The First Law of Holes #517
CATEGORY: Legally Speaking
TAGS: Assignment Breach of Trust Conflict of Interest Contract of Purchase and Sale Disclosure Fiduciary Duties
Will Rogers defined the first law of holes as follows: “When you find yourself in a hole; stop digging.” A recent discipline decision of the Real Estate Council of British Columbia1 suggests the licensee involved should have taken Mr. Rogers’ advice.
The licensee acted as the designated agent of the seller in the sale of a parcel of land that could be subdivided into two lots. The contracts of purchase and sale (“Contracts”) prepared by the licensee concerning the property contained a condition precedent with respect to municipal approval of the subdivision. Unfortunately, the Contracts did not indicate for whose benefit the condition precedent was included or the date by which it should be removed. Mistake number one.
A couple of months after the execution of the Contracts, the licensee was approached by the buyer who indicated he wished to assign his interest in the Contracts to a third party. The licensee agreed to act as the buyer’s designated agent in the assignment transaction and represented the buyer in the creation and execution of assignment agreements (“Assignments”) with the third party in respect of the proposed subdivided lots. Mistake number two. As the licensee was the agent for the seller, he owed fiduciary obligations to the seller until the completion of the Contracts transaction. By agreeing to act for the buyer in the Assignments transaction he created a conflict of interest between his duties to his seller/client with respect to the Contracts transaction and his buyer/client with respect to the Assignments transaction.
The licensee did not advise his seller/client of his representation of the buyer/client or his involvement in the Assignments transactions. Mistake number three. That information was material to his seller/client and by failing to disclose that information, he breached his fiduciary duty of disclosure to his seller/client.
After the Assignments had been entered into by the buyer/client and the third party, the licensee’s managing broker discovered the conflict and urged the licensee to contact his seller/client and fully disclose the conflict. The licensee did that. His seller/client instructed the licensee to take steps to nullify the Assignments. Rather than following Mr. Rogers’ advice, the licensee took steps to nullify the Assignments, which was clearly against the interests of his buyer/client who had entered into the Assignments. Mistake number four.
Not to be outdone, his buyer/client, having discovered that the third-party assignee was trying to flip the Contracts a second time, instructed him to take steps to nullify the Assignments. Shovel in hand the licensee kept digging, preparing new documents and dealing with deposits. Mistake number five.
The unfortunate but understandable result was a three-month suspension and $5000 fine for the licensee.
One would hope that most licensees would have avoided the conflict in the first place by simply refusing to act as the agent of the buyer in the Assignment transactions and remaining loyal to their seller/client.
However sometimes, as in this case, licensees make mistakes and inadvertently step in a hole. Once a licensee discovers they are in a hole, the best course of action is to stop digging. In this case, once the licensee was advised by his managing broker of the conflict, he should have immediately advised both his seller/client and buyer/client of the conflict and that he could no longer act for either party in the Contracts transaction or the Assignments transaction. He should have also advised both the seller/client and buyer/client to immediately seek independent legal advice, and immediately reported the matter to his insurers. Once he became aware of the hole he was in, picking up a shovel and continuing to dig was the wrong course of action and compounded the licensee’s problems.
Norton Rose Fulbright LLP
|1.||Real Estate Council of British Columbia: Re Gill July 17, 2019.|
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