Potentially resulting in a huge windfall for anybody who has sold a property through a real estate agent in Victoria in recent years, the case of Advisory Services Pty Ltd (Trading as Ray White St Albans) v Stella Augustin has sent ripples of uncertainty through the Victorian property industry.

In this case, a real estate agent pursued a vendor for sales commission on a contract of sale that ultimately fell through. It seems pretty fair, and probably a common sense outcome, that the real estate agent lost their claim for commission on a sale that didn’t complete. However, curiously that is not the reason that Court found the agent was not entitled to commission. Both the County Court, and the Court of Appeal of the Supreme Court upheld a technical argument by the vendor that the real estate agent failed to comply with an obligation to disclose any rebates (even though there were none to disclose) in its exclusive sales authority appointment, and that the agent was therefore not entitled to any commission. It seems the reasons for the decision will apply whether or not the contract of sale completed.

It is understood that the case involved the appointment of the real estate agent under a standard form exclusive sales authority appointment which is alleged to have been approved by the Director of Consumer Affairs, and then provided by the Real Estate Institute of Victoria (REIV) to its real estate agent members. This is problematic because nearly every real estate agent in Victoria uses the REIV standard form sales authority, which means that every vendor who engaged an agent using the defective standard authority is now potentially entitled to the return of the commission paid, even where the service has been performed by the agent.

On 24 May 2018 the REIV released a statement confirming that it “immediately took steps to change its authority documents in line with the County Court’s decision” last year to amend the exclusive sales authority produced by it and in the same release pointed the finger squarely at the Director of Consumer Affairs Victoria for the bungle. Whilst the amended form may now comply with the legislative requirements; it throws doubt upon property sales (commercial and residential) for the six years prior to the corrective action. No doubt there is a mad scramble happening between Consumer Affairs and the REIV right now, but according to this decision, someone got it wrong.

Importantly, the case did not limit in any way the circumstances in which commission will not be payable. For example, the Court did not find that commission is only not payable where it produces an unfair outcome, for example that the purchaser did not ultimately settle on the contract of sale, or that an agent did not disclose rebates actually received from third parties.

If the decision is challenged legally, it has to now go to the High Court. If a High Court challenge is not pursued, a number of issues present:

  1. Will the decision apply to all vendors – whether the contracts of sale fell through or not?
  2. Is a vendor entitled to the windfall return of commission paid to a real estate agent in circumstances where the vendor received the full service they understood would be provided by the agent, is there a quantum meruit claim available?
  3. As the industry body representative, is the REIV conflicted from representing the agents in claims made against them, seeing as the REIV is potentially a party to any proceeding itself?
  4. If the REIV is conflicted from acting for its members, how will individual real estate agents fund their defence?
  5. If the Director of Consumer Affairs is found to have erroneously approved the rebate statement in the sales authority, is the Government entitled to retrospectively amend the law to effectively avoid its own potential liability arising from its own mistake? Many would argue there are strong public policy reasons against this. However, if the Government is found liable to pick up the tab for the oversight, it is ultimately the tax payer who will pay.

It is unclear whether the Court of Appeal decision will be challenged in the High Court – but for now this sets a dangerous precedent for agents in respect of past sales commissions and until there is a successful appeal, nearly every real estate agent in Victoria, the REIV and Director of Consumer Affairs will be nervously awaiting the first claims by consumers for the return of the commissions paid.

This could be disastrous for individual real estate businesses if they are ordered to return years of commissions paid, and could result in many agencies who are unable to fund the refunds of years of commissions going out of business.

There are a number of issues posed by this decision and due to the significant commercial ramifications of the decision, we expect a High Court appeal is in the wings.