The suspension of Exit Realty on the Rock’s real estate licence on Feb. 4, which forced the St. John’s, Nfld. company into receivership, and the ensuing investigation by both the provincial Office of the Superintendent of Real Estate and Royal Newfoundland Constabulary, highlights the vulnerability of sales reps’ commissions.
Fortunately for the former Exit Realty on the Rock agents, it’s going to work out well for them. The receiver, PricewaterhouseCoopers, deemed that the commissions owed would be treated as trust money, so the salespeople will eventually be paid. (Editor’s note: See update below.)
“Many times agents find themselves on the losing end in a situation like this,” says Newfoundland and Labrador Association of Realtors (NLAR) CEO Bill Stirling. “I’m pleased the receiver is treating the commissions as trust money and I’m hopeful we’ll start seeing the payment of these commissions around the middle of March.”
Stirling says there are lessons to be learned as a result of this recent situation and that NLAR is looking at different options to help protect its members’ commissions in the future. This includes adding commission protection insurance, which is not part of their current insurance package, and on closing, having the real estate lawyer prepare separate cheques for the buying and selling brokerages.
Another option being considered is mandating that brokers put commission funds into a trust account as opposed to a general business account, which currently isn’t a requirement.
“Having the money in a trust account offers a better layer of protection so we’ll be looking to the regulators for some reference on this,” says Stirling.
Tom Curran, a real estate lawyer and small business advisor based in Ottawa, agrees that placing commission funds into a mixed trust account – the same type of account lawyers use when handling money on behalf of their clients – offers better protection.
“If the (commission) money isn’t in a trust account, then not only can there be long, drawn-out battles over whether the money was taken out properly or not, but now you also have fights over priorities and which creditors come first,” says Curran. “But if the money is in a mixed trust account, then there is no question about whose money it is. If at least some money is recovered, then the trust funds will go directly to the Realtors and not to the other general creditors, which would otherwise be the case.”
Curran adds that having the money in a trust account also acts as a deterrent for people who think of misappropriating those funds, noting that breach of trust is treated as a very serious offence – more so than a simple theft.
“The bottom line is fraud happens,” says Curran. “But if you take trust monies, you’re likely off to jail, (whereas) if you take general revenues, you probably aren’t.”
Curran agrees that issuing a cheque to each of the buying and selling broker is a safer approach, but cautions that there are some law firms that refuse to issue more than one cheque, other than for registered mortgages, to help cut down on their workload.
Brian Schlotzhauer, deputy registrar, industry standards, with the Real Estate Council of Ontario (RECO) says one of the easiest ways salespeople can protect themselves is to do their homework and ask a lot of questions about the brokerage they’re looking to work with. He suggests talking to other agents who work there and asking them directly if there have been any issues or delays with commission payments.
Schlotzhauer says that while there is no requirement with RECO’s insurance provider or the Real Estate and Business Brokers Act that brokers put commission monies into a trust account, he agrees that it’s something salespeople – both those who are working with an existing brokerage and those looking to move to a new one – want to make sure is happening if they want to better protect their commissions.
If an agent finds themselves in a situation where there is a problem with their commissions being paid as agreed, Schlotzhauer suggests talking to the broker of record first. If they’re not satisfied with the broker’s response, they should contact RECO (or their provincial regulator).
“If there are problems with commission payments, we can begin a review of the brokerage,” says Schlotzhauer. “We can’t get the payment but we can inspect the broker to see if they have been meeting their obligations.”
In Ontario, Realtors can also file a claim through their commission protection insurance, but Schlotzhauer cautions that the insurance only accepts claims where commissions are owed but the broker is either unable or unwilling to pay. It doesn’t cover disputes over commission amounts.
If an agent wants to file a claim, Schlotzhauer suggests they contact RECO’s insurance office, which will help guide them through the claims process.
Update: On March 8, Stirling issued a statement to members that said, “This morning we have been informed that there has been a change in the position of the receivers in the Realty on the Rock issues that we have been dealing with.
“We understand that PricewaterhouseCoopers (PwC), the Receivers of 50549 Newfoundland and Labrador Inc., have applied to become a Court-Appointed Receiver. Prior to the application, PwC was acting as a private receiver appointed by Bank of Montreal. This change could result in a delay in resolving the outstanding claims as a result of further court action.
“We are disappointed by this turn of events and fully recognize the challenge that this may create for some of our members. However, we also know that in this type of situation there are many competing interests. I wish to assure all of you that we are focused on the issue, working hard to protect your interests and committed to finding the best solutions that may be available to us.
“Our legal counsel will review the application today and we will have further information for our members once we’ve had time for that analysis…We are firm in our position that the outstanding commission funds should be treated as a trust, as agreed by the receivers, and will be making that argument to the court.”
Tony Palermo is a contributing writer for REM.
