The following item is really a series of postings from the Australian Real Estate Blog concerning trafficking in client referrals. The postings have been arranged by title, in the order in which they appeared on the Australian Real Estate Blog.
Richard Wood Solicitors – Gifts To Agents For Client Referrals
Richard Wood Solicitors is Melbourne Law firm. In 1998 a letter was sent to a local estate agent by this law firm, offering free gifts in return for conveyancing “referrals”. We received a copy of the letter because the estate agent to whom it was addressed saw an opportunity to make money from local lawyers and conveyancers by selling his “referrals” to the highest bidder. In my opinion the letter raises serious ethical questions, and goes some way to explaining the cosy relationships between estate agents and the conveyancers and lawyers who depend on conveyancing referrals.
In 1998 Richard Wood Solicitors sent what has now become known as “The Richard Wood Solicitors Letter” to a local estate agent, apparently in an effort to develop what could be described as a “business relationship” with the estate agent.
Under the heading “What Will We Do For You!” the letter tells the estate agent,
“Everyone likes verbal acknowledgement or a pat on the back but we know that something tangible, like flowers, a bottle of Port or a Myer voucher don’t miss the mark either.”
and postscrips to the letter state:
“Our major end of year special reward remains an all expenses paid weekend package for two at a 5 start Melbourne Hotel”
“Your referrals will count towards your personal Reward points for the year as well as entitle you to Movies Passes over the next 2 months.”
Concerned by the effect of the letter and the proposals contained in it, I wrote to Richard Wood Solicitors in April, 2006 and asked the following questions about “The Richard Wood Solicitors Letter”:
- Are you prepared to quantify, in dollar amounts, the total value of gifts made to local estate agents in return for “referrals”?
- Do you keep accurate records as to the gifts given to estate agents, including the value of gifts and the identity of the particular estate agents to whom they are made?
- What steps are taken to ensure that the gifts as described in the attached letter do not become “secret commissions”? i.e. How are referred clients advised that their referral by the estate agent is related to a gift having been made to the estate agent? What records are maintained in order to confirm that clients were informed of the gifts?
- What does the estate agent tell clients who are being referred to your office pursuant to such a promotion?
- Have either the Law Institue of Victoria or the Real Estate Institue of Victoria expressed a view on the ethics of such promotions?
I received no response from Richard Wood Solicitors.
In May 2007 I again wrote to Richard Wood Solicitors, and explained that I would be writing a blog posting about the matter:
“The posting will state that I came into possession of this copy of your letter to local estate agents as a result of one particularly business minded estate agent having taken the letter to other lawyers in the local area with a view to having other lawyers and conveyancers making higher offers in return for his referrals.
It is also my intention to make the observation that the offering of gifts and payments to estate agents in return for client referrals is a corrupting influence in the industry and must be stopped.
In the interests of balance and fairness I request that you provide me with your written comments for inclusion in the posting.”
I received no response to my letter, and Richard Wood Solicitors made no comment on the matter.
I have no doubt that “The Richard Wood Solicitors Letter” is just one example of the proposals that many lawyers and conveyancers put to estate agents in order to buy client referrals. I also believe that relationships of this kind are a precurser to, if not a cause of, much of the institutionalised corruption that exists in the real estate industry.
There will be more on this issue in future postings.
Richard Wood Solicitors – An Estate Agent Attacks
On 3 August, 2007 I published a posting titled “Richard Wood Solicitors – Gifts To Agents For Client Referrals“. On 13 August, 2007 a person identified only as “David” posted the first of a number of comments attacking me personally on the basis of my ethics. The attack would have been unremarkable, except for the fact that the estate agent failed initially to disclose certain facts about himself and the agency by which he is employed.
In one of his comments the estate agent identifies himself as David Stewart, and his email address indicates that he is employed by Barry Plant Real Estate. The estate agent also discloses that he knows Richard Wood, of Richard Wood Solicitors, well enough to comment on his professionalism.
On 21 August, 2007 I wrote the following letter to the Directors of each of the Barry Plant Real Estate agencies in the franchise’s Eastern Network, including Barry Plant’s own franchise at Doncaster: “On 3 August, 2007 I posted an article titled “Richard Wood Solicitors – Gifts To Agents For Client Referrals” on The Australian Real Estate Blog.
On 13 August, 2007 a person identified only as “David” posted the first of a number of comments attacking me personally on the basis of my ethics and suggesting that my business operates in circumstances of conflicting interests.
When pressed on the issue of his anonymity, David stated, “I am David Stewart, a real estate agent of 11 years, and someone who finds your continuous attacks on agents not only unfair but far less than ethical. My email is firstname.lastname@example.org. I have nothing to hide.”
David also stated, “I find Richard Wood to be a professional who seems to do his job to the best of his ability but we do not share a financial relationship of any kind.”
Having established that David is a Barry Plant agent, and that he knows Richard Wood well enough to make such a comment about him, I asked him, “Hey David, a search for “David Stewart” at Barry Plant Real Estate reveals that you are working from one of the Maroondah offices, local to Richard Wood Solicitors. What do you know about gifts for referrals between your office and Richard Wood Solicitors? Are you in on it?”
To which David replied, “No one in my office receives any type of referral or commission from solicitors or conveyancers. As to what happened 10 years ago, I am in no position to comment.”
David’s comment was quite precise, but it leaves open a number of possibilities, and I seek your assistance in exploring them.
- David confirms that no-one at his office receives any commissions from solicitors or conveyancers. I do not know which office David operates from. Can you confirm that no person at your office currently receives any form of commission from any solicitor or conveyancer in return for conveyancing referrals?
- David’s comment relates to the present, but he does not deny that commissions have been received in the past. In David’s words, “As to what happened 10 years ago, I am in no position to comment.” Are you prepared to confirm that no estate agent operating from your office has ever received any form of commission or payment from solicitors or conveyancers in return for conveyancing referrals. Alternatively, please advise as to whether your agents participate in such arrangements or if they no longer do so, when they ceased and why they ceased.
- David also states, “I don’t believe in these types of payments.” David appears to believe that making and/or receiving of such payments is wrong. Do you believe that such payments are wrong?
It is my intention to write a follow-up posting on this issue, and I will include the above material, together with your response.
My purpose is to investigate the use of commissions by lawyers and conveyancers to secure conveyancing clients, and the effect that this has on the integrity of the real estate industry. My reason for writing to you is that David’s comments, the address on the Richard Wood Solicitors letter, and the fact that David has identified himself as a Barry Plant estate agent make this an obvious avenue of enquiry.”
Not a single Director responded to my letter. While I acknowledge that there was no obligation whatsoever on Barry Plant or any of his agency Directors to respond to my letter, and that no adverse inference can be drawn from this, I believe that the fact that the Richard Wood Solicitors letter I have in my possession was addressed to a Barry Plant Real Estate agency, combined with the comments made by a Barry Plant Real Estate agent, indicate that although the letter itself was written in 1998, the issues and implications flowing from it remain both current and relevant.
It is important to note that even if every real estate agency in Victoria were to refer clients to Richard Wood Solicitors in return for movie tickets, 5 star hotel accommodation etc., it would not mean that either party would be breaking the law. Such activity only becomes illegal if it involves secret commissions (i.e. if the client being referred is unaware that gifts are changing hands as payment for the referral).
In my next posting I will further examine the concept of secret commissions as it may apply client referrals.
Richard Wood Solicitors – A Lawyer Responds
This is a comment submitted in response to the previous posting on this site. While I cannot help but be annoyed about the apparent weakness (personal and professional) of the lawyer who expresses it, it does seem to sum up the situation:
“While I am proud to confirm that I am a legal practitioner, I cannot identify myself as to do so would be to commit professional suicide.
With quiet interest I have watched this debate unfold, and am moved to confess to being one of those to whom you attach the labels “tame” and “fixed” (see comment 27/8/07 7.15 above).
My simple plea is that you acknowledge that some of us find ourselves in circumstances over which we can exercise little if any control.”
I note that another legal practitioner confirms that this problem occurs in Queensland, but perhaps not to the same extent as in Victoria.
Is the buying and selling of conveyancing clients a nationwide phenomenon?
And are the lawyers and conveyancers who are involved in it to be regarded as slick business people who sail close to the wind, or as pathetic small business operators who are overwhelmed by a powerful and ethically bankrupt industry?
Richard Wood Solicitors Letter – What If The Right Way Doesn’t Pay!
In the absence of evidence to the contrary, we must assume that Richard Wood Solicitors and Barry Plant Real Estate have done everything the law requires of them in relation to gifts offered to estate agents in return for client referrals. But does it make sense for a lawyer or conveyancer to offer gifts to estate agents if legal compliance makes the whole exercise a waste of time and money?
The value of “word-of- mouth” referrals
It is common knowledge that “word of mouth” referrals are the best form of advertising. This is because a word of mount referral is usually generated when a person receives good service, and wants to assist another to person to enjoy a similar experience. The referral is a favour to the person referred, and a reward to the professional who provided the service.
But what happens when a word of mouth referral is motivated by a gift or reward? A gift or reward is likely to taint the referral, changing it from being an expression of genuine gratitude and helpful advice to a commission.
Gift or commission?
A gift is usually unexpected; given in gratitude and received with humility and appreciation. Usually, a gift is an expression of thanks for better-than-expected service. A commission, on the other hand, is payment expected or demanded in return for something. It is a business arrangement. Something is being sold.
When an estate agent expects to be paid for referring clients, and when the lawyer or conveyancer making the payment for the referral knows that the payment is the reason for the referral, there are no favours being done. The client is simply being sold.
The buying and selling of clients in this manner may be unsavoury, but it is not illegal if the client is aware that he or she is being treated as a commodity. This is because the client is aware of what is going on, and can make a decision as to the value or otherwise of the referral.
But it all becomes rather grubby, and quite illegal, when the client is not made aware of the commission. A client who believes that she is being referred for reasons other than the payment of a commission may feel tricked and cheated if she later discovers that the the referring estate agent received a gift in return for ushering her in the direction of the gift-giving lawyer or conveyancer.
What is a secret commission
Section 179 of the Crimes Act 1958 states:
179. Gift or receipt of secret commission in return for advice given…
(1) Whenever any advice is given by one person to another and such advice is in any way intended to induce or influence the person advised…to enter into a contract with any third person…and any valuable consideration is given by such third person to the person giving the advice without the assent of the person advised the gift or receipt of the valuable consideration shall be an indictable offence…
So, if an estate agent gives a client a word-of-mouth referral to a conveyancer in order to have that client enter into a contract with the conveyancer to become the conveyancer’s client, and the estate agent receives a gift for that referral without the client’s knowledge, then both the estate agent and the conveyancer commit a serious criminal offence.
In other words, the client must be told that he is being bought and sold by the estate agent and the conveyancer.
Disclosure reduces the value of the referral
Imagine that you have just closed a deal to buy a home through an estate agent, and the estate agent hands you a card and says,
“This is the business card of a local lawyer who will help you with your conveyancing.”
The average consumer would probably assume that the estate agent and the lawyer have a good working relationship, that the estate agent has faith in the lawyer’s ability to represent and assist the consumer, and that the consumer is benefitting from the knowledge and experience of the estate agent. In short, the consunmer would appreciate the assistance of the estate agent.
>But what if the estate agent, holding out the lawyer’s business card, were to say,
“This is the business card of a lawyer who gives me gift every time I send her a client.”
The average consumer would probably become suspicious, and wonder:
Why does the lawyer have to pay for referrals?
Why doesn’t the lawyer attract me by giving gift to me rather than to the estate agent?
How much has the lawyer invested in gifts to the estate agent?
How supportive with the lawyer be if I have a dispute with the estate agent?
Secret commissions are more likely to be effective because they suggest that the referral is being made for noble reasons when in fact they are simply a business transaction.
Disclosure exposes the referral as a desperate attempt to buy business, and consumers tend to find this offensive.
Richard Wood Solicitors – Who Needs To Know?
I have discussed the way in which payments to estate agents can become illegal secret commissions if they are not disclosed, and how the disclosure of payments tends to work against the purpose of the payments. In the absence of evidence to the contrary, I assume that any payments or gifts made by Richard Wood Solicitors to Barry Plant Real Estate’s estate agents, or any other estate agents, have been disclosed in full by both parties. But to whom should these disclosures be made?
When a solicitor or conveyancer pays an estate agent for referrals, the payment must be disclosed to the client. Failure by the estate agent or the solicitor to disclose the gift or payment would probably constitute a criminal offence as the payment of a secret commission.
Consideration would also have to be given to the fiduciary duty owed by the estate agent to the client. In the case of Phipps v Boardman  2 AC 46 Lord Russell said,
“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit in no way depends on fraud, or the absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his actions. The liability arises from the mere fact of the profit having, in the stated circumstances, being made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account.”
On this basis a failure to disclose could be construed as a theft from the client!
Tim O’Dwyer a Queensland lawyer, and regular contributor to this blog, makes the following observations:
“Real Estate agents who receive kickbacks over and above their sales commissions are said to obtain “secret commissions”; seller clients are being cheated, of course, while buyers are mostly being used.
True story: an agent, engaged to sell his client’s property, negotiated a sale to a buyer whom the agent had dealt with previously. After the sale settled and the agent got his commission, the seller discovered that the buyer had made a secret payment to the agent. The seller sued the agent and recovered from the agent not only the amount of the buyer’s bonus but also the full sale commission.
Basic rule: agents who secretly score kickbacks from buyers (or advertising media outlets, or referred solicitors, finance brokers, building/pest inspectors, insurers etc.) are liable not only to lose their commissions but also to account to their seller clients for what they collected on the side or, rather, on the sly.
Usually secret commissions are money but may be gifts or other benefits. Whatever, a greedy agent’s liability to forfeit commission and account for the kickback remains the same. Property owners who discover their agents taking secret commissions in the course of selling (or managing) a property may terminate their agency agreements. Sellers may also cancel sales contracts with buyers paying secret commissions.
But wait, there’s more. The Criminal Code creates offences when an agent (or any agent’s parent, spouse, child etc.) corruptly receives or solicits any “valuable consideration” in connection with his handling of his client’s affairs. “Valuable consideration” includes money, gifts, loans, commissions, rebates and discounts. Similarly, anyone who corruptly gives or offers an agent a kickback commits an offence.
When a seller civilly sues an agent on the make, there is no need to prove “corruptness” – only the “secretness” of the deal.”
The Australian Taxation Office
The estate agent must declare payments or gifts received from solicitors for taxation purposes. Failure to do so could result in a variety of criminal charges.
The solicitor who makes the payment will undoubtedly claim the payments made to the estate agent as a tax deduction. This would be likely to alert the ATO to the fact that the estate agent has been receiving the payments claimed, and the claim and income of the agent and solicitor could be cross-referenced.
The solicitor’s accountant would be told of the payments, because the accountant is responsible for monitoring the financial health of the solicitor’s business, and for preparing and submitting the solicitor’s taxation returns.
Similarly, the estate agent’s accountant will need to know about the payments received by the estate agent so that they can be included in the estate agent’s taxation assessment.
The professional indemnity insurers
Solicitors and estate agents carry compulsory professional indemnity insurance. The purpose of professional indemnity insurance is to cover a professional person where a client claims that the professional has been negligent in fulfilling his or her professional duties, causing the client loss.
The insurer is entitled to know of anything that could affect its decision to provide cover. The offering of payments in return for client referrals could seriously affect the solicitor/client relationship and the estate agent/client relationship, and increase the insurer’s exposure. Prudent solicitors and estate agents would certainly discuss a payment-for-referral arrangement with their professional indemnity insurer.
The professional bodies representing solicitors and estate agents would be interested to know about payment-for-referral arrangements, so that members could be warned of the associated dangers. The Australian Institute of Conveyancers (Victoria Division) is aware that there is a significant problem with the payment of secret commissions to estate agents, and provides the following warning to conveyancers as part of its “Startup Kit” for new members:
“When commencing your Business and establishing contacts you may consider paying Referral Fees. Whilst this is your decision you should remember that depending on how you conduct this, it may constitute an offence under the Crimes Act. It has been brought to the attention of the VCA that the Victoria Police Fraud Squad have been instructed by Consumer and Business Affairs to investigate any complaint made regarding this issue.”
It reflects poorly on a profession if rogue members draw unwanted attention. While AICVIC doesn’t go far enough to discourage the practice, credit must be given for its having acknowledged that it is a problem and that new members should be informed that it could involve the commission of criminal offences. I am unaware of any similar warnings being issued by the Law Institute of Victoria or the Real Estate Institute of Victoria.
The staff of the solicitors and the estate agents would have to be told about the payment-for-referrals arrangement, because such an arrangement has the potential to affect not only the integrity of the firm but also that of the staff. This is particularly so if a member of the staff should become an unsuspecting “mule” for the passing of gifts and the arranging of appointments.
The situation could be even more serious if staff members were to become parties to criminal behaviour.
Principles of fairness would dictate that staff be fully informed of the arrangements, encouraged to ask questions, and permitted to refuse to participate.
Paying for referrals necessitates disclosure to a wide range of parties, all of whom are likely to take a very dim view of a practice that smacks of desperation, and casts its participants as potentially shonky.
Full and proper disclosure is also an administrative nightmare, with potentially huge costs associated with legal compliance.
Operating a payment-for-referral scheme legitimately and with full disclosure may be profitable for some, but it is more likely to remain the refuge of those who are new to the industry, and those in the industry who are desperate and struggling.
On the other hand, operating such a scheme secretly and illegally could be highly lucrative.
Richard Wood Solicitors – Who Should Not Be Told?
We have seen that client trafficking, where payments are offered in return for estate agent “referrals” is a problem, but it’s not just payment that corrupts the relationship. The true corrupting influence is the dependence of the parties on the referral relationship. For a referral to be of value to the parties who matter, the referral must be anonymous.
A good referral
To put it simply, a good referral is one that is made for the right reasons, and which will benefit the right parties.
An estate agent acts properly when he or she recommends a solicitor/conveyancer on the basis of professionalism, and the solicitor/conveyancer to whom the client has been referred is unaware of the referral.
The client is being assisted, insofar as she is being referred for reasons that are of benefit to him. The solicitor/conveyancer is being rewarded for good work and service by the fact that “word-of-mouth” is contributing to her reputation and generating work.
A self-serving referral
As soon as the party to whom the referral has been made is informed, the referral becomes self-serving.
Why would the estate agent tell the solicitor/conveyancer of the referral? The obvious answer is that the estate agent expects something in return. The estate agent may not expect payment, but he will expect a quid pro quo, perhaps a relationship involving mutual referrals, or a “good word” here and there. This is the start of creeping corruption.
Referral used as a form of control
Referrals from estate agents to solicitors/conveyancers allows the estate agent to cast himself as the High Priest of the real estate transaction, while the solicitor/conveyancer assumes the role of mere acolyte.
(A prime example of this is the ritualistic passing of the contract from the solicitor to the estate agent. The solicitor/conveyancer prepares the contract of sale, but then delivers it to the estate agent. The estate agent is permitted to take full control of the sale transaction on behalf of both parties, including all of the legalities associated with the final drafting and execution of the contract, and then delivers the completed “deal” to the acolyte.
It is then the acolyte’s role to examine the contract, and explain to her client what he has signed. It is also the acolyte’s role to placate the client when the client discovers that the contract as finalised by the estate agent differs from what the client wanted.)
Estate agents make it their business to harass any solicitor/conveyancer who does anything that may jeopardise a sale. Remember, the estate agent’s commission of many thousands of dollars hangs in the balance.
If a solicitor advises the client to “cool off” because the contract was not prepared as she wanted it, that solicitor risks future referrals being sent elsewhere, and this can affect the way the solicitor advises her client. On the other hand, if the solicitor was unaware of the referral, and of the estate agent’s “expectations”, she may not be so concerned about the estate agent’s reaction.
A dose of reality
Sure, estate agents, solicitors, conveyancers, accountants and most professionals enter into referral relationships; that’s how business operates. But in most cases the potential for corruption is small or non-existent. For example, if a solicitor refers clients to an account, and vice versa there is little likelihood that the relationship will be damaged if both parties act properly and professionally.
However, in real estate transactions the situation is entirely different. The estate agent stands to win or lose many thousands of commission dollars if a sale fails to proceed. It may be in the purchaser’s best interests to cancel a contract, and it may be in the best interests of the vendor to allow the purchaser to cancel. But the estate agent will lose a commission. It is at this point that the estate agent sets to work, not to save the purchaser or the vendor, but to save the sale. And this is the crucial point:
The estate agent works not for the vendor or the purchaser, but for the sale!
The solicitor/conveyancer does not assist the estate agent by saving the client, but by saving the sale.
Real estate transactions are unique, in that they involve many thousands of dollars being made on the basis of decisions made by other people. The estate agent cannot afford to simply stand by and watch a commission-generating deal being jeopardised because of advice offered to one of the parties by an independent solicitor/conveyancer.
The likelihood of corrupt intervention by the estate agent, and quiet acquiescence by the solicitor/conveyancer is so great that ANY client referral made on the basis of a relationship between the estate agent and the solicitor is tainted.