When working with a real estate agent, a homebuyer will typically enter into a Buyers Representation Agreement with their agent, which creates an exclusive relationship between the parties for the duration of the contract. The Agreement will further set out each party’s obligations, including any agreed-upon terms related to the payment of commission. A recent case decided in the Ontario Courts signals a note of caution for residential real estate purchasers with respect to these contracts – or lack thereof. The decision in Homelife Maple Realty et al v. Singh et al makes it clear that commission may still be owed to a real estate agent even without a written agreement being in place if the legal principle of “unjust enrichment” applies.
What is unjust enrichment?
Unjust enrichment refers to a situation where one party to an agreement is enriched at the expense of another, typically in a manner that is unfair.
The Singh case outlines the established three-step test for determining when unjust enrichment applies, as follows:
- One party became enriched;
- There was a “corresponding deprivation” to the other party (in more plain language, the other party has been deprived of what they are owed for services rendered); and
- There is a lack of any “juristic reason” for the enrichment (in other words, there is a lack of legal justification for the enrichment of one party at the expense of the other).
Real Estate Commissions
The facts of the Singh case illustrate how the principle of unjust enrichment can apply to real estate transactions. The buyers, in this case, were two brothers and their spouses, who had been looking for a property large enough that would allow both families to live in the same house. As such, they were looking for a house with unique features that would be conducive to their needs, such as a house containing two separate kitchens.
One of the brothers worked at a car dealership and met a real estate agent from Homelife Maple Realty there. That agent, without the “safety net” of a signed Buyers Representation Agreement (BRA), then began researching properties that would meet the specific needs of the buyers and found one in Caledon, Ontario. A series of offers to this property were made by the agent on behalf of the brothers and their spouses but were ultimately not accepted. The buyers then informed the agent that they were no longer going to pursue the Caledon property. However, a few months later the property in question went back on the market and the buyers opted to make an offer through the seller’s agent. They did not involve their original agent in the deal, or inform him that they were considering the property again.
When the original agent discovered that the two families had bought the property that he had found for them, he took them to Small Claims Court to retrieve his commission. The Small Claims Court judge found in favour of the agent, inferring from the evidence presented at trial that the buyers had deliberately cut the agent out of the transaction to save on having to pay the agent his commission. The buyers then appealed the decision to the Ontario Superior Court.
Rather than focusing on the lack of a signed agreement, the buyers argued that the terms of the unsigned BRA should be determinative of any oral contract or agreement between the buyers and the agent. Since the unsigned BRA had been set to expire on September 1, 2014, the buyers argued that the terms of any verbal agreement between the parties should not extend past that date. Since the home was ultimately purchased in February 2015, they argued that they were no longer obligated to use the original agent’s services.
On appeal, the Superior Court affirmed the decision of the Small Claims Court, dismissing the notion that a verbal agreement between the parties could be said to have expired by September 1, 2014, because:
- (a) The parties were still working together to find a property after September 1, 2014 (the agent had, on behalf of the buyers, put an offer towards the property after that date);
- (b) The buyers had not wanted to be bound by the terms of the BRA, hence they were not in a position to later claim that those terms in the BRA which happened to be in their favour should apply; and
- (c) It was fair for the Small Claims Court judge to infer from the evidence that the way the buyers were able to overcome the gap between the price that they were willing to pay for the house, and the price that the sellers were willing to accept, was to cut the agent and his commission out of the equation.
To apply this back to the principle of unjust enrichment, the agent had expended time and money finding a property for the buyers which the buyers eventually purchased, and was deprived of payment for his services. This satisfied part (b) of the unjust enrichment test. The buyers argued that this case failed part (a) of the test because they had not in fact been “enriched” because they didn’t receive any money as a result of the purchase of the home.
However, as the Judge noted, “[t]he case law makes it clear that an enrichment of the Defendant can come where there is either a positive or a negative benefit.” The buyers were effectively enriched because they were able to purchase the property for less than the listing price, because they paid a reduced commission.
Among the lessons to remember here are that contracts (including those involving real estate transactions) don’t have to be signed or in writing in order to be considered valid. Additionally, it is beneficial to retain a real estate lawyer early on in the process of buying or selling a home. Involving a lawyer in the purchase or sale process will enable them to advise a party if any of their actions may run afoul of a legal doctrine (such as unjust enrichment) with which they may not otherwise be familiar. Understanding one’s obligations early on can help to avoid costly litigation in the future.
Contact Prudent Law in Mississauga for Skilled Representation in Real Estate and Contract Litigation
The lawyers at Prudent Law in Mississauga are trusted advocates with respect to real estate transactions, real estate disputes, and contract litigation. We provide practical advice and passionate representation in both residential and commercial real estate deals. If you are contemplating the sale or acquisition of a piece of real property and you’d like to discuss it with one of our experienced real estate lawyers, please call us at 905-361-9789 or contact us online.