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Referral Fees Between Realtors and Lawyers in Ontario

Referral Fees Between Realtors and Lawyers in Ontario

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Published by Deborah325Dunn
sale, purchase, agreement for sale, exchange, option, lease, rental or otherwise and any offer or
sale, purchase, agreement for sale, exchange, option, lease, rental or otherwise and any offer or

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Published by: Deborah325Dunn on Feb 20, 2012
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Referral Fees Between Realtors And Lawyers In Ontario
 Please note that the information provided herein is not legal advice and is provided for informationaland educational purposes only. As always, my observations are based on current Ontario laws; youare cautioned not to rely on the information provided herein and that you should do your own duediligent on present and applicable Ontario laws.Ever wonder about the legality and ethics of referral fees between Ontario realtors (note: I use theterm "realtors" throughout this blog to mean real estate sales representatives) and lawyers? Say, forexample, your realtor recommends a lawyer to close your deal. If you end up going with that lawyer,is it legal and ethical for the lawyer to pay a referral fee to the realtor?Conclusion:The bottom line is that referral fees are prohibited as between a realtor and a lawyer. While the issueof whether a realtor can make a referral fee may be somewhat unclear, the Real Estate Council ofOntario has made a strong case that such fees are prohibited. A realtor is, however, capable ofreceiving a referral fee from a third party provided that such fees are first disclosed by the third partyto the client and the client agrees (preferably in writing). In such a case, the third party would pay thereferral fee to the realtor's employer (i.e. The broker), who would in turn pay the realtor. Much like arealtor, however, a lawyer is not capable of making a referral fee to non-lawyers, but is capable ofreceiving such fees under the same conditions as would a realtor. Therefore, since neither a realtornor a lawyer are capable of making referral fees (notwithstanding that they're capable of receivingthem) to one another, referral fees are prohibited as between them. Breach of this rule is both illegaland unethical.The following analysis shows how I came to these conclusions.Realtors and so-called "Bird-Dog" or Referral FeesThe combined effects of ss. 30(b) and (c) of the Real Estate Business and Brokers Act, 2002 providethat a broker shall not "pay any commission or other remuneration" to "employ or engage anunregistered person to trade in real estate".Here, a number of terms require further clarification.Section 1 defines a broker as "a person who, for another or others, for compensation, gain or rewardor hope or promise thereof, either alone or through one or more officials or salespersons, trades inreal estate, or a person who holds himself, herself or itself out as such".Moreover, s. 1 defines a salesperson as "a person employed, appointed or authorized by a broker totrade in real estate". Here, the word "employ" means "to employ, appoint, authorize or otherwisearrange to have another person act on one's behalf, including as an independent contractor".Finally, s. 1 defines a trade as including "a disposition or acquisition of or transaction in real estate bysale, purchase, agreement for sale, exchange, option, lease, rental or otherwise and any offer orattempt to list real estate for the purpose of such a disposition or transaction, and any act,advertisement, conduct or negotiation, directly or indirectly, in furtherance of any disposition,acquisition, transaction, offer or attempt, and the verb 'trade' has a corresponding meaning".
Clearly, while no broker may pay any form of compensation to unregistered persons in furtherance ofa trade in real estate, it is somewhat unclear whether salespersons (i.e. REaltors) are also prohibitedfrom doing so (because salespersons are not mentioned in s. 30). As Allan Johnson, Registrar of theReal Estate Council of Ontario, mentioned in a now expired Registrar's Bulletin: "A question posedrecently dealt with the salesperson and his or her right to pay some form of compensation in gratitudefor leads provided. This issue may not be as clear." Interestingly, RECO's new Registrar's Bulletin onBird-Dog fees states that, "where a brokerage is aware of, or more obviously where the brokeragewere to use an employee/salesperson as a conduit to pay some form of compensation, in an attemptto avoid the appropriate sanctions of the Act, this activity would be construed to be a violation". So if asalesperson acted alone without the knowledge of the brokerage, would the latter be immune fromliability? In the expired Registrar's Bulletin, Mr. Johnson suggested two caveats which would seem toprohibit salespersons from providing referral fees:"1. In light of the fact that salespersons are registered and employed by a specific broker and in factact with the expressed authority of their broker employer, it may be argued that a salesperson's actionin paying compensation with either before or after tax dollars, may in fact be tantamount to the brokerbreaching section [30(b)] and/or2. Payment of this type of compensation to an unregistered person, for what could likely be definedas 'in furtherance of a trade', may very well put the salesperson in the position of 'counseling tocommit an offence' wherein the person receiving the compensation is determined to be incontravention of the Act, by virtue of trading in real estate without benefit of registration."Mr. Johnson also went on to write that the form of the referral fee (e.g. A bottle of wine, a cashpayment, etc.) would not matter: "As far as the type of compensation, it would not appear to matterthe 'coin of the realm.'"While Mr. Johnson's suggested caveats were discussed in a now expired Registrar's Bulletin (and thenew bulletin does not explicitly reiterate these views), these caveats nevertheless seem sensiblegiven the purpose of the Real Estate Business and Brokers Act, 2002 (namely, to preventunregistered persons from trading in real estate) and the doctrine of vicarious liability.Accordingly, a realtor that makes a referral fee could get fined up to $25,000 and/or sentenced toimprisonment for up to one year. The broker may also be found vicariously liable and subject to thesame penalties for failing to take reasonable steps to prevent the brokerage - through the actions ofthe salesperson - from contravening theReal Estate Business and Brokers Act, 2002. Worth notinghere is that s. 40(4) of the Real Estate Business and Brokers Act, 2002 precludes any action beingcommenced by the Director against a salesperson or broker after two years from the date on whichthe offence was first known to the Director.Can a Realtor accept a referral fee from a third party? YesPrima facie, nothing in the Real Estate Business and Brokers Act, 2002, the associated regulations,or the Real Estate Council of Ontario's interpretation bulletin on referral fees seem to preclude alawyer or any other third party from providing a referral fee to a salesperson. Presumably, so long asno ethical obligations are being violated either by the lawyer or the salesperson, referral fees from the

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