Brown v Real Estate Agents Authority
[2013] NZHC 3309
•11 December 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-3527 [2013] NZHC 3309
BETWEEN DAPHNE BROWN Appellant
ANDTHE REAL ESTATE AGENTS AUTHORITY
First Respondent
ANDMARY WEALLEANS Second Respondent
Hearing: 15 October 2013
Appearances: PJK Spring for the Appellant
M J Hodge for the First Respondent
Judgment: 11 December 2013
JUDGMENT OF PRIESTLEY J
This judgment was delivered by me on Wednesday 11 December 2013 at 12.00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:………………………….
Counsel/ Solicitors:
PJK Spring, Keegan Alexander, Auckland
M J Hodge, Meredith Connell, Auckland
BROWN v THE REAL ESTATE AGENTS AUTHORITY [2013] NZHC 3309 [11 December 2013]
Introduction
[1] Mrs Brown is a licensed real estate agent and has been for over 30 years. Other than the matter with which this appeal is concerned she has never faced disciplinary charges. At the relevant time she was the principal officer of City Investments Services Limited (CISL). That entity was effectively linked to and a franchisee of L J Hooker.
[2] In 2005–2006 CISL developed a marketing scheme. This scheme focused on the sale of apartments in Auckland’s CBD. Evidence suggests that the marketing scheme was similar to schemes operated by other real estate agencies at the time. Indeed, since then, such marketing schemes have arguably become more sophisticated.
[3] In November 2006 (now seven years ago) a Hamilton couple in their late 50s, Mr and Mrs Wealleans, received a telemarketing call in their home. This led to them attending an investment seminar run by L J Hooker in Hamilton. The culmination of the marketing scheme, so far as the Wealleans were concerned, was their purchase of an inner city apartment in Auckland’s Nelson Street on 16 December 2006 for
$248,000. The couple paid a $1,000 deposit and borrowed $253,500 to complete the purchase.
[4] In 2010 (well over three years later) the Wealleans discovered, in the wake of the 2008 global financial crisis, that their apartment was only worth $143,000. This, as many property owners after the 2008 crisis in the developed world found, was a classic case of negative equity.1
[5] Understandably Mrs Wealleans, who in 2006 was employed as a bank teller, was aggrieved. Throughout the marketing process she had formed the view that L J Hooker and its various representatives whom she encountered were acting in the best interests of her and her husband. She had formed the view that the Nelson Street
purchase was a good investment, well suited to the couple’s needs.
1 By late 2012 the market for apartments had improved. The probable range of the Wealleans’
apartment had in the intervening two years risen to somewhere in the range of $185,000–
$205,000.
[6] Faced with an inevitable loss were the apartment to be sold, Mrs Wealleans wrote to Mrs Brown in March 2010. She said she and her husband were swayed by the suggestion that, even if they only kept the property for three years and then sold it, they would be looking at a profit of some $70,000 which would assist them with repaying the mortgage on their Hamilton home and enable them to retire earlier. This prospect was described by Mrs Wealleans as “the hook”.
[7] Mrs Brown’s reply was not unsympathetic. She observed that no one could have predicted the property price fluctuations with record highs and lows over the past three years. She recommended the Wealleans seek professional taxation advice. Unmollified, Mrs Wealleans lodged a complaint against Mrs Brown.
[8] Mrs Wealleans’ complaint resulted in the Complaints Assessment Committee laying two disciplinary charges against Mrs Brown. The first was that, as principal officer of CISL, she had marketed property in such a way as to create the impression that CISL was acting in the complainant’s interests, this being misconduct which constituted seriously incompetent or seriously negligent real estate agency work. The second charge, also one of misconduct, was based on the allegation that as principal officer of CISL Mrs Brown, through sales people and promotional marketing materials, had provided misleading information to the complainant when the property was being marketed.
[9] The upshot of Mrs Wealleans’ complaint was a decision by the Real Estate Agents Disciplinary Tribunal (the Tribunal), released on 24 June 2013.2 Mrs Brown was found guilty of seriously negligent real estate agency work under s 73 of the Real Estate Agents Act 2008 (the Act).3 The second charge, which had its focus on the provision of misleading information, was dismissed. The Tribunal fined Mrs
Brown $450.
2 Real Estate Agents Authority v Brown [2013] NZREADT 48.
3 The Real Estate Agents Act 2008 repealed and replaced the Real Estate Agents Act 1976.
However, comparable conduct which preceded the coming into force of the 2008 statute (in terms of s 2(2) 14 months after the date of the Royal assent on 16 September 2008) is caught by s 172(1). There was no retrospective increase of penalties.
[10] Mrs Brown challenges the Tribunal’s finding by this appeal. Section 116 of the Act confers a right of appeal to the High Court. The powers and procedures of such appeals are governed in the general way by Part 20 of the High Court Rules.
[11] Mrs Wealleans has, quite understandably, not participated in the appeal and abides the decision of this Court.
Relevant background
[12] The business of real estate agents is inherently conflicted. They are ultimately the agents of a property’s vendor. But their life blood, the commissions they receive once an agreement for sale and purchase becomes unconditional, would not flow if agents did not find and solicit purchasers for the properties they are trying to sell.
[13] This obvious conflict lies at the heart of the facts which surround this appeal. The ultimate issue is whether Mrs Brown crossed a line with conduct that warrants disciplinary sanction.
[14] The factual matrix of describing the path which Mr and Mrs Wealleans trod (or down which they were led) to the destination of purchasing the Nelson Street apartment is not in dispute and is clearly set out in the Tribunal’s decision.4
[15] Mrs Wealleans received a telemarketing call. As a result of that contact she agreed to attend an “investment seminar” run by L J Hooker in Hamilton. A brochure was distributed at the seminar. It emphasised the merits of investing in property (no particular property was mentioned) with some emphasis on properties in Auckland and in Auckland’s CBD. At the end of the seminar, attendees were asked if they wanted to make an appointment for a home visit. Mrs Wealleans made an appointment for the next evening, 17 November 2006. Mr Phelan from CISL attended, spoke to the Wealleans about various investment options, completed a work book, and sought details of the couple’s financial situation, including the value
of their current Hamilton home and mortgage details. Mr Phelan stressed property
4 Decision [3]-[6].
as being the best form of investment for them. Mr Phelan also told the couple that although property should be regarded as a long-term investment (an undoubtedly correct assessment), if they wanted to sell the property within the next two to three years on a rising market, a small profit would be available. Mr Phelan did not focus on any particular property but did stress investment opportunities in Auckland’s CBD apartments.
[16] Mr and Mrs Wealleans subsequently agreed to travel to Auckland to see some apartments which were for sale. This visit took place a month later on Saturday 16
December 2006. Although the couple were offered free overnight accommodation at an Auckland hotel, at L J Hooker’s expense, they did not avail themselves of that. There was a meeting in Auckland involving the couple and two CISL representatives. The first was a Mr Mika, described as a financial advisor. Mr Mika did not give evidence before the Tribunal. The Tribunal accepted, however, that he went through a “personalised investment plan” with the couple and ran through various financial scenarios involving the purchase of different types of apartment. There was an estimate of apartment values through a continuum of 10 years. Mr Mika also worked out tax deductions and advised the couple on setting up an LAQC (Loss Attributing Qualifying Company). Mr Mika’s assessment was that, given their particular financial position, only apartments in the Nelson Street block, where they ultimately purchased, would be suitable for their budget.
[17] The couple also met with Ms J McDermott, a real estate agent with CISL. Ms McDermott took the couple to see the apartment. She then asked them, on their return to the CISL or L J Hooker office, whether they wished to make an offer. They said they did. They paid a deposit of $1,000. The couple subsequently (the following Monday) went to see a lawyer who was on the CISL “panel” of lawyers.
The lawyer may have been recommended by the Wealleans’ accountant.5 The
agreement they had signed was subject to finance and contained a guaranteed rental agreement with a two year moratorium on the apartment’s outgoings. The agreement, with a purchase price of $248,000, was subsequently declared
unconditional with the Wealleans borrowing $253,500 to complete the purchase.
5 The accountant seems to have been “arranged” by Mr Mika, NOE 118. The Tribunal refers to the accountant (footnote 2) as “the Wealleans’ accountant”.
[18] It will be noted that Mrs Brown played absolutely no part in this process. Her responsibility, if any, is vicarious, flowing from her role as CISL’s principal officer and her personal monitoring of CISL’s marketing scheme for compliance. Thus her role as principal officer led to the first charge6 being proved although the second charge (focusing on misleading information) was dismissed.
[19] The Tribunal heard evidence from Ms McDermott who was a real estate agent of some 16 years experience. She had no personal recollection of the Wealleans’ transaction. During cross-examination before the Tribunal she gave refreshingly candid evidence.7 Ms McDermott made it very clear that if prospective purchasers, after viewing a property, wanted time to think matters over and re- approach the agent, that was a waste of time.8 In cross-examination and re- examination Ms McDermott was very clear that she was acting for a purchaser who was an investor and that her “philosophy” was that she believed she was acting in the best interests of a purchaser and was doing something good for them. She believed property investment was a way of assisting people in their retirement, enabling them to have some cash flow, and to do enjoyable things in their life.9
Relevant provisions of the Act
[20] The section of the Act under which the Tribunal found Mrs Brown guilty of misconduct is s 73 which provides:
73 Misconduct
For the purposes of this Act, a licensee is guilty of misconduct if the
licensee’s conduct—
(a) would reasonably be regarded by agents of good standing, or reasonable members of the public, as disgraceful; or
(b) constitutes seriously incompetent or seriously negligent real estate agency work; or
6 Supra [8].
7 After 45 years of practice at the Bar and on the Bench I have seldom encountered a real estate agent, when giving evidence who, in respect of an unconditional agreement for sale and
purchase, is disposed to be decisive. Perhaps my experience in dozens of cases has been
atypical.8 Her evidence (NOE 261-262) was “we don’t do a maybe.... They could say maybe ‘I will go away and then I will phone you next week ... with a decision’. In my experience those people that say that never phone, so if it’s a maybe, to me it’s a no”.
9 NOE 267.
(c) consists of a wilful or reckless contravention of—
(i) this Act; or
(ii) other Acts that apply to the conduct of licensees; or
(iii) regulations or rules made under this Act; or
(d) constitutes an offence for which the licensee has been convicted, being an offence that reflects adversely on the licensee’s fitness to be a licensee.
[21] The Tribunal’s finding was grounded on s 73(b). It concluded that Mrs Brown’s conduct constituted “seriously negligent real estate agency work”.10 It is worth observing that s 73 clearly focuses on actions which are at the upper end of misconduct by licensees. The four discrete subsections focus on conduct which is “disgraceful”, an adjective which carries with it a high degree of opprobrium; incompetent or negligent conduct which must justify the adverb “seriously”;
contravention of statutory provisions, which must be “wilful or reckless”; and an offence (clearly a criminal offence) which must reflect “adversely” on a licensee’s fitness. Given s 73’s spread over this range of seriousness, the Tribunal was obliged to consider whether Mrs Brown’s conduct reached that level. It is also pertinent to observe that the types of misconduct specified in s 73 are qualitatively different.
One would not expect an identical legal threshold to apply to all.11 Conduct which a
reasonable member of the public would regard as disgraceful would obviously be qualitatively different from serious incompetence or wilful contravention of the Act.
[22] This touchstone of seriousness is reinforced when one examines the preceding section, s 72, which provides:
72 Unsatisfactory conduct
For the purposes of this Act, a licensee is guilty of unsatisfactory conduct if the licensee carries out real estate agency work that—
(a) falls short of the standard that a reasonable member of the public is entitled to expect from a reasonably competent licensee; or
(b) contravenes a provision of this Act or of any regulations or rules made under this Act; or
10 The Tribunal’s decision did not discuss the “seriously incompetent” limb of s 73(b) nor did it find Mrs Brown guilty of seriously incompetent conduct.
11 This topic is explored further infra at [58].
(c) is incompetent or negligent; or
(d) would reasonably be regarded by agents of good standing as being unacceptable.
[23] A comparison with the subsections of s 73 is instructive. Conduct must fall short of the standard a reasonable member of the public might expect (no reference to agents of good standing, regarding conduct as being “disgraceful”). There must be mere contravention of the Act rather than qualifying conduct which is “wilful or reckless”. The incompetence or negligence need not be serious. And subs (d) returns to one of the limbs of s 73(a) – the conduct must be regarded as unacceptable by agents of good standing, rather than disgraceful.
[24] The provision relevant to Mrs Brown (s 73(b)) requires a finding that her conduct was “seriously negligent real estate agency work”. That, as the Tribunal correctly recognised,12 brings into play the relevant definition in the Act’s interpretation section, s 4, which provides:
real estate agency work or agency work—
(a) means any work done or services provided, in trade, on behalf of another person for the purpose of bringing about a transaction; and
(b) includes any work done by a branch manager or salesperson under the direction of, or on behalf of an agent to enable the agent to do the work or provide the services described in paragraph (a); but
(c) does not include—
(i) the provision of general advice or materials to assist owners to locate and negotiate with potential buyers; or
(ii) the publication of newspapers, journals, magazines, or websites that include advertisements for the sale or other disposal of any land or business; or
(iii) the broadcasting of television or radio programmes that include advertisements for the sale or other disposal of any land or business; or
(iv) the lending of money on mortgage or otherwise; or
(v) the provision of investment advice; or
12 Decision at [16] and [25]-[31].
(vi) the provision of conveyancing services within the meaning of the Lawyers and Conveyancers Act 2006.
[25] Significantly subs (a) of the definition covers any work or services for the purposes of bringing about a transaction but does not include subs (c)(v), the provision of investment advice.
[26] The Tribunal concluded,13 correctly in my view, that the marketing scheme in its entirety was real estate agency work. It held it would be artificial to exclude or ignore the investment advice which CISL had given to the Wealleans.
[27] However, there was lengthy evidence placed before the Tribunal by three witnesses, two called by Mrs Brown and one by the Real Estate Agents Authority, to which I now turn. This evidence had undoubted relevance to the central issue before the Tribunal – whether Mrs Brown’s conduct constituted seriously negligent real estate agency work. To some extent the evidence was in conflict. Regrettably, as I
detail below,14 the Tribunal’s decision does not resolve the conflict. Nor,
importantly, does it scrutinise the services bundled into CISL’s marketing scheme
against industry practices and standards at the time.
Evidence of real estate agency work
[28] The Tribunal heard from three expert witnesses on the topic of industry standards. The first was Ms Yvonne Box. Ms Box was called by the Real Estate Agents Authority. She had been a real estate agent between 1998 and 2003 and was subsequently an adjunct tutor in real estate at the Open Polytechnic. Mrs Brown for her part called two real estate agents, Mr Leslie Smith and Mr Howard Morley, who respectively had worked in the industry for 38 and 50 years.
[29] Both Messrs Smith and Morley accepted that industry standards needed to be assessed against what they saw as the widespread understanding by the general
13 Decision [25]-[31].
14 Infra [42].
public that a real estate agent was representing the vendor’s interests rather than the
purchasers.15
[30] Mr Smith observed that appeals to purchasers and offering to arrange purchaser finance were widespread throughout the New Zealand real estate industry, both in 2006 and currently. Such advice was regarded as an important part of offering a complete real estate service to all members of the public. To reinforce his view Mr Smith examined the promotional and marketing efforts of successful agencies (some award winning) by visiting their websites. Eight out of 10 such agencies appealed to purchasers and five of the 10 offered purchasers finance and/or property investment assistance which included introduction to brokers, completing applications, and in-house investment.
[31] Mr Smith then expanded his survey to websites of other agencies which confirmed his opinion. Two examples will suffice. On the Harcourts website the following appeared:
The Harcourts promise is your absolute assurance of just how seriously we take our responsibilities on your behalf; it is our way of being held accountable and your way of knowing you will be looked after every single step of the way. Consider it our total commitment to working together to make the whole experience easier, less stressful and far more rewarding. And that is a promise.
And the First National website included the following statement:
... real estate agents within the First National network can help you in your selection of the right home, in the right area, organising finance, and negotiating the sale to bring it to a successful conclusion. So, all our agents have to do is concentrate on you.
[32] Such statements, in my view, cannot be explained away as mere puffery. They are part, and probably a legitimate part, of how real estate agents operate and indeed have to operate to attract purchasers. The examples proffered by Mr Smith, underline the observation made earlier in my judgment16 about the extent to which
real estate agents are inherently, even hopelessly conflicted.
15 Mrs Wealleans too accepted this in cross-examination but nonetheless felt that CISL was promoting the interests of both her and her husband.
16 Supra [12].
[33] Mr Morley’s evidence reinforced Mr Smith’s. He noted agents would frequently help purchasers with advice about local schools, services, and infrastructure. That advice would often extend, if the purchaser came from another district, to providing information about lawyers and sources of finance.
[34] Mr Morley, in the context of commenting on Ms Box’s evidence, raised an important policy issue:17
Obviously, when agencies offer advice and services to purchasers, they are going to promote that advice and services as being of the highest standard. Under the approach of Ms Box, promotion of such advice would risk being deemed to be misleading the purchaser into thinking that you are acting in their best interests. Agents would be hesitant to assist the purchaser with the provision of advice if they believed disciplinary action might follow.
There is force in that observation. The Tribunal did not grapple with it. Does the fact that the Wealleans believed CISL with its marketing scheme, was focusing on their best interests ipso facto justify a finding of serious negligence when assessed against the backdrop of industry standards? Certainly agents must follow the Real
Estate Agents Act (Professional Conduct and Client Care) Rules 2012,18 which
provide that a licensee must not mislead a customer or a client,19 or place a customer under any undue or unfair pressure.20 But these are aspects which were not the reasons leading to the Tribunal’s decision. Indeed, the charge levelled against Mrs Brown that CISL’s promotional and marketing materials provided misleading
information was dismissed.
[35] Mr Morley for his part looked at the marketing strategy of an agency called
Asset Link which stated that it specialised in:
... the sourcing and introduction of unique properties suitable as either owner occupied or investment opportunities for our numerous national and international clients.
It also stated the company’s emphasis included:
17 Morley Brief of Evidence, para 21.
18 Not operative at the time but embodying certain professional standards.
19 Rule 6.4, “Customer” is a party or potential party to a transaction.
20 Rule 9.2.
Empowering our investor clients to capitalise of (sic) New Zealand’s rich property investment infrastructure to significantly increase their personal wealth, securing their long term financial goals.
Asset Link stated that it was,
“well positioned to assist you every step of the way”.
[36] Both Messrs Smith and Morley were of the view that good real estate agents did not limit their sales to a particular property. Rather they marketed the concept of real estate investment and the financial benefits which could flow from it.
[37] Mr Smith accepted in cross-examination that a real estate agent frequently walked a tight line but that, as a practical matter, the purchaser was unlikely to regard the marketing representations of real estate firms as excluding the agent’s responsibilities to the vendor.21 Mr Morley, in cross-examination, accepted that real estate agents had to take care that purchasers did not come away with a false impression that they were acting in a purchaser’s best interests. Reference might be
made to seeking independent advice, but the agent would still hope the prospective purchaser would still stick with the agent. He did not consider there could be a lasting misapprehension over the agent’s function of selling a property for the vendor.22
[38] Ms Box, for her part, did not dispute the evidence of Messrs Smith and Morley on current market practice. But it was apparent from her evidence she did not necessarily believe that some current real estate and marketing practices conformed with an agent’s obligations to purchasers. She considered23 that statements suggesting undivided attention, or loyalty, or total commitment to a purchaser were really a breach of professional standards because they could lead a purchaser to believe the agent’s primary duty was to him or her rather than to the vendor. She accepted that the conduct of First National, for instance, fell
“significantly below the standards [she had] espoused in [her] brief of evidence”.
21 NOE 334-335
22 NOE 351-352.
23 NOE 182-183.
How did the Tribunal resolve the industry standards evidence?
[39] The evidence from the three witnesses relating to industry standards was important. The charge against Mrs Brown was not levelled against her because of her particular conduct on one transaction. Rather it was brought because of perceptions (particularly Mrs Wealleans’ perception) of the nature of the CISL marketing scheme which Mrs Brown was operating. Indeed the particulars of the charge specified that Mrs Brown, as CISL’s principal officer, permitted sales people and distribution of promotional and marketing materials which created the impression that CISL was acting in Mrs Wealleans’ interests in the purchase of the apartment. The charge did not rely on misleading or false information provided to
the Wealleans by Messrs Phelan or Mika.24 Nor did it rely on undue or unfair
pressure applied to the Wealleans by Ms McDermott. Obviously the Tribunal was confronted by evidence from two very experienced real estate agents who had gone to some lengths to examine marketing information and claims by a large number of other real estate agents in New Zealand. There was only Ms Box who was prepared to give evidence along the lines that marketing strategies amounted to misconduct because they might mislead potential buyers.
[40] Unfortunately the Tribunal, in reaching its decision, did not deal with the centrality of this evidence. The Tribunal identified as an issue25 that if CISL’s marketing scheme was real estate agency work (the Tribunal correctly decided that it was), then were the facts “... merely evidence of the industry standards at that time”? The Tribunal dealt with this central issue in a mere two paragraphs:
[32] Can this conclusion be challenged by the evidence of Mr Smith and Mr Morley that the investment seminar and other attendances in Hamilton were nothing more than raising the profile of investment in the property market generally and creating a long-term plan/environment for those considering a potential purchase?
[33] While the evidence from the industry about market practice is obviously important we do not consider that in this case market practice is relevant to determine whether the conduct falls within the definition of real estate agency work.
24 The dismissed charge had that focus.
25 Decision at [10].
[41] This reasoning is far from convincing. If the “obviously important” evidence of market practice is accepted (as it seems to have been) by the Tribunal then it had to give reasons why it concluded that Mrs Brown, in her capacity as CISL’s principal officer, was misconducting herself at a seriously negligent level as specified in s 73(b). The “important” evidence of market practice, which the Tribunal seems to have accepted, must provide some form of benchmark against which serious negligence can be assessed.
[42] The “conclusion” to which the Tribunal refers in [32] of its decision was its undoubtedly correct conclusion that all six steps of CISL’s marketing scheme collectively amounted to real estate agency work. But having posed itself the question in [32], the Tribunal fails to answer it. Clearly the evidence of Messrs Smith and Morley gave the Tribunal an important backdrop, and indeed industry standards and practice, against which Mrs Brown’s conduct had to be assessed.
[43] The related issue which the Tribunal identified26 was whether, after considering all the facts, Mrs Brown was seriously negligent. The Tribunal mentioned the industry standards evidence it had heard only in passing when considering this issue:
[41] However was this serious negligence on behalf of Ms Brown? Evidence as to industry standards is relevant and was given by Ms Box for the Real Estate Agents Authority, Mr Morley and Mr Smith for Mrs Brown. All of the experts agreed that while a competent licensee must get on well with the purchaser and work with them their primary duty can only be to the vendor and that they cannot and should not create the impression that the licensee was acting for the purchaser. Where the parties differed was in their own view of whether or not the actions of CISL in this case did give that impression to a reasonable purchaser. The defendant submits that it was not negligent, misleading or a breach of professional obligations for a real estate agent acting for a vendor to believe that a property purchase was [also] in the interests of a purchaser and act accordingly. Ms Box however felt that the evidence showed that the actions of CISL did give the Wealleans this impression.
[44] I consider this analysis, although correct to the limited extent it goes, is not an adequate analysis of the evidence. Although s 25(2) of the Evidence Act 2006 permits an expert witness to give evidence on the ultimate issue, the thrust of the
evidence of Messrs Smith and Morley was on contemporary industry standards and
26 At [12].
practice. The issue is much more complex than whether a “competent licensee ... cannot and should not create the impression that the licensee was acting for the purchaser”. It is very clear from the unchallenged evidence of Messrs Smith and Morley, that real estate agents saw it as part of their function to give purchasers advice in the financial and investment areas, provide all manner of assistance, and do their best for purchasers. Those activities might cloud somewhat the obvious fact a real estate agent was acting for the vendor. But the real estate practices which appear to be widespread do not necessarily justify a conclusion that the real estate agent was acting solely for the purchaser.
[45] The evidence of all three experts was critical. If Ms Box’s evidence and opinions were to be decisive, then clearly there would need to be widespread, even fundamental changes in real estate practice. Unfortunately the Tribunal has avoided grappling with the ramifications of the evidence of the three experts. The prosecution stems solely from Mrs Wealleans’ complaint. There was never a suggestion that the prosecution against Mrs Brown was to be a test case and, like the hapless Admiral Byng, she was to be executed on her quarter deck pour encourager
les autres.27
[46] The somewhat truncated view which the Tribunal took of the industry practice and standards issue has regrettably led it into error.
On what basis did the Tribunal conclude Mrs Brown was guilty under s 73(b)?
[47] The Tribunal considered it would be entitled to conclude Mrs Brown was seriously negligent if, on the facts before it, it found CISL’s marketing scheme created the impression to the Wealleans that CISL was acting in their best interests. It concluded, on the unique facts of the case, that the marketing scheme led to that result. In fairness to the Tribunal I set out how it dealt with that preliminary assessment:
[39] After considering all the facts does the Tribunal consider that the defendant was seriously negligent? In order to reach this conclusion the
27 A cryptic comment of Voltaire referring to the English Admiral Byng who, during the Seven Years War, failed to pursue and engage the French fleet off Minorca in 1756 with sufficient vigour. Referred to in Voltaire’s Candide.
Tribunal must make a factual finding that it considers that the promotional and marketing materials of the CISL was such as to create the impression in the Wealleans that CISL was acting in their best interests rather than the interests of the vendor. As many witnesses commented during the hearing of this case it would be unusual if most purchasers did not know that an agent was acting on behalf of a vendor. Yet tellingly the evidence from Ms McDermott was that she considered that she was acting for the purchaser in this transaction because it was somewhat different from the normal sales process.
[40] We consider that on the unique facts of this case that the marketing policy was so professional that the Wealleans did consider that the CISL were acting in their best interests. It seems that the vendor, Conrad Trust did not feature in anyone’s considerations. There was no negotiation on the price as Ms McDermott told the Tribunal. Mrs Wealleans’ belief was evidenced by the letter that Mrs Wealleans wrote to Ms Brown when they discovered the market had dropped.
[48] The Tribunal then turned to legal submissions and a possible test for professional misconduct:28
[42] The defendant submitted that a finding of misconduct required a significant departure from industry standards. They referred to CAC v Downtown Apartments Limited where the Tribunal stated that a breach of s
73 requires a marked or serious departure from acceptable standards. The Tribunal relies upon the definition of professional misconduct set out in the CAC (1) Auckland District Law Society v APC where the full bench of the High Court said that:
“Professional misconduct … a deliberate departure from accepted standards or such serious negligence as, although not deliberate, to portray indifference and abuse of the privileges which accompany registration as a medical practitioner (citing Pillai v Messiter)”.
[43] This statement is the basis of the citation in Downtown Apartments
as to the definition of professional misconduct.
[44] The Real Estate Agents Authority submits that conduct is serious negligence if it can fairly be regarded as portraying indifference and an abuse of the privileges accompanying the holding of a licence as an agent. They submit that this test has been met.
[45] The Tribunal accepts that Mrs Brown did not consider that what she was doing (via the employees or contractors of CISL) was wrong. Mr Spring submits that in order to find professional misconduct the Tribunal must be satisfied that the Real Estate Agents Authority has discharged the burden of proof to provide evidence of the accepted standard and “demonstrate that the licensee’s actions were a deliberate and serious departure from that standard”.
28 Footnotes omitted. The italics are the Tribunal’s.
[49] The Tribunal next, in two lines, said it had accepted the industry standard had been established by the evidence of all the expert witnesses called. This can only be a reference to their statement at [41] of the decision.29 The problems with that finding, that all the experts had “agreed” that a licensee should not create the impression he or she was acting for the purchaser, have already been explored.30
[50] The Tribunal’s conclusion, correctly regarding the test of serious negligence as being objective not subjective, was:
[47] ... The Tribunal consider that the licensee’s actions in this case were a deliberate and serious departure from the acceptable standards. In this case the misconduct is established by serious negligence which although not deliberate portrays an indifference and abuse of privilege [CAC v APC]. The Tribunal consider that the sophistication of this policy was such that unsophisticated investors such as the Wealleans did not question the impartiality of CISL and truly considered that the totality of advice that they were getting was in their best interests, when, had they been more sophisticated, and more financially aware they would have been aware that the advice was really all designed to assist in concluding a sale. The conduct was a seriously negligent departure from acceptable standards because the impression created was one of support, encouragement and assistance to the exclusion of any other party (i.e. vendor) and any other party’s interests when the reality of the situation was the opposite. Accordingly the Tribunal find that Charge 1 has been established on the balance of probabilities by the Real Estate Agents Authority.
Analysis
[51] The Tribunal’s reasoning which led it to conclude the charge had been proved on the balance of probabilities, set out in the previous paragraph of this judgment, contains the following steps. Setting them out sequentially exposes some of the problems.
[52] (a) Mrs Brown’s actions were a deliberate and serious departure from the acceptable standards.
This conclusion can only be justified if the evidence established that a real estate agent should never create the impression that he or she was acting for the purchaser
29 See supra [43].
30 Supra [44]-[45].
or a prospective purchaser. The evidence the Tribunal had about industry practice and standards was much more extensive than that and, as I have said, was not sufficiently analysed.31
[53] (b) Mrs Brown’s conduct was established by serious negligence which
although not deliberate, portrays an indifference or abuse of privilege.
There is considerable circularity with this proposition. In terms of s 73(b) a licensee’s conduct will be misconduct if that conduct constitutes seriously negligent real estate agency work. It is not totally clear why or how Mrs Brown’s role in CISL’s marketing scheme was seriously negligent. Additionally, might it not have been mere negligence (s 72(c))? Was her conduct of the same genre as serious incompetence or disgraceful conduct?
[54] (c) The previous proposition might have been inelegantly phrased. The next proposition is that, the Tribunal regards its conclusion as consistent with the law set out in Complaints Committee No 1 of the Auckland District Law Society v C32 and the Tribunal’s previous decision of CAC v Downtown Apartments Limited.33
The reference attributed to a Full Bench of this Court in Complaints Committee No 1 of the Auckland District Law Society v C34 is in fact a test promulgated by the New South Wales Court of Appeal in Pillai v Messiter (No 2)35 which dealt with the statutory test of “misconduct in a professional respect” contained in the New South Wales Medical Practitioners Act 1938. Such misconduct, as the dictum suggests, includes a deliberate departure from accepted standards or such serious negligence
as, although not deliberate, would portray indifference and an abuse of the privileges which accompany registration as a medical practitioner. I deal with this in greater
detail below.36
31 Supra [40]-[46].
32 Complaints Committee No 1 of the Auckland District Law Society v C [2008] 3 NZLR 106 (HC).
33 CAC v Downtown Apartments Limited [2010] NZREADT 6.
34 At [42] of the Tribunal’s decision set out supra [48].
35 Pillai v Messiter (No 2) (1989) 16 NSWLR 197.
36 Infra [58].
[55] (d) The sophistication of CISL’s “policy” (which presumably means marketing scheme) was such that unsophisticated investors did not question the agent’s impartiality and considered that all the advice they received was in their best interests.
[56] (e) Had the Wealleans been more sophisticated and more “financially aware” they would have realised CISL’s advice was really designed to conclude a sale.
The difficulty with this proposition, which in the Tribunal’s decision is included in the same sentence as the previous proposition, is that it carries with it the unmistakable conclusion that the marketing scheme was seriously negligent even though purchasers who were “more sophisticated and more financially aware” than the Wealleans would not have been misled by it. The Act is framed as consumer protection legislation (s 3(1)). A trade practice can certainly be proscribed which risks causing damage to some but not necessarily all consumers. But, particularly against the backdrop of industry practice, does the fact that an unsophisticated investor had a view, which a sophisticated investor would not have shared, constitute serious negligence? I think not. Moreover, are the two propositions really consistent with the last proposition to which I turn next? On what basis could there be a finding (proposition (d)) that the Wealleans were not being given impartial advice or that the totality of the advice they received was not in their best interests? There was no such evidence. Were they really unaware (as apparently the sophisticated investor would have been) that the advice was to assist them in concluding a sale? The two propositions, with respect, are far from decisive.
[57] (f) The conduct of Mrs Brown was a seriously negligent departure from acceptable standards because it created the impression of giving support, encouragement, and assistance to the exclusion of the vendor whereas in reality the vendor’s interests were far from excluded.
This proposition is, of course, the Tribunal’s core conclusion, but in my view it rests on very shaky foundations.
What is serious negligence?
[58] It is very difficult, if not impossible, to consider relevant thresholds for such standards as “incompetent”, “negligent”, “unacceptable”, “disgraceful”, “seriously incompetent”, and “seriously negligent” in a vacuum. All relate to occupational standards and practice. Care must be exercised before applying the disciplinary standards of one professional occupation to another. Such tests as departure from accepted standards, indifference, and abuse of privileges as they had relevance to
New South Wales medical practitioners in Pillai37 might not illuminate the varying
standards and contexts to which ss 72 and 73 of the Act apply.
[59] The context of the alleged misconduct, and in particular the context of the professional or occupational standards and norms, are critical. The Tribunal has the responsibility of determining negligence or serious negligence but it cannot do so in a vacuum. Elias J (as she then was) put it particularly well in B v Medical Council:38
The structure of the disciplinary processes set up by the Act, which rely in large part upon judgment by a practitioner’s peers, emphasises that the best guide to what is acceptable professional conduct is the standards applied by competent, ethical and responsible practitioners. But the inclusion of lay representatives in the disciplinary process and the right of appeal to this Court indicates that usual professional practice, whilst significant, may not always be determinative: the reasonableness of the standards applied must ultimately be for the Court to determine, taking into account all the circumstances including not only usual practice but also patient interests and community expectations, including the expectation that professional standards are not to be permitted to lag. The disciplinary process in part is one of setting standards.
That in part is why, although not determinative, the evidence of industry standards and their reasonableness were matters with which the Tribunal had to grapple.
[60] I consider further that care is needed before applying, in an unquestioning way, a dictum relating to New South Wales medical practitioners to New Zealand real estate agents. Clearly it was not suggested that Mrs Brown had deliberately departed from accepted standards in the real estate industry. But was CISL’s scheme
really “serious negligence” by portraying indifference and abuse of a real estate
37 At n 35.
38 B v Medical Council HC Auckland HC 11-96, 8 July 1996 at 15.
agent’s (as opposed to a medical practitioner’s) privileges? At the risk of being
repetitive, such an assessment obliged the Tribunal to consider industry standards.
[61] In a medical practitioner context Courtney J stated in Martin v Director of
Proceedings:39
[33] In summary, when considering a charge under s 100(1) the Tribunal must, first, consider whether the practitioner has departed from the acceptable standard of conduct of a professional in the circumstances. What that standard is will be determined by reference to the conduct of other competent and responsible practitioners and the Tribunal’s own assessment of what is appropriate conduct, bearing in mind the purpose of the Act. If the Tribunal is satisfied that the practitioner has departed from the standard expected it must then consider whether the departure is significant enough to warrant sanction. This decision does not, however, reflect the degree of seriousness with which the conduct is to be viewed; that will be reflected in the penalty imposed.
Clearly the Tribunal was aware the purposes of the Act included consumer protection. But its analysis of standards of conduct in the industry was not comprehensive (given the evidence received) and seems to have been limited to the Wealleans’ own perceptions. Nor, against the backdrop of industry practice, is there any apparent consideration of whether Mrs Brown’s departure (if there was one) from the standards was significant enough to warrant sanction.
[62] I adopt, with respect, the approach of Woodhouse J, who was concerned in an appeal from the same Tribunal, with the wording of ss 72 and 73 in Wyatt v The Real Estate Agents Authority:40
[47] Mr Wyatt put the primary question on the appeal as being whether use of “an old form is a breach of an agent’s duty of care”. Defining the primary issue in these terms is likely to be confusing because it expresses the issue in the same terms as the issue that arises on an action for negligence in tort. Mr Wyatt in fact went so far as to submit:
The Act imports the common law duty of care, in that
‘unsatisfactory conduct’ includes real estate agency work that is
‘negligent’. The word is not defined in the interpretation section, so it should be given its ordinary meaning, which is breach of a duty of care, being the first two elements of the tort.
39 Martin v Director of Proceedings [2010] NZAR 333 (HC) at [33].
40 Wyatt v The Real Estate Agents Authority [2012] NZHC 2550 at [47]-[49]. The case involved whether the use of an earlier edition of the ADLS/REINZ agreement for sale and purchase form constituted unsatisfactory conduct.
[48] Cases of tortious negligence may provide some assistance. But the question must be determined in accordance with the statutory provisions. The question is whether there is unsatisfactory conduct as defined in s 72 or misconduct as defined in s 73.
[49] I am satisfied, and notwithstanding Mr Wyatt’s submissions, that the evidence falls well short of what would be required to embark on an enquiry into misconduct under s 73. The enquiry in this case is limited to s 72, although the provisions of s 73 assist to an extent in defining the scope of s
72. Substantially less will be required to establish unsatisfactory conduct than will be required to establish misconduct. Beyond that, the words in s 72
should not, in my judgment, be over-refined by treating the words in s 72 on
the basis that they have some technical meaning or by seeking synonyms for words which have natural meanings.
[63] What is unclear from the Tribunal’s analysis and conclusions is exactly why it was that CISL’s marketing scheme, which led the Wealleans to the conclusion that CISL was devoted primarily to their interests (or was even acting for them to the exclusion of the vendor), necessarily constituted serious negligence and if so, why disciplinary sanction having regard to industry practice was necessary. This inquiry, in my judgment, was essential, the more so because it was the ongoing effect of the marketing scheme on the Wealleans which was the issue, rather than Mrs Brown’s personal conduct.
[64] Serious negligence is a grave charge to level against a real estate agent, particularly one of Mrs Brown’s experience. The charge in s 73(b), as I have said, is linked to serious incompetence, disgraceful conduct and wilful or reckless contravention of the Act. Different tests must inevitably apply to those other types of misconduct stipulated in s 73. Nonetheless those other types of misconduct must inform serious negligence.
[65] The charge under s 72(a) of unsatisfactory conduct falling short of standards of reasonable public expectation might possibly have been made out. But no consideration was apparently given to that by either the Complaints Assessment Committee or the Tribunal.
Result
[66] I conclude, for reasons which will be obvious from the views I have expressed in earlier stages of this judgment, that the Tribunal’s finding that the
charge under s 73(b) of serious negligence against Mrs Brown is flawed and cannot stand.
[67] The Tribunal failed to grapple with the essential evidence of industry standards and practice. It failed to explain in a convincing way why the perceptions of an unsophisticated investor (and Mrs Wealleans never resiled from the fact that she knew vendors paid real estate agents commissions) should constitute unacceptable conduct. No adequate explanation is given as to why the marketing scheme of CISL might constitute serious negligence, particularly against the backdrop of the expert evidence the Tribunal heard. No consideration was given as to whether, in the context of both the marketing scheme and Mrs Brown’s personal
involvement, sanction was merited. The Pillai41 test, adopted by the Tribunal,
incorporated factors which were not necessarily applicable to real estate agents. No consideration was given to the appropriateness of a lesser charge.
[68] I thus have no hesitation in allowing the appeal and quashing both the finding and the penalty imposed by the Real Estate Agents Disciplinary Tribunal in its decision of 24 June 2013.
Costs
[69] Counsel did not address me on costs nor have I sought submissions.
[70] It is clear law that costs, in most cases, should be predictable and will usually follow the event. Mrs Brown, having been successful on this appeal, would normally be entitled to costs. However, in the circumstances of this case I decline to order costs in Mrs Brown’s favour. It is no reflection on her personally. Doubtless she has been supported throughout by L J Hooker.
[71] My reason for declining to award costs, as will be apparent from the last section of this judgment, is that I consider there were many aspects of CISL’s marketing scheme which were of dubious merit and, although consistent with industry practice at the time, ran the risk of placing many consumers, particularly the
unsophisticated, on an escalator travelling towards an unconditional agreement for sale and purchase which might not necessarily have been in their best interests. For the unsophisticated and gullible (as is the case with so many advertising and schemes aimed at the consumer), the escalator might have been difficult to jump off.
[72] Costs will thus lie where they fall.
Additional comment
[73] I have no evidence (there being no need on this appeal for any) about current marketing standards and schemes by the real estate industry in New Zealand. Nor have I turned my mind to whether statutes and regulations designed to control financial and investment advisors extend to real estate agents, or whether real estate agents can operate with impunity outside such legislation.
[74] These matters, although interesting, are not my primary concern. The Tribunal found, and correctly so in my view, that CISL’s marketing scheme involved six steps.42 There was no challenge on this appeal to the Tribunal’s finding that the six step marketing scheme fell inside the s 4(a) definition of real estate agency work. The six steps were:
1. An unsolicited marketing telephone call.
2. A written invitation to attend a seminar at Hamilton.
3.Discussion about and distribution of brochures at the seminar of investment options with particular emphasis on property investments.
4.A home visit which included a CISL representative obtaining personal financial information and deployment of a work book.
5. Arrangement of a meeting to view properties in Auckland.
6.Face to face meetings in Auckland with both a financial advisor, a real estate agent, a viewing of the property, and the requirement to decide whether to purchase or not.
[75] Omitted from those six steps, but readily available, were the opportunities of a free night’s accommodation in Auckland, a “panel” of lawyers to give advice on an executed agreement, and introductions to organisations who might be willing to provide mortgage finance.
[76] Such a marketing scheme is clearly designed to entice members of the public to regard property purchase as an “investment option” and to encourage them, at every step along the way, to purchase a property as an investment. Mr and Mrs Wealleans were not looking for a small apartment in Nelson Street as an alternative home, or a pied-a-terre for occasional jaunts from Hamilton. They were led to believe that purchasing the Nelson Street apartment was, for them, a sensible investment decision. So well might it have been but for the 2008 global financial crisis. Had there not been a spectacular downturn in the value of apartments in Auckland CBD apartment blocks in the wake of the crisis, no complaint would ever have been made.
[77] But that is not totally the point. The structure and purpose of the marketing scheme, which I have outlined above was clearly, on the evidence of Messrs Smith and Morley, not an aberrant or isolated occurrence in the industry. It is both surprising and undesirable (to use two mild adjectives) that on the evidence of those
two experts,43 well established real estate agencies should suggest to purchasers that
“we put you first”, or that the purchaser will be “looked after every single step of the way”, or that agents will “concentrate on you” (the inference being the buyer is their sole focus of concentration), or “empowering ... clients ... to significantly increase their personal wealth securing their long term financial goals”. The sophisticated or cynical will see such claims as mere exaggeration or puffery. But an occupational group which is rightly subject to consumer protection legislation needs to treat carefully stories such as that of Mr and Mrs Wealleans. Otherwise the building up of
consumer trust and respect for real estate agents will stall.
43 Supra [28]-[37].
[78] I raised, during the course of argument, my concerns over the marketing scheme with Mr Spring. Mr Spring’s submission, with which I agree totally, was that if the Real Estate Agents Authority44 wishes to address problems of this type, which inevitably arise out of the need for the industry to market properties and the inherently conflicted position which results, then the way to do it is to formulate rules, guidelines, and parameters. These might curtail marketing schemes and extravagant puffery of the type I have mentioned.
[79] Whether the Authority wishes to grasp this nettle is entirely a matter for them. These important issues, as this unhappy saga shows, are certainly not the sole responsibility of the Tribunal. Nor will sporadic prosecutions of the type brought against Mrs Brown provide a satisfactory or permanent solution.
.......................................…
Priestley J
44 Established by s 10 of the Act and charged by s 14 with the responsibility of formulating practice rules and publishing a code of professional conduct.
3
1