The new regime

by John Murdoch Some three years ago, the then consumer affairs minister at the Department of Trade and Industry made a number of public statements which criticised various aspects of estate agency practice and identified some alleged abuses. These pronouncements were not accompanied by any suggestion of legislative reform (not even the implementation of those sections of the Estate Agents Act 1979 which remain on the shelf); instead the minister hinted, albeit rather vaguely, at the desirability of self regulation for the profession on the basis of a voluntary Code of Practice. Whether this faint flicker of interest by the Government would in itself have produced anything concrete is open to doubt, but it was followed a few months later by the publication of a review of the workings of the Estate Agents Act, which was produced by the Director-General of Fair Trading under his statutory powers. This review itself led to a “consultation document”, which was far more specific in identifying areas of concern within estate agency practice, including conflicts of interest, misdescription of property and the use of certain contract terms (such as “sole selling rights”) which clients might not understand. Following the publication of this document there was indeed a period of further consultation, during which the major estate agency bodies attempted to persuade the DTI to water down some of its more unworkable proposals. To what extent they have succeeded is now of academic interest only; what matters to the profession at large is the new rules in the form in which they finally emerged from the consultation process. These rules (or at least the majority of them) are in force from July 29, and the purpose of this article is to consider just what they will mean to practising agents. One point should be made at the outset. The Estate Agents (Undesirable Practices) Order 1991 (which, together with the Estate Agents (Provision of Information) Regulations 1991, makes up the new legislative package) originally also dealt with the misdescription by agents of property being marketed. However, this particular topic was later picked up by a Private Member’s Bill which was given enthusiastic support by all political parties, and has now become the Property Misdescriptions Act. Misdescription of property accordingly ceased to be an “undesirable practice” but it will, it seems, be a criminal offence from early 1992. Further discussion of that aspect of estate agency control will therefore be postponed until nearer the time. Legal background In order to make sense of the undesirable practices order and the provision of information regulations, it is necessary briefly to sketch in the legal framework within which they are to operate. These statutory instruments are made under powers conferred by the Estate Agents Act 1979, and they will thus apply only within the scope of that Act. This is not the place for an extended discussion of the 1979 Act’s limits, but it is worth reminding ourselves that it covers only things done in the course of “estate agency work” However, despite a continuing undercurrent of belief that this is all about “consumer protection” and the residential sector, there is no doubt whatsoever that both the Act itself and the new regulations apply equally to commercial agency. Although there are some obscurities in the statutory definition of “estate agency work”, it is clear that it effectively refers only to an agent’s broking function; this will apply to auctions as well as to sales by private treaty, but it does not include the provision by an agent of professional services such as surveys and valuations, planning advice or property management. It should further be noted that “estate agency work” for this purpose is limited to the disposal or acquisition of freehold and certain leasehold interests (notably those which fall outside the protection of the Rent Acts), and that there is considerable doubt as to whether it applies to overseas property which is being marketed in the UK. Enforcement by the OFT The new order and regulations operate to extend the circumstances in which estate agents may be proceeded against by the Director-General of Fair Trading under the Estate Agents Act. In short, the Director-General’s powers involve the issuing of various types of order against a defaulting agent. The most serious of these is a general prohibition order, which effectively bans the agent from carrying on any “estate agency work” at all. Less extreme are prohibition orders which are limited by reference either to the type of work (eg the holding of deposits) or to the area of the UK which the order covers. Depending upon the grounds on which his intervention is based, the Director-General may have the option of issuing a warning order. Such an order (which may again be general or limited in scope) does not place any immediate restriction upon the agent’s right to practise. However, if the agent is guilty of any further contravention, the fact that a warning order has been issued makes it fairly simple for the Director-General to justify the issue of a full prohibition order. Before the Director-General is legally entitled to issue any type of order against an estate agent, two conditions must be fulfilled. First, the Director-General must be satisfied (on the evidence produced by his investigation of all the business activities of the agent concerned) that the agent is “unfit to carry on estate agency work”. Depending on the type of order to be issued, this “unfitness” may be general or limited to a particular type of work or part of the country. For a warning order, what is required is that the agent would be unfit if he transgressed again. Statutory triggers The second prerequisite for an exercise of the Director-General’s power is that the agent must be guilty of one of a number of specific defaults listed in the Estate Agents Act. These “triggers”, as they are known, fall into four groups: (a) Criminal convictions The Act lists three classes of criminal offence, conviction for which may expose an estate agent to the risk of further proceedings. These are: Any offence involving “fraud or other dishonesty or violence”. (Almost) any offence created by the Estate Agents Act itself. These are in the main “consumer protection” offences, such as obstructing a trading standards officer. However, also included is a conviction for any breach of the “client account regulations” (ie the statutory rules which govern the holding of deposits by estate agents). Any offence specified by statutory instrument. Until very recently this category remained empty, but since May 13 1991 it has contained some 50 offences listed in the Estate Agents (Specified Offences) Order 1991. These offences are for the most part taken from other “consumer protection” statutes such as the Trade Descriptions Act 1968, the Consumer Credit Act 1974, the Data Protection Act 1984, the Financial Services Act 1986 and the Malicious Communications Act 1988. However, such matters as acting as a company director when disqualified, or pretending to be a licensed conveyancer, are also included. It further seems inevitable that conviction for an offence under the Property Misdescriptions Act will in due course be added to the list. (b) Discrimination Where an estate agent is found guilty of “discrimination” in the course of estate agency work, following proceedings under the Sex Discrimination Act 1975 or the Race Relations Act 1976, that finding triggers the powers of the Director-General. (c) Breach of specific obligations under the 1979 Act The Estate Agents Act 1979 for the first time imposed certain specific obligations upon agents, which carried no criminal penalties but which were to act as “triggers” for the Director-General’s enforcement powers. These are: A duty to disclose any “personal interest” which the estate agent has or intends to acquire in property with which he is dealing (section 21). The impact of this obligation has been, as we shall see, effectively extended by the Estate Agents (Undesirable Practices) Order 1991. A duty to give the client advance notice of all charges to which he may become subject in respect of estate agency work (section 18). This obligation is extended in various ways by the Estate Agents (Provision of Information) Regulations 1991. A duty to account for interest earned on deposits, as required by section 15 and the Estate Agents (Accounts) Regulations 1981. (d) Undesirable practices The 1979 Act gave power to create new “trigger offences” by statutory instrument. This power has now been used for the first time in the Estate Agents (Undesirable Practices) Order 1991. In addition to “beefing up” the requirement to disclose a personal interest under section 21, this order also covers: Discrimination against a purchaser who does not want tie-in services. Failure to inform the client of any tie-in services provided to a purchaser. Misrepresenting offers made for a property, or the existence or status of a prospective purchaser. Failure to inform the client about offers. Enforcement procedures This is not the place for a detailed account of how enforcement takes place. Suffice it to say that the Estate Agents Act 1979 and the Estate Agents (Appeals) Regulations 1981 together cover the Director-General’s powers of investigation; proposed orders and the agent’s right to a hearing; appeals against orders; applications by agents to have orders revoked or varied; and the keeping of a public register of orders. We may now turn to consider how the recent changes will affect agents in practice. Dealing with clients The new procedures fall conveniently into two groups: those which require attention as soon as a client-agent relationship is created; and those which form a continuing obligation on the agent’s part. Agent’s duties at the outset Section 18 of the Estate Agents Act 1979 requires an estate agent to give his client detailed information as to the charges which the client may become liable to pay in return for estate agency work. Failure to give this information is a serious matter; not only does the agent risk incurring the wrath of the OFT but he may also find that a clued-up client is entitled to refuse payment of any commission. The information required by section 18 consists of: the circumstances in which commission becomes payable; the amount of commission or the way in which it will be assessed (eg percentage or scale); circumstances in which any other charges will become payable (eg expenses, withdrawal fees); either the amount of any such payments or the method of assessment and an estimate. (According to the well-known Burling Morrison case, in which proceedings were brought under section 18 against a firm of chartered surveyors, what is needed is a detailed itemisation of possible expenses; what is more, an agreed “ceiling” on advertising expenses does not constitute the necessary “estimate”.) As originally enacted, section 18 did not require this information to be given in any particular form (though any sensible agent would, of course, put it in writing). The information was to be furnished before the agent and client entered into a contract for the provision of estate agency work; this requirement could have caused considerable problems (owing to uncertainties as to when this contract comes into existence), but the OFT made it clear that they would regard a “confirming letter” as complying with the law, at least where such a letter was promptly sent. The Estate Agents (Provision of Information) Regulations 1991 significantly amend section 18, as to both the information which is to be provided and the time and manner of its provision. Additional information about services offered Apart from the general equitable principle which prohibits any agent from allowing his own interests to conflict with those of his client (a rule most commonly breached by an agent seeking to make a “secret profit”), the law has not hitherto attempted specifically to control the practices (and alleged abuses) relating to tie-in services. The new regulations thus break entirely new ground in providing that any estate agent who intends to make such services available to prospective purchasers must notify the client of this from the outset. However, the regulations do not specifically require the agent to obtain the client’s authorisation to offer services to purchasers (though without such authorisation the agent might be guilty of making a secret profit, and thus liable to the client under the general law). “Services” for this purpose are defined so as to catch any service (unless provided free of charge) such as would ordinarily be made available to a prospective purchaser in connection with his purchase or his use and enjoyment of the property (specifically including banking and insurance services, financial assistance such as mortgage provision and selling the purchaser’s own property). The agent must inform his client of all such services which are to be provided: by the agent himself, or by a “connected person” (defined below), or by any other person in circumstances where the agent or a “connected person” will derive a financial benefit such as commission from the transaction. “Connected person”, which is obviously crucial in this context, is in effect derived from the definitions used in the Estate Agents Act 1979 to define “personal interest”. It includes: the estate agent’s employer; the estate agent’s employee; the estate agent’s principal; the estate agent’s agent; any “associate” of the estate agent; any “associate” of anyone in the first four categories! The definition of “associate” (contained in sections 30 and 31 of the Estate Agents Act 1979) is an extremely complex one, which includes both “business associates” such as partners and also a wide circle of relatives. Furthermore, where the “estate agent” concerned is a company, partnership or unincorporated association, the Act provides that it may be “associated” with other linked companies, partnerships and unincorporated associations. The net result of all this is that clients must be informed if an estate agency firm intends: to offer services to prospective purchasers directly; to offer services to prospective purchasers through an associated firm; to recommend any provider of services to prospective purchasers (and to receive a commission for doing so). Time and manner of notifying the client As mentioned above, the original wording of section 18 was not altogether clear as to either how or when an estate agent was to furnish his client with the required information. More detail on these matters is given by the new regulations which, it is important to remember, apply to all the information which is to be given under section 18 — details of tie-in services as well as information about charges. As to form, all that need be said is that the new regulations require the information to be given in writing. As to timing, the information is to be given at “the time when communication commences between the estate agent and the client or as soon as is reasonably practicable thereafter provided it is a time before the client is committed to any liability towards the estate agent” The practical effect of this wording is that an agent who receives instructions by word of mouth (eg by telephone) must accept those instructions only conditionally, full acceptance being postponed until such time as the client has been given all the required information in written form. Notwithstanding their apparent acceptance by the OFT, it seems that the days of the “confirming letter” (which, in a buoyant market, might well be sent to a client after the agent had found a suitable purchaser) are over. It is worth noting that, although these regulations appear to have been drafted on the assumption that estate agents invariably work for vendors, the Estate Agents Act in general and section 18 in particular apply just as much to agents acting on behalf of persons looking for suitable properties (ie prospective purchasers or tenants). Such clients must also be notified promptly and in writing as to their potential liability for charges, although the provisions as to tie-in services are obviously not relevant in such a situation. Special commission clauses In an effort to ensure that clients do not commit themselves to certain restrictive estate agency arrangements, such as “sole agency”, without any understanding of what is involved, the new regulations require such arrangements to be explained to the client in advance. Furthermore, in a technique borrowed from statutes such as the Consumer Credit Act, the regulations insist that these explanations shall use a particular form of words which is set out in the regulations themselves. However, unlike other “consumer protection” provisions, there is no requirement that the client signifies his acceptance of the terms in writing, nor that he be given any kind of “cooling off” period. The three arrangements which are selected for this special treatment are “sole selling rights”, “sole agency” and the tying of commission to the introduction of a “ready willing and able purchaser”. The regulations provide a standard-form explanation of each of these terms (too lengthy to be reproduced here) and require agents to use these explanations “without any material alterations or additions” and to show them “prominently, clearly and legibly”. Two further provisions are designed to prevent simple evasions: if the context renders the statutory explanations in any way misleading, they must be amended, and if other similar terms are used (eg “joint sole agency” or “person willing to purchase”), these must again be accompanied by the statutory explanations, suitably tailored to fit. Agent’s continuing obligations Variation of terms Section 18 of the Estate Agents Act 1979 requires that, in addition to giving the client information at the outset of the relationship, the agent must keep this information up to date. If the parties agree to vary the terms, for example by turning what was a multiple agency into one of sole agency, then the agent must give the client notice of the new ones. The agent’s updating obligation under section 18 is filled out by a provision in the new regulations that, where the terms of an estate agency contract are changed by agreement between the agent and the client, the client is to be notified in writing of the new terms. The time at which this written notice is to be given is “the time when, or as soon as is reasonably practicable thereafter, those changes are agreed”. Disclosure of personal interest in purchase Section 21 of the Estate Agents Act 1979 compels an estate agent to disclose both his own personal interest in land, and that of his “associates”, to any person with whom he enters into negotiations for the acquisition or disposal of the property. The section has been heavily criticised for its ambigous and obscure drafting, which not only catches a number of situations in which abuses are highly unlikely to occur but also appears not to apply in certain areas where protection is required. It now seems that the Government has tacitly acknowledged the deficiencies of the section, since the Estate Agents (Undesirable Practices) Order 1991 covers much of the same ground. So far as an estate agent’s obligation to his client is concerned, the new order is clear and to the point. It requires the agent to disclose to his client “promptly and in writing” that he himself has, or is seeking to acquire, a beneficial interest in the land, or that he knows that a “connected person” (the meaning of which has already been discussed) is in a similar position. This new provision seems applicable to a number of different situations, including: where an agent acting for a vendor or landlord already has a “beneficial interest” in the property, eg where a tenant instructs the agent to market his lease and the agent has an interest in the freehold. (This might seem somewhat unlikely to occur without the client’s knowledge but, if the actual interest is owned by a “connected person”, it is of course perfectly possible for the client to be unaware of the “connection”.) where an agent acting for a vendor or landlord wishes to acquire a beneficial interest in the property. Again it might be assumed that the agent’s own interest would automatically come to light, but the interests of connected persons might well not do so. where an agent acting for a client who is seeking property to rent or buy introduces property in which he or a “connected person” has a beneficial interest. where an agent acting for a client who is seeking property to rent or buy introduces a property and then wishes to acquire it for himself (ie either the agent or a connected person intends to compete with the client for the property). Whether practising agents are worse off as a result of this provision depends on if section 21 (which continues to operate in parallel with the new rules) is actually capable of dealing with disclosure to the client. If it is not, then naturally a new and rather onerous obligation has been created. If, however, the section does apply in this situation, then the undesirable practices order adds nothing to an agent’s existing obligations. Indeed the new rules are narrower than the statute itself, in that they apply only where the estate agent actually knows that a connected person has an interest, whereas section 21 also catches situations where the agent merely ought reasonably to know. In the light of this uncertainty, it is suggested that any sensible estate agent will resist the temptation to adopt a “see no evil” policy, and will make regular enquiries among his employees and other associates to ensure that no indirect personal interest is left undisclosed. Services requested by purchasers The obligation placed upon an estate agent to notify his client in writing, if certain services are to be offered to prospective purchasers, has been considered above. However, this obligation is a continuing one in the sense that, once a prospective purchaser has been introduced to the client and has made an offer, the estate agent will be guilty of an “undesirable practice” if he fails to provide the client “promptly and in writing” with an accurate list of all services for which the purchaser has applied and which have not been refused, provided that the agent is aware of the application. The agent’s duty to inform the client (which continues until contracts have actually been exchanged) again extends to services supplied by a connected person and to those from independent sources out of which the agent receives commission. Details of offers received The 1991 order designates as an “undesirable practice” any failure by an estate agent to forward to the client “promptly and in writing” accurate details of any offer received from a prospective purchaser. It is provided that an “offer” for this purpose includes a conditional offer (eg one which is “subject to contract”); however, it is specifically left open for the client to agree in writing that certain details (or certain types of offer) need not be supplied. Dealing with purchasers Disclosure of personal interest One of the “undesirable practices” identified by the 1991 order is: “Failure by an estate agent to make disclosure of his personal interest as required by section 21(1) of the Estate Agents Act 1979 promptly and in writing.” In thus fleshing out what is already required by section 21, the draftsman has credited his readers with enough wit to know what “writing” means and has not sought to define it. “Promptly”, however, is a different matter; this is defined as “within as short a period as is reasonably practicable in the circumstances, from the moment when what is to be done can reasonably be done”. In order to make sense of this new provision, it is necessary to turn to section 21(1). This provides that, where an estate agent has a personal interest in land, he must not “enter into negotiations” with any person with respect to the acquisition or disposal by that person of any interest in that land until he has first disclosed to that person the nature and extent of his personal interest. The point therefore is not that the agent’s interests may conflict with those of his client, but rather that applicants should be told if the agent has an interest in the sale beyond that of merely earning his commission. For the purposes of the Estate Agents Act, and therefore of this new requirement, the concept of “personal interest” covers two possible situations. The first, that of a direct personal interest, is found where the agent has any beneficial interest, legal or equitable, in the land itself or in the proceeds of sale of it. (“Any” is important here; the agent’s interest need not be the one which is being marketed.) The second, which may be termed an indirect personal interest, arises where any member of a wide circle of persons, who are connected in some way with the agent, has a direct interest of which the agent is or ought to be aware. This “wide circle” consists of those who are described by the 1991 order and regulations (though, somewhat oddly, not by the Act itself) as “connected persons”. As we have already noted, it includes the agent’s employer, employee, principal and agent, with his (and their) “associates”. An estate agent who has a “personal interest” within this definition (and, given a small town and a large family, that could cover most of the properties on his books!) must disclose the nature and extent of his interest “promptly and in writing” to any third party with whom he negotiates. Furthermore, it should be noted that certain situations which are not covered by the new order are none the less caught by section 21 (which continues to apply). In such cases there is still a duty of disclosure, although there is no specific requirement in section 21 to make it “promptly and in writing”. None the less, any agent would be well advised to use writing for all disclosures of personal interest, whether or not this is strictly required by law. The most important cases which fall within section 21 but not within the undesirable practices order occur where an estate agent who does not have a personal interest in the property when he is first instructed none the less expects to acquire one as a result of the transaction in prospect. Such a situation may arise, for example, where an agent is seeking a suitable property on behalf of a prospective purchaser or tenant with whom he is “connected”. Here the vendor/landlord must be told before negotiations begin that the agent’s involvement in the deal goes further than his interest as a mere agent in earning commission. A further example (and one which shows up the deficiencies in the drafting of section 21) is where an estate agent acting for a vendor introduces a “connected person” as a potential purchaser. Here again the agent’s legal obligation is to make full disclosure of the connection — not to the client, but rather to the connected person himself! Before leaving the question of disclosure of personal interest, it is worth drawing attention to one matter which is not caught by either the undesirable practices order or section 21 of the 1979 Act, despite being singled out for adverse comment by the DTI. This occurs where an agent acting for a vendor wishes to purchase the property himself (or sell it to a connected person). In such a case, as we have already noted, the agent must disclose his interest to his client; however, it seems that there is no obligation on the agent to inform other prospective purchasers that he is in competition with them! Discrimination over services We have already noted that the new regulations require estate agents to inform their clients (continuously) about any “tie-in” services which are being offered to prospective purchasers. In addition, the 1991 order takes action on something which has received considerable adverse publicity, namely, discrimination by agents against prospective purchasers who do not want their services (“services” for this purpose being defined in the same way as before). Any such discrimination (a word which is not specifically defined in the new order) is henceforth to be treated as an “undesirable practice”. Misrepresentations as to offers or purchaser’s status As well as a positive obligation to keep the client informed about any offers which the agent has received for his property, the 1991 order imposes an obligation of a negative kind: an estate agent must not make any misrepresentation as to the existence of or details relating to any offer for the interest in land, or as to the existence or status (eg financial standing or readiness to exchange contracts) of a prospective purchaser. The particular abuse which this provision is intended to curb is presumably that of agents “bidding up” prices by telling lies to a prospective purchaser about the state of competition for the property, although it should be noted that the wording used may well also cover statements made to the client. (Whether it will do so depends on if the word “misrepresentation” is taken to have its technical legal meaning of a statement made by one contracting party to the other, or whether in this context it simply means any untrue statement.) The new order applies only to misrepresentations which are made knowingly or recklessly; given that restriction, however, it is important to bear in mind that oral statements will be caught, as well as those made in writing. As to the subject-matter of such misrepresentations, the order specifically includes conditional offers (such as those made “subject to contract”). However, it does not apply to “offers of a description which the client has indicated in writing to the estate agent need not be forwarded to him”. This, it must be said, seems a most peculiar exclusion, since it can hardly be suggested that the client in such circumstances intends to open the door to positive misrepresentation by his agent. What is more, why should the client’s agreement to forgo information entitle the agent to tell lies to prospective purchasers? The most charitable explanation may be that this is simply a drafting error. A final point which should be made about this provision is that, in deference to concerns expressed by property auctioneers, it specifically excludes “the right of an auctioneer to bid in accordance with section 6 of the Sale of Land by Auction Act 1867”. This means that, provided that a right to bid on behalf of the vendor has been reserved in either the particulars or the conditions of sale, the auctioneer may lawfully exercise that right, free from any fear that failure to tell other bidders that the vendor is still bidding might amount to a misrepresentation and thus to an “undesirable practice”. However, auctioneers would do well to keep within bounds their natural delight and triumph at this exemption. It remains the opinion of many writers, the present one included, that the time-honoured practice of taking bids “off the wall” may well amount to the criminal offence of “obtaining property by deception” under section 15 of the Theft Act 1968. If that is correct, then an auctioneer who faces the prospect of a 10-year holiday at Her Majesty’s expense will be marginally consoled only by the thought that what he did may arguably not constitute an “undesirable practice”! Conclusions There is no doubt that the Estate Agents (Provision of Information) Regulations and the Estate Agents (Undesirable Practices) Order will have to be taken seriously. Since they were drafted to curb what the OFT considered to be abuses in estate agency practice, it seems reasonable to assume that the OFT will want to flex its new muscles, and so the profession can expect to see a flurry of enforcement activity for a while. As to what, in practical terms, agents will have to do to avoid falling foul of the new regulations, four particular lines of approach spring immediately to mind: all standard letters currently used by the firm (eg to confirm instructions or to notify clients of offers received) should be carefully checked, in order to ensure that they comply with the new requirements. new standard letters should be drafted to cover such matters as tie-in services requested by applicants, or potential purchasers who are “connected persons”. all staff (including those whose function has no connection with “estate agency work” as such) should be thoroughly instructed in the workings of the new rules, especially those which relate to the disclosure of “personal interest”. in general, office procedures should be designed to ensure so far as possible that all forms of communication — not only correspondence but also sales particulars, advertisements etc — are either in standard form or are checked by a senior employee. (This will assume an even higher degree of importance when the Property Misdescriptions Act comes into force.) All these precautions will add significantly to the pressures on those seeking to earn an honest crust from estate agency, and they are of course especially unwelcome in the current state of the market. However, anyone tempted to cut corners in this area should be under no illusions as to the stakes involved — to be banned from practice altogether would be an awful price to pay for an agent’s failure to put into operation an effective system of communication with clients and applicants alike!