Sellers ‘could sue online agents for breach of fiduciary care’, says barrister

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The barrister who has looked into the business models of hybrid agents says that the possibility of legal actions being brought against them on the basis of a breach of fiduciary duty cannot be discounted.

Ian Rees Phillips, of 6 Pump Court chambers, said yesterday that he sees no immediate likelihood of such cases, and nor does he currently know that there are a lot of unhappy sellers.

However, said Mr Rees Phillips, there is “always the potential danger” for hybrid agents to face legal action because of “mismatched incentives”.

A breach of fiduciary duty allows the wronged principal (say, a home seller) to bring a claim against the fiduciary (in this case, the agent).

If there has been a conflict of interest or profit at the principal’s expense, then the remedies can include normal compensatory damages, an account of profit unlawfully made by the agent, or a full transfer of sums received, on the basis that sums earned in conflict with the principal should be held under a constructive trust for the benefit of the principal.

Mr Rees Phillips said that hybrid agents are incentivised by charging to list a property, whereas the vendors’ interest is usually to want the best possible price.

He said: “In a ‘traditional’ commission-based model, these two interests would be aligned, but that is not the case for hybrid agents

“Agents traditionally defer the whole of their fee until the end of the transaction, and it is contingent on achieving a sale.

“It could be that this is at the expense of being more expensive.

“With the hybrid model, the agent’s incentive is to list. If, after having sold and moved, a vendor came to believe that their interests had been ill-served, perhaps because the property had been seriously under-valued, then they could bring an action.

“A refund of their fee may not be enough, because property is so valuable. If a house had been under-valued by, say, 10%, that could be a great deal of money and the vendor could seek redress through the courts – the refund would not compensate them.”

Mr Rees Phillips also said that the deferred payment model – which he refers to in his opinion – could also be subject to legal challenge.

Where hybrid agents allow vendors to defer their fee on the basis that they must use a specified conveyancing service, he said that this might be challenged on competition grounds

Mr Rees Phillips pointed out that he was not presently aware of any legal cases that have been brought against hybrid agents. He expects that any that are brought in future would have to turn on their own individual merits; however, were there a “running thread” in a number of them on a point of principle, such as breach of fiduciary duty, there could be a group action against an agent.

He said: “It is very early days yet in the life of the online agent industry, but the potential is there.”

In his opinion, commissioned by new trade body UKPA (UK PropTech Association), Mr Rees Phillips notes: “In short, the online agents’ commercial interest is not to sell properties, but just to list them, and in that circumstance, it is easy to imagine a scenario where conflicts of interest or profits at principal’s expense could occur – for example, once the property is listed, there is no incentive for the agent to do any work in selling the property that a ‘traditional’ agent would do, such as following up on inquiries, consulting existing potential purchasers about new properties for sale and so on.

“It has to be the case that this would have a marked effect on the conversion metric from listing to sale when compared to a traditional estate agent.

“If, however, the online agent values its conversion metric as a marker of performance, (perhaps for marketing to potential customers or investors), but it has no interest in the price that the property sells for (as it has already been paid its flat fee) there is a conflict between the agent’s desire to get a sale and the vendor’s desire to achieve the best price, which could easily lead to properties being sold at an under-value to the detriment of vendors.”

His opinion concludes: “The mismatch in interests and incentives between principals and online agents, given the bare ‘incentive to list’ [on the part of the online agent] might mean that the fundamental nature of the relationship is likely to tend towards breach of fiduciary duty given the competitive nature of the estate agent marketplace.”

Online agent eMoov’s Russell Quirk yesterday afternoon welcomed the legal opinion and moved to distance his own firm’s business model, saying that all of its workers are fully employed, and that “our office team is predicated around negotiators and sales progressors that do the traditional part of the job that we feel is vital for the best outcome for our customers, namely achieving the best price, qualifying buyers properly and pushing each transaction to completion”.

A new report, from Peel Hunt, tells investors that Purplebricks’ share price could rise over 50% and advises “buy”, saying it is the clear market leader in the online/hybrid sector and taking share from high street agents: “We believe it will be the largest agent in the UK within the next 12 to 24 months.” The report says Purplebricks could have over 1,000 local property experts in due course. However, it does not believe that Purplebricks will move into monthly profitability until the second half of the 2020 financial year. It forecasts that Purplebricks will make an operating profit of £85m in 2022.

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Written by: Houseladder