By PETER MORAN
Two recent cases highlight the importance of agents adhering to their duty to disclose known information and facts to their principal when selling or managing a property.
CASE 1
Failure to disclose conflict of interest
In a recent Supreme Court case,¹ an agent purchased a number of strata units in a Central Coast development. They did so via a separate corporation of which they were a director and principal shareholder.
The agent also acted as selling agent for a group of vendors. The vendors claimed that the agent had breached his duty to disclose the fact that the purchaser was a company that he owned and controlled. They gave evidence that they were not aware until after the contracts were terminated that the agent was a director and principal shareholder of the purchaser corporation.
Proceedings were instituted by the purchaser company against the group of vendors for specific performance of the contracts for sale of 10 of the strata units.
The Supreme Court found that although the precise duties owed by agents to their vendors will depend on the terms of an agency agreement, there is nevertheless “implied in every contract of agency … terms requiring the agent to act in accordance with the instructions contained in express authority or given subsequently by the principal, to act honestly and in good faith, and to act for the benefit of the principal.”
To this end, agents have an obligation to inform a vendor of all matters material to the agency.
In addition, the Supreme Court found that agents can’t place themselves in a position where there is, or may be, a conflict of interest between the duty they owe a vendor and their own interest. Further, agents may not make a profit out of a fiduciary relationship, except with the informed consent of the vendor.
The Supreme Court said that the duty to disclose relates to all material information the agent possesses that pertains to the agency relationship. Further, if an agent is unsure as to whether information is material or not, disclosure should be made. The duty to disclose is an obligation to disclose everything known regarding the subject matter of a contract for sale that would likely influence the conduct of the vendor. What would a reasonable person in the agent’s position consider, in the circumstances, to be likely to influence a vendor’s conduct.
The duty to disclose is an obligation to disclose everything known regarding the subject matter of a contract for sale that would likely influence the conduct of the vendor. What would a reasonable person in the agent’s position consider, in the circumstances, to be likely to influence an agent’s conduct.
Up to the point in time when the purchaser company entered into the contracts for purchase of the units, the agent had a duty not to place himself in a position where there may be a conflict between the duty he owed to the vendors as fiduciaries and his own interests.
The Supreme Court found that the agent had made a deliberate choice not to tell the vendors about his involvement in the purchaser company prior to exchange. By doing so, he breached the ‘no conflict’ duty.
He also breached his duty not to make a profit out of his fiduciary relationship with the vendors (unless he had informed consent). As he did not seek their consent, he was also in breach of the ‘no profit’ duty.
The Supreme Court ordered the agent to repay commissions received in respect of the sales.
Key takeaways
The lesson to be learnt from this case is that agents must adhere to their duty to disclose any conflict of interest and must not profit from their vendor (unless informed consent is given).
Being associated with the party who is proposing to purchase a property (e.g. as a director or shareholder), where that property is one over which you have an agency agreement, is likely to be found by a court or tribunal to be a material fact warranting disclosure. This disclosure should be full and frank, and clearly set out the nature of the relationship.
If, after making the disclosure, there is consent by the vendor, that consent should be in writing. As an added protection, it is worthwhile for agents to suggest to the vendor that they obtain independent legal advice, so any consent they give may be considered by a court or tribunal to be fully informed.
1. D Capital 2 Pty Ltd v Western [2022 NSWSC 1064]
CASE 2
Failure to disclose changes to agreement
A property owner brought a claim before the NSW Civil and Administrative Tribunal against a managing agent.
The owner sought compensation from the managing agent, claiming that the agent had decided not to remove clauses from the residential tenancy agreement; these clauses had been removed from the agreements for previous tenancies. The effect of the clauses not being removed meant that the owner had limited rights against the defaulting tenant in the event of the tenant terminating the agreement prior to completion of the lease term.
The managing agent had not sought instructions from the owner to leave the clauses in the agreement.
The Tribunal found that the managing agency agreement included a clause authorising the agent to refer to the principal for instructions concerning re-leasing of the premises. The Tribunal considered this clause created a “clear obligation” on the part of the managing agent to refer to the owner for instructions. Failure to do so was a breach of the agent’s obligation under Australian Consumer Law to provide services with due care and skill.
The issue for the managing agent was that they made the decision not to remove the clauses from the residential tenancy agreement unilaterally and this caused the agreement to operate differently from earlier established agreements. The Tribunal found that the decision not to remove those clauses was for the owner to make, not the agent.
Key takeaways
Always seek specific instructions from a client prior to altering the terms of a residential tenancy agreement in any way that may materially impact their recovery rights.
If the client provides instructions and authorises entry into an agreement with altered terms, always ensure the instructions and authority are in writing.
PETER MORAN is a Partner at Colin Biggers & Paisley.