Peterson Management Services Pty Ltd v Chief Executive, Department of Justice and Attorney-General [2017] QCA 89 (12 May 2017)

The above appeal was distributed 6 June 2017 and we would make the following comments:

Under Property Agents and Motor Dealers Act 2000 (PAMDA) commissions were regulated. The industry standard commissions were 7% permanent / long term and 12% short term rental. These commissions applied for the services to be provided by the letting agent in the letting of the lot.

It was considered greater servicing was required for short term rental, thus the higher 12% commission. Details of services to be provided were scant but were expected to include provision of cleaning and linen and all daily servicing to keep the lot available for letting.

The owner was expected to pay for the costs of the services provided.

The letting agent was compensated by the 12% commission of the gross rental for providing their servicing. In many instances this letting was undertaken in strata schemes where the agent had exclusive access to the letting pool, providing the agent numerous properties delivering rental commission. The agent’s income could be substantial.

Short term rental generated higher tariffs than permanent rental.

A person or company who purchases a Management Rights Agreement is subject to the legislative supervision of PAMDA/Property Occupations Act 2014 (POA) and the Body Corporate and Community Management Act 1997 (BCCM Act), including the Code of conduct for letting agents. Section 133 of PAMDA deals with the appointment of a real estate agent. Due to the benefits and protections provided under management rights a higher level of conduct is demanded on letting agents by the BCCM Act Code.

For instance, at Code 3., a letting agent must act in the best interests of the body corporate and individual lot owners. This requires that in a situation of conflict arising between the letting agent and client, the letting agent must put the interests of the client before his own. It therefore follows that in matters of disclosure as required under s. 133(3)(c) the fullest disclosure of fees, charges and commission or benefit that the agent may receive, would be in the owners’ best interests to be disclosed. Any failure to fully disclose these details would breach the code.

(1)

At paragraph 33 of the decision, the Judges made reference to: “the Minister in the second reading speech on the Bill which became PAMDA:” That this speech was important enough to reference, it is interesting to read the full paragraph:

Many complaints are made about the expenses incurred by the agent and billed to the vendor. Accordingly, the amount an agent is permitted to expend for expenses on the client’s behalf will be clearly set out in the approved form.

This includes details of the source and estimated amounts of any rebates and discounts or commissions the agent expects to receive for items the agent is authorised to incur as expenses

The blue text above was quoted by the Judges. The following section shaded orange provides insight into the Minister’s intention for fuller disclosure. This required fuller disclosure is not made in current engagement documentation. This failed fuller disclosure has given rise to action taken by the Chief Executive, Department of Justice and Attorney-General.  This aspect of the appeal has not been addressed by the Judges.

(2)

The question of entitlement needs to be addressed. PAMDA and POA provides reward for letting services by way of commission on the rental payment. Code of conduct contribute to determine how the services are to be exercised or delivered.

The letting agent is entitled to recover the additional costs and charges involved in delivering the services. The Code requires the letting agent to

  • act honestly, fairly, in the individual lot owner’s best interests,
  • not engage in misleading conduct and
  • supply services at competitive prices.

By not disclosing the contractors actual charge and the commission or benefit that the agent may receive, to establish the recoverable additional cost, breaches the code and PAMDA obligations.

(3)

The Queensland Government web site states:

Fees and commissions

Where a third party has done work on your unit, your monthly statement should clearly show the amount charged by the third party (e.g. the fee charged by a plumber for plumbing work) and any fee the agent has charged you for managing the process.”

It is argued that strata industry practice is inconsistent with this statement.

(4)

The Judges did not address the 12% commissions paid to the letting agent for the provision of the letting agent’s services.

The Judges addressed the costs applied by the letting agent that included an undisclosed commission on the charges. What is the basis for the undisclosed commission when the letting agent has already been remunerated within the 12% commission on the gross rental payment for the provision of the servicing? This would seem that the letting agent is seeking to be paid twice for the same servicing.

(5)

The Judges addressed the charges of cleaning and Foxtel as if they were independent or isolated to the management of the business of renting the unit. These services are part of the room rental as they are an added value that justifies the higher tariff. The letting agent is paid his commission or share on the higher value.

(6)

The Judges did not take into account the “Code of conduct for letting agents” under the BCCM Act. It could be strenuously argued that many of these codes were breached by the manner in which the letting agents operate. What is the purpose of the Code if it has no influence on a letting agents’ performance or conduct? The Code may make owners feel warm and fuzzy that their consumer interests are being protected, but it is now evident that the BCCM Act is simply paying lip service to a process without teeth. This judgement demonstrates that the Code is a misleading, disregarded, worthless inclusion in the BCCM Act. and cannot be relied upon to provide the consumer protection it suggests.

For instance, Code 8 requires “Goods and services to be supplied at competitive prices” The letting agent did not advise his clients of the prices of the contractors providing the service. He only supplied his price and in doing so established a conflict of interest between himself and his client, and breached Code 3, “Acting in individual lot owner’s best interests”.

PAMDA and POA Form 6 agreements are prepared and offered by a letting agent to clients.

It should be understood that letting agents in CTS schemes come into being under the regime of management rights, which provides the exclusive right to let units in the scheme. Owners in the letting pool of a scheme are of the belief that the letting agent acts in accordance with the law and that the terms of the provided agreement comply accordingly. They further believe that the letting agent complies with the Code of conduct not to engage in fraudulent or misleading conduct.

In those circumstances the client believes that the costs applied by contractors are the costs being recovered by the letting agent. S. 133(3)(iii) “the source and the estimated amount or value of any rebate, discount, commission or benefit that the agent may receive in relation to any expenses that the agent may incur in connection with the performance of the service;” must be stated. To include a term into an engagement agreement that does not disclose both the contractor’s payment and any commission or benefit that the agent may receive is in breach of the Code of conduct, in breach of the Act and therefore unlawful.

It follows therefore that the judge’s decision must be that such undisclosed commissions are lawful – which would appear an absurd proposition and against all intentions of the PAMDA, as described in the second reading speech on the Bill by the Minister in item 1 of this document.

(7)

Property Agents and Motor Dealers Act 2000

Appointment of real estate agent—general

133.
(3) The appointment must, for each service— (emphasis added)
(c) state—
(iii)       the source and the estimated amount or value of any rebate, discount, commission or benefit that the agent may receive in relation to any expenses that the agent may incur in connection with the performance of the service;

and

Property Occupations Act 2014

Subdivision 1   Property agents and resident letting agents
104     General content of appointment
(1)         An appointment of a property agent or resident letting agent must include the following in the approved form—-
(c)         for each service, provision for the inclusion of a statement about the following—-
(v) the source and the estimated amount or value of any rebate, discount, commission or benefit that the agent may receive for any expenses that the agent may incur in connection with the performance of the service;

This requirement of the Acts has not been disclosed in many past PAMDA Form (20)(a) and POA Form 6 documentation. The commission or benefit that the agent may receive has not been fully disclosed as required under PAMDA even though the Minister in her second reading speech as referenced stated that details of “expenses incurred by the agent and billed to the vendor” would be included. Those details should and would have fully disclosed the commission or benefit. The POA has been amended to include a statement about any commission or benefit. This requirement has not led to greater disclosure by letting agents in their POA Form 6.

Are these sections of the Acts endeavouring to require by the stating of details, transparency and disclosure in order that the client is able to be fully aware of all transactions in order that he can be satisfied he is not being charged any amount to which he has not agreed.

(8)

The Judges have carefully examined Section 133(3)(c)(i) & (ii) and avoided the fullest scrutiny of s. 133(3)(c)(iii) which deals with stating a “commission or benefit that the agent may receive”. This is how it is addressed:

[38] S. 133(3)(c)(iii) should be mentioned. Unlike s 133(3)(c)(ii), it is not limited to expenses that the agent is “authorised to incur”. It has different work to do, being concerned with undisclosed rebates, discounts, commissions or benefits. No such issue arises in this case. There is no allegation that the applicant received any such benefit, let alone a “secret commission” or “kickback”. Each subsection of s 133(3)(c) addresses a different matter. The mischief at which s.133(3)(c)(iii) is directed concerns benefits that the agent may receive in relation to “any expenses that the agent may incur in connection with the performance of the service”. S.133(3)(c)(ii) is concerned with a more limited category of expenses, namely the expenses the agent is “authorised to incur” in connection with the performance of each service or category of service.

The section does not go to any mischief but requires that any benefit that the agent may receive be stated. The purpose of the stating of the benefit is to make the client aware of this detail. Letting agents have deliberately decided not to provide this transparency, probably to prevent clients questioning their entitlement to the additional benefit. Refer Code 1,3,5,6 & 8.

(9)
Considering the impact of the above on the Mantra business model

The 2016 Mantra Annual Report to shareholders discloses that the company has 15,000 units under management. Consider the following:

Units under management 15,000
Average nightly room rate $300
Average weekly room occupancy 5
Gross annual rental income 15,000 x $300 x 5 x 52 $1,170,000,000
Pre POA / PAMDA commission 12% $140,400,000
   
Disclosed room revenue $382,117,000
Disclosed commission revenue $31,807,000
                                   Subtotal $413,924,000
Food and beverage revenue $84,658,000
Provision of services $107,494,000
Disclosed total revenue $606,076,000

The above demonstrates how Mantra has been able to convert an entitled 12% commission estimated to be $140million to room and commission revenue of $414million. It would be reasonable to say that based on the information’s being disclosed and the way in which the law is being interpreted, Mantra clients will be unaware of the funds/proportion of letting income flowing to Mantra revenue.

The real question is, given that Mantra employs a manager to act as letting agent, and considering the influence that Mantra would have over these employed letting agents, could the management practices exercised by the Mantra organisation including their employees, considering the opportunity that is available in this incestuous arrangement, by use of a convoluted structure to avoid the disclosure obligations of PAMDA s 133, be considered fraudulent, given the lack of disclosure in the letting process and the substantial undisclosed commissions that are alleged to be applied. The revenue disclosure of the Mantra annual report provides an insight to the extent of monies potentially involved in this alleged fraud.

(10)

At [27] of the appeal decision, the judges place significant weight of their decision upon the statement

“It is about the expenses the agent is “authorised to incur” on behalf of the client in connection with the performance of the service.”

However, the judges then fail to examine precisely what expenses the agent is authorised to incur. Had they done so they would have been drawn to PAMDA s. 111.

111 What a resident letting agent’s licence authorises
(1) A resident letting agent’s licence authorises the holder of the licence (resident letting agent) to perform the following activities as an agent for others for reward—
(a) letting lots in a building complex;
(b) collecting rents for lots in a building complex.

… and nothing more! The agent’s license only authorises the services stipulated in (a) and (b).

It therefore follows that the agent is only authorised (under its license) to incur expenses on behalf of the client that are related to its engagement as a licensed letting agent. This is further identified in 114(3)(e), supported in 116(2) and established in 117(1)(b).

This should have brought the judges to then examine whether the agent was indeed authorised to Act under its appointment outside the authority provided by its license.

114 Appointment of resident letting agent

(3) The appointment must—
(a) state the service to be performed by the letting agent and how it is to be performed; and
(b) state—
(i) in the way prescribed under a regulation, that fees, charges and commission payable for the service are negotiable up to any amount that may be prescribed under a regulation; and
(ii) for a single appointment, if commission is payable and expressed as a percentage of rent, the amount of commission expressed in dollars based on the listed rental charge; and
(c) state—
(i) the fees, charges and commission payable for the service; and
(ii) the expenses, including advertising and marketing expenses, the letting agent is authorised to incur in connection with the performance of the service; and
(iii) the source and the estimated amount of any rebate, discount, commission or benefit that the letting agent may receive in relation to any expenses that the letting agent may incur in connection with the performance of the service; and
(iv) any condition, limitation or restriction on the performance of the service; and
(d) state when the fees, charges and commission for the service become payable; and
(e) if a service to be performed is the letting of lots or the collecting of rent and commission is payable in relation to the service and expressed as a percentage, state that the commission is worked out only on the actual am
ount of rent collected.

It follows that the expenses that the agent is authorised to incur are integral to the business of letting (cleaning, linen, Foxtel) and that the agent is rewarded by way of a letting commission for the provision of those activities or services.

Section 114(3) requires that the appointment must state fees, charges, expenses and commission or benefit that the agent is authorised to incur in connection with the performance of the service. At this section the commission or benefit must be stated in order that the client gives approval at the point of engagement, to the commission or benefit and is provided with the opportunity to strike out the words providing that approval. Failure to state the commission or benefit would go to an amount recovered or retained as an amount to which the person was not entitled and would be recoverable by the client from the agent under s. 118 PAMDA or s. 91 POA.

Division 3 Recovery of reward or expense
116 Commission may be claimed only in relation to actual amounts
(1) This section applies to a resident letting agent who performs, for the payment of a commission, a service of letting lots or collecting rents.
(2) The resident letting agent must not claim commission worked out on an amount more than the actual amount collected.
Maximum penalty—200 penalty units.
117 Restriction on remedy for reward or expense
(1) A person is not entitled to sue for, or recover or retain, a reward or expense for the performance of an activity as a resident letting agent unless, at the time the activity was performed, the person—
(a) held a resident letting agent’s licence; and
(b) was authorised under the person’s licence to perform the activity; and
(c) had been properly appointed under division 2 by the person to be charged with the reward or expense.

There appears no ambiguity or confusion between PAMDA sections 111(1), 114(3)(e), 116(2) with the clarity provided by section 117(b).

It can therefore be reasonably held that an agents license does not authorise it to charge any commission, reward, fee or expense for any service that is beyond that of its license and, as such the agent, in this case, was not authorised to incur any such expenses or retain any reward or commission in acting on behalf of the client.

Conclusion

The appeals panel placed considerable reliance on PAMDA s. 114(3)(c). An ordinary person would read this section and reasonably conclude that the disclosure required by the section included the disclosure of any benefit that the letting agent may receive in relation to any expenses that the letting agent may incur in connection with the performance of the service.

Not so, say the lawyers and I am reminded by a lawyer colleague that I am not familiar with the Acts Interpretation Act that requires the appeals panel to rule otherwise.

An ordinary person therefore may rely on the intent of the legislation and in that regard return to the Ministers speech on the second reading of the Bill which became PAMDA:

Many complaints are made about the expenses incurred by the agent and billed to the vendor. Accordingly, the amount an agent is permitted to expend for expenses on the client’s behalf will be clearly set out in the approved form. This includes details of the source and estimated amounts of any rebates and discounts or commissions the agent expects to receive for items the agent is authorised to incur as expenses

An ordinary person would therefore conclude that it was the Minister’s intent to provide that at the time of appointment of an agent, the engagement document would “clearly set out” the amount an agent is permitted to expend for expenses on the client’s behalf and that clarity would include details of amounts of any rebates and discounts or commissions the agent expects to receive for items the agent is authorised to incur.

Should that clarity not be achieved by the legislation, as seems to be confirmed in the appeals panel’s decision, must go to failed legislation which should be, in the interests of natural justice, amended immediately to guarantee clients that the clarity intended by legislators is delivered.

The Office of Fair Trading should undertake an investigation into the extent of the practices of Mantra with regard to letting income being directed to Mantra, and become subject to a 30% commission before the rental income is passed to the letting agent, and there is inadequate disclosure of the transaction to the client.

Questions have been raised at paragraphs 70 to 72 of the Appeals decision regarding these fees. These sections deal with Wotif commissions that are disclosed in a client’s rental statement. The Mantra commissions are totally undisclosed in both the engagement documentation and the clients rental statement, which makes these transactions totally different to Wotif transactions.

[72] The primary Tribunal’s dismissal of the disciplinary ground alleged in relation to the Wotif bookings in connection with an alleged contravention of s 139(2) should not be interpreted as resolving any issue concerning the use of booking agents which, like Wotif, deduct a fee from the amount of rent which is collected. Whether such a deduction constitutes an expense which must be disclosed in accordance with s 133 of PAMDA or s 104 of POA is a matter which was not the subject of disciplinary proceedings and is not a matter which either the Tribunal or this Court was required to decide.

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