Disclosure of Unrepresented Buyer in Competing Offer Situation

Cheering from the sidelines – El Estoque

There is actually an additional disclosure that is required to be made in a Competing Offer situation which is often overlooked.

If a Buyer is not represented by a registrant under the Real Estate and Business Brokers Act, 2002, this information would have to be disclosed in a competitive Offer circumstance.

Why?

It’s ethical, and it’s legally required.

The Scenario

Let’s assume the following:

  • ABC Brokerage has a listing for 123 Main Street, Hilda is the Seller and her Sales Representative is Edith.
  • Sales Representative Bob from DEF Brokerage acts for Bill and puts in an Offer.
  • Sales Representative Mary from XYZ Brokerage acts for Martha and puts in an Offer.
  • John Smith acting on his own submits an Offer.

In this situation, let’s further assume that the total commission payable is $50,000.00. It will be split 50/50 according to the MLS Listing, $25,000.00 for the Listing side and $25,000.00 for the Buyer’s side in terms of the Co-operating Brokerage’s commission.

There are three Offers. Two Buyers are represented by Brokerages as Agent, so they will be paid their $25,000.00 in co-operating commission.

John Smith cannot be paid a commission because he’s not a registrant.

However, funds could be transferred to him in two ways:

  1. Funds could be paid to him, since he is a party to the transaction, or
  2. The price could be reduced to reflect that no commission will be paid to him.

Effectively, either of these approaches would work in a “one-on-one” situation. But, in a Competing Offer situation, this “advantage” would have to be disclosed to other bidders in order to “level the playing field”.

Bob and Mary need to know about this commission reduction, so that they can adjust their bidding accordingly. Everyone knows this, it occurs with great regularity.

No Price Adjustment and No Commission Payment

This is now the common reaction by Listing Agents. The price will not be reduced should a registrant wish to “forgo” their commission. If the co-operating Brokerage doesn’t want it, then the Listing Agent will just keep it.

That position enunciated by the Listing Agent is simply to level the playing field. No commission reductions! Thanks for competing! Thank you for bidding and driving up the sales price!

And, should the Co-operating Sales Representative wish to provide individually some funds to assist their own client, then they can do it, but, “out of their own money”. First, pay HST, then split the commission with their Brokerage, then, pay their own Income Taxes, then, receive their own share of what’s left. With that leftover money they can provide either all or a portion of it to their own client.

This still leaves us with a little situation when we come to John Smith.

The $25,000.00 in co-operating commission is still on the table. John Smith is not getting it himself and it’s not going to come off the top, in terms of the purchase price.

HOWEVER, bottom line, Edith would be secretly cheering for John Smith’s bid to win. Her commission goes from $25,000.00 guaranteed already to $50,000.00 should John be the WINNER.

Actually, Hilda might feel the same thing. Edith already promised a large screen TV as a gift following the sale. Now, Hilda will think that Edith should be able to afford a much better TV with that extra $25,000.00. Alternatively, you might appreciate that Hilda and Edith are friends. All things being equal, Hilda would rather see Edith have the extra $25,000.00 than see it go elsewhere, to complete strangers.

Disclosures in Competing Offer Situation

In a competing Offer situation, three disclosures are required:

1) the number of offers that have been submitted; 
2) whether any of the buyers are represented by the same brokerage as the seller; 
3) whether the seller’s brokerage has an agreement to reduce their commission for buyers who are represented by a certain brokerage.

You will find the obligations set out in s. 26, s. 17 and s. 25 respectively.

THE LAW

  1. Number of Offers

Competing offers

26. (1) If a brokerage that has a seller as a client receives a competing written offer, the brokerage shall disclose the number of competing written offers to every person who is making one of the competing offers, but shall not disclose the substance of the competing offers. O. Reg. 580/05, s. 26 (1).

(2) Subsection (1) applies, with necessary modifications, to a brokerage that has a seller as a customer, if the brokerage and the seller have an agreement that provides for the brokerage to receive written offers to buy. O. Reg. 580/05, s. 26 (2).

  • Same Brokerage

Nature of relationship

17.If a registrant represents or provides services to more than one buyer or seller in respect of the same trade in real estate, the registrant shall, in writing, at the earliest practicable opportunity and before any offer is made, inform all buyers and sellers involved in that trade of the nature of the registrant’s relationship to each buyer and seller. O. Reg. 580/05, s. 17.

  • Commission

Agreements relating to commission

25. (1) If a brokerage has a seller as a client and an agreement between the brokerage and the seller contains terms that relate to a commission or other remuneration and that may affect whether an offer to buy is accepted, the brokerage shall disclose the existence of and the details of those terms to any person who makes a written offer to buy, at the earliest practicable opportunity and before any offer is accepted. O. Reg. 580/05, s. 25 (1).

(2) Subsection (1) applies, with necessary modifications, to a brokerage that has a seller as a customer, if the brokerage and the seller have an agreement that provides for the brokerage to receive written offers to buy. O. Reg. 580/05, s. 25 (2).

Application to Fact Situation

In our circumstance, it is the John Smith Offer that poses the problem. Let’s look at the wording carefully, with my commentary in Italics:

If a brokerage has a seller as a client and

ABC is the Brokerage, and Hilda is the Seller

an agreement between the brokerage and the seller

          This is the Listing agreement

contains terms that relate to a commission or other remuneration and

          Commission is specified

that may affect whether an offer to buy is accepted,

This is the usual commission reduction provision. But, it doesn’t say just commission reduction. It says “affects”. The Listing Agent wants that Offer, and the Seller may want it too. In our example, Edith prefers it, and so might Hilda.

the brokerage shall disclose the existence of and

          The obligation is now DISCLOSURE

the details of those terms

details of the terms, that would be the fact that the co-operating commission is not being paid, the Seller is still paying it, and it is now going to the Listing Agent who will retain it rather than pay it out

to any person who makes a written offer to buy,

          This includes all other participants who have made Offers

at the earliest practicable opportunity and

          asap

before any offer is accepted.

Meaning that no Offer should be accepted before that communication has been made.

COMMENT

This situation is rather rare, and may be more theoretical than real. But, it may arise in situations where the Buyer is either unrepresented completely, or represented by an Agent who is a lawyer, however the lawyer is not entitled to receive the commission since they are not registered under REBBA, 2002.

It is overlooked because the commission disclosure clause is often referred to as the “commission reduction clause”.

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

Comments 1

  1. Perhaps if future changes to REBBA/Tresa are put in place your example will be commonplace.

    As I understand it, we might see ‘Customer Service’ (one of the options Registrants now offer to the public as part of the current disclosure presentation) into something currently called “unrepresented buyer/seller/customer” ( I don’t have the Reco advisory in front of me to be precisely exact on their wording).

    IMO, the ‘No commission payable because one buyer is unrepresented’ aspect requiring LBO disclosure before any offer is presented (that you describe in your not-simple, not-everyday example) will become more common.

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