Convictions for breach of the Real Estate Agents Act 2008 (Act) have been rare, which is why the case of Home Buyers Limited v Real Estate Agents Authority (HC Wellington CRI-2011-485-83, 22 December 2011) is a significant one. The Home Buyers Limited (HBL) case concerned an appeal against the first conviction for carrying out real estate agency work without a licence. The case is important in that it highlights the courts’ approach of taking into account the relatively recent inception of the Act as a mitigating factor when imposing penalties under the Act.
The definition of "real estate agency work" in section 4 of the Act is the cornerstone of the Act. It determines whether the consumer protection provisions in the Act apply and whether an offence has been committed. These consumer protection provisions link back to the Act's purpose which is to promote public confidence in the performance of real estate agency work through adequate regulation.
The breach of the Act in the HBL case related to HBL and its director, Mrs F, carrying out real estate agency work without a licence. While the High Court imposed a fine on HBL and discharged Mrs F without conviction, it is interesting to note the High Court's discussion of mitigating factors when imposing its penalties.
Agent in Trader's Clothing
HBL was a family company whose business model involved buying property from a vendor and on-selling it for a profit, usually on the same day as the property was bought by HBL. HBL expressly held itself out as a trader and not a real estate agent. On that basis, HBL did not believe it needed a licence under the Act.
HBL had used its business model on a number of previous occasions. But in this case, the buyer wanted to enter into an agreement directly with the vendors, with a side agreement with HBL to pay HBL a "finder's fee" of $6,000 for finding the property and helping out with the transaction. This arrangement, not originally envisaged by HBL, arose because the purchasers were concerned about vendor warranties after seeking legal advice.
Following completion of the sale and purchase, the purchasers paid HBL only $5,000 instead of the $6,000 "finder's fee" because of their dissatisfaction with HBL's services. The purchasers then complained to the Real Estate Agents Authority (Authority). HBL and Mrs F were investigated by the Authority and eventually convicted in the District Court for carrying out real estate agency work without a licence. HBL and Mrs F appealed their conviction to the High Court, arguing that they did not hold themselves to be real estate agents as they did not carry out real estate agency work. The High Court upheld HBL's conviction but discharged Mrs F without conviction.
Real Estate Agency Work Is a Question of Substance
HBL and Mrs F were found to have been carrying out real estate agency work without a licence and that they had therefore breached section 141 of the Act. The High Court said in paragraph 23 of their judgment that "the combination of ss4 and 141 mean that an offence is committed if:
- Any work or services provided are carried out by a person;
- In trade;
- On behalf of another person;
- For the purpose of bringing about the sale and purchase of land;
- Without a licence (or exemption)."
HBL argued in its submissions to the Court that by buying real estate and on-selling it as vendors, they were effectively acting for themselves and not "on behalf of another person". In addition, HBL said that by making it clear that they were not real estate agents and by not taking money from the original vendors, HBL's actions fell outside the scope of the Act.
However, the High Court disagreed with HBL's submissions. The High Court decided that locating potential buyers, and negotiating with the purchaser and vendor all amounted to work carried out to bring about the sale of real estate. Also, the work went beyond "the provision of general advice or materials to assist owners to locate and negotiate with potential buyers". In substance, the work was "indistinguishable" from real estate agency work.
Strict Liability Offences Under the Act
The District Court judgment considered offences in section 141 to be offences in strict liability because the offence was of a "public regulatory nature" and the definition of real estate agency work was clear. Only a total absence of fault would exclude HBL and Mrs F from liability.
The High Court considered the strict liability issue would be relevant if HBL and Mrs F thought they had a licence when in fact they did not. In this case however, Mrs F and HBL knew that they did not have a licence to carry out real estate agency work and so any discussion on strict liability did not help their cause. The District Court's views on strict liability then, still stand in relation to offences under the Act.
Culpability and Penalties under the Act
Under the Act, the maximum fine for unlicensed trading is $100,000 for a company and $40,000 for an individual. The eventual penalties imposed by the High Court were a fine of $13,000 on HBL plus a refund of the $5,000 finder's fee back to the purchasers.
The High Court found mitigating factors to be the lack of intent to breach the law, the relative newness of the legislation and the absence of harm to vendor or purchaser. Despite those factors, the Court paid homage to the consumer-oriented intent of the Act and commented that "to achieve deterrence, fines must be significant so as 'to bite' rather than to amount to a licence fee".
The High Court decided that the consequences of a conviction for Mrs F including the heightened disrepute and publicity were disproportionate to the gravity of her offending. And in any case, her close link with HBL would have a detrimental financial effect on her anyway.
Significantly, when commenting on "the relative newness of the legislation being relevant to the culpability", the High Court supported its reasoning by reference to the first prosecutions under the Fair Trading Act 1986 and the case of Commerce Commission v L D Nathan & Co Ltd  2 NZLR 160 where the Court thought it was not "necessary to begin with very substantial fines".
Overall, the HBL case involved a number of mitigating factors, which kept the penalties towards the lower end of the spectrum. The penalties imposed were kept to a level intended to have a deterrent effect while sustaining the principles of the Act. In future cases, the relative newness of the legislation and the lack of awareness about licensing requirements may be two mitigating factors less readily available to defendants.