Contract Note Banned! Estate Agents Lose Deception Tool

OPINION
by Peter Mericka B.A., LL.B
Real Estate Consumer Advocate
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd

The document known in the real estate industry as “the standard REIV Contract Note” has been banned.  As from 28 September, 2008 the only document available to estate agents will be the standard form of contract prescribed by the Estate Agents (Contracts) Regulations 2008 or a contract prepared by a Legal Practitioner or a Licensed Conveyancer.

Contract Note – A Deceptive Title

The single page Contract Note was favoured by real estate agents in Victoria, firstly because of its name.  Everyone knows what a contract is, but what is a Contract Note?  Whenever a purchaser asked an estate agent if the Contract Note they were asked to sign was an actual contract, the answer was always a firm “No”, followed by the words, “it’s only an offer, and there is no contract unless the vendor accepts it.”

Technically, this explanation was true.  No mere document is a contract unless it has been executed by the parties. But this was not really the question being asked.  The question “Is this a contract?” was really a question about whether or not the purchaser was entering into a binding contract.  But the estate agent was always able to avoid having to answer this question truthfully because the name of the document, “Contract Note” suggested that it was something less than a binding contract.

The new Contract of Sale of Real Estate is appropriately titled “Contract of Sale of Real Estate”.

Contract Note – An Alternative Contract

The Contract Note was also deceptive insofar as it presented as a lesser alternative to the full “Contract of Sale of Real Estate” which was also prescribed in the Estate Agents (Contracts) Regulations 1997.

The fact that two contract documents were prescribed, one being the Contract Note and the other being the Contract of Sale of Real Estate, made it even easier for real estate agents to pretend that the Contract Note was either not a contract, or a lesser form of contract.

In fact, the Contract Note was every bit as powerful as the full version of the Contract of Sale of Real Estate.  It was just that the details were hidden from consumers.

Using the concept of “incorporation by reference” the Contract Note displayed only brief details of the transaction on its face, but it bound the purchaser to all of the conditions contained in the Contract of Sale of Real Estate by including the following clause under the heading “SUBJECT TO”:

“The general conditions of sale, other than GC3, contained in the Contract of Sale of Real Estate prescribed under section 10 of the Estate Agents Act 1980.”

Of course, no purchaser would go to the trouble of looking up the Estate Agents Act to find out what the full Contract of Sale of Real Estate contained.  Not that it would do them any good anyway, as Section 10 the Estate Agents Act has been changed by subsequent amendments to to the point that a lay-person would soon lose the trail.  So what would the purchaser do?  The purchaser would ask the estate agent.

There are three problems with estate agents who answer questions asked by purchasers in relation to contracts.  First, the estate agent doesn’t want to purchaser to be “spooked” into seeking legal advice before signing.  Second, the estate agent doesn’t know anyway.  Third, it is illegal for an estate agent to offer legal advice to anyone, let alone a purchaser in circumstances where the estate agent is in a conflict of interests.

The answer of the estate agent was invariably, “It’s just standard wording, and if there’s a contract later it will have the general conditions in it.” Technically true, but highly deceptive nonetheless.

Contract Switching

A problem throughout the real estate industry in Victoria is “contract switching”.  Ask any lawyer or conveyancer in Victoria, and you will find that they have experienced the frustration of having prepared a full Contract of Sale of Real Estate, only to see it switched by the real estate agent without their knowledge for the single page Contract Note.

For examples of contract switching CLICK HERE:

Why do real estate agents switch contracts?  It is my belief that contract switching occurs for the reasons alluded to above: real estate agents don’t want consumers to obtain legal advice before signing, and they don’t want to have to answer questions about documents they themselves don’t understand.

Will contract switching end with the banning of the Contract Note?  It remains to be seen.  I expect that contract switching will drop significantly, simply because there will be no advantage for estate agents in switching a full contract prepared by a lawyer or conveyancer with a full version of the Contract of Sale of Real Estate.

The Next Step – Preventing Estate Agents From Acting As Lawyers

Estate agents act as lawyers in most real estate sale transactions.  The estate agent acts as the purchaser’s lawyer by presenting the purchaser with the contract, explaining the contract to the purchaser (to the extent that the estate agent’s legal expertise will allow), drafting and inserting special conditions required by the purchaser, then assisting the purchaser in executing the contract.

The estate agent then presents the purchaser’s offer to the vendor, explains the document to the vendor, advises the vendor on accepting the offer, and assists the vendor to execute the contract.

This involvement of the estate agent in the formal contract execution stage of the sale is, and always has been, WRONG!

Why do estate agents assume the role of lawyer?  There are 3 reasons:

1. The estate agent wants to control the sale process in order to ensure that the purchaser is locked into the purchase, and the vendor is locked into the sale, and the estate agent’s commission is locked into the deal brokered by the estate agent;
2. It suits those lazy lawyers and complicit conveyancers who have close relationships with estate agents (see below) to have real estate agents assume responsibility for this stage of the transaction.  Less responsibility means that conveyancing can be reduced to a mere clerical task; a mere after-the-event process, which can remain lucrative at low fixed fees; and
3. It allows for the forging of mutually beneficial relationships between lawyers and conveyancers on one hand, and their real estate agent masters on the other.  The problem of corrupt and secret commissions paid by lawyers and conveyancers to estate agents has taken some of these relationships to the point that they could probably be described as criminal conspiracies.

It is my hope that the banning of the Contract Note may force more lawyers and conveyancers to take responsibility for properly explaining documents to consumers.  If this occurs, the role of the estate agent as “lawyer to both parties” may also go the same way as the Contract Note.

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