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Court overturns agent fraud 

11 November 2016

Realcover has warned agents to review their limit of indemnity insurance after a recent court case where an agent was initially found liable for over $3 million.

The case involved a commercial property which the buyer claimed was sold to them under misleading circumstances, including by several real estate agents involved. 

However, the State’s Court of Appeal overturned the finding of fraud and found apportionment against two of the defendants in the amount of 15%. The purchaser has since filed an application for leave to appeal to the High Court of Australia.

Professional indemnity insurer, Realcover, who represented one of the defendants, said it should serve as a warning to all agents.

Realcover Claims & Compliance Manager, Nancy Rainbird, said: “The original judgement in the lower Court was a terrible result and the appeal to overturn the finding of fraud is welcomed.

“This should serve as a reminder to all agents to review the limit of indemnity insurance under their policy considering the initial judgement had significant potential.

“Agents need to be wary about making representations about ‘good rent payers/good tenants’ and make sure they get an opinion from the owner, in writing, about the quality of the tenant – particularly in commercial properties, and especially if they don’t manage the property.”

The Court of Appeal judgment supports a finding that agents should only be held liable to the extent that their misrepresentations contribute to a loss by a purchaser. 

Tips for avoiding similar claims 

  1. Agents should verify the amount of rent for any tenancy before including it in promotional material, or not include details on the promotional material.
  2. Agents should avoid making any statements about the capacity of a tenant to pay unless they have proof.
  3. Outside auction conditions, agents should have purchasers sign a statement to say they have made their own necessary enquiries and do not rely upon any representation (oral, written or implied) on any matters which have influenced their decision to make an offer on the property.
  4. Agents must not make any statements about amounts of offers, or reasons why a property is being taken off the market which are untrue.

Facts of the case

  1. The purchaser was a commercial property investor, with a pre-existing investment on the same street.
  2. They decided to purchase an additional commercial property given the good returns on the existing investment.
  3. The purchaser had a discussion with Real Estate Agent 1 in respect of a commercial property for sale in the same street which had three tenants; a convenience store, a nightclub and a smaller commercial tenant. 
  4. The property was subsequently marketed for sale by auction by Real Estate Agent 2.
  5. Neither Real Estate Agent 1 or 2 were the leasing agent for the property.
  6. The promotional material for the property marketed it as having three tenants with long leases.
  7. Co-incidentally, the purchaser was meeting with Real Estate Agent 1 on the day scheduled of the auction, in relation to a rent review for the purchaser’s other commercial property.


Background to the case

Prior to the auction the purchaser made an offer of $5.925 million to purchase the property, which was accepted. 

The purchaser gave evidence the offer was based on their calculated yield of the property based on the rental return being over 6%. The purchaser was also satisfied the existing tenants were “good payers” based on representations by Real Estate Agent 2, and that another offer of $5.92 million had already been received which had cancelled the auction.

However, it transpired that there was an agreement between the vendor and the nightclub tenant, who had not paid rent previously, that they would not be required to pay rent until eight months after the purchase was settled.  This agreement was known as the “rent abatement agreement”.

Real Estate Agent 2 gave evidence that he was not the leasing agent for the property and did not know about the rent abatement agreement, which the Court accepted.  He also gave evidence that he did not make any statements about whether the tenants were good payers as that information was not known to him. 

He also denied revealing the amount of prior offers or making a statement that the auction had been cancelled.  (Real Estate Agent 1 was not required to give evidence as the purchaser ultimately said that they did not rely upon anything they had been told by Real Estate Agent 1.)

The purchaser argued that the statement allegedly made by Real Estate Agent 2 that the tenant was a “good payer” was false, and that the making of that statement amounted to fraud.

The Court of Appeal disagreed, and the purchaser has appealed against this finding to the High Court. This appeal is likely to be heard sometime in 2017