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Know your limits

January 2017
A recent case serves as a timely reminder to all agents to review the indemnity limits under their professional indemnity insurance policy.

By Nancy Rainbird

The case in question involved a commercial property comprising a convenience store, nightclub and another smaller business. The buyer claimed that the property was sold to him under misleading circumstances.
Alleged misrepresentations
The buyer, who was a commercial property investor and already owned another property on the same street, made an offer of $5.925 million prior to auction. He told the court that the agent had told him that an offer of $5.92 million had been received and, on this basis, the auction had been cancelled. He also explained that he had calculated the yield of the property by reference to the rental return being more than six per cent, and this formed the basis of his offer. In addition, due to representations by the real estate agent, he was satisfied that the three existing tenants were “good payers”.

It later transpired that the nightclub tenant had not paid rent for some time and there was a rent abatement agreement in place between the seller and that tenant. The real estate agent told the court that he was not the leasing agent and had no knowledge of the rent abatement agreement. The agent also said that he didn’t make statements to the effect that the tenants were “good payers”.

The court made a finding of fraud against the agent and damages (with interest) were assessed at in excess of $3 million (against the agent and his fellow defendants).

Finding of fraud overturned
On appeal, the decision was overturned on the basis that there was no specific evidence to back up the buyer’s claims that certain representations were made. The court of appeal also found that agents should only be held liable to the extent that their misrepresentations contribute to the loss.

The buyer has now filed an application for leave to appeal to the High Court and the decision is pending.

What’s your limit?
The appeal decision overturning the finding of fraud is a welcome one. However, as the original judgment shows, it could have easily gone the other way – leaving an agent drastically out of pocket, because the amount of the judgment was in excess of the indemnity limit under many professional indemnity insurance policies. Realcover strongly advises all agents to review their indemnity limits.


Avoid similar claims
To avoid falling victim to similar claims, agents:

  • Should verify the amount of rent for any tenancy before including it in promotional material. Alternatively, do not include it at all.
  • Avoid making statements about the capacity of a tenant to pay the rent, unless proof is available.
  • Should verify the details of any rental arrears in writing.
  • Outside auction conditions, make purchasers sign a statement saying they have made their own enquiries and aren’t relying on oral, written or implied representations on matters that may have influenced their decision to make an offer.
  • Avoid untrue statements about other offers or reasons why a property is being taken off the market.

Let Realcover protect your business with professional indemnity insurance designed with your needs in mind. When it is time to renew your policy, contact Realcover on 1800 990 312 for a quote. REINSW members are eligible for a substantial discount off Realcover’s standard professional indemnity insurance premium (excluding charges).

While care has been taken in preparing this article, and the information in it has been obtained from sources that Realcover believe to be reliable, Realcover does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose that the article may be used. Realcover accepts no liability for any loss or damage (whether caused by negligence or not) resulting from the use of this article.