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When is a deal a conflict of interest?

deal image Following cases concerning conflicts of interest in 2011, it is apparent that this is a topic over which there remains a degree of confusion. To clarify, there are two broad sets of circumstances in state agency work in which a conflict of interest could arise. The first is where an agent or a connected person has a personal interest in the property to be sold or purchased and the second is from situations in which an agent or connected person provides, or financially benefits from, the provision of services to a prospective purchaser.

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Christopher Hamer

The legislative provisions can be found in the Estate Agents Act 1979 (the Act). The Act states that an agent must not enter into negotiations regarding a property in which he or a connected person has a personal interest until such interest has been disclosed to all parties. A personal interest is defined as a beneficial interest in the property or in the proceeds of sale, and includes circumstances in which an agent or connected person would acquire such an interest as a result of the proposed transaction. It is important for agents to note that the definition of connected person is quite broad and includes:

  • The agent’s employer or principal.
  • An employee of the agent.
  • Any associate of an employer, principal, or employee.
    An associate is deemed to be:
  • A business associate, for example the
    director of a company of which the
    agent, employer, principal, or employee,
    is a co-director or controller.
  • A spouse or relative, or spouse or relative of a business associate.

If an agent fails to disclose a personal interest he can face serious sanctions – it is defined as an undesirable practice under the Estate Agents (Undesirable Practices) (No.2) Order 1991, and can be met with a banning or prohibition order issued by the Office of Fair Trading (OFT). Failure to disclose a personal interest could, therefore, result in an agent being prohibited from all, or parts of, estate agency work.

The statutory provisions can be found in the Estate Agents (Provision of Information) Regulations 1991 (the Regulations). The Regulations require an agent to disclose to his client any services he or a connected person intends to offer prospective buyers, and whether he or a connected person will benefit financially from the provision of such services by a third party (for example, commission paid for a referral to a solicitor or financial advisor). Such disclosure should be made in writing prior to the client having committed any liability towards the agent.

Again, failure to disclose information regarding the provision of services can have serious consequences for the agent. This, too, is defined as an undesirable practice and the same enforcement actions – banning and prohibition orders, may be taken by the OFT.

I have received a number of cases where complainants have been concerned that a potential conflict of interest has affected an agent’s handling of the sale of their property. A recent case concerned an agent who did not disclose to his seller client that he was a partner of the firm proposing to purchase the property. The firm was, for the purposes of the Act, his business associate. This arrangement was then discovered by the seller, who withdrew his instructions and referred the matter to my Office. The agent made light of his involvement with the firm that had proposed to purchase the property. I considered that in failing to disclose his personal interest, the agent had committed a serious breach of the TPO Code of Practice, meriting a payment to the complainant of £750 in compensation.

Another case concerned a sales agent who also agreed to act as the letting agent for the prospective purchaser of the property, and began to act as such while instructed by the seller. The agent denied that any conflict of interest arose and commented that it was not unusual for him to act in the sale of properties to buy-to-let purchasers. I accept that it may not be out of the ordinary for an agent to sell a property to a buyer intending to let the property. However, if the agent intends to offer lettings services to the prospective purchaser, it must be disclosed to the seller. The agent in this case had made no such disclosure and I supported the complaint and made an award of compensation.

Paragraphs 10c to 10h of the Code of Practice for Residential Estate Agents (as effective from 1 August 2011) set out what is expected of agents when a conflict of interest, or the potential for a conflict of interest, arises. My key expectation is for that facts giving rise to the conflict are disclosed in writing as soon as possible. Such disclosure embodies best practice and allows all parties to make an informed decision as to whether to proceed. Agents should be familiar with the requirements of the Code and should ensure that they have regard to their legal obligations.

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