Complaint No C05160 [2015] NZREAA 237 (3 September 2015)

Last Updated: 14 May 2016

In the Matter of Part 4 of the Real Estate Agents Act 2008

And

In the Matter of Complaint No: C05160

In the Matter of Agency Two

License Number: XXXXXXXX

Licensee One

License Number: XXXXXXXX

Licensee Two

License Number: XXXXXXXX

Agency One

License Number: XXXXXXXX

Licensee Three

License Number: XXXXXXXX

Agency Four

License Number: XXXXXXXX

Licensee Four

License Number: XXXXXXXX

Licensee Five

License Number: XXXXXXXX

Agency Three

License Number: XXXXXXXX

Licensee Six

License Number: XXXXXXXX

Licensee Seven

License Number: XXXXXXXX

Decision of Complaints Assessment Committee

Dated this 3rd day of September 2015

Complaints Assessment Committee: CAC 405

Chairperson: Graham Rossiter Deputy Chairperson: Jane Parker Panel Member: Geoff Warren

Complaints Assessment Committee

Decision to take no further action

1. The Complaint

1.1 This complaint is by the Real Estate Agents Authority (the Authority). It follows an expression of concern from a real estate agent that the four major real estate companies in that city (collectively, the four Agencies) were engaging in anti-competitive ‘cartel’ type behaviour. A decision was made by this Complaints Assessment Committee (the Committee) to inquire into the complaint and the Authority investigator has sought and obtained full responses from each of the four Agencies. Those responses have been now referred to the Committee for a decision on the complaint.

2. Material Facts

2.1 The expression of concern, following which the Authority submitted a complaint to the Committee, alleges that the four Agencies will not ‘conjunct’ with smaller agencies and that this practice is a matter of deliberate policy, to which the heads of the four Agencies have instructed their sales staff to give effect. The allegation is that the object and purpose of this putative

‘policy’ is to prevent other real estate companies in the city from becoming established and commercially successful.

2.2 ‘Conjuncting’ is the process whereby a real estate salesperson introduces a buyer to another real estate company’s listed property and, if a sale results, the selling licensee receives a commission share from the listing company. The benefit of such a practice is that home sellers have access to every potential buyer in the market.

2.3 The four Agencies, who are allegedly operating a ‘cartel,’ have a combined 75% market share, both in terms of the licensees working for them and in terms of volumes of sales. The number of real estate companies operating in residential sales in the city would appear to be disproportionately low, on a comparative basis. The number of sales per company is disproportionately high, again in comparative terms.

2.4 It is contended that by working together, if in fact that is the case, the four Agencies’ dominance allows for the price fixing of commissions. In this regard, it is again suggested, that the risk to smaller companies entering the city’s real estate market is that, if there is a ‘cartel’ operating, any general awareness or understanding that the four Agencies and their staff will not work with other companies to assist in a sale, will limit the ability of those other companies to establish a market presence and offer the public genuine competition.

2.5 Further to the above paragraph, this summary of material facts must immediately acknowledge that the four Agencies all deny, in strong terms, the existence of a ‘cartel.’ The four Agencies have different policies as to who they will ‘conjunct’ with and on what terms. The content of their

‘conjunct’ policies have been fully disclosed to the Authority. (See the discussion below).

3. Relevant Provisions

3.1 The relevant law includes, as a starting point, the definition of ‘misconduct’ in s73 of the Real Estate Agents Act 2008. In addition, consideration is required of rule 6.3 of the Real Estate Agents Act (Professional Conduct and Client Care) Rules 2012. This states that: “A licensee must not engage in any conduct likely to bring the industry into disrepute.”

3.2 With reference to the particular issues arising from this complaint, regard should be had to the relative, broader, regulatory framework, including legislation such as the Commerce Act 1986. Particular provisions of this statute of relevance include:

a) S27(1): “No person shall enter into a contract or arrangement, or arrive at an understanding,

containing a provision that has the purpose, or has or is likely to have the effect, of

substantially lessening competition in a market.”

b) S36(2): “A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of- a) restricting the entry of a person into that or any other market, or b) preventing or deterring a person from engaging in competitive conduct in that or any other market or c) eliminating a person from that or any other market.

4. Discussion

The Agencies’ Responses:

4.1 The Authority obtained responses from each of the four Agencies to the allegations that are the subject of this complaint. The four Agencies’ stated positions on conjunctional agreements are summarised below:

Agency One:

4.2 Agency One has standing reciprocal conjunctional agreements in place with Agency Two, Agency Three, and Agency Four (with an agreed fee split of 60 per cent to the listing agency, 40 per cent to the selling agency).

4.3 Agency One states that it does not deny access to its listings to buyers working with salespersons from agencies outside the big four, who are welcome to view and buy their listings. What they do not allow is “unsupervised access” to the property / client by a salesperson from an outside agency. Agency One’s listing agent is expected to show the property, attend to disclosure, prepare any sales and purchase agreement etc., and on that basis, Agency One does not split its commission with the outside agency.

4.4 Agency One’s written policy on non-conjunctional buyer introductions – which we note is dated

29 October 2014 – states: “If you are contacted by a salesperson from a [the city’s] firm that we don’t have a conjunctional arrangement with, it is very important you don’t deny access to the buyer which would disadvantage our client.”

4.5 As to disclosure of its policy to the client, Agency One’s written policy goes on: “If when signing up a new listing the prospective vendor asks any questions re our Conjunctional Policy you need to cover all the above points clearly. The vendor needs to understand we welcome all buyers but only allow our Conjunctional partners UNSUPERVISED access to our listings.”

4.6 Agency One states that, should one of its buyers express an interest in a property listed with an outside agency, it would encourage that buyer to contact the outside agency directly; Agency One would not expect to share in any commission.

Agency Two:

4.7 Agency Two has reciprocal conjunctional agreements in place with: (a) Agency One (60/40);

(b) Agency Three (60/40); (c) Agency Four (60/40); (d) Agency X (60/40);

(e) Agency Y (75/25).

4.8 Agency Two states that it has no problem conjuncting with smaller companies providing that there is a “mutually respectful relationship” between the two companies; the smaller company is not operating as a “buyer’s agent” only (i.e. it has properties listed for sale) and the company’s services and fees to the vendor are in line with established industry practice. It states that it has always had two commission split arrangements: 60/40 with companies that offer access to a similar number of listings as Agency Two and 75/25 with companies offering less by way of listings back to Agency Two.

4.9 Agency Two offers particular reasons for not having a conjunctional agreement in place with Ms.

H/Agency Z, relating to the circumstances in which Ms. H, a former Agency Two salesperson, left

Agency Two to set up her own business, allegedly taking staff and clients with her.

Agency Three:

4.10 Agency Three has reciprocal conjunctional agreements in place with: (a) Agency One (60/40);

(b) Agency Two (60/40); (c) Agency Four (75/25);

(d) Agency Y, Agency Z, Agency X and Agency W (90/10).

4.11 Agency Three states that it will conjunct with any “competing full service real estate company”, provided that the company reciprocates and operates in a professional manner and does not put Agency Three or its reputation at risk.

4.12 Sales data has been provided confirming conjunctional sales have taken place with outside agencies, including Agency Z (Ms. H).

Agency Four:

4.13 Agency Four has standing conjunctional agreements with: (a) Agency One;

(b) Agency Two; (c) Agency Three; (d) Agency W;

(e) Agency V.

4.14 This company states it has, in addition, previously had conjunctional agreements with smaller companies that are no longer operating.

4.15 Agency Four advises that it makes decisions on whether or not to enter into a conjunctional agreement with another agency based on the commercial benefit to Agency Four (i.e. reciprocal listings) and the relationship between the two companies. It states that the absence of a conjunctional agreement does not exclude other agencies from Agency Four’s listings, as it will agree to conjunct on an “ad hoc” basis and has done so with companies including Agency A, Agency B, Agency X (different branch), Agency Three (different branch), and Agency C.

4.16 Agency Four has provided documents showing that its salespeople have allowed access to

Agency Y and Agency Z salespeople in line with its “ad hoc” referral sales policy.

Our Analysis:

Conjunctional Agreements and the Responses:

4.17 It appears that the phrase “conjunctional agreement” has two distinct meanings within the real

estate industry. It may refer to:

(a) An ongoing, standing relationship between companies to allow reciprocal access to listings on the basis of a standard agreed commission split (Standing Conjunctional Agreement); or

(b) A one-off agreement between companies to “work-in” on a sale and split the commission, on the basis that a salesperson from Company A introduced a buyer to a property listed by Company B (Work-In Agreement).

4.18 The potential risk to consumers comes not from a company’s failure to have a Standing Conjunctional Agreement in place with all its competitors, but arises where a company refuses to enter into Work-In Agreements, on an arbitrary basis, without full disclosure to its clients.

4.19 A common theme across the responses of the four Agencies is that they will only enter into Standing Conjunctional Agreements with companies with which the Agency has a good relationship, where there is a degree of reciprocity in terms of access to listings, and where the other company operates with a similar level of professionalism to the Agency itself. That seems to be because, where a Standing Conjunctional Agreement is in place, the conjuncting company’s salespersons are allowed a large degree of access to the listing companies’ properties and clients.

The Allegation of a ‘Cartel’:

4.20 The Concise Oxford Dictionary defines a ‘cartel’ as including a “union [of business entities] to control production, marketing arrangements, prices etc.” What is, in substance, alleged in this case is that there is and has been, in the city, a ‘union’ or combination between the four Agencies to deliberately restrict or limit conjunctional arrangements, so as to exclude or at any rate make it more difficult for other, and especially smaller agencies, to enter or survive in the real estate market in this city. The Committee acknowledges that evidence of an anti-competitive cartel or combination may often be indirect and circumstantial. That said we have to say that any evidence of a cartel or combination on the part of the four Agencies is conspicuous by its singular absence. In this regard, what is significant in our view is the striking differences in the content of the four Agencies’ respective policies, this being a factor which is hardly consistent with the existence and operation of a cartel.

4.21 Based on the four Agencies’ responses and the documents provided in support, there is

insufficient evidence to establish that Agency Three and Agency Four refuse to enter into Work-

In Agreements on a blanket or arbitrary basis. Both appear to be open to working with outside agencies, at least on a case by case basis.

4.22 The only company that appears to have a blanket policy of never working-in with outside agencies is Agency One. Agency Two also appears to have a general policy of not working-in with Ms. H /Agency Z.

4.23 Agency One states that it does not deny access to its listings to buyers working with outside agencies; it is just not prepared to offer “unsupervised” access and expects its listing salesperson to retain responsibility for any real estate agency work on the transaction. As a result, it will not agree to share commission in such circumstances, although the buyer is welcome to view the property (including with their agent) and make an offer.

Summary and Conclusion:

4.24 With reference to general principles applicable, it has to be acknowledged, we think, that companies do have the right to choose who they will and will not do business with. Section 17 of the New Zealand Bill of Rights Act 1990 provides that: “Everyone has the right to freedom of association.” This must surely, as a matter of natural implication, include a right to not associate

– and, as stated, exercise choice in this regard for whatever reasons a particular corporate entity regards as being legitimate. This proposition must however, be obviously qualified by the important caveat that a decision not to associate with another business entity must not be actuated by the kinds of motives that are, in legislation such as the Commerce Act, proscribed for very valid public policy reasons.

4.25 A further contextual observation is that conjunctional arrangements cannot be said to be universally found throughout the real estate industry. In some parts of New Zealand, they are hardly seen at all. With respect to the conjunctional policies of the four Agencies, as already stated, they vary as to their terms and effects – including as regards such aspects as the degree of conjunctional interaction and the sharing of commissions. It is not really for the Committee to question the four Agencies’ policies, provided that, again, they are not created or applied for anti-competitive purposes or in a manner that is inconsistent with the fundamental consumer interests the Real Estate Agents Act is all about supporting and protecting. It is further (but subject of course to the qualification just made) not for the Committee to substitute its business judgment for that of particular agencies with respect to the fundamental commercial question of who they are prepared to enter into conjunctional agreement with and on what terms.

4.26 The overall conclusion the Committee is, as might be inferred, moving towards in this matter is that the four Agencies’ conjunctional policies are not, in their intent or application, such as to breach relative industry standards under the Committee’s empowering statute. We would, however, raise a possible concern that if a company does have a policy of not conjuncting at all (which would appear to be, in practical terms, Agency One’s position) or not conjuncting with a particular licensee or company, as seems to be the case with Agency Two’s declining to so engage with Ms. H/Agency Z, such policies should be appropriately disclosed to the agencies’ vendor clients. This is because of the obvious potential for a restricted conjunctional policy – or a refusal to conjunct at all – to restrict the pool of possible buyers who may have access to an agency’s vendors. In this regard, Agency One’s practice, for example, is to apparently only disclose the parameters of its conjunctional policy if a client asks about it. There might well be a need for positive pro-active disclosure of its policy to clients. We leave that point open because we do not need to determine it to resolve this complaint. That said, Agency One and Agency Two may wish to review their position with respect to the disclosure of their conjunctional policies to

their respective clients. The Committee would invite them to do so.

5. Decision

5.1 After conducting an inquiry into the complaint, pursuant to section 89(1) of the Real Estate Agents Act 2008 (the Act), the Committee held a hearing with regard to that complaint. In accordance with section 90(1) of the Act, the Committee conducted the hearing on the papers, and pursuant to section 90(2) the Committee’s determination was made on the basis of the written material before it.

5.2 The Committee has determined under section 89(2)(c) of the Act to take no further action with regard to the complaint or any issue involved in the complaint.

6. Publication

6.1 One of the Committee’s functions pursuant to section 78(h) of the Act is to publish its decisions.

6.2 Publication gives effect the purpose of the Act of ensuring that the disciplinary process remains transparent, independent and effective. The Committee also regards publication of this decision as desirable for the purposes of setting standards and that it is in the public interest that the decision be published.

6.3 The Committee directs publication of its decision, but omitting the names and identifying details of the Complainant (including the address of the property), the Licensee and any third parties in the publication of its decision.

6.4 The Authority will publish the Committee’s decision after the period for filing an appeal has ended. Any application for an order preventing publication must be made to the Real Estate Agents Disciplinary Tribunal (the Tribunal).

7. Right of Appeal

7.1 A person affected by a determination of a Committee may appeal to the Tribunal against a determination of the Committee within 20 working days after the date of this notice.

7.2 Appeal is by way of written notice to the Tribunal. You should include a copy of this Notice with your Appeal.

7.3 Further information on filing an appeal is available by referring to the Guide to Filing an Appeal

at www.justice.govt.nz/tribunals.

Signed

Graham Rossiter

Chairperson

Complaints Assessment Committee 405

Real Estate Agents Authority

Date: 3 September 2015

Appendix 1: Relevant provisions

The Real Estate Agents Act 2008 provides:

Section 89 Power of Committee to determine complaint or allegation

(1) A Committee may make one or more of the determinations described in subsection (2) after both inquiring into a complaint or allegation and conducting a hearing with regard to that complaint or allegation.

(2) The determinations that the Committee may make are as follows:

(a) a determination that the complaint or allegation be considered by the

Disciplinary Tribunal:

(b) a determination that it has been proved, on the balance of probabilities, that the licensee has engaged in unsatisfactory conduct:

(c) a determination that the Committee take no further action with regard to the complaint or allegation or any issue involved in the complaint or allegation.

(3) Nothing in this section limits the power of the Committee to make, at any time, a decision under section 80 with regard to a complaint.

Section 111 Appeal to Tribunal against determination by Committee

(1) A person affected by a determination of a Committee may appeal to the Tribunal against a determination of the Committee within 20 working days after the date of the notice given under section 81 or 94.

(2) The appeal is by way of written notice to the Tribunal of the appellant's intention to appeal, accompanied by—

(a) a copy of the notice given to the person under section 81 or 94; and

(b) any other information that the appellant wishes the Tribunal to consider in relation to the appeal.

(3) The appeal is by way of rehearing.

(4) After considering the appeal, the Tribunal may confirm, reverse, or modify the determination of the Committee.

(5) If the Tribunal reverses or modifies a determination of the Committee, it may exercise any of the powers that the Committee could have exercised.