The Consumer Law Reform Bill (Bill) was introduced on 20 April 2011 and is currently going through the select committee process. The report is due on 9 August 2012. We examine the real estate issues presented by the Bill.
Our sales and marketing law team has previously issued an FYI outlining other key reforms and explaining why we have significant concerns with some of the reforms.
In this FYI, we cover the two main areas of interest within the real estate context:
- The overhaul of the law of auctions.
- The new offence of "unsubstantiated representations".
With auctions becoming a popular way of selling property, the relationship between the new provisions in the Bill and the Real Estate Agents Act 2008 (REAA) is significant. In particular, auctioneers selling land and licensed under the proposed regime, will need to make sure they are also licensed under the REAA.
The area of "unsubstantiated representations" raises a number of potentially major issues. Despite recent media headlines, it is not only about "telling the truth". The issues are not confined to the real estate sector either; submissions from other bodies have voiced similar concerns. As we will discuss, the provision deals with an area of law with adequate existing regulation.
Current and proposed regulation is designed to protect against potential areas for significant harm in the auction industry. These are:
- auctioneers failing to account to vendors for the proceeds of sale;
- auctions being used as a mechanism to sell stolen goods (although less applicable for real estate); and
- manipulation of the auction so that lower or higher prices are obtained.
The current law of auctions and auctioneers is found in:
- the Auctioneers Act 1928 (Auctioneers Act), which deals mainly with registration of auctioneers;
- part of the Property Law Act 2007 (PLA) and the REAA, which deal with conduct at auctions; and
- generally in contract and agency law.
Overhaul of the Law of Auctions
The Bill aims to repeal and replace the Auctioneers Act, and consolidate all auction conduct provisions into the Fair Trading Act 1986 (FTA). Three issues arise from these changes:
- A modernised definition of "auction".
- A revamp of the auctioneers registration system.
- New conduct provisions for auctions in the FTA.
A Modernised Definition of "Auction"
The Bill modernises the definition of "auction" to accommodate changes in technology. Modernising the definition of "auction" makes sense but how does it sit with the definition of "real estate agency work" in the REAA? The short answer is that this has not been addressed. The new definition of auction does not distinguish real estate agency work in any sense, so arguably, an auctioneer will be "carrying on the business of an auctioneer" but also handling "real estate agency work".
At present, auctioneers do not have to be licensed under the REAA if they are selling land by auction. Conversely, licensed real estate agents do not have to register as auctioneers to buy or sell land by auction. This exception for real estate agents is preserved in the Bill, but the exemption for auctioneers from the REAA is repealed.
For auctioneers selling land by auction, the Bill provides, perhaps inadvertently, that auctioneers have to be registered as real estate agents as well. It will be interesting to see if the exemption for auctioneers from the REAA is addressed after the select committee report comes out.
Revamp of the Auctioneers Registration System
Currently, auctioneers are registered under the "negative licensing" system in the Auctioneers Act. This means people can be registered auctioneers unless they are not "fit and proper" people as decided by the District Courts. "Positive licensing" requires obtaining certain qualifications in order to be licensed. Real estate agents licensing, for example, is a combination of both positive and negative licensing.
The Bill preserves the negative licensing system for auctioneers but creates a new register of auctioneers to move registration away from the District Courts.
Submissions to the select committee note the need for real estate professionals to be up to date on current laws including zero-rating in land transactions and new unit titles laws. These submissions support the view that auctioneers selling land should be licensed real estate agents so that the standards in the REAA apply.
This would, however, increase costs for professionals as they would need to be registered under two regimes. Also, having different codes and standards in different places may confuse those who deal with real estate professionals and even the professionals registered under those regimes. Again, the Bill could be clearer in expressing whether auctioneers selling land by auction should also be registered as real estate agents, and therefore subject to the standards in the REAA.
Conduct at Auctions
The Bill repeals the conduct provisions in the PLA and the Auctioneers Act and transplants them into new sections 36V to 36ZC of the FTA. The new provisions largely restate the current law but add detail to the wording.
There are three main issues to be aware of in relation to auction conduct:
- Vendor bids.
- Account and payment of proceeds.
- The start and end of an auction.
Auction Conduct Issue 1 - Vendor bids
Vendor bids are a device to stimulate bids at an auction where there are reluctant bidders. The Bill attempts to make the current law clearer by requiring an auctioneer to "clearly identify each vendor bid as it is received". This is particularly relevant when the auctioneer is bidding on behalf of the vendor and even more so when there are multiple vendor bids in succession.
The risk for auctioneers is that any individual vendor bid made during an auction has the potential to be misleading and deceptive under section 9 of the FTA, if not identified clearly as a vendor bid. This was the subject of the Court of Appeal case Commerce Commission v Grenadier Real Estate Limited  2 NZLR 186 where the court said that unidentified vendor bids can "be misleading to create the illusion of real competition where there is none". The Court of Appeal further noted that vendor bids have to be "expressly notified and that every such bid is able to be recognised by members of the relevant section of the public for what it is".
However, there needs to be a practical balance between when vendor bids are clearly identified and when auctions are halted because an auctioneer has to announce vendor bids an impractical number of times. The current Bill does not provide for any such procedure but it does give flexibility by allowing auctioneers to decide how they want to make vendor bids clear.
Auction Conduct Issue 2 - Account and payment of proceeds
A new section in the FTA sets out the obligations an auctioneer has to a vendor to account for the sale. This must be done within ten working days of the sale of property by auction or within a minimum of five working days if agreed otherwise.
However, if a licensed real estate agent conducts the auction, then the accounting provisions in part 5 of the REAA apply instead.
There is no substantial change to the law in relation to this issue but as discussed earlier, if auctioneers are expected to deal with issues such as taxation in real estate transactions, then their level of training may need to reflect that.
Auction Conduct Issue 3 - The start and end of an auction
The Bill proposes that if an auctioneer accepts an offer within one working day after the close of bidding, that property may be treated as having been sold at auction.
While the provision reflects the nature of auctions where deals often occur after the bidding process, there are two concerns with this proposal.
First, post-auction negotiations sometimes extend beyond one working day before an offer is accepted. Submissions have included the point that parties should be free to agree that the terms apply for a reasonable period after the auction.
Secondly, there are concerns that disclosure of the type of sale will affect whether a real estate agent breaches rule 6 of the Real Estate Agents Act (Professional Conduct and Client Care) Rules 2009 (Rules). Rule 6 prohibits misleading a customer or client. Therefore, an agent or auctioneer who represents a sale as being by auction, after the auction has concluded, could be accused of misleading a customer or client.
The Bill defines "unsubstantiated representation" as:
"a representation made by a person who does not, at the time of making the representation, have reasonable grounds for the representation, irrespective of whether or not the representation is in fact false or misleading."
The representation can be in connection with "the sale or grant or possible sale or grant of the interest in land".
It is already an offence under the FTA to make certain misleading and deceptive representations. The Contractual Remedies Act 1979 also provides remedies for misrepresentations. In the real estate industry in particular, rule 6 of the Rules, as outlined earlier, states that licensed agents must not mislead clients or customers.
Given these existing mechanisms, there are concerns that introducing "unsubstantiated representations" as an offence will lead to uncertainty and open the floodgates to claims. The flaws in this area are discussed below.
Main Issues with Unsubstantiated Representations
There are compelling arguments against making "unsubstantiated representations" an offence under the FTA. These have been outlined in the previous FYIs by our sales and marketing law team. The arguments are that:
- existing laws already sufficiently cover claims against such representations;
- prohibiting "unsubstantiated representations" is contrary to the Government's pledge to "remove requirements that are unnecessary, ineffective or excessively costly";
- uncertainty about standards of compliance to substantiate representations will increase compliance costs for businesses; and
- the provision raises the possibility of competitor harassment if businesses are required to substantiate their representations irrespective of whether they are true or have caused any harm.
These issues are apparent in the real estate context. Real estate agents in particular will face difficulties with making representations within the timeframe, having reasonable grounds for a representation, and being exposed to complaints, even where no harm to buyers or sellers has occurred.
Issue 1 - Timing of representations
Real estate agents and professionals make representations early in the marketing process and they work in teams. As noted in the submissions, representations during an open home, for example, may need to be substantiated by checking with the client, branch manager or listing agent holding the necessary information or, at times, with the relevant local authority the next working day. It is not unusual for agents and a buyer to have different recollections of what was said or how a statement was qualified.
Therefore, the provision for unsubstantiated representations can act as a device for customers to abandon responsibility for satisfying themselves that a property meets their requirements and place heavy obligations on property professionals instead.
The Rules already require agents to disclose information to a certain standard while striking a balance with the commercial reality of agents selling property. Having to substantiate representations at the precise time they are made does not fit comfortably with that commercial reality.
Issue 2 - Reasonable grounds for the representation
The Bill provides some guidance on what constitutes "reasonable grounds". The court will consider factors such as research undertaken before a representation was made and the actual or potential effects of the representation.
In a property context, much of a real estate agent's information is gathered from the property description sheet completed by the client and it is difficult (if not impossible) for agents to have grounds for their representation beyond those instructions. For example, information about properties not obvious from a physical inspection are difficult to substantiate. It is widely accepted that even construction professionals have to sometimes guess what construction material may be behind a wall.
There are examples of real estate professionals making representations based on knowledge attained over years of experience in the industry. There are commonly accepted expressions that are not misleading or incorrect but can be difficult to prove. These representations include statements such as "city fringe", "ideal first investment", or "spacious one bedroom apartment".
Placing the burden of proof on the property professional would be inappropriate, not to mention time consuming for the Commerce Commission, as it would require significant resources to investigate these claims if the representation is challenged. Investigations should not be initiated unless the originating complaint is justified.
Issue 3 - Irrespective of whether or not a representation is in fact false or misleading
This requirement in the "unsubstantiated representation" definition has the potential to open the floodgates to complaints. Associated compliance costs for vendors as well as those involved in selling real estate may increase. Without adequate thresholds in place, property professionals could be exposed to unwarranted or frivolous complaints where there has been no harm to the party making the complaint.
Most submissions on the Bill take the view that the words "irrespective of whether or not the representation is in fact false or misleading" should be deleted. As mentioned earlier, sufficient avenues already exist for consumers to make complaints about conduct or misleading information.
We will be closely monitoring the Bill as it makes its way through the legislative process.