the brokerage has a copy and follows it. Industry members can assist the broker in upholding the supervisory responsibility by showing respect for the role of the broker and keeping the broker informed of important issues and concerns. Practice Tip: The broker is responsible for the operations of the brokerage and associates should always consult with their broker about their transactions, clients, concerns about the dealings of others, and so on. While your office colleagues may be a good sounding board, your broker is ultimately responsible for your actions and should have input and final say on the direction you take. Delegation of Broker Duties [Rule 52] The broker may delegate some responsibilities of the brokerage operation to another person registered with the brokerage. This is a practical alternative to assist the broker in managing the brokerage, particularly in a large, multi-branch operation. However, this delegation of duties does not absolve the broker s responsibility for all brokerage responsibilities. Certain criteria apply: the delegate must be registered with the brokerage the delegate must be qualified to carry out the delegated responsibilities, by education or experience details of the delegation must be clearly set out in writing and agreed to by both the broker and the delegate the broker must communicate the delegation to all staff Ideally, the brokerage s policies and procedures will include a delegation policy which includes the framework for the delegation agreement and a communication system for informing the brokerage s employees of the tasks delegated. Practice Tip: The brokerage policy and procedures manual covers office administration and provides practice guidance to the associates. Guidelines are given on handling contracts, referral fees, working alone safely, associate personal trades, confidentiality and privacy, brokerage delegation and much more. Each new associate should receive a copy and agree in writing to abide by it. Non-Owner Broker Authority [Rule 51(2)] Real estate brokerages vary in size and style from small broker/owner operations to large multi-branch operations owned by major corporations. The broker may have no ownership interest in the brokerage for which he or she is responsible. Ownership has no impact on broker responsibility. A non-owner broker must have a written agreement with the brokerage which gives the broker authority to carry out the duties and responsibility of a broker as discussed above. 39

40 This requirement accomplishes two things it causes owners to be aware of all a broker is responsible for and it prevents brokers from shirking their duties under the legislation due to a contradictory instruction from the owner. Disciplinary Action 6 Broker Failures Issue: Multiple breaches of broker responsibilities. Facts: The broker was a dual agent acting for both buyer and seller in a transaction. As indicated in the purchase contract, the buyers paid a $20,000 deposit, which the broker deposited to the brokerage trust account. When the sale did not close, the buyers requested their deposit be returned. The seller disputed this. The terms of trust within the contract indicated that when the deposit is in dispute the funds will be transferred into a lawyer s trust account pending resolution. However, in this case, the broker kept the funds. A month later he transferred these trust monies to the brokerage s general account and spent the money on personal and business expenses. The broker was out of the country for six months, leaving the brokerage with no supervision. The broker did not fulfill his obligations to make accounting reports to RECA and to sign monthly trust reconciliations, as required. Result: The Hearing Panel found the broker s conduct to be deserving of sanction in that he used trust funds fraudulently and unlawfully and failed to: handle trust fund in accordance with the terms of trust keep trust monies separate from other monies be actively engaged in the brokerage management properly maintain the trust account file reports to RECA The Hearing Panel ordered the broker s authorization to trade as a broker be suspended for five years, and an authorization to trade as an associate suspended for 18 months. The Panel also assessed a fine of $15,000, plus substantial costs and ordered the completion of the applicable licensing program before applying to re-enter the industry. Industry Member General Responsibilities Part 2 of the Rules is titled Industry Standards of Practice. Sections 41 and 42 indicate what industry members must do and what they must not do. These rules indicate general responsibilities and standards of conduct and apply to all sectors of the industry and all classes of licenses. Rule 41 Must Do Rule 41 Industry members must: (a) act honestly (b) provide competent service (c) disclose to their clients, at the earliest practical opportunity, how they will be paid for their services 40

41 (d) fulfill their fiduciary obligations to their clients (e) ensure the role of the industry member is clearly understood by their clients and third parties (f) disclose to clients, at the earliest practical opportunity, any conflict of interest they have in the course of providing services to, or in their dealings with, a client (g) practice in strict accordance with the Act, Regulations, Rules, Bylaws and any other laws that govern trading in real estate, mortgage transactions or appraisals in Alberta (h) cooperate fully with, and provide any information to a representative of Council carrying out their duties and responsibilities under the Act; (i) comply with an order issued pursuant to the Act by the Council, the executive director, a hearing panel, appeal panel or court; and any terms, conditions or restrictions of licensing; and (j) refuse to provide further services to or on behalf of a client who instructs him to withhold a disclosure required by the Act, Regulations, Rules, Bylaws, or any other laws. Rule 42 Must Not Do Rule 42 Industry members must not: (a) make representations or carry on conduct that is reckless or intentional and that misleads or deceives any person or is likely to do so; (b) participate in fraudulent or unlawful activities in connection with the provision of services or in any dealings (c) use confidential information obtained from any person for personal gain nor should that information be used for any purpose other than that for which it was obtained (d) discourage a client, customer or a party to a trade in real estate from seeking legal counsel or expert advice (e) deny professional services to, or be a party to any plan or agreement to discriminate against any client, customer or party to a trade in real estate for reasons of race, creed, colour, gender, sexual orientation, family status, marital status, age, national origin, or physical disability (f) physically, sexually, emotionally or verbally abuse a client, customer, industry member or party to a trade in real estate; or (g) engage in conduct that undermines public confidence in the industry, harms the integrity of the industry, or brings the industry into disrepute The requirements of these two Rules provide guidelines for the professional and legal practice of an industry member. For the most part, compliance is simply good business practice of any person who deals with the public. Many of these requirements also support the principles discussed in Section 3, Representation Relationships, regarding the duties of an industry member to a client and customer. Trade in Proper Name All industry members brokerage, broker, associates and associate brokers, must trade in the name of the brokerage. This means that the brokerage name must be referenced in any advertisements, communications, websites, trade documents, etc. Additionally, industry members must trade only in the name that appears on their licence (Rule 53). The application and renewal forms allow applicants to provide their legal name, and a name they are also known as and commonly use: Last name; First name; Middle name(s); Also known as; All previous legal names & other names by which you are/have been known; Residential address City, province, and postal code; Birthdate; Residential phone number; Cell phone number; address, etc. Note: RECA must be advised immediately of changes to your information. RECA also relies on an accurate and current address to send out important industry information to industry members. 41

42 Example Algernon Paulo Abernathy is employed by Prairie Fields Realty. Most people know him as Al Abernathy. To properly fill in the application form, he should indicate Algernon as his first name and Al as his Also Known As name. Once the registration certificate is issued, he may use either Algernon or Al in combination with his last name, but may not use any other variation of his name, such as A. P. Abernathy, Algernon A. or Algy (his Mom s favourite). When conducting real estate transactions, Al may use his name as either Algernon or Al Abernathy and he must include Prairie Fields Realty on any documents, communications and advertisements. Licence Search When industry members properly use their name as it appears on their licence, the public and other industry members can determine their licence status through RECA s website. RECA encourages the public and industry to use the website licence search to ensure they only deal with individuals holding a current licence. If the person you are searching for has a licence history, an explanatory legend and the current status of the licence will display. If no record exits, the system will notify the searcher. This may mean the person you are searching is not authorized, however there may be a simple explanation such as a misspelling. For further inquiries, there are other options: on RECA s website, search the brokerage and its licensed individuals to find a possible match with the name you are seeking verify licence status by asking the individual to provide a Registration Certificate call the broker to enquire call RECA s Information Officer Get Credit for Taking Your Mandatory Course(s) Using the correct name is also important when enrolling in mandatory courses for license renewal. RECA tracks the compliance of industry members with respect to the mandatory course. For example, if an associate is licensed as Angelica Spumoni but signs up for a mandatory course as Angie Spumoni the course provider will report to RECA that Angie took the course, not Angelica. In this scenario, it could even result in Angelica s licence renewal being delayed. Trade Only for Brokerage [Rule 54(1)(a)] To be authorized to conduct real estate transactions, industry members must be registered to a brokerage and they may only act on behalf of that brokerage. Some examples are: an associate of Brokerage A cannot hold an open house on Brokerage B s listing The broker of Brokerage B cannot supervise the staff of Brokerage C An associate may not offer advice to a client of another brokerage Industry Application Co-brokering Co-brokering is an arrangement where two or more brokerages co-operate to represent one or more clients in their mutual transaction. 42

43 Consider a situation where a divorcing couple wants a different brokerage to act for each of them in the sale of a jointly owned property. A co-brokering arrangement, where each spouse enters into a seller brokerage agreement with a different brokerage offers a viable solution for these clients. Co-brokering arrangements can cause confusing circumstances. Unless carefully handled, it may appear an industry member is representing a brokerage other than his own or, in fact, conducts activities for the cooperating brokerage. For example: Mr. Seller of the divorcing couple has a question. When he is unable to reach his own associate, he calls Mrs. Seller s associate, who offers advice in answer to the question. Mr. Seller acts on the advice. By offering this advice the associate may cause confusion about his role, and raise questions that are difficult to answer: Who did the associate represent when giving this advice - Mr. Seller or Mrs. Seller? Was an unintended agency relationship created between the associate s brokerage and Mr. Seller as a result of the associate s advice? Did Mr. Seller s question involve the relaying of confidential information? Did the associate breach his duty to his client, Mrs. Seller, when he offered advice to her exhusband? Did the associate interfere with the agency relationship between Mr. Seller and the brokerage with which Mr. Seller chose to list? Did the associate act for the other brokerage when offering advice to its client? These are difficult questions to answer, to be sure! Any situation or action which causes confusion about which brokerage an industry member represents should be avoided. To assist the industry, RECA published an article on co-brokering in the Regulator, May 2004, available at Industry Application Industry member acting as an Assistant There is a key difference between an unlicensed assistant and a licensed industry member who chooses to act as an assistant to another industry member. An unlicensed assistant can perform freelance work for industry members from different brokerages. However, an industry member who acts as an assistant may only do so for the brokerage to which they are registered. An exception is if the activities performed for other brokerages are not considered trade activities (e.g. an industry member designs websites on a fee basis for associates of other brokerages). However, they should not have any access to that brokerage s confidential client files. An industry member s role must be clear [Rule 41(e)]. Any appearance of trading for another brokerage is not acceptable. Industry Member Responsibilities to Clients Industry members responsibilities in client/agent relationships were discussed in the Representation Relationships readings. Here, the responsibilities will be reviewed in the context of the Rules. General Obligations to Clients: Sections 57, 58 and 59 (discussed below) provide the most comprehensive view of industry member responsibilities to clients. However other areas of the Rules apply to the agency relationship. These are: 43

44 Fulfill fiduciary obligations to clients [Rule 41(d)] Not discourage expert advice (also applies to customers) [Rule 42(d)] Keep information confidential [Rule 44] Refuse services when client instructs to withhold a required disclosure [Rule 41(j)] Obtain written service agreements for exclusive agency relationships [Rule 56] Ensure written service agreements contain the required elements [Rule 43(2) below] Written Service Agreements The purpose of a service agreement is to detail the brokerage agreement and the relationship between the brokerage and the client. They also outline the duties of the brokerage to the client and the obligations of the client to the brokerage. When a service agreement is in writing, it must contain specific elements [Rule 43(2)]: be signed by the relevant parties clearly show the applicable terms and conditions of the agreement, including: names of the parties address or legal description of the property effective date of the agreement duration of the agreement the services to be provided by the brokerage each party s responsibilities the use and distribution of personal or confidential information the amount or method of calculating the remuneration or compensation when remuneration will be payable that amendments or additions be in writing and signed by the parties Finally, the industry member is responsible to provide the client with a true copy of the agreement (e.g. written service agreements, purchase contracts, etc.) and any subsequent amendments. These documents should always be provided to clients in a timely manner. Sole Agency An industry member in a sole agency relationship with a seller or buyer must fulfill the requirements of Rules 57 and 58 respectively and comply with provincial real estate legislation. These sections are specific to the promotion of the interests of the seller or buyer client and include the obligation to: fulfill fiduciary duties of loyalty, confidentiality and full disclosure of any conflicts (see Industry Application, below) act only for one client (dual agency is discussed below) obey lawful instructions exercise reasonable care and skill assist in negotiations not appoint another brokerage to act, without the client s consent prepare a legally binding agreement of purchase and sale provide all offers and counter offers disclose all information and relevant facts recommend expert advice when required advise other parties of industry member s role 44

45 Industry Application Disclosure of conflicts of interest The Rules define conflict of interest [Rule 1(1)(h)]:... conflict of interest means a real or apparent incompatibility between an industry member s interests and the interests of the client or potential client. When an industry member has some type of interest in a client s real estate trade it can be a conflict of interest. Disclosure of these conflicts of interest must be made. In this context, an interest occurs when an industry member has a legal share in a property and/or has the potential to benefit from the transaction. This can occur when the industry member has a direct or indirect interest. Direct personal conflicts of interest are usually clear and include a situation where the industry member has a direct interest as the actual seller or buyer in a transaction with a client. Another example is when the seller or buyer is a firm or corporation owned or controlled by the industry member and that firm is involved in a transaction with a client. Indirect conflicts are less clear, for example, when the industry member knows a party to a client s transaction through an association with a relative. Examples of conflicts of interest between an industry member and a client s trade or potential trade include situations where the industry member or another industry member in the same brokerage: has any interest in the property that is the subject of the trade has a relationship or association with any other person involved in the trade represents more than one buyer for the same property is competing with a buyer client for the same property represents sellers with virtually identical properties (i.e. a townhouse row) is, or will be, receiving remuneration from any other person as a result of the client s trade is in a dual agency situation These conflicts extend to brokerage employees, managers directors, etc., therefore, the brokerage is responsible to disclose conflicts between the interests of its clients and these individuals as well. Disclosure of conflicts must be made by the agent to the client. Once the conflict of interest is disclosed to the client, the client should be encouraged to seek independent advice. It becomes the client s decision whether to terminate the agency relationship and seek independent representation or consent to an alternative representation arrangement. See the Representative Relationships for any further information on conflicts of interest and disclosure. 45

46 Industry Application Disclosure of Relevant Information Relevant information is any information important to the transaction or which may affect the client s decision making process. Industry members should not judge what is relevant to the client; rather, all information should be disclosed, allowing the client to determine its relevance. Giving the client too much information is preferable to not enough. In the following example, the associate made the right disclosure decision: Associate Anatole s seller has insisted his asking price will be $201,000 no matter what, I m not reducing it, so don t ask me to. Anatole learns all the competing listings in the area have recently reduced their list prices, leaving his seller s property as the highest priced of all. Anatole knows his seller s pricing policy is firm and wonders if he should bother telling him this information or simply respect his seller s insistence on his current asking price. He decides to tell his client the information and let the client decide whether the information is relevant to his current pricing decision. When an industry member understands their responsibilities under agency law, they know they must place the interests of the client above the interests of all others, including their own. Knowing this responsibly makes it easier to understand the duty to disclose any circumstances that might affect the client. When disclosure is made, it allows the client to consider the impact of the disclosed information and decide whether it is of importance. Specific Duty to Seller Client Disclose to buyers all material latent defects known to the industry member. [Rule 57(i)] Material latent defects are defined in the Rules, 1(1)(t) and a full discussion can be found in Section 3, Representation Relationships. Specific Duty to Buyer Client Disclose existence and terms of competing offers known to the industry member [Rule 58(n)] Dual Agency Obligations [Rule 59] Dual agency occurs when the brokerage represents both buyer and seller (or tenant and landlord) in the same transaction, for example, when: one industry member is representing both the seller and buyer or one industry member is representing one party and another industry member with the same brokerage is representing the other party in the same transaction. An industry member acting as a dual agent can not offer the fiduciary duty of undivided loyalty to either client. Therefore, when the brokerage is representing both the seller and the buyer or landlord and tenant, it cannot fulfill the most basic obligation to act in the client s best interests. A real estate industry member can be a dual agent with limitations provided the proper authorization of both clients is obtained and there is compliance with the obligations under Rule 59, summarized below. First, the clients can agree to the dual agency through a dual agency agreement. This agreement will set out how the brokerage is to be remunerated and indicate that the brokerage will: treat the parties in an even-handed, objective and impartial manner exercise reasonable care and skill obey the instructions of the parties within the terms of the agreement perform facilitation services - those not requiring the industry member s discretion or judgment, confidential advice or advocacy for either party provide statistics and comparable property information provide and prepare agreements of purchase and sale, etc. 46

47 provide names of experts, but not recommend an expert to either party present all offers and counteroffers even when the property is already the subject of a contract convey to the parties all information they wish to have communicated keep the parties fully informed on the progress on the transaction disclose to the buyer, all known material latent defects affecting the property disclose to the seller all known material facts relevant to the buyer s ability to purchase (see Industry Application below) ensure that the brokerage s industry member(s) will provide services in compliance with the brokerage policies governing dual agency properly hold all trust monies provide no false or misleading information to the buyer or the seller not disclose, without the party s informed written consent, o that the buyer may offer a higher price or terms o that the seller may accept a lower price or terms o the motivation of either to buy or sell the property o personal or confidential information (exception material latent defects and buyer s capacity to buy) not conduct or influence the selection of inspections or verify information in favour of either party Industry Application Disclosure of buyer s ability to finance: The industry member has the obligation to disclose to buyers any material latent defects in a property known to the industry member. The disclosure is required as the existence of such defects might affect the buyer s decisions on the price to offer, the conditions in the purchase contract, the progress of negotiations or whether the buyer offers on the property at all [Rule 59(4)(e)(i)]. Equally significant to a seller is the buyer s ability to finance a property [Rule 59(4)(e)(ii)]. The seller might base decisions on whether the buyer has a viable chance of qualifying for financing. If it is known to the dual agent it must be disclosed to the seller, as this information may impact the seller s decisions. This is not condoning the disclosure of confidential information. Only information that is known and factual and that does not breach confidentiality as described in the Dual Agency With Limitations Brokerage Agreement may be given. The industry member can comply with the Rule and maintain the buyer s confidential information by giving the following types of information to the seller: The buyer has obtained lender pre-approval in this price range. The buyer was unable to qualify to purchase a property in a similar price range. The purchase contract indicates the buyer has less than 10% down payment and will be financing the balance. The buyer s down payment is equal to 50% of the offer price and the lender has pre-approved the loan. The industry member may NOT provide information such as the buyer: makes $50,000 per year, plus bonus is in line for a promotion at work is a single parent of three receiving child support payments just inherited $100,000 This type of information is confidential information to the buyer and may not be disclosed without the buyer client s approval. Industry members must find tactful and appropriate ways of communicating the viability of the buyer to the seller. For further information see the Representative Relationships readings. Industry members will find that the information that comes forth will vary from transaction to transaction. The Dual Agency With Limitations Brokerage Agreement will assist in determining what sorts of information can and cannot be disclosed. 47

48 Obligations of Clients In the agency relationship, the client will have some legal duties toward the agent. These duties are: Indemnification Remuneration Disclosure Indemnification reimbursement for expenses incurred while an industry member fulfills responsibilities to a client. To avoid confusion, the terms of the service agreement should detail in writing which expenses will be reimbursed. Remuneration the commission or fee an industry member earns for services rendered. The details of this remuneration should be in writing and agreed to by the brokerage and the client. Disclosure of Relevant Information clients have an obligation to disclose matters that may affect the transaction, such as a material latent defect. The specific obligations of the client should be set out in the seller or buyer brokerage agreement. Clients Obligations The obligations of a client are agency law obligations and RECA has no jurisdiction over the actions of clients. The best way to protect the interests of the client, the brokerage and yourself is to establish the representation relationship through a clearly written service agreement describing the obligations of the client and the brokerage. Industry Member Disclosure Requirements In addition to the sole agency and dual agency requirements for disclosure, the Rules require that industry members make other disclosures to clients, potential clients and customers. The underlying premise for the timing of any disclosure is that it must be made before the individual owed the disclosure makes an important decision that may be affected by the disclosure. The Rules require that industry members must: disclose to clients how they will be paid [Rule 41(c)] ensure their role is clear [Rule 41(e)] ensure the role of an unlicensed assistant is clear [Rule 46(3)(4)] disclose any conflict of interest with a client [Rule 41(f)] disclose details of referrals and that a fee may be earned [Rule 45) before entering into a service agreement, disclose the nature of services, any conflicts, other facts likely to influence the person s decision [Rule 55] Industry Member Responsibilities to Customers Sometimes buyers and sellers choose to act for themselves and not have the representation of a brokerage. Despite this, they are still owed obligations under the Act and Rules. An industry member s responsibilities in customer relationship are discussed in Section 3, Representation Relationships. Here, the responsibilities owed a customer are reviewed in the context of the Rules. 48

49 Disciplinary Action 7 Failure to disclose cost of service Issue: The following is an excerpt from a multiple issue case. Facts: The broker and his brokerage were retained by a property owner to manage a residential rental property. The broker prepared a written property management agreement between the brokerage and the owner, which provided that the owner would pay the brokerage a monthly property management fee of $ The brokerage, however, invoiced the owner for a monthly fee of $ The broker rationalized that because the property management agreement did not define property management services, the brokerage could charge the owner above and beyond the monthly $60.00 fee for services such as inspecting the property and serving notices to tenants. As a result, (of this and the other issues in the case), the owner cancelled the property management agreement. The brokerage charged the owner a three-month cancellation fee even though there was no provision in the Property Management Agreement which allowed the brokerage to charge any cancellation fee. Result: The Hearing Panel found the broker s conduct to be deserving of sanction on many issues. Regarding disclosure of how the brokerage was to be paid for its services, the Hearing Panel found the broker failed to fully inform the owner how the brokerage would be paid for its services. The broker was assessed a fine and costs and required to complete an educational course. Section 60 When the brokerage: acts as the agent of a seller, interested buyers are considered customers acts as the agent of a buyer, owners of properties are considered customers If that party is not represented by another brokerage, the industry members can ensure their role is clear through a customer status acknowledgement confirm name. This document will provide that the customer has received and read the document and has the opportunity to seek further information and independent advice on it. The document will also clarify that: the customer has chosen not to be represented by an industry member the customer understands the brokerage owes no agency or fiduciary obligations the brokerage s services to the customer will be limited to those not requiring discretion, judgement, confidentiality or advocacy on behalf of the customer the brokerage will: o exercise reasonable care and skill o not negligently or knowingly mislead o hold monies in accordance with the Act o comply with real estate legislation Services Offered to Customers The brokerage may offer the following services to customers: information on real estate statistics and comparable property information provide various forms and, provided no advice is given, complete them as instructed by the customer provide names of real estate service providers, but not recommend a particular one present all offers and counter offers convey information as requested by the customer keep the customer informed as to the progress of the transaction 49

50 Practice Tip: If you assist a customer in filling out a document, ensure the document does not indicate you are acting for the customer. For example, the purchase contract has blank spaces where the agents for the parties to the contract fill in their contact information. If you only assisted the customer with the form and did not create an agency relationship don t put the brokerage name on the contract. By following these Rules, industry members will fulfill their obligations to customers. An additional benefit is that proper behaviour toward customers may also indirectly assist the industry member in fulfilling the duty to act in the client s best interests. This is illustrated below: Industry Application Services to Customers An unrepresented buyer has made an agreement with Associate Alfred s seller client to purchase the seller s property. The offer is conditional on obtaining a home inspection within three days. The buyer asks Alfred to recommend a home inspector. Alfred reminds the buyer that he acts for the seller, and cannot offer specific advice to the buyer. Instead, Alfred offers four names of qualified inspectors for the buyer to consider. The buyer selects an inspector, but the inspector is only available to perform the inspection tomorrow otherwise, it will be delayed until late next week. As a delay would require a written amendment to extend the condition date, Alfred makes an extra effort to be cooperative in setting the appointment for tomorrow. His efforts are rewarded when the inspection is completed the next day, the buyer removes the condition quickly and the seller is pleased with the fast action. Delivery of Documents The industry member is typically the individual who receives and delivers all paperwork required to effect a real estate transaction. Whenever industry members receive an offer or an acceptance of an offer, they must ensure each party has a true copy of the offer or acceptance [Rule 61]. Practice Tip: A true copy is a document that is unaltered from the original. Often, faxed or photocopied documents are acceptable but if they are altered in any way from the original, they are not a true copy. Industry Member Responsibilities to Brokerage Typically, it is the industry members of a brokerage who are involved in facilitating client transactions on behalf of the brokerage. They work directly with the brokerage s clients; draw up the service contracts, purchase contracts, amendments, advertisements, etc. The broker is responsible to ensure the business of the brokerage is carried out competently. In order to fulfill this responsibility the broker requires the cooperation of all the industry members registered to the brokerage. Rule 53 sets out requirements and responsibilities of industry members to their brokerage. An industry member must: trade in real estate only in the name that appears on the industry member s licence trade only in the name of the brokerage ensure trades in real estate and the relevant documentation meet requirements provide the broker with all original documentation and/or copies of original documents provided to the parties or maintained by other brokerages keep the broker informed of activities being performed on behalf of the brokerage 50

51 ensure adequate level of supervision for any employees who perform duties, i.e. assistants notify the broker if a deposit for a transaction has not been received respond promptly to an inquiry by the broker notify the broker upon learning of any violation of the Act, Regulations, Rules or Bylaws by any industry member or employee associated with a brokerage. (Industry Application below) When new to the industry, associates often have a lot of contact with their broker or a broker delegate who may be delegated the duty to train new associates. The broker may be less involved after the associates gain more experience. However, associates will continue to represent their brokerage in all activities and they are responsible to report to the broker from time to time. In particular, associates must respond to the broker s inquiries. Associates should consult with their broker whenever they have questions or concerns about their transactions and clients or the questionable dealings of other industry members. RECA s investigation unit investigating a consumer complaint has often found that the associate did not know how to handle a problem, but they did not consult with the broker even after things went wrong. In these cases, the broker is surprised to receive notification about a client s complaint because it is the first they have heard of any concerns. Most brokers will take proactive steps to avoid a formal complaint by working with a client to resolve a concern but this is only possible when they know about it! While office colleagues may provide good water cooler advice, the broker is ultimately responsible for the actions of all industry members registered to the brokerage and should have input and final say on the direction taken when problems arise. Industry Application Notify Broker of Violations Industry members may learn through the industry grapevine where another industry member has breached the legislation. Rule 53(h) requires they bring these issues to the attention of the broker. The following scenario examines this responsibility: Associate Allison of Brokerage A and Associate Brad of Brokerage B represented their respective clients in a real estate trade. During negotiations, Associate Allison, who represented the buyer, arrived at the seller s house to present the buyer s latest terms. Associate Brad was not there. Soon, Allison was surprised to see Brad s unlicensed assistant, Cheryl, arrive at the house without Brad. Cheryl explained to the seller that Brad could not come, but they were not to worry as Brad had instructed her on everything that was to be done. Allison was concerned about Cheryl s involvement, but felt she was obligated to present her buyer client s offer to the seller and proceeded. When Allison finished presenting her buyer s price and terms, Cheryl showed the sellers a market evaluation that she explained she had prepared earlier in the day. She compared the offer price to the market evaluation and advised the seller the offer was good and that they should accept it. The sellers accepted the offer. Allison was pleased but uncomfortable with Cheryl s activities because she had offered specific advice to the seller, without holding a real estate authorization. Would Allison be correct to report Cheryl s activities to her broker? Yes. Rule 53(h) requires industry members to report to their broker when they suspect a situation violates legislation. In this case, Cheryl is not licensed, yet she performed trade activities by 51

52 providing specific advice to the seller. Further, Associate Brad s action of sending Cheryl to negotiate in his absence is a violation of Rule 46(1), requiring that an industry member only assign tasks to an assistant that they are competent to perform. Because she is not licensed, Cheryl is not considered competent to offer advice to clients. In this case, when Allison reports to her broker, the broker should inform Brad s broker of the situation. Upon becoming aware, Brad s broker must take steps to correct the misconduct and reduce any harm that may have resulted [Rule 51(3)(f)]. Industry Member Responsibilities in Personal Trades When industry members (including brokers, associate brokers and associates) are involved in buying or selling real estate they tend to appear to the public as having the upper hand in the trade. This means they are at risk of their personal trades appearing to be suspicious or detrimental to the public. Section 3, Representation Relationships discussed the industry member s responsibility to disclose conflicts of interest in their personal trades. This section will focus on the Rules and Act requirements of industry members involved in personal trades with clients and other members of the public, along with some industry examples. When a member of the public has been involved in a trade with an industry member and decides unfair advantage was taken by the industry member, it is an onerous, time consuming task for the industry member to defend such a claim. Courts require industry members to bear the burden of proof to show that the trade was conducted fairly. Following the brokerage s policies on personal trades and documenting all the disclosures and consents required by legislation is the best proof of professional and fair practices. There are two relationship situations to consider when entering into a personal trade with a member of the public: 1) No Agency Relationship Where the industry member has no brokerage agreement with the other party involved in the transaction. 2) Agency Relationship Where the industry member has a brokerage agreement and an agency relationship with the other party involved in the transaction. 1) No Agency Relationship Having no agency relationship with the other party to the trade is the preferred practice. However, sometimes the public will perceive an agency relationship exists where one does not. The Court will place onus on the industry member to recognize and correct situations where it may be possible for a member of the public to be confused about the relationship, as could occur in the following circumstances: An agency relationship was established for another trade. For example, an industry member recently acted for a buyer client on a purchase and is now buying that buyer s existing property. Since there was an agency relationship created to conduct the buyer s purchase, the buyer client might think the agency relationship continues to apply in the trade between the industry member and the buyer client. Ensure the client knows the agency relationship does not continue into the next trade. Has the industry member ever acted as an agent for the person in the past? Has the industry member ever offered real estate advice to the person? Did the person ever disclose confidential 52

53 information to the industry member? If any of these apply, take steps to ensure the person knows the agency relationship does not continue to exist and recommend independent advice. When entering into a trade with another party whom you do not represent in an agency relationship, ensure there is no perception of such a relationship by making a clearly written disclosure such as Ms. Industry Member discloses that she is acting solely for her own interests in this trade and does not have an agency relationship with Mr. Public. Industry members are often thought to have the upper hand in their personal real estate trades. Entering into a personal trade is problematic enough without the existence of a client relationship. Having no agency relationship with the other party to the trade is the preferred practice. 2) Agency Relationship It is extremely difficult for an industry member to overcome the inherent conflict of interest that exists when entering into a personal trade with a client to whom fiduciary duties are owed. In fact, it is doubtful an industry member can have such an involvement in a trade and still claim to place the interests of the client above those of his or her own. Proving such a claim to a Court usually results in failure because of the extent of the conflict of interest. It is recommended that an industry member terminate any agency relationship with a client, prior to entering into a real estate trade with that person. If the industry member and the client agree to maintain an agency arrangement throughout their mutual trade, the client s written consent must be obtained [Rule 54(3)]. Before obtaining this consent, the industry members should think carefully about the relationship and the client s knowledge level. Then, the disclosure should be made in such a way that it ensures the client fully understands the situation before consent is given to continue in an agency relationship. Sophistication level Even if the client has experience in real estate trades, don t assume the client will have a good understanding of the implications of a trade between the client and yourself. Ensure the client seeks independent advice before consenting to maintain the agency relationship. Client Perception If you maintain an agency relationship, consider what your client s expectation of your service will be. Example: An industry member wishes to buy his seller client s property. He wants to negotiate a competitive, but fair, price. However, the client was first attracted to the industry member s marketing because of the statement: I have a track record of getting the most money for sellers in this area. Will this cause the seller to perceive the industry member will pay the most money for the seller s property? Confidential Information Has the client disclosed confidential information that the client may think the industry member used to the client s detriment? Example: A buyer client buys a property belonging to his agent. Later, when buyer s remorse sets in, he thinks he paid too much for it. He becomes convinced he was dealt with unfairly, especially since he had just disclosed his recent stock market gains to his agent. Three Levels of Disclosure In order to protect the public, the Rules require industry members to provide certain disclosures. The more potential risks to the public, the greater the industry member s requirement for disclosure. 53

54 Level 1: Example 1 Direct Interest When an industry member wishes to enter into a trade in real estate, either directly or indirectly, with a party who is represented through an agency relationship with a brokerage, the industry member must make written disclosure to the other party s agent that he or she is authorized under the Act and provide the name of the brokerage. [Rule 62(b)]. When the other party s agent learns this information, it should be treated as relevant information and passed on to the client [Rule 57(k)]. Level 1: Example 2 Indirect Interest Arnie is an associate of ABC Brokerage. He represents a numbered company in which he has a minor interest and has listed a property owned by the numbered company. A buyer represented by Associate Brian of XYZ Brokerage has made an offer on the property. To meet the disclosure requirements, Arnie discloses to Brian that he is authorized to trade in real estate as an associate through ABC. Because the buyer has agency representation through Brian and XYZ, Arnie is not required to disclose details of his ownership interest in the numbered company. Example: Associate Allen of Anytown Realty is interested in buying a property listed with Associate Brianne of Buynow Realty. To comply with the disclosure requirements, Allen informs Brianne in writing that he wishes to make an offer to her client and that he is authorized to trade in real estate through Anytown Realty. Brianne informs the client of the offer and Allen s status as an industry member. This level of disclosure allows Allen to negotiate in his own interest, while Brianne, as seller s agent, can offer any cautions that may be relevant to her client. Level 2 The Rules require more stringent disclosure when an industry member enters into a trade with an unrepresented member of the public [Rule 62(1)(a)]. In these situations the member of the public does not have the advantage of brokerage representation and therefore is at greater risk. An industry member who is involved in a trade, either directly or indirectly, with an unrepresented party must disclose the following information to that party: that the industry member is authorized under the Act the name of the industry member s brokerage 54

55 any direct or indirect interest the industry member has in the transaction complete details of any negotiations for further trade of the real estate that occur at any time up to completion date any information known to the industry member that could materially affect the value of the real estate Practice Tips: As an industry member, you should always take steps to reduce the risks in your trades with members of the public. In addition to these disclosures, a good tip is to disclose upfront that you may sell the property at any time and you may make a profit. Example: A For Sale By Owner (FSBO) seller is offering a vacant lot for sale. Associate Jeffrey would like to buy it because he knows a pending zoning change will allow it to be developed for office use. Jeffery s ambition is to become licensed as a broker and open his own brokerage and this lot will suit that purpose once the zoning change takes effect. He prepares the purchase contract with his numbered company named as buyer. Jeffery is required to disclose that: he is the owner of the numbered company named as buyer (direct interest) he is currently authorized to trade in real estate and provide the name of the brokerage to which he is registered he has knowledge of a zoning change for the subject property This level of disclosure requirement provides information that assists unrepresented members of the public to decide if and how to negotiate with an industry member. For example, in this case, the FSBO may not be aware of the zoning change. While Jeffery s disclosure of the zoning may cause the FSBO to bargain harder with Jeffery, it does much to avoid a future lawsuit and enhances the integrity of the industry overall. Example 2: Associate Ella represents her son Jay in his purchase of an Edmonton condo. She properly discloses her indirect interest in the trade. 55

56 Before completion day, Jay is offered a great job in the tar sands and will be moving away from Edmonton. Ella agrees to buy the condo in his place and Jay assigns his contract to her. Associate Ella now has direct interest in the trade and she is required to disclose this new information to the seller. Level 3 This level of disclosure requirement deals with a situation where an industry member registered to the brokerage or brokerage employee wishes to enter into a trade for a property of a brokerage client. The Rules require the broker to become involved in the process by immediately providing specific disclosures to the brokerage client [Rule 62(2)]. The brokerage is required to disclose to the seller: the existence of a conflict of interest the name of the buyer and the nature of their relationship to the brokerage any confidential information about the seller that the buyer may have already received who will be representing the buyer with respect to the transaction provide the seller an opportunity to seek legal and independent advice In addition to this disclosure by the broker, all industry members are required to disclose, at the earliest opportunity, any conflict of interest they may have in their dealings with a client [Rule 41(f)]. Because all clients of the brokerage are clients of each industry member registered to the brokerage, an industry member who wishes to enter into a trade with a brokerage client must disclose everything about the conflict of interest. The following examples will illustrate a broker s disclosure to a client about an unlicensed brokerage employee s interest in the client s property (Example 1) and the additional disclosures required by an industry member involved in a trade with a brokerage client. Example 1: Robert, an unlicensed employee of Commercial Enterprises Realty, wants to buy a small manufacturing factory which is listed by Associate Alicia of the brokerage. The broker assigns Associate Sheng to represent Robert in the trade. 56

57 To comply with the disclosure requirement of Rule 62(2), the broker is obligated to disclose to the seller client the following information: there is a conflict of interest because of a dual agency situation both clients will be represented by brokerage associates. Robert is an employee of the brokerage who has access to client files because of Robert s role, he knows the reason the seller needs to sell the factory is to raise money to prevent an impending bankruptcy Sheng, an associate with the brokerage will represent Robert the seller is encouraged to seek legal and other independent advice before proceeding Example 2: Associate Mai and her family wish to purchase a brokerage listing, listed by Associate Pierre. Mai follows the brokerage policy and meets with her broker to discuss the disclosure requirements. Afterward, the broker contacts the seller and discloses the following information: Mai is an associate of the brokerage, who wishes to represent herself in the trade there is a conflict of interest because of a dual agency situation within the brokerage both Mai and Pierre are brokerage associates Mai has no access to brokerage files and has stated she knows none of the seller s confidential information if the brokerage and the seller agree to maintain an agency arrangement throughout this trade, the brokerage will require the client s written consent [Rule 54(3)]. the broker will ensure the client fully understands the situation before consent is given the seller is encouraged to seek legal and other independent advice before proceeding Becoming involved in a personal trade with a client is problematic and complicated. If you choose to proceed without ending the agency relationship, be aware that any problems will be magnified by the fiduciary relationship. Disciplinary Action 8 Personal Trades Issue: Misrepresentation and breach of the Rules pertaining to an industry member s personal trades and conflicts of interest. Facts: Associate A, using his numbered company as the buyer, bought a property from Mr. Seller, who was selling privately. There was no seller brokerage agreement and no agency relationship established. Before the transaction between A s numbered company and Mr. Seller completed, Associate A s acquaintance, Mr. Buyer, told him he wished to buy a property and Associate A agreed to represent him. Associate A. told Mr. Buyer about Mr. Seller s property and showed him the exterior. Associate A did not tell Mr. Buyer, that his own company had already contracted to buy the property. Instead, Associate A intentionally led Mr. Buyer to believe Mr. Seller was only thinking of selling but had not yet listed the property. He did this because he hoped to sell his interest in the property to Mr. Buyer for more money than his company had contracted with Mr. Seller for. To get Mr. Buyer access to view the interior of the home, Associate A. devised a scheme where Mr. Buyer would pose as a carpet layer hired by Associate A. to assist in renovation plans Associate A had for the property. Mr. Buyer agreed to the scheme because he believed he could get a better price on the property since it was not yet listed and if Mr. Seller was unaware of any buyer interest. As planned, Associate A. and Mr. Buyer viewed the property and led Mr. Seller to believe Mr. Buyer was a carpet layer. This showing resulted in Mr. Buyer wanting to buy the property. 57

58 Disciplinary Action 8 Personal Trades (continued) Associate A prepared a contract for the property showing his numbered company as seller and Mr. Buyer as buyer and it was agreed to by both parties. Associate A did not disclose that he had an ownership in the numbered company, nor that the company already had a contract with Mr. Seller. Mr. Buyer assumed the company named on the contract belonged to Mr. Seller. He was not aware that Associate A was flipping the property from his company to Mr. Buyer. Coincidentally, Mr. Seller held a garage sale which Mr. Buyer attended. They spoke together and Mr. Buyer learned that Associate A s company had a contract with Mr. Seller for the property and also that the price he paid was substantially more than what Associate A s company had paid. He cancelled his contract and complained to RECA. Result: A Hearing Panel found that Associate A s conduct was deserving of sanction, in that he: gained access for a showing of a property by misrepresentation and deceit toward both Mr. Seller and Mr. Buyer (even though Mr. Buyer agreed to the scheme, he did not have all the facts) failed to provide written disclosure of his licensing status to Mr. Buyer failed to disclose his interest in the property as a buyer to Mr. Buyer failed to disclose to Mr. Seller the subsequent negotiations for the sale of the property to Mr. Buyer failed to ensure his role in the transaction was clear to Mr. Buyer Associate A was suspended for two months, fined $5,500 and ordered to pay costs in the amount of $1,500. He was also required to complete an educational requirement. For industry members who become real estate board members, additional disclosure may be required by the board or association rules. For example, CREA s REALTOR Code indicates a REALTOR who has a direct or indirect interest in the purchase of a property must make the REALTOR s position known to the Seller in writing. When a REALTOR is selling a property where the REALTOR has some interest, the REALTOR Code requires that the interest be revealed to the Buyer in writing. For further information, visit CREA s website, These requirements differ from the Real Estate Act, Rules. Generally, industry members can avoid conflicts by making full disclosure to their clients and obtaining informed consent before proceeding with disclosures that may not be in the client s interests. Commissions Industry members typically earn their income through commissions paid by their clients for the provision of brokerage services. The terms for payment of the brokerage s services are set out in the service agreement. In the real estate industry, the most common types of service agreements are: seller and buyer brokerage agreements and property management agreements. The client and brokerage will agree in the contract as to the details of the fee payment, and the applicable GST. All industry members are registered to a brokerage and authorized to represent the brokerage in fulfilling its duties to clients. As such, any commissions or other remuneration earned or paid must go through the brokerage. The Rules state a real estate broker, associate broker or associate must not: promise to pay or pay a commission, referral fee or other remuneration to any person in connection with a trade in real estate except through the brokerage [Rule 54(1)(b)] accept a commission, referral fee or other remuneration for a trade in real estate except through the brokerage [Rule 54 1(c)] When the brokerage receives the commission, it will pay its industry members in accordance with their employment agreements. 58

59 Disciplinary Actions 9 Improper Payment and Receipt of Commission Issue: Unauthorized payment and receipt of commissions outside of brokerage Facts: Associate Pink, registered with Brokerage Red referred 18 clients to another industry member, Associate Grey, of Brokerage Black. The two associates had agreed that the referring associate, Pink, would get a percentage of each commission Associate Grey earned on the referrals that resulted in a transaction. Over time, Associate Grey paid Associate Pink directly by personal cheque approximately $8, When Brokerage Red learned of the payments, it terminated Associate Pink and submitted a complaint about the activities of both associates to the Real Estate Council. Result: Regarding Associate Pink: Associate Pink was assessed a fine of $8,335.32, plus $ costs and was required to complete an educational course. Regarding Associate Grey: Associate Grey was assessed a fine of $6, plus costs of $3,500 and was required to complete an educational course. Commission Calculations A brokerage s fee must be an agreed upon amount and may be calculated in the following ways [Act 24(2)]: by a percentage of the property s sale price a flat fee a fee for service (hourly rate or specific amount for each service provided) a combination of any of these Fees may not be calculated based on the difference between what a property is listed for and what it sells for [Act 24(1)]. This situation may occur when a poorly informed seller underestimates the value of a property and a dishonest industry member fails to offer proper advice and takes advantage of the situation. Improperly Calculated Commission Contravention of REA 24(1) Seller Sam tells his associate that his property should sell for about $150,000 because a neighbouring property recently sold at that price. The associate knows of that sale and is also aware that Sam s property is far superior and could likely sell for up to $20,000 more. Aware that Sam does not know the true value of his property, the associate, who is unscrupulous and willing to contravene the Real Estate Act, tells Sam, If you re happy with $150,000, I can try to sell it for that. To do you a favour, I ll only keep anything above $150,000 for my fee. (To keep the scheme from his broker, the associate does not hand the brokerage agreement in to the office). Sam thinks this is a fine arrangement; after all, his neighbour got $150,000, but then had to pay commission, while his associate is offering to get him $150,000 in his pocket and only keep more if he can get it. Of course, when the property sells for $170,000 and the associate claims $20,000, Seller Sam will be writing a letter to the Real Estate Council about his associate s underhanded actions. 59

60 Commissions Are Negotiable The amount of commission or fee that might be charged is not officially set out by any provincial body or industry organization; therefore industry members may not indicate these fees are pre-set or not negotiable by such organizations. Brokerages are free to set policies about the fees they wish to charge. They may or may not allow for negotiating or adjusting those fees under certain circumstances. Industry members will communicate the brokerage s fees to potential clients and must honestly communicate the usual or typical rates charged in their area, whether or not their brokerage rate fits within this range. Disclosure of Commission Disclosure of Fee Industry members are required to disclose to their clients how they will be paid. [Rule 41(c)]. This should be done at the earliest opportunity because this information is of relevance to clients and may affect how they decide to proceed in a transaction. Disclosure of Compensation from Other Parties An industry member cannot accept a payment from any other party to a transaction without disclosing the payment to the client [Rule 41(c)]. Otherwise, such payments would be termed secret profits, which industry members are prohibited from making when they are acting in a fiduciary capacity. A situation where this payment might occur is when a seller offers a selling bonus to associates working with buyers as an incentive to encourage more showing activity and a possible sale of his property. Receiving such payments may place the industry member in a conflict of interest with the client s interests, therefore this conflict must be disclosed to the client [Rule 41(f)]. Disclosure of Referral Fees In the real estate industry referral fees and other forms of remuneration are sometimes paid by other real estate industry members, moving companies, home inspectors, mortgage brokers, etc. The potential for an industry member to earn a referral fee or compensation as a result of passing along a person s name is of relevance to the party being referred [Rule 45]. Therefore, industry members are required to disclose that: the person s name has been forwarded to a service provider the industry member may be entitled to receive a fee for making the referral Recovery of a Disputed Commission The brokerage is the only class of licence authorized to conduct transactions (brokers, associate brokers and associates are only authorized to represent their brokerage), and therefore, only the brokerage can take action before the courts for the recovery of a commission where the client and the brokerage are in dispute. This includes a civil suit or the filing of a caveat against a client s property. RECA has received complaints that an individual industry member has placed a caveat on a property to protect their commission interest in a transaction. The legislation allows only brokerages to take this action, when the following circumstances exist: The brokerage held the appropriate authorization [Act 21(1)]. A written and signed service agreement exists [Act 22(a) When a brokerage has been responsible for a sale or lease of land, and the parties to that sale or lease have executed the necessary documents to enable the transaction to occur [Act 22(b)]. 60

61 The Real Estate Act supports the action of a brokerage with a valid commission claim, and at the same time, protects the public from legal battles with industry members over frivolous commission claims. Industry Application Improper Caveat The following is an excerpt from a communication sent by the Executive Director to an industry member as a result of an investigation into whether a caveat was inappropriately placed: The facts indicated that you acted improperly when you filed the caveat against the title of the property known as Property X. The brokerage, and not the individual associate, earns commissions as per the listing contract. Any caveat should be filed by the brokerage to which commissions are owed. Recovery of Shared Commissions In many real estate trades, one brokerage represents the seller and another represents the buyer. Often, it is agreed that the commission will be shared between the two brokerages. Typically the seller s brokerage will collect the commission and pay out the appropriate share to the buyer s brokerage. Controversies may arise when a seller is disputing the commissions owed and the seller s brokerage chooses not to pursue an action for commission in order to maintain a positive relationship with its client. Nevertheless, the cooperating brokerage may still have a right to its share of the commission or other remuneration and wish to pursue it. To provide a cooperating broker some recourse in these situations, the entitled brokerage may assign its rights to collect commission to the cooperating brokerage [Act 23]. Many seller brokerage agreement forms include a term allowing for the assigning of the seller s brokerage s rights to the buyer s brokerage. An example is the following clause from the Alberta Real Estate Association s Seller Brokerage Agreement (2006): 12.3 If you owe money under this Contract and the Brokerage does not wish to enforce this Contract against you, then upon mutual agreement between the Brokerage and the buyer s brokerage, the Brokerage may assign this Contract to the buyer s brokerage. If this Contract is assigned, then the buyer s brokerage may enforce this Contract against you to collect the portion of the Commission or Alternate Compensation, plus GST, to which the buyer s brokerage is entitled, and the buyer s brokerage will have the same rights and security given to the Brokerage according to Section 12 of this Contract. Ensure clause is checked with new forms. Incentives and Inducements The Rules regarding the offerings made by industry members are meant to protect the interests of the public and the integrity of the industry. While the public will rarely find fault with an offer of an incentive or inducement, they will complain if there is no follow through on the promise. The Rules place the responsibility for all incentives and inducements on the brokerage in order to ensure the public is protected from false promises. A brokerage is not required to offer incentives or inducements. If a brokerage chooses to offer them, it is free to set its own policies and procedures, provided the requirements of the Rules are followed. Industry members should have a clear understanding of their brokerage s policies on the offering of incentives and inducements. 61

62 The key difference between an incentive and inducement is that an incentive is offered to attract new business to a brokerage, while an inducement is offered to encourage an individual to proceed in a specific trade. The Rules definitions are found below: Incentive Definition, Rules 1(1)(o): incentive means anything that is advertised, communicated or offered by a brokerage to the public or a person for the purpose of attracting business to the brokerage and includes a promise, good, service, game of chance, contest, or anything else of value Examples include; air miles, gifts, contests, games of chance, money, etc. Incentives are brokerage based and an industry member may not offer an incentive unless it is one that is provided by and on behalf of the brokerage [Rule 54(1)(d)]. Brokerages should take care to ensure the incentives they offer and pay out do not contravene the rule regarding payments to persons who should be licensed but are not [Rule 50(d)]. For example, if a brokerage advertises to its past clients that it will pay a fee for a referral and then finds that one client consistently refers two or three new clients each month, the broker should make enquiries to ensure the person passing on the referrals is not conducting trade activities to obtain those leads. (Refer back to the scenario of Associate Aileen and Ernie Eager.) Inducement Definition, Rules 11)(q): inducement means anything that is offered or provided by a brokerage to a person who is, or could be, a party to a real estate or mortgage transaction and is intended to either assist, persuade or cause that person to enter into a particular real estate or mortgage transaction. An industry member may not provide an inducement unless it is provided by and on behalf of the brokerage and with the broker s written approval [Rule(54(2)]. The broker may choose to prearrange the approval of inducements by way of a written brokerage policy which clearly sets out the types and value of inducements that the broker will approve. As well, the details of the inducement must be made in writing and signed by the industry member [Rule 54(1)(e)]. Incentives and Inducements Compliance with the Legislation The Rules as they apply to incentives and inducements is to set out guidelines that will protect the public, while not unduly restricting an industry member s marketing programs or advertising campaigns. Incentives [Rule 54(1)(d)] To ensure an incentive meets the legislative requirements it must: Be advertised as a brokerage incentive Not be exclusive to any individual industry member(s) registered to the brokerage Be part of a brokerage marketing plan and include a communication strategy Have mandatory participation from all industry members registered to the brokerage Be made available to all the target clientele regardless of which individual industry member they contact Be purchased and paid for by the brokerage and in turn, given by the brokerage. (The brokerage s policy may require the associates and associate brokers to reimburse the brokerage for the cost of the incentive.) Be managed by the brokerage, including resolution of any concerns associated with the incentive Not be paid to an individual required to be licensed in relation to real estate services, but who is not licensed [Rule 50 (3)(e)]. 62

63 Appropriate Incentives ABC Realty places a newspaper advertisement offering a draw entry for a trip to Hawaii to any seller who lists with ABC Realty in the next 60 days. The trip is to be paid for and provided to the winner by ABC Realty. The broker for Buy Alberta Brokerage appears on the local TV station to promote their services. He offers a one month promotion to all first time buyers who buy a property with a Buy Alberta Brokerage industry member. These first time buyers will receive a $ gift certificate from Our Town Hardware and Farm Supply, courtesy of the brokerage. Inappropriate Incentives Sally Kan, an associate with XYZ Realty, offers to owners of a condo complex who list with her in the next 30 days, a pair of free tickets to an upcoming concert, featuring her son s heavy metal band, KannaK. (This is not a proper incentive as incentives may only be provided by the brokerage.) To increase business during a slow month, Big Box Brokerage offers a DVD player to all buyers who buy through the brokerage that month. Big Box s broker announces the plan to the associates. He tells them they must all participate in the offering and they must buy the DVDs and give them to the buyers. He also tells them he doesn t care about the brand, price or quality of DVD player they choose. (This is an inappropriate incentive. The broker has delegated control of the choice of DVD and payment of it to the associates.) Associate Kurt has been in the real estate business for many years. Over time, he has developed an extensive list of past clients, which is a prime source of repeat and referral business. His monthly newsletter contains the following statement: Refer your friends and relatives to me and I ll pay you $300 for every finalized sale! (This is an inappropriate incentive. Only the brokerage can advertise incentives and only the brokerage can pay fees to unlicensed people as incentives for referrals.) If a brokerage offers incentives, it must ensure that they are not misleading and the public must be able to easily access any terms and conditions that exist before committing to the brokerage. Inducements [Rule 54(2)] To ensure an inducement meets legislative requirements it must: Be offered to assist or persuade a person to enter into a particular real estate or mortgage transaction Be provided to the person in writing Be approved in writing by the broker Be provided by and on behalf of the brokerage Be something other than a change to a term of a brokerage agreement (i.e. a commission reduction is a change to a brokerage agreement and therefore not an inducement) Appropriate Inducements Associate Andre s buyer client has a bad back and tight finances. To encourage the client to make a purchase, Andre offers to pay the moving costs. This might help the client s bad back and make the deal financially satisfactory to him. Andre provides written details of the offer, including the amount to be paid and that the brokerage will pay the moving company directly. Andre has obtained written approval of his offer from the broker. The brokerage pays the moving company and charges Andre back. 63

64 Tar Sands Realty s policies allow associates to offer its clients inducements up to $ value in cash or merchandise, without prior broker approval. For any other amount, the policy requires associates to obtain the broker s approval. Associate Valeria s client is happy with a particular property except for the orange paint in the living room. Valeria offers the client a $ gift certificate for the local paint store. She details the inducement in writing and signs it. The brokerage purchases the gift certificate and deducts the fee from Valeria s commission. Inappropriate Inducements Associate Mel is registered to CommRent Realty, which specializes in leasing commercial space in downtown office towers. Mel hasn t had a successful lease negotiation for some time and is worried about next month s bills. Despite his brokerage s policy that associates may not offer inducements, Mel offers his current client $ if the client leases space through CommRent and Mel. The client agrees. When a lease agreement is completed, Mel pays the $ to the client. (This is an inappropriate inducement because it is not brokerage based, was offered verbally and Mel paid the sum directly.) Another example of an improper inducement is found in the following Disciplinary Action. Disciplinary Action 10 Improper Inducement Issue: Improper broker management regarding inducements. Facts: An associate informed the broker that he had offered a client an inducement, in writing, to pay the client s legal fees. The broker did not approve the inducement in writing but notified the associate that the payment of the inducement would be the associate s responsibility. When the transaction closed, the lawyer invoiced the brokerage for the client s legal fees. When the invoice was unpaid, the lawyer contacted the broker who informed the lawyer that the associate was no longer licensed with the brokerage and the brokerage would not be responsible for paying the expenses incurred by the associate. The lawyer complained to RECA. The investigation found that although the brokerage had a policy manual, policies about inducements were not included. The broker did not clearly understand the difference between an inducement and an incentive. The broker was unaware that he had to approve inducements in writing. Result: The broker was assessed an Administrative Penalty for failure to properly manage the brokerage by ensuring the brokerage policy specifically addressed how associates of the brokerage would handle inducements. Guaranteed Sale Agreements If your home does not sell within 90 days, I (we) will buy it! This type of phrase is often seen on industry member s bus benches and other real estate marketing materials. These advertisements refer to a guaranteed sale. A guaranteed sale is a written agreement between a property owner and a brokerage, where the brokerage agrees to pay the owner a certain amount of money for the property by a certain time [Act 20]. 64

65 A guaranteed sale agreement is written just as any other purchase contract; however certain terms will be included one that the contract will be effective on a certain date (i.e. 90 days in the future) and another that the contract will become void if the seller enters into another purchase contract. Marketing programs aside, a completed guaranteed sale is rare, especially when the market conditions are good. Guaranteed sales rarely occur because these advertisements often sound better than the deal really is. Most often, when sellers are responding to the industry member s advertisement they expect the guaranteed price will be at market value. However, in most cases the industry member s offer is less than market value in order to reduce the industry member s risk and to cover the expenses incurred in completing the transaction. The benefit to sellers is that they know their property is sold, one way or the other, but most sellers are reluctant to consider selling for less than market value. Brokerage Only Only a brokerage can enter into a guaranteed sale agreement with a seller. While a broker, associate broker or associate may be delegated authority to conduct the transaction, it is the brokerage that is guaranteeing to purchase the real estate [Rule 63]. Not all brokerages will participate in guaranteed sales. If a brokerage does allow guaranteed sales, clear guidelines should be established and included in the brokerage s policy manual to prevent problems. Example: Under certain circumstances, Brokerage We-Buy offers guaranteed sales. We-Buy s policy manual specifies the type of properties on which it will offer a guarantee and its offering price criteria. Occasionally, to promote the interests of a client, a brokerage associate will request We-Buy offer a guarantee on a property that does not comply with brokerage policy. To support the associate s request, the brokerage may make the guarantee provided the associate agrees, in turn, to buy the property from the brokerage. We-Buy s policy manual provides details of how and when this will occur, including the price the associate will pay, the responsibility for legal fees and closing costs, etc. Guaranteed Sales as Incentives and Inducements If a brokerage offers guarantee sales, it must decide if it will be offered as an inducement for specific transactions or an incentive to attract business to the brokerage. Note the following defintions incentive is anything that is advertised, communicated or offered by a brokerage to the public for the purpose of attracting business to the brokerage inducement is anything offered or provided by a brokerage to a person with the intent to assist, persuade or cause that person to enter into a particular real estate transaction Guarantee sale must only be done through the brokerage. Therefore, if a guarantee is offered as an inducement, the brokerage must approve and participate in the guarantee. When guaranteed sales are offered as an incentive to attract new business to the brokerage, the incentive must be available to all sellers and offered by all members registered to the brokerage (no opting out of the program). If the brokerage does not offer guaranteed sales, no industry member of the brokerage may do so. Example Associate Larsen of Tree House Realty advertises that he will personally guarantee to buy the property of any seller he represents whose property has not sold within 60 days of listing. This is not an appropriate incentive for two reasons: 65

66 o o It is not offered by the brokerage but by an individual associate of the brokerage. As this is an offer of a guaranteed sale, it must be done only in the name of the brokerage. The offer is not available to all seller clients of the brokerage but only those working with Associate Larsen. How does a Guaranteed Sale Occur? As mentioned, the contract for a guaranteed sale is written just as any other purchase contract; however terms will be included that the contract will become effective on a certain date (i.e. 90 days hence) and will become void if the seller sells the property to another buyer. The property will continue to be marketed in order to attract other buyers. However, in order to protect the interests of the public in these transactions, the Real Estate Act sets out certain requirements of the brokerage: The brokerage must maintain a separate trust account to hold deposit monies [Act 20(2)]. A deposit of not less than 5% of the purchase price in the agreement must be deposited into a separate trust account [Act 20(3)]. No commission is payable to an industry member involved in a Guaranteed Sale [Act 20(8)]. The terms of trust regarding the deposit funds [Act 20(4)]will provide that the funds are to be: o paid to the seller as part of the total payment, or o o forfeited to the seller if the seller is not paid in accordance with the agreement, or returned to the brokerage, when under the terms of the agreement, money is no longer payable under the agreement. This would occur if the seller enters into a contract with another buyer causing the brokerage s agreement with the seller to be voided. Guaranteed Sale Advertisements Avoiding the Pitfalls RECA receives complaints about guaranteed sales gone wrong but and about guaranteed sale advertisements. These complaints are often made because the owner s impression was that they would receive market value on the guaranteed sale, when in fact they are offered less (complaint records indicate guaranteed sales offers are between 85 and 93% of market value). Disciplinary Action 11 Improper Guaranteed Sales Issue: Improper guaranteed sales. Facts: The associate was registered to Brokerage X. During a period of time the associate offered to guarantee the sale of properties listed with him. He advertised that if an individual were to purchase a home through him, he would buy that individual s home. He further guaranteed that if he did not sell a home within a certain period of time he would then buy it himself. These guarantees were not made by or through Brokerage X. The associate subsequently entered into guaranteed sales agreements with clients other than on behalf of his brokerage. Results: A Hearing Panel found: The associate breached the Rules by advertising, offering and entering into a guaranteed sale agreement himself not on behalf of the brokerage to which he was registered. As a result, the associate was assessed a fine and educational requirements. To the public, many of these ads appear to be misleading. Merely including an asterisk indicating certain restrictions and conditions may apply does not change the general impression of a misleading advertisement. 66

67 Other complaints are because it is an individual associate advertising to offer a guaranteed sale, not the brokerage. These offerings are incentives and may only be offered and advertised by the brokerage. Guaranteed sales incentives can be confusing to the public. They are a somewhat complicated concept for a non-industry member to understand. Industry members who participate in them must ensure the seller fully understands the guaranteed sale agreement and its implications Advertising Requirements Advertising plays a key role in the real estate industry. It attracts business and influences the purchasing decisions of the consumer. Truthful advertising benefits the consumer and enhances the image of the industry. Conversely, misleading advertising negatively affects consumers, the business of industry members and the integrity of the industry. As a general practice guide, industry members should ensure advertising and other communications are not: false Inaccurate reasonably capable of misleading the recipient in bad taste offensive harmful to the best interests of the public prohibited by law. Rule 42(a) industry members must not make representations or carry on conduct that is reckless or intentional and that misleads or deceives any person or is likely to do so. This rule includes misleading representations made in advertisements and all verbal or written representations made by industry members. Misleading Advertising The line between innovative and misleading advertising can be thin and many complaints are made about advertisements that are perceived as misleading. In determining whether or not an advertisement is false or misleading, RECA considers both the literal meaning of the advertisement and the general impression it creates. This is the same approach as that taken by the Courts and other law enforcement organisations. An advertisement may be considered misleading even if it is not demonstrated that a consumer was actually misled. It is only necessary to show that the advertisement is capable of misleading a reasonable consumer. Advertising is considered misleading when it makes a representation that is false or misleading in a material respect. Material, in this context, means something significant by its importance or that could affect a person s decision. Consider the industry member who stretches the truth, and knowingly advertises a property as being larger than it is: More Bang for Your Buck Why buy any other house when you can get the biggest one on the block for the same price? Call today for your viewing. 67

68 This advertising is a material misrepresentation because the industry member chose to make a false statement which may cause a person to act. What buyer wouldn t want a bigger house for the same price as another, smaller one? A claim such as the friendliest broker in town is not misleading in a material respect even if the broker is usually grumpy. This is considered puffery, which is a statement that is entirely subjective and can t be proven. The public generally understands that such statements are exaggerations or simple opinions. Causes of Misleading Advertising: Any one or combination of the following elements can cause misleading representations and advertisements: Negligence Incompetence Recklessness Intention Negligence If an industry member provides incorrect information by mistake, the industry member has made a negligent misrepresentation. For example, a mistake occurs when an industry member punches the wrong number into the calculator when determining the size of a property. Negligent activities do not fall under the Rules. RECA only has jurisdiction when so many similar mistakes occur that the industry member s competence comes into question. Despite this, consumers may (and often do) seek recovery of damages through the courts. Incompetence Consider the industry member who carefully measures properties but does so incorrectly every time because he doesn t know how to measure correctly. Each time he advertises the information, he makes a misrepresentation. Both misrepresentation and competence are at issue [Rule 41(a) and 41(b)]. Recklessness A misleading claim can result from failing to follow proper procedures. For example, when determining the size of a property, an industry member decides to use the same size as recorded on the last listing without verifying its accuracy. This behaviour is reckless and a breach of Rule 42(a). Sometimes the industry member is unable to verify a fact through lack of expertise or inaccessibility to the feature being described. In these cases, the industry member can protect the client and himself by disclosing when information has not been verified - Seller thinks the insulation was upgraded to R40. Brokerage could not verify. Intentional Misrepresentation: Intentional misrepresentation is an intentional untrue statement. Examples include: an untrue statement used to entice a party to act, i.e., an industry member attempts to convince a seller to accept a commission rate by stating commissions are pre-set or fixed a deliberate withholding of information relevant to a transaction, i.e., an industry member knows of a material latent defect in a property and chooses not to disclose this information to a potential buyer. This is also a breach of Rule 57(i). 68

69 Intentional misrepresentations are serious and dealt with harshly by Hearing Panels. Additionally, victims of these types of misrepresentations may initiate legal action against industry members and their clients. Avoiding Misleading Advertising The following areas are hot spots in the subject of misleading advertising. Understanding the problem areas will help create advertisements that are clear and reduce the incidence of misleading representations and consumer complaints: 1. Some Restrictions Apply 2. Use of Industry Terms 3. Comparative Ads 4. Permanence 5. Up-to-date 6. Implied Endorsements 7. Teasers 8. Specialists 9. Distribution Range 1) Some Restrictions Apply When space or time is limited, industry members may question how much they should include in an advertisement. Sometimes, a simple reference to the existence of terms, conditions or restrictions eliminates the need for a long description and increases the appeal of the ad. Caution should be taken that the terms or conditions do not unreasonably alter the advertisement. A) Reasonable Terms/Conditions: offer is not open to properties currently listed with another firm offer is available to new clients, not existing ones offer is available only in the city where the brokerage is located B) Unreasonable Terms/Conditions: Example: "Our brokerage promises to pay you $1,000 if your property does not sell within 90 days. Terms and Conditions apply." This statement creates the impression to the consumer that they will receive $1,000 cash if the property does not sell within 90 days. However, the advertisement does not detail that the "terms and conditions" are: the client must agree to continue to renew the brokerage agreement until the property is sold the property must eventually be sold through the brokerage the 90 days is calculated as 90 business days, not calendar days the actual offer is substantially different from what appears to be offered in the advertisement, making it misleading to the consumer. 2) Industry Terms used in Advertising What is clear to industry members can be confusing to the general public. Avoid use of industry jargon. 69

70 Example: A brokerage advertises a 1% selling commission. This sounds attractive but does not indicate how a buyer s agent will be compensated. The public can be easily misled because they will not often understand the terms selling commission and buying commission or know that the seller s brokerage usually pays the buying commission portion to the buyer s brokerage out of the total commission paid. Example: Publication space is expensive and abbreviations are often used to shorten ads. Use of abbreviations is not likely to be misleading but they are confusing to the public and won t make the phone ring. After all, what does this description mean? lg. bung - 3 bd, w/i clos, w/o bmt, full ens b, fp 3) Comparative Ads Comparative advertisements can be beneficial to the marketplace. The Competition Bureau states, "the increased use of direct comparisons is a positive development... enabling potential purchasers to make more intelligent decisions." Ads that compare facts and figures in a straightforward way make it easier for consumers to decide who they want to deal with. Despite these positives, of all the advertising complaints RECA receives, those involving comparative advertisements make up the largest category. Consider the following examples: Example: "Our client saved $3000 in commissions. Compared to what? While this tends to indicate the client saved when compared to another brokerage s rates, it gives no basis for the comparison. There are many reasons why a client might save commission. For example: The client negotiated a low commission for minimal marketing service The value of the property has an impact on percentage-based commissions. That is, a client paying a 6% commission on an $80,000 sale price will pay less than another paying 6% on a $380,000 sale price. The brokerage may have done a favour for a relative or employee, etc. Example: This advertisement can be made more useful and truthful by a simple clarification: "Our client saved $3000 in commissions!* *based on our rate compared to a 7% commission rate note, there is no fixed commission rate. Example: "Our brokerage sells more houses than anyone else." Where? When? This comparison might mislead consumers who have access to this advertisement because they would reasonably assume that the information is recent and applies locally. If this claim actually refers to the brokerage s 2005 success in St. Albert, but the advertisement is circulated in Edmonton during 2007, the consumer will be misled. The claim would also be misleading if it left out the sales of a competing brokerage, exclusive sale, private sales, etc. that do not use involve MLS sales, but happens to sell even more houses than the advertising brokerage. A simple modification would correct both these problems: "This month, we sold more MLS houses than anyone else in St. Albert" 70

71 To avoid an unprofessional industry image, any advertisement that makes a comparison to a competitor should be clear, truthful and in good taste. 4) Permanence Advertisements that will be in circulation for a long period of time (billboards, yellow pages, bus benches and flyers) can present special problems for industry members because the message or offering may be long outdated, while the original advertisement is still seen by the public. 5) Up-to-date Advertisements should be reviewed and updated on a regular basis. This is of special concern for Internet based advertisements. Complaints include: the advertised property has been sold but still shows as being available on the website the listing price was amended but the website advertisement does not reflect the change the associate is no longer employed by the brokerage, but still appears on the website 6) Implied Endorsements As many major companies know, the use of endorsements by celebrities or recognized organizations is a strong marketing tool. An implied endorsement is the use of information that indicates - without actually stating - that a certain individual or organisation endorses the industry member. Care must be taken to avoid giving the impression of an endorsement unless authorization has been given by that person or company. Example: Industry members sometimes attach RECA s logo to their advertising, or state they are members of the Real Estate Council. This is incorrect. Industry member indicates a person in a sector of the real estate industry, not a member of RECA. RECA regulates the industry and is not a membership organization. Unauthorized use of another s copyrighted logo is illegal and is an example of an implied endorsement which may mislead the public. 7) Teasers Teasers are advertisements that are deliberately devoid of information. They are meant to get the phone to ring. For example: "I offer a buyer brokerage performance guarantee. Call me for details." Teasers are generally not misleading because they are designed to create curiosity and don't provide sufficient information to create any specific impression. However, teasers can easily become misleading by the addition of a comparative word, for example: I offer the best buyer brokerage performance guarantee. Call me for details. By the addition of the word best, this statement runs the risk of being misleading. 71

72 8) Use of the term Specialist Industry members often advertise that they have special qualifications or expertise in a specific industry sector, type of property sales, or in a specific geographic area. Common examples are: commercial specialist condominium consultant inner city leasing professional historic property expert living and working in a certain neighbourhood country living specialist Consumers will rely on an industry member s claim to have a specialty. Industry members who claim to have a special expertise may face increased liability, particularly if a consumer relies upon and is somehow disadvantaged by the industry member s advice. Industry members must have measurable qualifications from verifiable education or experience to uphold the claim to specialize, otherwise the claim could be misleading. 9) Distribution Range When marketing messages are placed in newspapers or magazines that have a wide distribution area, care should be taken to include disclaimers for offerings only available in a certain area within the distribution range. This particularly affects internet advertisements. If claims or statistics are given, some detail to support the claim can help to avoid misleading advertising complaints. For instance, if a Lethbridge brokerage places an ad in a publication available throughout southern Alberta, it might be misleading for the brokerage to advertise the claim: We are number three in sales!. Are they number three in Lethbridge, or in all of southern Alberta? Source: Reference RECA s Article, Electronic Marketing: Internet Guidelines June 2000, January Avoid Misleading Marketing It is the responsibility of industry members to be aware of what makes an advertisement or marketing program misleading and to avoid the pitfalls. 1. Show your advertisement to a friend or client and ask for an opinion. If their impressions are different from your intention, make the necessary revisions. 2. Discuss the advertisement with your broker. Your idea may have been tried before, and your broker may be able to offer suggestions or advice. In fact, because all advertisements are made on behalf of the brokerage, every broker should have an approval policy in place for promotions and advertisements. Advertising is a valuable tool. The originality and consumer appeal of advertisements, marketing programs and representations are limited only by the industry member s imagination. The Rules are not intended to restrict innovative advertising options provided they are truthful. If you are new to the industry, it is wise to have your brokerage review your marketing and advertising plans prior to implementing them. If you have any questions regarding marketing or advertising either your listings, the listings of the brokerage or your personal promotional materials, please contact your broker. 72

73 Conduct Proceedings One of the basic responsibilities of any self-regulatory body is to conduct investigations and take disciplinary action when necessary. All of the disciplinary actions referenced here are the result of the process followed in Part 3 of the Real Estate Act Conduct Proceedings, which apply when an industry member fails, or is perceived to have failed, to comply with legislation. The phrase conduct deserving of sanction is used throughout Part 3 and in subsequent publication of disciplinary action by RECA. Conduct deserving of sanction is conduct by an industry member that breaches the provisions of the legislation and/or does not follow the standard of practice set by competent real estate practitioners in Alberta. RECA has drafted a working definition of conduct deserving of sanction to include one or more of the following elements: a detriment to the best interests of the public or industry members a contravention of the Act, the Rules, the Regulations or the Bylaws breaches of fiduciary duties harm or potential harm to the public at large harm or tendency to harm the standing of the industry a display of lack of knowledge, skill or judgment in the industry member s practice lack of adherence to the normally accepted standards of practice Examples include: fraud, theft, misrepresentation, secret commissions, breach of fiduciary duties, referring a client to an unlicensed person/agency, and false affidavits. Considering the responsibility for a high degree of competence and professionalism, all industry members must be aware of the standards of business practice and conduct they are expected to follow. Even with this awareness, a small percentage of members will experience some type of disciplinary action for wrongdoings. Not all issues warrant a formal investigation. If you observe a wrong committed by a fellow industry member, bring it to his or her attention. Many mistakes are the result of misinformation and many industry members would be grateful to have the opportunity to right any unintended wrongs. Serious breaches should be brought to the attention of your broker [Rule 53(h)]. The conduct proceeding process begins when an issue or complaint comes to the attention of RECA. This section reviews that process. Complaint A person may complain to the executive director about the conduct of an industry member. The complaint must be made in writing [Act 37]. Complainants may be members of the public, industry members, other regulatory bodies, etc. A person may complain to more than one organization. For example, when the industry member is a real estate board member, the public may complain to both RECA and the board, in addition to commencing legal action against the industry member. Each organization looks at a complaint from its own jurisdiction. The courts, industry associations or other regulatory bodies do not have RECA s legal responsibility to determine whether an industry member s conduct complies with the Real Estate Act. 73

74 Investigation RECA investigations are conducted according to a formal process as set out in the Act and the principles of natural justice (procedural fairness). The investigative process has three main objectives: to gather all relevant information to enable the executive director and hearing panels to make an informed decision to gather the information efficiently to treat all parties courteously, fairly and in accordance with administrative law An investigation is initiated when the executive director receives either: a written complaint about an industry member [Act 37] information that the conduct of an industry member may be in breach of the Real Estate Act or Rules [Act 38]; The information being considered for investigation must meet certain criteria, including: the matter must fall under RECA s jurisdiction, that is, a breach of the Real Estate Act or Rules sufficient evidence exists to indicate a likelihood of conduct deserving of sanction on behalf of an industry member An investigation is NOT likely to be undertaken when: the conduct in question has resulted from following the lawful direction of a client the complaint is anonymous and no evidence is provided the complaint is simply a suspicion the matter is relatively minor. (Minor incidents are dealt with by corrective communication to the industry member and the broker. This method assists the industry in understanding proper procedures.) If asked, RECA will neither deny nor confirm an investigation is underway except in the following situations: Brokers are always informed of an investigation in relation to an industry member registered to the brokerage. When an industry member s license is suspended pending the outcome of the investigation [Act 53]. When an industry member under investigation applies to transfer to a new brokerage. RECA will share information with the new broker. When an industry member transfers to a new brokerage during an investigation, the new broker will receive copies of all subsequent correspondence related to the investigation. Those who are asked to provide witness statements or to verify documentation will be aware that an investigation is underway. While RECA keeps investigations as confidential as possible, complainants who have an issue with an industry member are very likely to tell others of their problems. Industry members under investigation are welcome to seek legal counsel or the advice of their broker (when the broker is not a witness). However, an investigator s inquiries must be answered by the industry member not the lawyer or the broker. During the investigative process, investigators assess the direction of the investigation by evaluating the evidence and remaining open-minded to determine whether additional investigative steps are required. Ultimately, relevance of the evidence is determined by a Hearing Panel, Appeal Panel or a Court. 74

75 Providing Information to RECA RECA is authorized by the Real Estate Act to request or order the production of information for an investigation and industry members must fully comply [Act 38(4), Rule 41(h), 51(j)]. This cooperation requirement is supported by the courts, which have held that those who become members of a regulated industry give implicit consent to the investigation of their conduct which may include personal information. Investigation Outcomes Following an investigation, the executive director of the Real Estate Council of Alberta may decide to [Act 39]: take no further action, if the complaint is frivolous or there is insufficient evidence of conduct deserving of sanction impose an administrative penalty refer the matter to a Hearing Panel (for unlicensed activity) impose an administrative penalty or refer the matter for prosecution in the courts Admission of Conduct When a person is subject to conduct proceedings, the person may make a statement of admission to the executive director, provided this is done prior to a Hearing Panel making a finding. If the executive director accepts the statement of admission, it will be immediately referred to a Hearing Panel [Act 46 & 47]. Hearings RECA conducts disciplinary hearings in which a three-person panel comprised of members of Council and the industry inquires into whether an industry member's conduct is deserving of sanction under the Real Estate Act [Act 42]. The process is comparable to a court proceeding where a judge hears a case and reviews its evidence and arguments and then reaches a decision of innocence or guilt, in which case an appropriate penalty is assessed. At a hearing, the Hearing Panel will consider the evidence, including the evidence presented by the industry member to contradict or explain the facts or allegations. The Hearing Panel may examine witnesses under oath and has many of the powers of the court, such as enforcing the attendance of witnesses and compelling witnesses to produce evidence. The industry member may also give evidence and call witnesses and be represented by legal counsel throughout the process. Hearing Panel Sanctions If a hearing panel finds that an industry member s actions constitute conduct deserving of sanction, the panel may order one or more of the following disciplinary actions [Act 43]: reprimand fine up to $25,000 for each finding payment of investigation and hearing costs suspension or cancellation of an authorization place conditions upon an authorization require the industry member to complete educational courses any other order agreed to by both sides 75

76 Right to Appeal Complainant - If the executive director decides to take no further action following an investigation, complainants who disagree with that decision have the right to appeal to a Hearing Panel. However, if the Hearing Panel determines the complaint is frivolous or vexatious, it may order the complainant to pay costs to the Real Estate Council of Alberta [Act 40]. Industry Member - Industry members have the right to appeal a Hearing Panel s decision to an Appeal Panel [Act 48], after which the executive director will serve a copy of the Appeal Panel s decision on the industry member [Act 51]. If the industry member continues to disagree with the decision of the Appeal Panel, the industry member may appeal the decision to the Court [Act 52]. Temporary Order RECA may temporarily suspend the authorization of an industry member or temporarily impose conditions or restrictions on the business of an industry member pending the outcome of conduct proceedings under the Real Estate Act [Act 53]. Withdrawal by Industry Member An industry member who is the subject of an investigation or disciplinary hearing may apply to the Real Estate Council of Alberta to withdraw from the industry. If Council approves the application, all proceedings against the industry member are discontinued. However, a withdrawal of the industry member is permanent and such individuals are banned for life from returning to the industry [Act 54]. Publication of Information The executive director may publish information in regard to conduct proceedings and authorizations [Act 55]: the refusal, cancellation or suspension of an authorization the withdrawal of a person from the industry prosecutions and disciplinary actions Publication of information is done on the RECA website and in its communications to the industry and the public. Providing this type of information to the public is practiced by other self-regulated professions. By doing so, RECA and other organizations are working toward protection of the public and increasing the standards of their respective industries. Compliance Audit A compliance audit is a RECA review and examination of a brokerage s records and activities to ensure compliance with Real Estate Act obligations and to recommend any needed changes in control, policy, and procedures [Act 74]. RECA s compliance audit program has three main objectives: 1. To serve industry members. RECA auditors work with brokers to develop sound accounting practices and procedures in compliance with the Act and Rules. 2. To reduce Assurance Fund claims. Identifying problems reduces the number of claims against the fund, to the benefit of all industry members who share the cost of claims. 3. To promote legislative compliance to avoid negative public perception. RECA s audits reduce violations of the Act and Rules. 76

77 Audit Schedule Most audits are assigned at random and although they may be unannounced, they are usually scheduled with the broker. Brokerages may also be selected for audit according to certain criteria, including: brokerages in their first year of operation deficiencies in the brokerage s annual accountant s report information received (i.e., a lawyer receives a brokerage s NSF trust cheque) Courtesy Audits A courtesy audit is an educational resource available to new brokers who can request RECA review the brokerage operations to ensure compliance with the legislation. Audit Outcomes The auditor will review the audit results in a question-and-answer session with the broker and administrative staff that the broker wishes to be present. Recommendations will be made and a written summary provided. The intent of the audit process is to resolve concerns in a constructive way. Minor breaches of the Real Estate Act or the Rules are found in nearly all audits, but seldom are penalties or sanctions assessed. Only in serious cases are referrals made to RECA s investigation unit. For further information on the Investigation and Audit process, reference the RECA website (Guide to Compliance Audit for Real Estate Industry Members, Guide to Investigations for Consumers, and Guide to Investigation for Industry Members). Record Keeping and Trust Accounts Every industry member should be concerned with proper record keeping. This section will also deal with trust accounts, which will be of particular interest to brokerages or those intending to become brokers at some point. Let s begin with some of the items that involve funds which are the responsibility of the broker. This area may be quick review of content presented earlier in the materials. 1.0 Incentives Occasionally, and industry member may offer a good or service, or something of value as a means of attracting more business. The Rules explain what the industry member may and may not do with respect to incentives. Only a brokerage may offer an incentive. Definition of Incentive [Real Estate Act Rules, Sections 1(1)( o)] 1(1) In these Rules, (o) "incentive" means anything that is advertised, communicated or offered by a brokerage to the public or a person for the purpose of attracting business to the brokerage and includes a promise, good, service, game of chance, contest, or anything else of value; An incentive is anything advertised, communicated, or offered to the public or a person by a brokerage as a means of attracting business to that brokerage. Incentives include such things as air miles, gifts, contests, games of chance or anything else of value used to attract customers and clients. Only a brokerage can publicly advertise incentives to the public and brokers, associate brokers and associates are prohibited from offering any incentives to the public at large except those incentives that the 77

78 brokerage provides. An incentive cannot be money, sharing of commissions, or remuneration with a person who is required to be licensed in relation to those services but is not. In determining if the incentive is provided by the brokerage, RECA will consider the following: Does the brokerage advertise the incentive as a brokerage incentive? Does the brokerage have a marketing plan to communicate the incentive to all its clients? Do all associate brokers and associates of the brokerage participate in the incentive? Is it mandatory for all associate brokers and associates to participate in the incentive or can they opt out from participating? Who purchases, lends, gives or provides the incentive? If there are problems or concerns associated with the incentive, who is responsible for dealing with those issues? Who pays for the incentive? Do all of the brokerage s clients receive the incentive regardless of which associate broker or associate represents the brokerage when dealing with the client? 2.0 Inducements Occasionally an industry member may offer an incentive in order to move the negotiations along in a particular trade. Incentives are covered in the Rules. Although industry members may offer their clients an inducement, only a brokerage may approve an inducement and pay any cost related to that inducement. The brokerage is typically reimbursed for any costs related to inducements by the industry member. Definition of Inducement [Real Estate Act Rules, Sections 1(1) (q)] 1(1) In these Rules, (q) "inducement" means anything that is offered or provided by a brokerage to a person who is, or could be, a party to a real estate or mortgage transaction and is intended to either assist, persuade or cause that person to enter into a particular real estate or mortgage transaction; An industry member may avoid the use of inducements and requisite permission of the brokerage, by simply re-negotiating the commission involved in the transaction. This would need to be documented at the time of the negotiation and the document submitted to the brokerage for their records. As brokerages are responsible for the paying out or the receiving of commissions, depending on their role in the transaction and the service agreement(s), it is important that they know the exact amounts involved. Brokerage Responsibilities [Real Estate Act Rules, Section 54(1)] (1) A real estate broker, associate broker or associate, as the case may be, must not: (a) trade in real estate on behalf of a brokerage other than the brokerage with which he is registered; (b) promise to pay or pay a commission, referral fee or other remuneration, directly or indirectly, to any person resulting from or in connection with a trade in real estate except through the brokerage with which he is registered; (c) accept a commission, referral fee or other remuneration, directly or indirectly, for a trade in real estate except through the brokerage with which he is registered; (d) directly or indirectly, advertise, communicate or offer to any person an incentive except an incentive that is provided by and on behalf of the brokerage with which he is registered; or (e) make an inducement unless, at the time of making the inducement, he delivers to the person to whom the inducement is made a statement signed by: (i) the real estate broker, associate broker or associate, and 78

79 (ii) if applicable, the other person involved in the inducement, clearly setting out all the details of the inducement. Prohibitions [Real Estate Act Rules, Section (50)] Rule 50. A real estate brokerage must not: (a) employ, permit or engage a broker, associate broker or associate registered with another brokerage to trade in real estate in its name or on its behalf, directly or indirectly, as the case may be; (b) employ a person to trade in real estate unless that person meets the requirements of the Act, Regulations, Rules and Bylaws, and all levies, fees, premiums, fines, administrative penalties and other amounts that are payable under or pursuant to the Act, Regulations, Rules, or Bylaws or under any predecessor enactments in respect of that person have been paid; (c) pay a commission or other remuneration, directly or indirectly, in connection with a trade in real estate except: to a broker, associate broker or associate employed by the brokerage or to not more than one corporation of which that broker, associate broker or associate as the case may be, owns not less than fifty percent (50%) of the shares issued by that corporation; ii) to a brokerage that is licensed under these Rules or under similar legislation in a jurisdiction outside of Alberta; or (iii) to an auctioneer qualified under the regulations under the Fair Trading Act, where the trade in real estate is made in the course of and as part of that person s duties as an auctioneer; (d) pay, offer to pay, agree, or allow to be paid a referral fee or any remuneration to a person in relation to real estate services if the person is required to be licensed in relation to those services but is not licensed; or (e) pay a commission or other remuneration directly or indirectly in connection with a trade in real estate to a brokerage that is licensed under these Rules or under similar legislation in a jurisdiction outside of Alberta when the brokerage has knowledge that the commission or remuneration will be paid to or be shared with a person who is required to be licensed in relation to those services but is not licensed. Prohibitions [Real Estate Act Rules, Sections 54(2). (2) A real estate broker, associate broker or associate, as the case may be, must not directly or indirectly, provide an inducement unless the inducement is provided by and on behalf of the brokerage with which the real estate broker, associate broker or associate is registered, details of the inducement are provided in writing and the broker has provided written approval. An inducement means anything that an industry member offers or provides to a person who is, or could be a party to a real estate trade or a mortgage transaction. Inducements can include offering a good or service such as a new refrigerator, payment of legal fees, reducing or even sharing commissions and/or other types of remuneration. The inducement is intended to either assist, persuade, or cause that person to enter into a specific real estate or mortgage transaction. The offering of the inducement is based on the assumption that a contract is in the negotiation phase and the inducement is being offered to create the sale. 79

80 The details of the inducement must be provided in writing to the party to the transaction must have provided written approval of the broker. While the industry member must have the written approval of the broker in order to offer an inducement, the broker s approval can be done by a written policy specifying the types and value of inducements that can be offered by the industry member on behalf of the brokerage. Since commission rates are a matter of negotiation and written agreement between an industry member and a client, RECA takes the position that a commission rate is a contractual matter and can be renegotiated at any time between the parties. In contrast, an inducement is something offered or provided that is outside the bounds of a service agreement. Therefore, RECA does not view a reduction in commission or a renegotiated commission as an inducement for the purposes of Rule 54. Brokerage Trust Accounts In this section trust accounts are addressed according to the requirements for trust accounting specified in the Real Estate Act. The Real Estate Office Administration course also reviews real estate trust accounting in Module 3: Financial Records, but there the emphasis is on financial management. Trust Accounts [Real Estate Act, Section 25] 25(1) An industry member who is required by the Rules to keep and operate a trust account shall (a) keep complete and accurate financial records in which the industry member shall maintain a separate record for each person on whose behalf the industry member is acting of all, (i) money received in trust, (ii) money held in trust, (iii) interest earned on money held in trust, and (iv) disbursements made from money received or held in trust, in respect of a dealing or trade for that person, (b) deposit money received in trust in respect of a dealing or trade within two banking days after receipt of the money, or within any longer period agreed to in writing by the parties to the dealing or trade in an interest-bearing account that is (i) branch, and (ii) maintained in a bank, loan corporation, trust corporation, credit union or treasury kept in the name of the industry member and designated as a trust account, (c) keep money received or held in trust in respect of a dealing or trade separate from money that belongs to the industry member or any industry members the industry member employs, and (d) disburse money received or held in trust in respect of a dealing or trade only in accordance with the rules and with the terms of the trust governing the use of that money. (2) Where an industry member receives money in trust in respect of a dealing or trade, the industry member shall ensure that the terms of the trust governing the use of the money are in writing and agreed to by the industry member and the client and any other parties. (3) Subject to subsection (4), all money deposited under subsection (1)(c) shall be kept on deposit in Alberta. 80

81 (4) Where an industry member (a) maintains business premises in the City of Lloydminster, (b) maintains an account designated as a trust account in a bank, loan corporation, trust corporation, treasury branch or credit union situated in the City of Lloydminster, and (c) otherwise complies with subsection (1), subsection (3) does not apply to deposits to the extent that they are made and kept in the account referred to in clause (b). (5) Where an industry member of a class specified in the regulations holds money in trust for more than two years after the date on which the person for whom it is held becomes entitled to receive payment of it and, using reasonable efforts, is unable to locate the person, the industry member shall pay the money to the Foundation. (6) If at any time a person establishes entitlement to any money paid to the Foundation pursuant to subsection (7), the Foundation shall pay the money to that person. (7) An industry member is not liable to any person referred to in subsection (6) for money paid to the Foundation under subsection (5). (8) Subsections (1), (3) and (4) do not apply to a trust corporation. (9) An industry member shall, in accordance with the rules, keep in Alberta records and books of account of the industry member s dealings and trades and accounting records, and shall keep those records and books of account (a) for a period of three years after they came into existence, or (b) for any longer period that the executive director directs in a particular case for the purposes of an investigation or prosecution under this Act. (10) A trust corporation that holds an authorization issued by the Council under this Act shall provide to the Council a certified copy of each financial statement of the corporation prepared for distribution to its shareholders and the auditor s report on the financial statement within five days after they are first mailed or delivered to its shareholders. (11) Any waiver or release by a client on whose behalf the industry member is acting of the rights, benefits or protections provided to the client under this section is void. Brokerage Trust Account [Real Estate Act Rules, Section 95). 95 A brokerage must: (a) open and maintain at least one trust or pooled trust account for the deposit of funds received on behalf of clients or owners of real estate managed under real estate management agreements, and for the purpose of section 97 of these Rules; (b) ensure that the broker is an authorized signing authority for each account in which monies are held in trust and controls the receipts and disbursements on each account; (c) issue a written receipt if money is received in the form of cash; (d) ensure that cheques used to disburse funds from a trust or pooled trust account are numbered and identified with the words Trust Account ; 81

82 (e) account for all cheques, including but not limited to void cheques, as part of the records maintained by the brokerage; (f) make every disbursement of money held in trust by cheque or bank transfer and these documents shall be cross-referenced in sufficient detail to permit them to be identified with the corresponding disbursement or disbursements recorded in the brokerage s books required by section 25 of the Act or by these Rules; and (g) not issue a cheque, allow a bank transfer or present a cheque for payment or collection unless there is in the account in which the monies are held in trust on which it is drawn, a sufficient credit balance, exclusive of tenants conditionally refundable deposits, to cover the cheque or transfer, or there is a written agreement between a financial institution and a client guaranteeing to the brokerage the payment of funds to ensure that there are sufficient funds to cover any disbursements from an account in which monies are held in trust. Trust Shortage Must Be Funded [Real Estate Act Rules, Section 88] 88 If at any time there is a shortage of money in an account in which money is held in trust, the brokerage shall deposit the brokerage s own money into the account as soon as the amount of the shortage is determined. Notification of Trust Shortage [Real Estate Act Rules, Section 89] 89 (1) If a brokerage is aware there is a trust shortage, the amount of which has not been determined, the broker must notify the executive director in writing of the existence of a trust shortage and what steps are being taken to determine the amount of the shortage. (2) If a brokerage cannot immediately fund a trust shortage, the broker must notify the executive director in writing of the amount of the trust shortage and what corrective action the brokerage will be taking. If there is a shortage in a trust account, the broker must deposit his or her own money into the trust account or pooled trust account as soon as the shortage is discovered. If the broker cannot make up the shortage immediately, he or she must write to RECA indicating the amount of the trust shortage and what actions the brokerage will take to correct the problem. Real Estate Brokerage Accounting [Real Estate Act Rules, Section Rule A brokerage shall report to Council at the brokerage s fiscal year end with regard to the operation of its accounts in which money is held in trust. 91 (1) If a brokerage receives or holds money on the account of others, in the course of its business, the brokerage s accounting for the purposes of section 90 shall consist of the Brokerage s Representations to the Council and an Accountant s Report, both in a form and containing the information required by the executive director. (2) The Accountant s Report must be completed by a chartered accountant, certified general accountant or certified management accountant. (3) The Accountant s Report shall be prepared pursuant to an Engagement Letter between Accountant and Client, in a form and containing the information required by the executive director. 82

83 (4) A brokerage s accounting shall be filed with the Council not later than 3 months after the end of the brokerage s fiscal year and shall cover the fiscal year or, where the brokerage did not carry on business for the entire fiscal year, that part of the fiscal year for which the brokerage carried on business. (5) In preparing the Accountant s Report, the accountant shall comply with the guidelines prescribed by the executive director. 92 (1) For the proposes of reporting under section 90, a brokerage that has not received or held money on the account of others in the course of its business shall file with the Council a Declaration Respecting Absence of Trust Transactions in a form and containing the information required by the executive director not later than 3 months after the end of the brokerage s fiscal year. (2) The Declaration Respecting Absence of Trust Transactions shall cover the fiscal year or, where the brokerage did not carry on business for the entire fiscal year, that part of the fiscal year for which the brokerage carried on business. Brokerage Accounting Reports [Real Estate Act Rules 90-92] Brokerages establish their fiscal year end when they apply for a license. This date is use for the annual report the brokerage is required to submit on the operations of its trust account(s). The report must be submitted on the required forms within 3 months of the brokerage s fiscal year end. These forms are usually sent to the brokerage or are available on the RECA website. If the report is not submitted within the required time period, an administrative penalty will likely be assessed against the brokerage. If a brokerage did not carry on business for the entire year, they only need to report on the portion of the year the brokerage did carry on business. If any trust funds were received or held in trust then the brokerage must submit an accountants report to Council. The accountants report must be prepared by a chartered accountant, certified general accountant, or certified management accountant. If no trust funds were received or held during the year, the broker can submit a Declaration Respecting Absence. This declaration does not require involving an accountant. A trust account is a specially designated account for the sole purpose of holding money for other parties. Trust accounts must be: interest bearing maintained in a financial institution kept in the name of the brokerage designated as a trust account Trust funds must be: kept in deposit in Alberta, except if the industry member practices and maintains a trust account in the City of Lloydminster kept separate from any money that belongs to the industry member and kept separate from any other trust funds. disbursed only in accordance with the terms of trust A brokerage (property managers in particular) can never maintain trust accounts for Alberta properties outside of the province even if the client requests it. Failure to meet this requirement contravenes the legislation. 83

84 The Real Estate Act Rules require that a brokerage keep and operate at least one trust account. The brokerage must keep separate trust accounting records for each person on whose behalf it is acting. Accurate accounting for trust accounts is mandatory for all brokerages. The trust account is meant to be a flow through account meaning that any money in the account must be disbursed according to the written terms negotiated between the parties to a contract. A brokerage may choose not to use its own trust account. For example, a brokerage acting as a sub franchise of a large franchised brokerage may choose by agreement between the two brokerages to use the trust account of the larger franchise. This means that the sub franchise must still have a trust account but it remains dormant. A broker who operates with this agreement must gain informed consent of all parties to the contract. Full disclosure must be made to both parties to the contract advising them that a third party will be privy to their contractual information. The brokerage or the lawyer who is holding the deposit monies must act in the capacity of a trustee for both parties. The contract must clearly specify the terms of the trust money and outline what procedure will take place to disburse the trust money if the transaction collapses. Another option for the brokerage is to open its trust account and deposit money into it and contract the administrative staff of the larger franchise to administer the trust account and deal with any problems that may arise. When a brokerage opens a trust account, the broker should instruct the financial institution in writing that he or she wishes the interest earned on the account to be forwarded to the Alberta Real Estate Foundation (AREF). This is a legislative requirement for all pooled trust monies; the only exception being when a broker opens up a separate trust account for a client. For example a broker receives a substantial deposit, the closing date for the transaction is lengthy and the client requests interest on their deposit. In this case, the broker is allowed to forward the interest to that particular client as long as all parties to the transaction have agreed in writing. The broker would then purchase a guaranteed investment or term deposit certificate in the brokerage s name and In Trust for the individual to whom the interest is being paid. Trust Fund Payment to the Alberta Real Estate Foundation Brokers may wonder what to do with outstanding trust funds. Real Estate Act Section 25(5) provides the answer. Before taking any action with outstanding funds, these two conditions must be met: 1. The trust funds must have been held in trust for more than two years from when the person for whom the trust funds are held become entitled to receive them. 2. The industry member must have made reasonable efforts to locate the person for whom the trust funds are held. If these conditions are met, the trust funds are to be paid to the Alberta Real Estate Foundation (the Foundation). While the majority of the trust funds to the Foundation under this section result from trades in residential real estate trust accounts, this section equally applies to commercial real estate transactions, business brokerage transactions and property management trust accounts (and may include Residential Tenancies Act security deposit trust accounts). When determining the date upon which the funds can be forwarded to the Foundation, industry members should keep in mind that the two-year period commences on the date from when the person becomes entitled to it." This date is likely not to be the same date the funds were placed in trust. More likely this will be the date when the conditions are not fulfilled, the deposit is forfeited, or the deposit becomes payable as a part of the purchase price, etc. Occasionally funds are held in trust for more than two years but the event that determines the entitlement of funds has not occurred (for example all conditions have not been removed). Since the event has not 84

85 occurred, section 25(5) does not apply and the trust funds should not be paid the Foundation. The twoyear time period only commences on the day that there is an entitlement to the trust funds. The legislation requires the industry member to use reasonable efforts to locate the person entitled to the trust funds. Industry members should be able to provide evidence of these reasonable efforts. One way for an industry member to provide evidence is to keep written record of activities such as reviewing appropriate phone books, phone calls made, and written requests (make sure to keep any returned envelopes). The reason industry members need to be able to prove that both requirements have been met is that Section 25(7) of the Act states that industry members cannot be held liable for any monies paid to the Foundation in accordance with Section 25(5). If monies are paid to the Foundation in other circumstances e.g. before the two years or without making a reasonable effort, there may be liability to the brokerage. If the industry member is unable to locate the person entitled to the funds, they must keep the funds in trust until either the funds qualify for disbursement to the Foundation, or the person entitled to them is found. If subsequent to paying the trust funds to the Foundation person to whom the funds belongs is located or comes forward, Section 25(6) of the Act requires the Foundation to return the funds. In order to do so, the Foundation must have sufficient information. For real estate transactions this information includes: the name of the person for whom the trust funds were being held the amount of trust funds being held the date on which the funds became payable a description of the transaction giving rise to the holding of the trust funds including the street address or business name, the names of buyer and seller and the transaction date If the amount is interest from an interest bearing GIC or term deposit include the amount and dates of the deposit it relates to For other types of transactions: the name of the person for whom the trust funds are being held the amount of trust funds being held the date on which the trust funds became payable a description of the nature of the transaction (for example, Residential Tenancies Act security deposit) a description of the transaction giving rise to the trust funds including the street address, the names of lessor and lessee, or business owner and business buyer, and the date of the property management agreement, or business sale agreement. If the amount is interest from an interest bearing GIC or term deposit, include the amount and dates of the deposit it relates to. Please note this section does not apply to instances where the entitlement of the trust funds is in dispute. Industry members who require information on how to determine the entitlement of trust funds when a dispute arises, may refer to the May 1997 Regulator or to the Deposit Dispute Responsibilities of the Brokerage section of the Interpretation and Guidelines Manual. Record Keeping 85

86 The brokerage acting in a real estate transaction and holding deposit money in the brokerage trust account is deemed a trustee under the Trustee Act (Alberta). In the event of a dispute, the broker, under the Trustee Act (Alberta), acts as a trustee on behalf of both the seller and the buyer. As a trustee of the deposit money, the broker must follow the terms of trust outlined in the Purchase Contract or Offer to Lease. Difficulties may arise when the broker must make a decision when the parties cannot agree on the handling of monies being held in trust by the brokerage. The chances of the difficulties occurring can be reduced if the terms and conditions are written concisely and unambiguously along with including terms (agreed to by the parties) to provide guidance to the broker should the parties disagree. Industry members who require information on how to determine the entitlement of trust funds when a dispute arises, may refer to the May 1997 Regulator or to the Deposit Dispute Responsibilities of the Brokerage section of the Interpretation and Guidelines Manual. Failure to deposit monies in trust, keep adequate trust accounting records, disburse money or any misappropriation of money are all serious matters and can result in licence suspension or cancellation, a fine of up to $25,000 plus additional costs of any investigation. To protect the public, the Real Estate Act states that clients cannot waive or release their rights or benefits under Section 25 of the Act. Protection of the public by an industry member means: depositing trust money into the brokerage s trust account upon receipt within the prescribed time or in the timeframe agreed to by parties to a contract returning deposit monies in a timely manner not adding any additional trust conditions to the return of deposits stating on a contract if interest from the deposits is to accrue to one of the parties informing all parties to a contract of the implications of conditions written into a contract The Real Estate Act requires that a brokerage maintain all of its books and records for a minimum of three (3) years however RECA may request a longer period for the purposes of an investigation or prosecution. The books and records for a real estate brokerage office would consist of the following items: trust bank accounts trust account deposit book trust account cheques trust account bank statements trust ledger trust account reconciliations brokerage transaction files general account deposit books general account cheques general account bank statements The Accounting Cycle The accounting cycle for trust monies received in a real estate brokerage transaction is fairly straightforward. In the steps outlined below, if any activity occurs that affects the trust account all corresponding books and records must be updated. In a real estate brokerage transaction, the typical cycle is as follows: 86

87 1. Money is received in trust: The timing of when trust funds are to be provided to the brokerage depends on the terms of the offer to purchase or lease. If there is no reference to the timing of the deposit, then the funds must accompany the offer. When the deposit is provided the broker becomes the trustee of this money. Since the broker must follow the trust conditions stated on the contract, the broker must ensure these conditions are clear to all parties to the contract. The broker should clarify any questions and no bias on the part of the broker should occur with respect to these term and conditions. Real Estate Act, section 25 states that if the parties to a real estate transaction have not otherwise agreed in writing, the time frame for money to be received in trust by a brokerage is three (3) days from date of receipt or from the date which the offer to purchase was accepted (whichever is later). Any deposit monies received in trust as part of a real estate transaction must be deposited into the brokerage s trust account according to these terms. 2. Payment of trust funds in excess of commissions: If payment of any funds held, in excess of total commissions, is to be made to a party to the transaction or their representative this payment must be authorized in writing. The authorization may be in the offer to purchase/lease or other instructions may be received from the parties as to whom and when these funds are to be disbursed. 3. Commission monies released in accordance with Rule 97: The brokerage should only release monies from its trust account in accordance with the terms and conditions of the contract. The broker should request written confirmation from the parties when the transaction closes. Section 97 of the Real Estate Act Rules deals with the handling of commission monies. (See Rule 97 Payment of Commission from Trust.) The amount of the deposit used to pay commissions should be deposited into the brokerage s general account. 4. Brokerage pays associate(s): Brokerage pays its associates from its general account. This payment is consistent with the remuneration arrangements that the associate has with the brokerage. Monthly Reconciliation Procedures The monthly brokerage reconciliation process consists of two procedures. The first involves reconciling the balance held in all trust accounts maintained by the brokerage, including any term deposits held for clients, to the trust liability balance recorded in the brokerage s general ledger or trust liability listing. The second procedure involves reconciling the trust liability balance to the brokerage s trust ledger files at the reconciliation date. Each procedure must be done monthly and the broker must initial and date the reconciliation as evidence of his or her review. The reconciliation procedures must be performed within 30 days from the date of the period being reconciled. The broker should follow up immediately on any discrepancies or unusual items. Brokers may want to seek the assistance of a professional accountant. Real Estate Sales Trust Ledger - Example File St. SW Calgary 87

88 Richards - Parker Date Details Ref Debits Credits Balance 30-Apr-07 Paul Parker # 12 $ 5, $ 5, May-07 Paul Parker additional dep. #16 $ 10, $ 15, Jun-07 Hendry & Co excess funds chq 234 $ 1, $ 13, Jul-07 Homelite helpful chq 239 $ 6, $ 6, Jul-07 my brokerage chq 240 $ 6, $ - Trust Account Reconciliation Example Trust account reconciliation as at 31 May 2007 Balance as per bank statement 42, Less outstanding cheques # # , Plus Outstanding Deposits Bank charges in error $ Balance as per General Ledger Control/Cheque Book $ 41, Trust Liability as per Trust Ledger Files , , , ,112 $41,112 Prepared by Reviewed by

89 Brokerage undertaking Property Management Just as a real estate office must keep books and records, so must a property management office. The books and records for a property management office would consist of: trust bank accounts deposit book trust account cheques trust account bank statements trust ledger statement of receipts and disbursements invoices paid on behalf of owners real estate management documents lease files correspondence with owners A property manager may choose to have a trust account for each building, each owner or may elect to have a pooled trust account for all clients. Trust funds in property management include: any money as defined in the management agreement with the property owner funds such as rental payments received on behalf of the owner of the property The property manager can make disbursements from the trust account(s) on behalf of the owner as long as the disbursements are allowed in the management agreement with the owner. Examples of disbursements are utilities, appliance repairs, snow removal, condo fees, the brokerage s management fees and payments of funds to the owners. Rule 87 states these disbursements can be made providing they do not create a negative balance in the owner s ledger. Property Management Trust Ledger - Example St. SW Calgary Owner Date Details Ref Debits Credits Balance 1-May-07 Paul Parker (unit A) 45 $ $ May-07 M Richards - (unit B) 911 $ 1, $ 1, May-07 City of Calgary - utilities chq 234 $ $ 1, May-07 city appliance - fridge repair chq 239 $ $ 1, May-07 my brokerage - management fee chq 240 $ $ 1, May-07 owner chq 250 $ 1, $ - Section 44 of the Residential Tenancies Act requires all funds received as security deposits under a residential lease be maintained in a separate trust account. The funds must be kept separate from funds received for rents. A property manager must establish at least one other trust account for such security deposits. 89

90 Section 7 of the Residential Tenancies Ministerial Regulation (Residential Tenancies Act) prohibits property managers from paying security deposits to the property owner. See the Residential Tenancies Act legislation for further information. A property manager may also maintain a pooled disbursement account. This account, designated as a trust account, is used to avoid issuing a large number of cheques to common suppliers for properties managed by the property manager. For example, the property manager could issue one cheque from the pooled disbursement account to a utility provider, instead of cheques from each client s trust account. The property manager would transfer funds to the pooled disbursement account from the various trust accounts based on the amount owing to the utility provider for each property. The Real Estate Act does not allow an owner to have his funds maintained out-of-province. All trust accounts that the property manager maintains must be: designated as trust account on bank statements designated as trust account on cheques interest bearing and held in an Alberta financial institution in the name of the brokerage (the one exception is the City of Lloydminster). If a property manager maintains a pooled trust account, the broker should instruct the financial institution where the account is held, in writing, that he or she wishes the interest earned on the account to be forwarded to AREF. This is a legislative requirement for all pooled trust monies and the only exceptions to this Rule are when a broker opens up a separate trust account on behalf of a client, or the account is a designated security deposit trust account. In this case, the broker is allowed to forward the interest to that particular client. This must be indicated in writing and agreed to by all parties to the transaction. In property management activities, this would consist of the property management company establishing a separate trust account for a particular building owner, and ensuring a clause is inserted in the management agreement indicating the owner wishes to receive the interest earned on the account. The interest can then be forwarded to the owner. Electronic Records and Banking Brokerages are required to maintain full records. Brokerages are required to maintain paper records in their original form and any electronic records be printed and also kept. Exceptions are discussed in Rule 82. If record storage is internet based, a brokerage must ensure the server on which the records are maintained is in Alberta and that it is accessible to the broker. Electronic Records 82(1) A brokerage and appraiser may convert and store written, printed, or any paper records into electronic format if the following conditions are met: (a) the storage location and medium where the electronic records are to be stored is reliable and can reasonably be expected to maintain the integrity of the information from the time the electronic record was created; (b) the identity of the person who made the electronic copy of the written, printed or any paper record and date of the recording into electronic form is embedded in the document without altering the information contained in the written, printed or any paper record; (c) the information is maintained in an electronic form that does not materially alter the information originally contained in the written, printed or any paper record; 90

91 (d) the record in electronic form is safeguarded by password or security codes controlled by the brokerage or appraiser so that the record cannot be altered; (e)the brokerage or appraiser maintains a copy of the computer program or of any other electronic devices required for the electronic records to be viewed and reproduced in printed form in a timely manner; (f) the electronic records are located in a physical premise, accessible by the broker or appraiser in Alberta; (g) the physical location where the electronic records are stored is secure and is only accessible by the broker, appraiser or by persons authorized by the broker or appraiser; and (h) the brokerage or appraiser has a system to ensure all electronic documents created in respect to a trade or potential trade, deal or potential deal or appraisal or appraisal services are stored together or are linked so as to create a complete record of all documents or records relating to the trade or potential trade, deal or potential deal or real estate appraisal or appraisal services. 82(2) A brokerage or appraiser may retain in electronic form records created, sent or received in electronic form if: (a) the storage location and medium where the electronic records are to be stored is reliable and can reasonably be expected to maintain the integrity of the electronic information; (b) where the electronic record was sent or received, information, if any, that identifies its origin and destination is also retained; (c) the information in electronic form is maintained in the format in which it was created, sent or received, or in a format that does not materially alter the information of the original record in electronic form; (d) the brokerage or appraiser maintains a copy of the computer program or of any other electronic devices required for the electronic records to be viewed and be reproduced in printed form in a timely manner; (e) the document in electronic form is safeguarded by password or security codes controlled by the broker or appraiser so that the records cannot be altered; (f) the electronic records are located in a physical premise, accessible by the broker or appraiser in Alberta; (g) the premises where the electronic records are stored are secure and are only accessible by the broker or appraiser or by persons authorized by the broker or appraiser; and (h) the brokerage or appraiser has a system to ensure all electronic records created in respect to a trade or potential trade, deal or potential deal or real estate appraisal or appraisal services are stored together or are linked so as to create a complete record of all documents or records relating to the trade or potential trade, deal or potential deal or appraisal or appraisal services. 82(3) The broker or appraiser or a person authorized by the broker or appraiser may only delete electronic records in compliance with the record keeping requirements under the Act. 91

92 Electronic Banking Brokerages are allowed to both deposit into, and withdraw funds electronically from trust accounts (e.g. using an ABM card or internet banking). If electronic banking is used the broker is required by Rule 51(1)(h) to ensure there are adequate controls over both the access to any ABM cards and over the access codes / passwords for ABM and internet banking. Depositing money into a trust account: If the brokerage is transferring funds from another source, the transfer must be documented in the accounting records. This may be accomplished by entering the details of the transfer in the deposit book, and noting the deposit was by way of bank transfer into the account. If the brokerage uses an ABM card to make deposits, Rule 84(1) requires the brokerage to maintain details of the deposit. They should attach a copy of the deposit receipt showing the account number, time, date and amount of the deposit. If the brokerage is transferring funds into a trust account, the brokerage is required to record the detail of the transaction. A printed confirmation of the transaction should be produced and attached to the records. This confirmation must show the account number, time, date and the amount being deposited. The record should be signed by the broker or a person authorized by the broker to make the transfer into the account. Transferring money out of a trust account Rule 95 (f) allows funds to be transferred from a trust account providing sufficient documentation is maintained to ensure the transfers can be identified by corresponding disbursements in the trust ledger. If funds are transferred out of a trust account using an ABM card then Rule 85 (1) requires that: (a) the card can not allow a cash withdrawal from the trust account (b) there must an ABM slip produced as part of the transaction (c) there must be adequate supporting documentation to show how the amount transferred was arrived at (d) the ABM slip must be reviewed, signed and dated by the broker a person authorized by the broker on either the day of the transfer or the next business day If funds are transferred out of a trust account using internet banking then Rule 85 (2) requires that: (a) there must be a printed record of the transaction produced (b) the must be adequate supporting documentation to show how the amount transferred was arrived at (including a printed record of the internet transfer) (c) the printed record must be reviewed, signed and dated by the broker or a person authorized by the broker on either the day of the transfer or the next business day If the broker is not going to personally review the printed record of the transfers, they must formally authorize somebody else to so. This is equivalent to allowing other persons the authority to sign trust cheques. 92

93 Commissions In order to recover a commission the brokerage has to prove that a contract (written service agreement) existed between the brokerage and other party. As mentioned earlier a service agreement is the contract between a brokerage and a client whereby the client agrees to hire the brokerage to act on his or her behalf and agrees to reimburse the brokerage for the services performed. Written service agreements should be filed with the brokerage in a timely manner. Written Service Agreements are covered in Rule (1) Subject to these Rules, an industry member who establishes a client relationship should enter into a written service agreement with that prospective client, unless declined by the prospective client. (2) Every written service agreement shall: (a) be signed by the relevant parties; (b) clearly show all terms and conditions of the agreement and shall include: (i) the names of the parties to the agreement; (ii) if applicable, the address or legal description of the property affected by the agreement; (iii) if applicable, the date on which the agreement will become effective; (iv) the duration of the agreement; (v) the services to be provided by the brokerage or real estate appraiser; (vi) the responsibilities of each party to the agreement; (vii) the use and distribution of personal or confidential information; (viii) the amount or method of calculating the remuneration or alternate compensation to be paid and the circumstances on which it will be payable; (ix) provisions for the termination of the agreement; and (c) provide that any amendment or addition to the terms of the agreement shall be in writing and signed by the relevant parties. (3) An industry member must deliver to the client a true copy of a service agreement and of any amendment or addition, immediately upon its signature. Recovery of Commission Section 22 of the Real Estate Act states: (22) No action shall be brought to charge a person by commission or otherwise for services rendered in connection with the sale of land or an interest in land unless 93

94 (a) the service agreement on which recovery is sought in the action or some note or memorandum of it is in writing signed by the party to be charged or by that person s agent lawfully authorized in writing, or (b) in the case of a trade in real estate, the person sought to be charged (i) has as a result of the services of a real estate broker employed by that person for the purpose effected a sale or lease of land or an interest in it, and (ii) has either executed a transfer or lease signed by all other necessary parties and delivered it to the buyer or lessee, or has executed an agreement of sale of land, or an interest in it signed by all necessary parties, entitling the buyer to possession of the land or any interest in it, as specified in the agreement, and has delivered the agreement to the buyer. This section permits an action before the courts for the collection of commissions for a trade in real estate. Before commencing an action for commissions the Real Estate Act states that an industry member must: have the appropriate licence from RECA commit the amount of the commission in writing, or have effected a sale and have executed and delivered documents Recovery of a Shared Commission Section 23 of the Real Estate Act states: (23) Where there is an agreement between two or more industry members providing for the sharing of a commission or remuneration payable in respect of a transaction in the business of an industry member, only the industry member who, by virtue of a service agreement between that industry member and a party to the transaction, is entitled to the commission or remuneration, or an assignee of that industry member, may bring an action for recovery of the commission or remuneration against the person who is liable to pay it. Only the industry member who is a party to a service agreement (or an assignee) is entitled to bring an action for commission recovery. A seller or buyer brokerage agreement, or other agreement, sets out both parties rights and obligations. The agreement is between a brokerage and the buyer or seller (this could also include a leasing contract between a brokerage and a landlord). Typically in a Seller Brokerage Agreement, the seller agrees to pay an agreed upon commission to the brokerage for the services provided for the sale of the seller s property. As well, the seller s brokerage offers to pay a portion of the commission to a brokerage representing a buyer for finding a buyer. Typically, a Seller Brokerage Agreement further states that if the seller owes money under the contract and the seller s brokerage does not wish to enforce the contract against the seller, then the seller s brokerage may assign the contract to the buyer s brokerage. This would make the buyer s brokerage an assignee as defined in the Real Estate Act and allow the buyer s brokerage to enforce the contract against the seller to collect that portion of the commission owed to the buyer s brokerage. Calculation of Commission Section 24 of the Real Estate Act states: 94

95 24(1) No real estate broker (a) shall request or enter into a brokerage agreement or other arrangement for the payment to the broker of a commission or other remuneration based on the difference between the price at which real estate is listed for sale and the actual sale price of it, or (b) may retain a commission or other remuneration computed on a basis referred to in clause (a). (2) A commission or other remuneration payable to a real estate broker in respect of the sale or purchase of real estate must be an agreed amount or based on a percentage of the sale price. (3) If no agreement as to the amount of commission has been entered into, the rate of commission or other basis or amount of remuneration is that generally prevailing in the community where the real estate is situated. The commission an industry member charges must be in writing on the brokerage agreement between the seller and the industry member and must be based on: an agreed amount or a percentage of the sale price. Otherwise, the rate of commission is established as the generally prevailing where the real estate is situated. The commission cannot be based on the difference between the list price (the price the seller states he wants to receive) and the sale price. This is known as a net commission and is prohibited. Payments of Commission from Trust Real Estate Act, Rule 97 states: 97(1) Subject to (2) below, all payments received by a brokerage as or on account of commission or other remuneration for transactions in real estate shall be classified as trust money and shall be paid into the brokerage s trust account notwithstanding that the commission or remuneration may already have been earned, and, where applicable, the payments shall be recorded as being received in trust for the person liable to pay the commission or other remuneration. (2) Subsection (1) does not apply to a commission or other remuneration that is not to be shared between brokerages or to a share of a commission or other remuneration received from another brokerage. (3) Any money in a brokerage s trust account which represents a commission or remuneration that has been earned and is no longer required to be held in trust shall be paid out in accordance with the following rules: (a) any share of such commission or remuneration payable to another brokerage shall be paid out to that brokerage directly out of the trust account; (b) after the payment pursuant to clause (a) has been made, the commission or remuneration shall be transferred into a brokerage account; and 95

96 (c) where a client fails to pay a commission or other remuneration in full when due, which is to be shared between two or more brokerages, the amount actually received shall be shared between them as they may agree and, in the absence of an agreement, the brokerage holding the commission or other remuneration may not withdraw any part into its general account until the other brokerage or brokerages have been paid in full. When a brokerage receives monies on account of a commission payment for a real estate trade, the monies must be deposited into the brokerage s trust account and recorded as trust monies held for the client who is paying the commission. This applies even if there is enough being held in trust to pay any cooperating brokerage(s). The two exceptions from the payment into trust are: a commission that is not to be shared between brokerages a commission received by one brokerage from another brokerage which is a share of a commission. In these exceptions, the commissions must be paid directly into a brokerage account. When the exceptions do not apply and the commission monies are no longer required to be held in trust, they must be paid out of trust as follows: any cooperating brokerage is paid out of trust first. This means providing the other brokerage with their cheque and there is no requirement to wait until that cheque is actually deposited. the brokerage holding the trust monies may then pay itself by making payment from its trust account into a brokerage account if the commission is to be shared by more than one brokerage and it has not been paid in full by the client, the brokerages may agree on how the commission monies are to be shared. If they are unable to agree, no monies may be withdrawn from the trust account until the cooperating brokerage has been paid in full. Note: According to Rule 96 none of the commissions payable to the broker, associates or associate brokers are to be paid to them directly from a trust account and no personal or general office expenses are to be paid from trust monies. Example 1: Listing holds 100% of commissions Brokerage A enters into a service agreement to list a property with its client. Commissions are to be $10,000 with $5,000 to go to any cooperating brokerage, Brokerage B finds a buyer for the property. An offer is made and a trust deposit of $10,000 is held by Brokerage A. The deal closes and $10,000 commissions are payable by the client to Brokerage A. A direction is received from the client for Brokerage A to use the $10,000 being held in trust in payment of commissions. Brokerage A in turn owes $5,000 to Brokerage B. Application of Rule: Brokerage A must first pay Brokerage B $5,000 from trust. The trust transfer takes place. Brokerage B deposits this $5,000 into its general account as a commission payment. Brokerage A draws $5,000 from the trust account and pays this into its general account as payment of commissions. Brokerage A then pays their associates. Example 2: Listing holds less than either brokerage s commission Brokerage A enters into a service agreement to list a property with its client. Commissions are to be paid in the amount of $ 5,000 Commissions are to be paid to any cooperating brokerage, Brokerage B finds a 96

97 buyer for the property. An offer is made and a trust deposit of $500 is held by Brokerage A. The deal closes and $5,000 commissions are payable by the client to Brokerage A. A direction is received from the client for Brokerage A to use the $500 being held in trust in payment of commissions. With this direction, a further $4,500 is paid to Brokerage A to satisfy the commissions owing. Brokerage A owes $2,500 to Brokerage B. Application of Rule: Brokerage A must deposit the $4,500 received from its client into Brokerage A s trust account. There will then be $5,000 in Brokerage A s trust account. From the $5,000 being held in trust, Brokerage A must pay Brokerage B $2,500. The trust transfer takes place. Brokerage B deposits this $2,500 into its general account as a commission payment. Brokerage A draws $2,500 from the trust account and pays this into its general account as payment of commissions. Brokerage A then pays their associates. Example 3: Double end holds 100% commissions Brokerage A enters into a service agreement to list a property with its client. Commissions are to be paid in the amount of $ 7,000. Brokerage A is successful in finding a buyer for the property. A $10,000 deposit is made to Brokerage A on the deal. The deal closes and commissions in the amount of $7,000 are payable by the client to Brokerage A. A direction is received from the client for Brokerage A to pay $3,000 from trust to the client s lawyer and to maintain the remainder of $7,000. Later a direction is received from the client to pay the $7,000 owed for commissions from the $7,000 held in trust. Application of Rule: Brokerage A draws $7,000 from the trust account and pays it into its general account as payment of commissions. Once again the brokerage can then pay any associates involved. Example 4: Double end requires balance of commissions Brokerage A enters into a service agreement to list a property with its client. Commissions are to be paid in the amount of $ 7,000. Brokerage A is successful in finding a buyer for the property. A $5,000 deposit is made to Brokerage A on the deal. The deal closes and commissions in the amount of $7,000 are payable by the client to Brokerage A. When the deal closes, the client provides Brokerage A with an additional $2,000 in payment of commissions. A direction on the commission payment of the other $5,000 being held in trust is also received. Application of Rule: The exemption applies. Brokerage A draws the $5,000 from the trust account to pay into the general account in payment of commissions. Brokerage A further deposits the $2,000 received from the client to Brokerage A s general account. Example 5: Listing referral Brokerage A refers its clients to Brokerage B. A 30 % referral fee is agreed between Brokerage A and Brokerage B. Brokerage B enters into a listing with the client. The commissions are to be $10,000, $5,000 to go to any cooperating brokerage. Brokerage C finds a buyer for the property. An offer is made and Brokerage B holds a $5,000 trust deposit. The deal closes and $10,000 in commissions are payable by the client to Brokerage B. A direction is received from the clients' lawyer for Brokerage B to use the $5,000 being held in trust in payment of commissions. With this direction a further $5,000 is paid to Brokerage B to satisfy the commissions owing. Brokerage B owes $5,000 to Brokerage C and $1,500 to Brokerage A. 97

98 Application of Rule: Brokerage B deposits the $5,000 received from its client into its trust account. There will then be $10,000 in Brokerage B's trust account. From the $10,000 being held in trust, Brokerage B pays Brokerage C $5,000 as commissions and pays Brokerage A $1,500 as a referral fee. Brokerage B draws the remaining $3,500 from the trust account into its general account as payment of commissions. Example 6: Buyer referral Brokerage A refers its clients to Brokerage B. A 30 % referral fee is agreed between Brokerage A and Brokerage B. The clients are looking to purchase a property. Brokerage B is successful at helping the buyers find a property and a deposit of $5000 is placed in trust with the seller's brokerage, Brokerage C. The deal closes and commissions in the amount of $7,000 are payable by the seller to Brokerage C. A direction is received from the seller s' lawyer for Brokerage C to use the $5,000 being held in trust as payment of commissions. With this direction a further $2,000 is paid to Brokerage C to satisfy the commissions owing. Brokerage C owes $3,500 in commissions to Brokerage B. Brokerage B owes a $1,050 referral fee to Brokerage A. Application of the Rule: Brokerage C deposits the $2,000 received from the seller's lawyer in trust. There is now $7,000 in trust. Brokerage C pays $3,500 to Brokerage B from trust. Brokerage C draws $3,500 from its trust account into its general account. Brokerage B deposits the $3,500 in its general account. Brokerage B pays Brokerage A $1,050 from its general account as the referral fee. Example 7: Buyer s brokerage holding deposit Brokerage A enters into a service agreement to list a property with its client. Commissions are to be $ 6,000. Commissions are to be paid to any cooperating brokerage, Brokerage B finds a buyer for the property. A $5,000 deposit is made to Brokerage B on the deal. The deal closes and commissions of $6,000 are payable by the client. A direction is received from the seller for Brokerage B to pay $2,000 of the $5,000 held in trust to Brokerage A and Brokerage B is to take their commission of $3,000 from the remainder of the trust deposit held. With this direction is notification that a cheque for the remaining $1,000 owing to Brokerage A will be sent directly from the seller's lawyer to Brokerage A. Application of Rule: When the direction is received, $2,000 is paid to Brokerage A from the trust account. Brokerage A deposits these monies into its general account. Brokerage B then draws the remaining $3,000 from the trust account and pays these monies into its general account. Brokerage A will deposit the $1,000 from the seller's lawyer into its general account. Example 8: Listing brokerage holds enough to pay cooperating brokerage Brokerage A enters into a service agreement to list a property with its client. Commissions are to be $6,000. Commissions are to be paid to any cooperating brokerage, Brokerage B finds a buyer for the property. A $5,000 deposit is made to Brokerage A on the deal. The deal closes and commissions of $6,000 are payable by the client. A direction is received from the client to pay $5,000 of the $6,000 owed for commissions from the trust deposit held. With this direction a cheque for the remaining $1,000 is received from the seller's lawyer. Application of Rule: As the commissions are being shared, the $1,000 received from the client must be deposited into the trust account. There will then be $6,000 in the trust account. $3,000 is then paid to Brokerage B from the trust account, which deposits these monies into its general account. Brokerage A then draws the remaining $3,000 from its trust account and pays this into its general account. 98

99 Example 9: Property management Brokerage A, a property manager, receives $500 each month in payment of management fee for property management work. Application of Rule: The exemption applies. Brokerage A deposits the $500 received from the client to Brokerage A s general account as payment of commissions Guaranteed Sales A guaranteed sale occurs when and industry member makes a representation that the seller will receive a specific price for their property within a specific time. The Real Estate Act spells out the conditions under which guaranteed sales can take place. Representations Prohibited [Real Estate Act, Section 19] 19 Except in accordance with section 20, no industry member shall make a representation to a seller of real estate that the industry member or another person on the industry member s behalf will pay to the seller a fixed or determinable amount of money within a fixed or determinable period of time. Guaranteed Sale Agreement [Real Estate Act, Sections 20(1) to (4)] 20(1) In this section, guaranteed sale agreement means an agreement in writing under which an industry member or another person on behalf of or to the benefit of an industry member undertakes to pay to the seller of real estate within a fixed or determinable period of time a fixed or determinable amount of money in respect of that seller s real estate. (2) An industry member who enters into a guaranteed sale agreement or has another person enter into a guaranteed sale agreement on behalf of or to the benefit of that industry member shall maintain a separate trust account in a bank, loan corporation, trust corporation, credit union or treasury branch in which money is payable under this section must be deposited. (3) When a guaranteed sale agreement is entered into by an industry member or other person on behalf of or to the benefit of an industry member, that industry member shall deposit into the trust account maintained under subsection (2) not less than 5% of the total amount that may be payable under the guaranteed sale agreement. (4) When money is deposited under subsection (3), it must be held in trust for the seller and must be (a) paid to the seller or to some other person as directed by that seller as part of the total amount payable under the guaranteed sale agreement, (b) forfeited to the seller if the seller is not paid in accordance with the guaranteed sale agreement, or (c) returned to the industry member when, pursuant to the terms of the guaranteed sale agreement, there is no longer any money payable to the seller under that guaranteed sale agreement. 99

100 Guaranteed Sale Agreement [Real Estate Act Rules, Section 63] 63 A real estate broker, associate broker or associate must not advertise, offer or enter into a guaranteed sale agreement except on behalf of the brokerage with which that broker, associate broker or associate is registered. No industry member may make a representation to a seller that the industry member will guarantee a specific sale price for real estate within a specific time except under the terms of a guaranteed sale. Only a brokerage can execute a guaranteed sale with an owner. The brokerage may delegate that authority to associate brokers and associates but the guaranteed sale agreement can only be executed on behalf of that brokerage. In other words, the brokerage is guaranteeing to purchase the real estate for a specific price as of a specific date. Brokerages should have policies dealing with guaranteed sale programs. In order for a brokerage to perform a guaranteed sale: a purchase contract is drawn up between the brokerage and the owner outlining the purchase price, date of possession and terms of the sale the brokerage must place 5% of the total purchase price into a separate trust account and release it from trust upon completion of the transaction the brokerage must hold the money in trust for the seller the brokerage cannot charge a commission on the guaranteed sale Relocation companies can also become involved in guaranteed sales. Their involvement with the corporate client in the guaranteed sale can be as a power of attorney for the corporate client. In this case they are not directly involved in a guaranteed sale and the rules governing guaranteed sales would not apply. At some point the relocation company may be involved in the takeover of a corporate client s employee s property. If they are also involved in the payout of the purchase price to the employee, the relocation company is acting as a brokerage, and as such must be licensed and follow the rules of a guaranteed sale like any other brokerage. Note: A guaranteed sale by a brokerage, is not the same thing as an industry member purchasing property on their own behalf, which is referred to in the next section on Personal Trades (Rule 62). Disclosure requirements for personal trades vary depending on whether the other party is represented by an industry member. If the other party to the trade is being represented by another brokerage, then Rule 62 (1) (b) applies. If the other party to the trade is not being represented by an industry member then Rule 62 (1) (a) applies. If the other party is being represented by the industry member s brokerage, Rule 62 (2) applies. If an industry member sells or buys property directly from a member of the public not represented by a brokerage (e.g. a For Sale By Owner ), the industry member must carry out all disclosures in writing that he or she is required to do under Rule 62. When such a sale takes place, there is no listing contract created with any brokerage. Because the industry member is deemed to have insider knowledge, the price paid for the property should generally be market value or a price agreed to by the buyer or seller and the industry member. The buyer or seller should have full knowledge and understanding of market conditions. In this way, there is no perception of the public being disadvantaged by the industry. If there is concern over market values, the industry member might consider having a third-party evaluation performed. However, it might be wise for the member of the public to carry out a third-party evaluation on their own behalf. The industry member should be removed from the third-party evaluation or recommendation of any parties that might assist the member of the public in their third-party evaluation. At no time should the third-party evaluation be done by someone employed by or affiliated 100

101 with the same brokerage which employs the industry member in the transaction. No commissions would be payable by the seller or buyer to the industry member on this type of transaction. If the property is listed with the brokerage to which the industry member is registered, and the industry member is responsible for the listing and also wishes to buy it, the industry member should be aware that an agency relationship between the brokerage, industry member and the seller has been established. In such situations, fiduciary obligations are difficult to carry out given the inherent conflict of interest between the industry member, the brokerage and the client. In this case, the listing contract between the seller and the brokerage should be cancelled, as the industry member is in a conflict position and would clearly have difficulty representing the best interests of the seller and his own best interests at the same time. Full disclosure of any of the seller s confidential information known to the industry member must be made to the seller. An industry member should not be in an agency relationship with the seller of property and also be a buyer at the same time. Industry members must be particularly careful not to place themselves in conflict positions with consumers or be perceived as having taken advantage of less knowledgeable persons when buying or selling property for themselves. Conclusion Since the topics of agency relationships, advertising, trust accounting, commissions and disclosure are important to the real estate industry, they are covered separately in this module. The Real Estate Office Administration course also discusses trust accounting but from a financial management point of view. As a broker, you need to fully understand these topics so that you can explain and interpret them to your associate brokers, associates, brokerage support staff, and unlicensed assistants, as well as to the public. Other Legislation Affecting Real Estate Besides the Real Estate Act, various pieces of Provincial legislation and Federal legislation affect the real estate industry. This section addresses some of that legislation, starting with Provincial followed by Federal. However, this is not necessarily an all-inclusive list. Changes to the current legislation are made periodically and new legislation is created from time to time. It is the industry members responsibility to be current regarding legislation that impacts the real state industry. Provincial Dower Act The Dower Act was previously explained in the section on Contract Law. In certain circumstances, this Act allows the spouse of a married person to prevent the sale of a property by withholding consent to the sale. The Dower Act also allows the spouse to prevent other dispositions such as mortgages and leases. Therefore, before entering into a seller brokerage agreement, industry members must determine the marital status of a property owner when he/she is the sole owner of the property. A copy of the Dower Schedule can be found in the Forms workbook. You will find reference to dower again in courses on Seller Brokerage Agreement and Purchase Contract. 101

102 Further information about the Adult Interdependent Relationships Act can be found in the article entitled Alberta s Adult Interdependent Relationships Act and You on the Alberta Justice website: link to Publications. Law of Property Act The provincial legislation in the Law of Property Act relates to real estate transactions and includes foreclosure procedures. The foreclosure process is reviewed in Financing Real Estate Transactions. Municipal Government Act The Municipal Government Act provides the legislative basis for determining the use of property in Alberta. It encompasses all aspects of land use planning, from the broadest scale down to the regulation of development of properties within the boundaries of individual municipalities. Reference to the Municipal Government Act appears in Land Use Controls. Agricultural and Recreational Land Ownership Act The Agricultural and Land Ownership Act and Regulations prevent non-canadians from buying significant amounts of prime agricultural and recreational land. The Act does not discourage non- Canadian investors who wish to invest in new manufacturing plants, agricultural processing operations, recreational developments and new home subdivisions, or to expand existing plants or similar developments. Joint business ventures between non-canadian enterprises and Alberta companies are encouraged because they create jobs for Albertans and significantly benefit the province. Statute of Frauds The Statute of Frauds is an English statute in force in common law jurisdictions, including Alberta. This Statute requires that any contract for the sale of lands or any interest in lands must be in writing and signed by parties to be charged or their legal agents. Occupational Health and Safety Act: Working Alone Legislation Alberta s Occupational Health and Safety Act sets standards to protect and promote the health and safety of employees throughout the province. The Act outlines the rights and responsibilities of employers, employees and others who are on the worksite. The Act (under the General Safety Regulation) includes specific rules covering situations where employees work alone. Under the amended Working Alone legislation, brokers and associates are considered to have an employer/employee relationship. As such, brokers have an obligation to comply with the legislation and industry members have an obligation to take reasonable care to protect their health and safety. Personal Information Protection Act (PIPA) Alberta has developed its own privacy law, called Personal Information Protection Act (PIPA), which came into effect on January 1, 2004 and deals with the collection of consumers personal information. PIPA is based on federal privacy legislation: Personal Information Protection and Electronic Documents Act (PIPEDA). The basic concept of PIPA, like the federal law, is protection of consumer privacy. The law requires that consumers must consent to the collection of their personal information, and provides restrictions on how that information may be used, disclosed and maintained. It allows consumers to access any of their own personal information that companies have collected, and provides for remedies in the event that the personal information is incomplete or inaccurate. 102

103 Information about PIPA can be found on the website for the Office of the Information and Privacy Commissioner of Alberta: link to PIPA. Residential Tenancies Act This Act deals with the requirements of landlords and tenants of residential premises. Industry members are often involved in transactions of rented premises and will need a working knowledge of this legislation. Condominium Property Act The Condominium Property Act addresses legal matters concerning condominium development, ownership and management. The shared aspects of condominium ownership make it very complex and industry members who conduct condo trades should be familiar with the Act. In Alberta, examples of condominium ownership can be found in commercial, industrial, retail and residential developments. Federal Competition Act The Competition Act is designed to promote fair competition in Canada s marketplace. The Act became law in 1986 and replaced previous legislation to make Canadian competition law more effective and in line with the Charter of Rights and Freedoms. The Act applies to all sectors of the economy, including the real estate industry and its industry members, real estate boards and associations. Serious consequences can arise from a failure to comply with the Competition Act, including fines resulting from a criminal prosecution and/or adverse publicity that damage the reputation of the industry. The relevant provisions of the Competition Act may be simplified to three basic rules: 1. Don t collude make your own independent business decisions without discussion or consultation with competitors. 2. Don t discriminate against or refuse to do business with competitors or other persons because of their pricing policies. 3. Don t mislead the public in your advertising. For industry members, there are two key tips for compliance. Industry members should: be able to explain the brokerage services provided for the fees charged and never infer that fees were fixed in cooperation with other brokerages or that fees are standard for all brokerages. never suggest to competitors, potential clients or customers that they should not do business with a particular competitor because other brokers will not co-operate with that brokerage. The Canadian Real Estate Association (CREA) has published information focusing on portions of the Competition Act most relevant to the real estate industry. In addition, as an assurance of public service and protection, each member of a local real estate board is bound by CREA s REALTOR Code. Further information can be found on CREA s website: Personal Information Protection and Electronic Documents Act (PIPEDA) PIPEDA is the federal privacy legislation dealing with the collection, use and maintenance of personal information. The Canadian Real Estate Association (CREA) has developed a Privacy Code based on the 10 principles of PIPEDA. CREA s Privacy Code is available on their website: link to REALTOR Codes and link to Privacy. This Code sets out the commitment of real estate industry members regarding the privacy of personal information, including: 103

104 accountability identifying the purposes of personal information obtaining consent limiting collection of personal information protecting information consumer access to personal information. NAFTA and FTA Acceptance of the North American Free Trade Agreement (NAFTA) and Free Trade Agreement (FTA) has resulted in concerns regarding the non-resident acquisition of real estate. The NAFTA agreement, Annex 1 Canada, indicates that the Foreign Ownership of Land Regulations is in accordance with the Citizenship Act and the Alberta Agricultural and Recreational Land Ownership Act. This legislation essentially prohibits foreign governments or their agencies, foreign-controlled corporations, and people who are non-canadians from owning more than 20 acres of non-urban land. When handling real estate transactions involving persons who are not Canadian citizens or permanent residents (landed immigrants), you are advised to obtain legal advice regarding interpretations of this legislation and make your broker aware of the nature of any potential transactions. Goods and Services Tax Applicability of the Goods and Services Tax (GST) in a real estate transaction may vary. If GST is applicable, as may occur in new home sales, business or land, the buyer should be advised of the applicability of GST before entering in the purchase contract. There is no general rule as to the applicability of the GST and each transaction should be dealt with on its own merit. The buyer may wish to refer to accountants, tax experts and/or the GST office. Whether or buyer or seller, you should also advise your client, whether buyer or seller, to contact the Interpretation and Services Department of your district Excise Tax/GST Office (usually a GST inquiry line is available in the federal government directory of your phone book). Human Rights, Citizenship and Multiculturalism Act Alberta s Human Rights, Citizenship and Multiculturalism Act includes fair housing sections on discrimination regarding public accommodation and tenancy. Discriminatory practices include: denying a person accommodation, services or facilities customarily available to the public discriminating against a person with respect to accommodation, services or facilities because of their race, religious beliefs, colour, gender, physical disability, mental disability, ancestry or place of origin. Proceeds of Crime (Money Laundering) and Terrorist Financing Act The Proceeds of Crime (Money Laundering) and Terrorist Financing Act requires financial institutions and others covered by legislation to identify customers who conduct financial transactions such as depositing funds, purchasing a life insurance policy or buying a money order. Real estate industry members are bound by this law when they engage in any of the following activities during real estate transactions: receiving or paying funds deposit or withdrawal of funds transfer of funds by any means FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) collects, analyzes and discloses financial information and intelligence on suspected money laundering and terrorist financing activities. Money laundering is the process used to disguise the source of money or assets derived from 104

105 criminal activity. Industry members are obligated to report financial transactions to FINTRAC in the case of suspicious transactions related to money laundering or terrorist financing, and large cash transactions. The information that FINTRAC requires of brokerages has recently been increased. If you are a broker, please check out the website and publications mentioned below so that you are current with these requirements The FINTRAC website has information that brokers can review, print or download. For example, FINTRAC has prepared a brochure: Who has to report? Real Estate Brokers which can be found on their website: link to Publications ; link to Industry Specific Information Sheets ; link to Real Estate Brokers. Summary The Real Estate Act and its Rules and Regulations are extremely important to the new associate as they provide the foundation and framework for trade in real estate in Alberta. You should have a clear understanding of the implications of the Act to your daily work. As well, it is important to understand the legal requirements of the brokerage and the broker and become familiar with other legislation affecting real estate. The Real Estate Act combined with the Rules benefits the real estate industry by providing protection to the public and by establishing standards for the industry to follow. Competent industry members minimize problems for clients and bring credibility to the real estate industry. SELF-STUDY EXERCISES The following section includes Self-Study Activities and Exercises which are intended to help you become more familiar with the Real Estate Act and Rules. They will help you self-check your understanding of the Act and Rules, integrating key concepts and apply them to practical situations. The Exercises include True/False, fill-in-the blank, and multiple choice questions. All Disciplinary Activities are numbered and relate to the Disciplinary Actions found in the text. Review the Disciplinary Action to address the activity. No answer keys or solutions are available from RECA. Solutions to the Self-Study Activities and Exercises can be found by reviewing the related material in the text along with the files containing the Real Estate Act and Rules. Please reference these files as you work your way through the Self-Study Exercises and Activities. You can also find the most current version of the Real Estate Act, Rules, Bylaws and Regulations on the RECA website ( 105

106 Real Estate Act Student Self-Study Activities Activity: Interpretations and Definitions The first part of the Act, Rules, Bylaws and Regulations have the Interpretation or Definition section, which defines terms mentioned in the legislation. Using the Real Estate Act and the Rules, match the following terms to the correct definition: Terms Definitions 1. Council the act of recommending or directing a person for service, assistance or business to another person or business 2. buyer includes exchange, option, lease or other acquisition of an interest in real estate 3. agent the Real Estate Foundation continued under section conflict of interest a relationship in which an industry member acts as the agent of only one party in a trade or deal 5. customer a person acquiring or attempting to purchase an interest in real estate 6. party the Real Estate Council Of Alberta established under section 3 7. referral 8. sole agency 9. purchase an industry member who is expressly or implicitly authorized to act for or represent another person a person who has contacted but not engaged or employed an industry member to provide services a real or apparent incompatibility between an industry member s interests and the interests of the client or potential client 10. Foundation a person who is a legal party to a transaction Activity: Disciplinary Action 1 (Review Disciplinary Action 1). Did the hearing panel make the correct decision in this case? To determine this review the case described in Disciplinary Action 1 and compare the facts of the case to the sections in the learner text which describe: who requires a licence? What are the exceptions to licensing requirements? What are the substantial interest exemption requirements? 106

107 Activity: Disciplinary Action 2 (Review Disciplinary Action 2). 1. What were the reasons for the executive director s decision? 2. Under what section of the Rules does the Executive Director have authority to refuse a licence? (Hint Rules, Part 1, Division 7) 3. If a person is refused a licence by the executive director, what section of the Rules allows an appeal of that decision? (Hint - Rules, Part 1, Division 8) 4. Could the executive director have granted the licence, but made it subject to stringent terms? (Hint Rules, Part 1, Division 5) Activity: Disciplinary Action 3 (Review Disciplinary Action 3). In this case, when the associate reapplied for a licence, it was granted, provided she met with her broker on a monthly basis to review her real estate trade activities. This condition was applied in accordance with Rule section Does section 22 apply to other industry sectors? 2. When may terms and conditions be applied to a licence? 3. Put yourself in the place of the executive director. Brainstorm and list possible terms conditions and restrictions that might be placed on a licence where: a) the associate was involved in a fist fight with a client. b) the associate attempted to conduct a complicated commercial transaction and made numerous mistakes 107

108 Activity: Disciplinary Action 4 (Review Disciplinary Action 4). In this case the associate was transferring brokerages and failed to become properly authorized at the new brokerage. Answer the following questions about transferring between brokerages. 1. At the time of transfer, the associate will cancel existing client service agreements and draw up replacement agreements with on behalf of the new brokerage. True or False 2. When transferring between brokerages, if there is a slight time lag between the associate s termination from the former brokerage and authorization to trade at the new brokerage, the associate: a) Can show properties of the old brokerage until authorized at the new brokerage. b) Can only show properties if under the supervision of the broker. c) Can finish up any outstanding paperwork for trades at the old brokerage. d) None of the above. 3. An industry member who transfers between one brokerage to another, must pay an additional fee to the Real Estate Council. How much is the fee? (Hint Rules, Part 6, Schedule 2) Activity: Notice of Changes to Industry Member s Information (See Disciplinary Action 5) In Disciplinary Action 5, the associate was assessed a fine because he failed to give notice of a disciplinary action to the Real Estate Council of Alberta. Answer the following multiple choice questions about notifying RECA regarding changes to an industry member s information. 1. Section 40 of the Rules requires written notification to the executive director of certain events. Circle the correct choices. a) Change of marital status b) Disciplinary actions c) Judgments relating to services to the public d) Failure to pay outstanding debt e) Judgments against industry member s business interests f) Personal bankruptcy g) Spousal bankruptcy h) Industry member s business in bankruptcy i) Traffic tickets j) Commencement of Criminal Code proceedings k) Convicted of offence l) Personal mortgage foreclosure 108

109 2. When the executive director receives a notification under section 40, one of the following options may occur: a) Take no action, open an investigation, assess change notice fee. b) Take action in the public interest, open an investigation, take no action. c) Open an investigation by placing the information on file, suspend or cancel the licence, decide on conduct deserving of sanction. 3. While associates must report to the executive director under section 40, they are not required to inform the broker. True or False? Activity: Unlicensed Assistants Case Study: Associate Billie has an unlicensed assistant, Rose. Rose s usual duties are to handle incoming calls, set up showing appointments, install for sale signs, perform basic bookkeeping, draft correspondence, etc. One afternoon, Rose receives a call from an important client who wishes to speak to Billie, who is out of the office on an appointment. Rose tells the client that Billie will not be available for at least a couple of hours. The client is seeking advice on current market conditions and is in a hurry. Rose just heard Billie answer this same question for another client this morning. Eagar to help the client, Rose simply relays the same advice she heard Billie give the other client. Unknown to Rose, the advice Billie gave the client in the morning, was not suitable for the client she spoke to. The advice she gave was inappropriate and the client suffered a loss as a result. 1. Since Billie did not assign this responsibility to Rose, will she be accountable for Rose s actions? 2. List some possible circumstances that may result: 109

110 Activity: Late Deposits Refer to the section in the text regarding late deposits and answer the following questions: 1. Terms of trust on a purchase contract typically indicate a deposit must be deposited into a trust account within three business days of final signing. True False 2. Parties to a purchase contract may alter the usual terms of trust if they both agree to it. True False 3. A failure to deposit trust funds on time is a breach of the Real Estate Act. True False 4. The associate has no responsibility for the deposit, only the broker. (Hint Rule section 53.) True False Activity: Broker Responsibilities (See Disciplinary Action 6) Review Disciplinary Action 6 in the text. In this case both the contraventions and fine were significant. As an associate, some of your success is attributable to the success of the brokerage. A good brokerage usually has a good broker. What effect could working with a broker such as the one in Disciplinary Action 6 have on the career of a real estate associate? 110

111 Activity: True/False Quiz Must Do & Must Not Do In sections 41 and 42, the Rules describe those things that industry members must do and conversely, those they must not do. Please answer the following true or false questions. Industry members. 1. are to disclose any conflicts of interest with a client T F 2. must refuse to provide information to the Real Estate Council of Alberta T F 3. cannot disclose to anyone how they will be paid T F 4. may not discuss their role to third parties T F 5. cannot use a person s confidential information for personal gain T F 6. may not participate in unlawful activities T F 7. must discourage expert advice when it may jeopardize a transaction T F 8. must follow the client s instruction to discriminate because of race. T F 9. may not bring the industry into disrepute T F 10. will provide competent service, if possible T F 11. are to comply with conditions or an order pursuant to the Act T F 12. are permitted not to comply with licence conditions if the broker so orders T F 13. may not make misleading representations T F 14. may be verbally abusive to a customer, but not a client T F 15. may refuse to disclose a required disclosure if the client insists T F 111

112 Activity: Trade Only for One Brokerage 1. Review the co-brokering scenario in the text. A. Review the questions presented in the scenario and determine if you believe the associate s actions could indicate that he is acting on behalf of Mr. Seller s brokerage? B. If you believe the associate s actions caused confusion, describe what he ought to have done when Mr. Seller called? 2. Review the Industry Member Acting as an Assistant section You are an industry member doing assistant work for an industry member registered to another brokerage. You know the rules about trading for your own brokerage. Of the 5 assistant level activities below indicate which ones you would refuse to do. i. Design the graphics for a promotional brochure ii. Do conveyancing letters to lawyers for the brokerage s transactions iii. Organize non-confidential files iv. Enter client information into a data base v. Research cell phone plan options Activity: Disclosure of Conflict of Interest and Relevant Information Denise and Marie Scenario (Based on an actual case heard by a Hearing Panel) On Sunday afternoon Associate Denise had an open house on a vacant residential property that she had listed. Marie, a potential buyer who had visited the open house contacted Associate Denise later that evening. Marie was interested in buying the house and requested that she see the property the next day with her own agent. Marie stated that she would be writing an offer but first needed advice on the terms of her offer from her agent. That same evening, Associate Denise decided she would purchase the property herself. She contacted the sellers who had been transferred to Ontario and a purchase contract was accepted that evening. During her negotiations with the sellers, she failed to enter into discussions about her interests conflicting with theirs. She also failed to mention anything about Marie s potential offer. 112

113 The next morning, Associate Denise called Marie s agent and left a message saying the appointment was cancelled because the property was sold. Marie s disappointment turned to anger when she learned that Denise herself had bought the property. What should Denise have disclosed to the seller? Activity: Disciplinary Action 7 This case (refer to learner manual) indicates that the broker failed to inform the client how the brokerage would be paid for its services. Review the Disciplinary Action 7 carefully. If the broker was acting competently and in the client s best interests, there are two other disclosures that should have been made. What other disclosures should have been made? Activity: Responsibilities to Customers 1. Industry members must prioritize delivery of documents, by always delivering documents to clients in priority over customers. True False 2. Proper behaviour toward customers may indirectly assist an associate in representing the client s interests. True False 3. When a brokerage acts for a seller, it will treat interested buyers as customers. True False 4. If an associate fills out a purchase contract form with a customer, an agency relationship is automatically created. True False 5. If an associate clearly discloses his role as agent for his own client, he can advise the customer that outside advice is not necessary. True False 113

114 Activity: 3 Levels of Disclosure Select the level of disclosure required in the following scenarios. (Hint: refer to the discussion in the text on Rule 62 and personal trades). 1. Associate Tracy has located a property she would like to buy. She located the property on a For Sale by Owner website. The owner s listing information indicates Agent Chosen, but they have told Tracy they have not entered into a brokerage agreement yet. Disclosure Level Brokerage Blue has a property listed on a lake, just outside of town. The brokerage accountant loves to fish, and has been looking for just such a property. The accountant tells the broker of his wish to buy the property. Disclosure Level Bill, an associate with Northern Realty, has been contacted by his golf buddy Jeff, of Southern Realty. Jeff has a new listing he thinks Bill will like. Bill sees the property and likes it, but thinks it will suit his brother much better. He prepares an offer for his brother and calls Jeff to set up an appointment to present it. Disclosure Level Jan, Rotary Realty s top associate, has earned numerous commissions and wants to spend some money on investment properties. Rotary Realty has just listed a number of condos near the university. With many students looking for rental accommodations, investors are interested in these properties. Jan decides to buy two of these condos. Disclosure Level Activity: Disciplinary Action 8 Personal Trades This scenario is based on a true case! Review the case and consider the questions below: 1. What level of disclosure did Associate A owe the seller? 2. Did Associate A have an agency relationship with Mr. Buyer? 114

115 3. If Associate A had an agency relationship with Mr. Buyer? What should he have disclosed to Mr. Buyer? Activity: Disciplinary Action 9 Improper Payment and Receipt of Commissions 1. Given your knowledge of the brokerage/associate relationship and commissions, what was the motivation of Pink and Grey to have the payment done outside the brokerage? 2. What specific Rule did Associate Pink breach? What specific Rule did Associate Grey breach? (Hint Rules, Division 2 Real Estate Brokerage Standards) 3. In your opinion, did the punishment seem appropriate? Activity: Incentives and Inducements Review Incentives and Inducements to ensure that you are familiar with the differences between them and the requirements for each. Then answer the following questions. Incentives: 1. are provided on behalf of the brokerage T F 2. must only be offered by individual associates T F 3. can include gifts, but not money T F 4. are used to encourage a party in a particular trade T F 5. are brokerage offerings, therefore all associates must participate T F 115

116 Inducements: 6. may be offered by an associate, if the broker has given written approval T F 7. are offerings to the general public to attract business to an associate T F 8. can be a commission adjustment T F 9. the industry member making the inducement must do so in writing T F 10. can only be made by industry members in the real estate sector T F Activity: Improper Inducement (see Disciplinary Action 10) Review this disciplinary action in the learner manual. Answer the following questions. 1. Under what circumstance is an offer to pay a client s legal fees an inducement? 2. Should the associate have made the inducement without the broker s approval? a. If yes, why? b. If no, why? 3. Assume you are the broker developing a policy statement on inducements for your brokerage. Fill in the blanks of the following policy statement: Brokerage associates may not offer an inducement unless the inducement statement is made in and by the associate. The statement must clearly set out the of the inducement. Additionally, the broker must give prior approval of any inducements made. (Hint reference Section 54 of the Rules) Activity: Guaranteed Sales Select the best answer for the following: 1. A guaranteed sale agreement will include the following term: a. the associate will pay cash and not get a mortgage b. the brokerage is to assign ownership to the associate or the broker c. the contract will be void if the seller enters into another purchase contract d. due to the guarantee, the property will no longer be marketed 116

117 2. What is the benefit of a guaranteed sale to an owner? a. the price is higher than what the property is worth on the open market b. the property is sold, yet the opportunity for another offer exists c. the guarantee includes a non-refundable cash payment to the owner d. buyers will pay more for a property they think they can t get 3. What must the brokerage do with a deposit on a guaranteed sale contract? a. Deposit an agreed upon amount to a separate trust account b. Deposit not less than 5% to a separate trust account c. Instruct the owner s lawyer to hold the funds d. Deposit the funds within 90 days to a separate trust account 4. When a guaranteed sale is offered as an incentive: a. sellers who do not want a guarantee will receive a lower commission rate b. only industry members who have guarantee experience will get the leads c. the guarantee includes a non-refundable cash payment to the owner d. all advertisements offering guarantees must be on behalf of the brokerage Activity: Review of Advertisement Requirements A) Industry members should ensure the following: 1. Advertising and other communications are not: false inaccurate reasonably capable of misleading the recipient in bad taste offensive harmful to the best interests of the public prohibited by law 2. Incentives are: advertised as a brokerage incentive not exclusive to any individual industry member 3. Inducements are: offered to assist a person to enter into a particular real estate transaction provided by and on behalf of the brokerage B) To avoid misleading advertising, industry members should: indicate when Some Restrictions Apply avoid use of Industry Terms be accurate when placing Comparative Ads use caution when an ad has Permanence ensure information is Up-to date avoid Implied Endorsements ensure Teasers are not overstated and misleading ensure Specialist description is earned take care that the Distribution Range does not affect the ad C) Industry members must trade only in the name on their licence and in the name of their brokerage. 117

118 Activity: Advertising Guidelines. Have the above guidelines been used in the next three ads? 118

119 119

120 Activity: Advertising Guidelines. Practice writing ads that comply 1) Property Ad: Write an ad to describe the following property that you just listed: Property Type: Single Family House Style: Bi-level Age: Built in 1994 Bedrooms: 3 Bathrooms: 2 Fireplace: No Central A/C: No Garage: No Workshop: No Fencing: Fenced rear yard Features: Landscaped, Schools nearby, Back lane, Undeveloped basement with roughed in plumbing Possession: Flexible House Size: 1276 sq ft/ sq m Lot Size: 46 x 105 ft/14 x 32 m 2) Personal Promotional Ad: Write an ad to promote your services as an industry member. Assume that you are developing some personal promotional materials that will be delivered to neighbourhoods that you would like to prospect. Assume the following information is correct regarding your industry experience and interests. You have 5 years of real estate experience You try to specialize in the Springdale district, but will work anywhere 20% of your business is condominiums You enjoy golf and your child s soccer team Your sales record is in top 15% of office Your receive a number of referrals from clients and real estate colleagues Your brokerage does not offer guaranteed sales You speak two languages fluently You have an address and a website 120