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Lawsuits in the U.S. and Canada: Possible catalysts for innovation, choice and lower consumer costs

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In recent years, ongoing legal battles in both the United States and Canada have brought significant attention to the real estate industry, raising questions about traditional commission structures, antitrust regulations and the potential impact on consumers. These lawsuits could potentially serve as a driving force for innovation – increasing choices, enhancing services and lowering costs for real estate consumers.

 

Legal battles south of the border

 

In the U.S., two notable lawsuits have garnered significant attention: the “Sitzer/Burnett” case and the “Moehrl” case. These cases have achieved “class status”, signifying their potential impact on the industry.

Class certification is a major milestone for the plaintiffs and could result in significant financial implications for the defendants, possibly amounting to hundreds of millions of dollars. The long-anticipated Sitzer/Burnett commission trial is currently underway in Kansas City, Missouri.

The central focus of these lawsuits revolves around commission-sharing arrangements between listing and buyer brokers, which may infringe upon U.S. federal antitrust laws. This has broader implications for both the U.S. and Canadian real estate markets, given their striking similarities.

 

Parallel realities in Canada

 

In Canada, our system closely mirrors that of the U.S. Brokerages in either country adhere to similar rules and policies, requiring the listing brokerage to offer compensation to the cooperating brokerage to access a real estate board’s MLS system.

In practice, this effectively removes fee negotiation from the hands of the buyer’s agent, providing selling brokerages with a significant degree of control over the cost of services being delivered. The amount is considered material since the fee often constitutes a substantial portion, frequently half, of the total fee charged to the seller.

 

Sunderland

 

Similar to the U.S cases in many respects is the “Sunderland case”, a Canadian lawsuit currently underway, which alleges violations of certain provisions of the Canadian Competition Act. This case arose from a Toronto seller, Mark Sunderland, objecting to the 2.5 per cent commission required to be paid to a buyer’s brokerage when he sold his home in 2020.

The case is said to be filed on behalf of sellers who listed on the MLS owned and operated by the Toronto Regional Real Estate Board (TRREB) dating back to March 2010. While TRREB is a defendant in the Sunderland case along with the Canadian Real Estate Association (CREA), so are seven brokerages and five prominent real estate franchisors.

Charges, however, that defendants conspired to “fix”, “maintain” and “increase” prices for buyer brokerage services were recently struck down by the judge. But, claims suggesting that defendants somehow “control” prices of buyer brokerage commissions are being permitted to proceed.

The Sunderland case, unlike the U.S. cases, is still in the process of seeking class certification and claims that defendants violated the Canadian Competition Act.

 

The politics of competition enforcement

 

In the realm of competition enforcement, the political landscape plays a significant role.

Currently, the industry faces pressure due to the rise of political consumerism. In the U.S., President Joe Biden’s recent Executive Order vigorously targets any practices hindering competition across various sectors, including real estate, where he wants lawmakers and all levels of government to work together in identifying and eradicating any:

  • unfair tying practices or exclusionary practices in the brokerage or listing of real estate, and
  • any other unfair industry-specific practices that substantially inhibit competition.

This political push prompts industry leaders to reevaluate existing regulations, policies and traditional commission structures to drive innovation, choice and lower prices for consumers.
And, although Canada and the U.S. have distinct competition enforcement models, there is an inclination in Canada to perhaps draw key policy insights from the U.S. approach, especially concerning dealing with “abuse of dominance” or monopolistic practices.

Recently, Canada’s Commissioner of Competition invited the U.S. Federal Trade Commission and the U.S. Department of Justice to share some of their experiences in enforcing antitrust laws. This collaboration makes sense, considering the strong economic ties between the two countries.

Furthermore, Commissioner Matthew Boswell emphasized the need to modernize Canada’s competition laws and implement pro-competitive policies in response to a recent competition report. Like Biden, he seeks support from all levels of government to counteract market forces that harm competition and disproportionately impact consumers. You can bet that the real estate sector will be on his radar.

 

Earlier Canadian intervention

 

A significant development occurred in 2010 when Canada’s Competition Bureau entered into a Consent Agreement with CREA. This was inevitable, as it was playing catch up to similar and earlier enforcement initiatives achieved in the U.S.

The deal, brokered by then Commissioner of Competition Melanie Aitken, opened the door for member brokerages of CREA to access real estate boards’ MLS systems to offer and deliver innovative and lower-cost services to consumers.

Both existing and new market entrants began almost instantly marketing services where sellers could access the boards’ MLS systems for a hugely discounted fee and where the seller could negotiate commissions directly with the cooperating brokerage instead of it being negotiated in advance by the selling brokerage.

Those who choose to practice real estate this way believe it’s the best way to achieve maximum competition, as it gives the seller optimum negotiating power. Based on that, perhaps the best solution to the industry’s problems is right under our very noses.

 

A plausible solution

 

Why not simply have the amount of buy-side commissions entirely removed from the boards’ MLS systems and instead have these commissions negotiated as part of the offer process? This approach would drive competition like no other idea and immediately put an end to illegal “steering” – which is difficult to pinpoint and prove but is likely more rampant than reported, and only exists as a result of current commission policies.

 

The ongoing legal battles in the real estate industry, both in the U.S. and Canada, have the potential to reshape the landscape for real estate consumers. The lawsuits challenge traditional commission structures, drawing attention to antitrust concerns and their effects on consumers.

The real estate industry’s long-standing uniformity in commission rates and the complex challenges it faces are now under the spotlight. While this issue has roots dating back decades, the current legal battles may prove to be the very catalyst needed to promote innovation, increase choices and, ultimately, lead to better services and lower costs for real estate consumers, both in Canada and the United States alike.

 


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