Commission Upon the Sale of "An Insolvent Property" #232
By Gerry Neely
The case referred to in Column #231, which discussed the loss of a commission payable by an insolvent owner of property valued at less than the total amount of mortgages and liens registered against it, raised comments as to how licensees can protect themselves. The judge stated that licensees either needed the consent of the encumbrance holders, or an order of the court to collect commission from the sale proceeds. The facts in that case were unusual in that no foreclosure action had been commenced. Instead the court was asked to make a vesting order in favour of a purchaser, which would have the effect of giving the purchaser title clear of the mortgages and liens.
In the more usual circumstances of a foreclosure action, where one of the parties is given an order for conduct of sale, that party is generally given the power to appoint an agent. The court order will contain the terms upon which commission is payable. If those terms are met, the agent is entitled to a commission in priority to the claims of the chargeholders.
In the absence of a court order, licensees should not knowingly take a listing on insolvent property, unless they are satisfied the owner can pay the commission from a source other than the property. Usually this is not a solution because it is the owner's insolvency that creates the problem in the first place.
Where a licensee is acting for a buyer interested in property, the agent should look to the buyer for commission, and try to structure the offer so that court approval of the sale includes a direction to pay the commission. If the offer is net of the commission to be paid to the buyer's agent, the offer should contain a statement that the buyer is responsible for commission. If the offer includes commission, it should contain a term that the commission in the stated amount will be deducted from the purchase price, in satisfaction of the buyer's obligation for commission.
Whether these deductions will be accepted will depend in part upon how close the price is to the appraised value of the property, and in part upon whether objections are made by encumbrance holders. For example, the court might reject the offer because one of the encumbrance holders is a licensee, who is prepared to sell the property for no commission or payment of part of the commission to the cooperating agent. Obviously attempts should be made to obtain the consents of the encumbrance holders. The bottom line is that the court's duty is to obtain the best price possible for the benefit of the encumbrance holders and owners.
If the proposed amendment to Section 28 of the Real Estate Act becomes law in 1995 without any change to it, property managers will find themselves with the same obligations for the disclosure of agency relationships, as other licensees have in connection with the sale of property.
That will be relatively simple to do for an agent entering into an agency relationship with a landlord, particularly one owning a multi-unit rental building. However, since tenants outnumber landlords, the explanations of agency disclosure, whether contained in the BCREA brochure or not, mean that these requirements for both landlords and tenants will add additional costs in staff time and paper.
Agency disclosure was introduced to dispel the confusion in the public mind concerning agency relationships. That confusion was found mainly in the sale of real estate. It is unlikely that the same confusion exists in the minds of residential tenants, few of whom can believe that property managers act for them.
A number of states in the United States of America have dealt with this reality by not requiring disclosure, if a lease is of residential premises for a term of less than 12 months. An argument can be made that it is beneficial to the public to provide this or a similar exemption. Otherwise, it is likely that the additional cost of meeting agency disclosure requirements, which are incurred by property managers and landlords, will eventually be passed on to short term residential rental tenants.
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