Shane Lowe is the Director of Methven Professionals Real Estate in Mooroolbark, Victoria. A case of “contract switching” resulted in some startling revelations from Mr. Lowe. It seems that Mr. Lowe and the great P.T. Barnum have much in common when it comes to business ethics.
P.T. Barnum is credited with the saying, “Never give a sucker an even break and never wise up a chump”. This advice is regularly observed in the real estate industry where estate agents often attempt to limit the chances of a purchaser backing out of a sale.
Lawyers regularly experience difficulty in properly representing their clients in real estate sales because of commission-driven estate agents who fear that a purchaser may not proceed with a purchase. In order to limit the chances of a purchaser backing out, some estate agents go to extraordinary lengths. The now famous Ian Reid Gazumping Clause and the Ian Reid Finance Condition are two examples.
Some estate agents will go even further, using what is known as the “contract switch”. This is where the sale contract prepared by the vendor’s lawyer is provided to the estate agent, but the estate agent switches it, replacing it with one that is more to the estate agent’s liking. The vendor’s lawyer is not told of the switch, and only discovers it after the sale has been effected by the estate agent.
For some estate agents “switching” the contract is not enough of a limitation on the purchaser’s options and so special conditions, designed to restrict the purchaser’s opportunity to withdraw from the sale, are inserted into the contract.
Our law firm was engaged to represent the vendor in a real estate sale transaction in which Methven Real Estate Professionals Mooroolbark was appointed as estate agent. In this particular case the Methven agent not only “switched” the contract without our knowledge, but also switched the building inspection condition we had drafted for one which severely limited the purchaser’s right to withdraw from the sale.
Because this type of behaviour could constitute a criminal offence in certain circumstances, I wanted an explanation for the Methven agent’s conduct. Mr. Lowe’s explanation, provided in a letter signed personally by Mr. Lowe, was most revealing.
A fair and reasonable building inspection condition
Because it is common for purchasers to sign a contract before paying for a building inspection report, we always include a special condition which allows the purchaser 7 days from the day of sale to obtain a building inspection report. If the purchaser is not happy with defects revealed in the inspection report, the purchaser has 3 days to cancel the contract. Simple and fair.
The special condition was included in the contract with the intention that any intending purchaser could take confort in the belief that their needs had been catered for. Instead of having to postpone the purchase until after the property had been inspected, the purchaser could safely purchase the property first, with the option of cancelling if a building inspecton caused the purchaser to become dissatisfied.
As a law firm, we were comfortable in the knowledge that our client’s interests were well protected, because the building inspection condition satisfied the needs of any vulnerable purchaser, while at the same time providing our vendor client with certainty of the sale after the time limits in the special condition had expired.
Nobbling the purchaser’s right to withdraw
But it would seem that our building condition was a little too fair for Mr. Lowe’s team at Methven Real Estate. The purchaser could cancel the contract if asbestos was found in the house, or if the wiring was dangerous, or if too much money would have to be spent to get the house into good repair. What is an estate agent to do if a purchaser were to cancel a sale (and a commission) because of such defects?
The Methven estate agent did not provide the purchaser with the contract we had prepared for the purchaser’s use. Instead, our contract was “switched” in favour of a Contract Note prepared by the estate agent. Similarly, the building inspection condition we had prepared to ensure fairness for both parties was replaced with one drafted by the Methven agent.
The special condition drafted by the Methven agent is provided by the Real Estate Institute of Victoria (REIV), and the REIV tells estate agents that they must confer with the vendor’s lawyer before using it (more on this later).
As the vendor’s lawyer I found the Methven agent’s behaviour particularly offensive in that the purchaser would be entitled to believe that the law firm responsible for preparing the sale document would have had knowledge of, and condoned, the use of the Methven agents Contract Note and the Methven agent’s REIV building inspection condition. Because the Methven agent kept me in the dark about the “switch” I could not do anything about it.
The “Major structural defect” problem
The limiting words in the estate agent’s special condition were “MAJOR STRUCTURAL DEFECT”. So, for the purchaser to be able to withdraw there would have to be DEFECT, but not just any defect – it would have to be a STRUCTRUAL defect (i.e. one that affects the structural integrity of the house). But not only would it have to be a structural defect, it would also have to be a MAJOR structural defect. Thus, dampness, rot or damage that has not yet affected the supporting structures may not be regarded as MAJOR, and so the purchaser would have no right to terminate.
Would any purchaser with proper legal advice allow such a special condition to be inserted into the contract? Of course not.
But who advised the purchaser about the substitute contract before the purchaser signed it? The Methven agent who prepared it!
Problems for the vendor
Purchasers who feel that they have been misled and deceived can become quite angry. Of course, they will be angry with the estate agent but they will also become angry with the vendor. Why? Because the vendor will not “let them off the hook”.
And why won’t the vendor let a dissatisfied purchaser “off the hook” by allowing them to cancel the contract? Because the estate agent is standing by with his hand out, waiting for a commission.
In these circumstances the vendor can be as much a victim of the estate agent’s behaviour as the purchaser. The estate agents’ Exclusive Sale Authority states that a commission is payable if the estate agent does no more than to obtain the purchaser’s signature on an offer. If the vendor is liable to pay a commission it becomes an expensive exercise to let the purchaser walk away.
A further problem would arise if the purchaser then attempts to sue the estate agent for misleading and deceptive conduct, and the vendor is drawn into the dispute. The estate agent is likely to say that it was the vendor’s idea, and that the estate agent was acting under the vendor’s instructions. In fact, it is more likely that the vendor was advised by the estate agent, and simply went along with what the estate agent suggested.
Mr. Lowe’s explanation
Mr. Lowe tried to blame the vendor for “switches”. According to Mr. Lowe:
“The listing agent discussed the form of building inspection condition provided in your contract with the vendor, who felt that it was too loose and favoured the purchaser unduly and felt the form of standard condition we normally employ was more in their interests.”
Why did the Methven “discuss” the issue directly with the vendor? Why didn’t the estate agent discuss the matter with the vendor’s lawyer? Why didn’t the Methven agent suggest that the vendor should discuss the matter with his lawyer? If the vendor felt that there was a problem it was probably because of advice provided by the Methven agent.
When it was put to Mr. Lowe that the Methven agent was in a position of conflicting interests, Mr. Lowe’s response was:
I fail to see how this special condition represents a “most obvious conflict of interests” on behalf of the purchaser when your standard contract provides such a condition in a form which is more favourable to the purchaser!
It seems that Mr. Lowe believes that a lawyer is “batting for the other team” if they attempt to play a fair game. In my experience, estate agents regard lawyers as something of a hazard of the job. The trouble with lawyers is that they are bleeding heart types who are interested in fairness and protecting clients, when every agent knows that the sale and the commission are the only things that matter. This ends-justify-the-means attitude, with its focus on the sale and the commission, is a cause of much misery for real estate consumers.
Methven Real Estate ignored the REIV’s instructions on the use of special conditions
One issue that Mr. Lowe did not address was the fact that he and his agent had a duty to discuss any change of contract with the lawyer whose job it was to protect the interests of the vendor.
The “standard form” special conditions issued by the Real Estate Institute of Victoria (REIV), which include the “major structural defects” building inspection condition, is issued to estate agents with the following formal warning:
“Neither the Institute nor its solicitors can accept any responsibility for incorrect or inappropriate usage of these conditions. It would be advisable to work in conjunction with the vendor’s solicitor to obtain approval for any special conditions intended for inclusion in a Contract Note.”
Why did the estate agent ignore this instruction and keep the vendor’s lawyer in the dark? Perhaps it was because Methven Real Estate had already been warned by the vendor’s lawyer.
Methven Real Estate ignored the vendor’s lawyer’s instructions on switching contracts and use of special conditions
In a letter to Methven Real Estate we instructed Methven Real Estate as follows:
“Instructions For Use Of Sale Documents
In order to properly protect our clients’ interests in this matter, we provide the following instructions for your guidance in effecting the sale of our client’s property:
- The REIV “Contract Note” is not to be used in this sale. We have been instructed to prepare the legal documents by which the sale of the above property is to be effected, and we have prepared the combined Contract Note and Section 32 Vendor’s Statement for this purpose. There is no need for the preparation of an REIV Contract Note
Our Contract and its Special Conditions provide the vendor with maximum legal protection, and take into account such issues as land identity, purchaser acknowledgements and warranties, and comprehensive default provisions. No part of it is to be altered without prior consultation with us.
- Building inspection
Please note that item 2 under the heading “SUBJECT TO” should be deleted if the purchaser is not purchasing subject to a building inspection report or a pest inspection report.
- An estate agent is not permitted to draft or insert special conditions. Where a purchaser requests the insertion of special conditions into a contract, that purchaser must be advised to seek independent legal advice from a qualified legal practitioner, and to have their own legal practitioner draft appropriate special conditions on the purchaser’s behalf. An estate agent who advises a purchaser as to the appropriateness or otherwise of a special condition, or who inserts any special conditions into a contract, breaches Section 314 of the Legal Practice Act 1996.
- Contract to be checked by vendor’s lawyer. Where a purchaser has arranged for the insertion of any special conditions into the contract, the vendors should have this drawn to their attention so that they have an opportunity to have the offer checked, and to seek our advice prior to acceptance.”
What is a lawyer to do when, despite doing everything possible to protect a vendor client and an innocent purchaser of that client’s property, the likes of Methven Real Estate, under the Directorship of Mr. Shane Lowe, display such open arrogance? The only option left is to warn others by way of a blog posting!
Legal advice from Mr. Lowe
So confident is Mr. Lowe in his knowledge of the law, and his ability to convince others of his legal expertise, that he provided me with legal advice when I mentioned to him that his agent would feature in a blog posting because of her negligent handling of the matter:
“I wish to point out that the word “negligent” in referring to (Mr. Lowe’s agent) is clearly your opinion and not in any way a fact established in any proceedings. You intend to publish it, it is damaging to (the agent’s) reputation and as such is grounds for defamation in a libel action which both she and our company reserve the right to pursue if indeed you use this term.”
Not negligent – deliberate!
Well, I don’t think the behaviour I have complained of was simply negligent. I believe that it was arrogant, deliberate and calculated. It was intended to ensure that the purchaser of my client’s property would have her options limited beyond anything either purchaser, the vendor or I had contemplated. I believe that the behaviour of Methven Real Estate Professionals Mooroolbark, operating under the Directorship of Mr. Lowe, can be described as a truly Lowe act!
This incident provides one more reason why estate agents should NEVER be permitted to touch real estate contracts.