Each week, national law firm Simpson Grierson answers commercial property questions which can be emailed and headed "commercial property question". This week's question is answered by senior associate Daniel Kelleher and associate Stef Jang who can be contacted at daniel.kelleher@simpsongrierson.com and stef.jang@simpsongrierson.com
Q. We are trying to sell some of our investment properties. For the first property, we engaged a real estate agent who we had used before. We have signed another agency agreement but having gone through it again we noticed some new clauses. One clause relates to "leaky building". Another clause states that we warrant that the property is free from hidden or underlying defects. There is also a lengthy clause called an indemnity. This says that if we provide any incorrect or incomplete information (including non-disclosure of any defects in the property), we would indemnify the agent for all costs, claims damages, liabilities etc. When we first bought this property about five years ago, there was an issue with the roofing. We got it fixed and since then there hasn't been a problem and the tenants have not complained. We haven't said anything to the agent and we don't want to as the problem has been fixed. Do we need to worry about anything?
A. We would need the exact wording in the agency agreement to be conclusive. However, the new clauses in the agreement appear to have been included as a response to the new Real Estate Agents Act (Professional Conduct and Client Care) Rules 2009. The rules provide a standard of professional conducts for real estate agents which came into force in November 2009 and include:
* Rule 6.4 which prohibits an agent from misleading or withholding information from a customer (ie. a potential buyer) or a client (vendor); and
* Rule 6.5 which requires an agent to inform a potential buyer of any significant potential risk where the land may be subject to hidden or underlying defects.
As the agents are now required to inform a potential buyer of any significant potential risk, we are aware that some agents have included in their agency agreements certain indemnity and warranty clauses to cover the risk that they have taken on. This is because under the relevant legislation, the agents can face large fines and other serious consequences in the case of complaints or non-compliance.
We presume the warranty clauses would have had some qualification such as "to the best of the owner's knowledge and belief". (It would have been unreasonable if it did not). In such a case, we do not think you need to worry about not mentioning the history of the roof. There is no reason or duty on you as a vendor to disclose to your agent a fixed problem where there is no reason to believe it was not fixed properly.
On the other hand, the rules require the agent to use its own knowledge and judgment to either make inquiries to the vendor to obtain confirmation that the land is not subject to a defect; or inform the potential purchaser of any significant potential risk so that he or she may seek expert advice. The standard of knowledge or experience that can be expected from an agent is not yet clear but we think it is likely to be of a reasonable and competent agent (and not entirely based on the individual's actual knowledge). This is because the agents must now be registered, have prescribed qualifications and a minimum of three years experience in the real estate agency work. Presumably, if the vendor cannot confirm that the property is defect free when the agent considers otherwise, the agent would have to warn potential purchasers.
Even if there was an unknown defect, we do not think a blanket warranty or indemnity clause in an agency agreement can shift the liability from the agent (as required by the rules) on to the owner. The agent will be liable to the purchaser.
The indemnity merely allows the agent to try to recover from the vendor for its loss. But in case of any doubt, and where possible, we would recommend that a vendor seek legal advice before signing any agency agreement if the agreement includes any such indemnity or warranty provisions. The rules and the relevant legislation are quite new and yet to be tested. Taking precautionary measures is likely to reduce the risks of ending up in lengthy and costly litigation.
The information contained in Commercial Property is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.
