Another attack on attorneys by the estate agency industry?

October 1st, 2020
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There appears to be a perception in the real estate agency industry that it should control the entire supply chain in a property transaction. That is, from accepting a mandate, to finally paying the proceeds of the sale to the seller, including the role of the legal practitioner.

This is probably why Proxi-Smart Services (Pty) Ltd (Proxi-Smart) was conceptualised. Fortunately, the bold and dangerous ambitions of Proxi-Smart were thwarted in court (see Proxi Smart Services (Pty) Ltd v Law Society of South Africa and Others (CC) (unreported case no CCT114/19, 5-8-2019) (Mogoeng CJ, Cameron J, Froneman J, Jafta J, Khampepe J, Madlanga J, Mhlantla J, and Theron J)). (The dire consequences to both the legal profession, and the public at large, had Proxi-Smart been successful, are widely acknowledged by the legal profession and is not discussed in this article. It has been ably and persuasively argued in court.)

The history of attorneys acting as estate agents

It is trite law that legal practitioners have been acting as estate agents from time immemorial and are, arguably, the oldest regulated estate agents in South Africa (SA) (see Incorporated Law Society of the Orange Free State v Kalil and Meltz 1951 (3) SA 645 (O) at 648F and De Jager & Vennote v Van Ravensteyn [1983] 1 All SA 416 (C)).

The Estate Agency Affairs Board

Of late, the Estate Agency Affairs Board has adopted a policy that legal practitioners may only act as estate agents in a very narrow band of circumstances. (That is, only when a legal practitioner is instructed by an existing client. For example, a mandate from an executor of a deceased estate or a liquidator of an insolvent estate.)

This policy is probably based on a restrictive interpretation of the phrase ‘… in the course…’ in s 1(d) of the Estate Agency Affairs Act 112 of 1976 (the Act).

The same terminology is used in the Property Practitioners Act 22 of 2019 (the New Act). (This is probably why reg 35(a)(i) found its way on the statute book (see GenN139 GG43073/6-3-2020 (the regulations)).

In the De Jager case, the precise import and meaning of the words ‘… in the course of …’ in s 1(d) of the Act, were debated and ruled on.

The relevant excerpt, the De Jager case, which I freely translated from Afrikaans into English appears below:

‘… but I am of the opinion that the Legislature, when bearing in mind, the relevant words [“… in the course of …” in s 1(d) of the Act], was mindful of the type of multi-practice activities of a practising attorney and intended to exclude estate agency work from the ambit of the Estate Agency Affairs Act.’

Sadly, this important practice of legal practitioners gradually fell into disuse through the years.

The rise of the estate agent

Conversely, whether by design or accident is uncertain, but with the introduction of the Act in 1976, estate agents were forced to organise and structure themselves to comply with the Act. (The use of the expression ‘estate agent’ was preferred to ‘property practitioner’ as the New Act was not in force at the time of writing this article.)

During this period, a number of estate agencies developed into powerful and influential businesses, while legal practitioners preferred to rely on estate agents for an income stream, rather than plying their century-old trade of selling properties themselves.

Thus, in the real estate agency realm, which includes the sale and transfer of immovable property, the pendulum of power gradually swung from the legal profession to estate agencies, which began to control the entire industry and for good reason as explained below.

The essential role of the estate agent

It is generally accepted, that after death and divorce, relocation is the most stressful experience a person may have to endure. Relocation usually goes hand-in-hand with selling immovable property.

During this time, most sellers and purchasers are uncertain, uninformed, and anxious and rely heavily on the estate agent for guidance when important and life-changing decisions have to be made.

Thus, the role of the estate agent has evolved into one, of not only being an expert in their field, but also that of a ‘therapist’. In short, they manage the stress of both seller and buyer.

The unethical alliance between attorney and estate agent

By the time the deal is closed, both the seller and purchaser trust the estate agent completely.

Legal practitioners, like any other service provider, rely on the estate agent for a mandate to transfer the property, which is only one of a range of new business opportunities (such as interior decorators, garden services, builders, painters, bond originators, banks, etcetera) that follow from the sale of immovable property.

Add to the mix, the fact that there is a plethora of legal practitioners vying for conveyancing work through estate agents, and a perfect storm is created for a dangerous and unethical relationship between the legal practitioner and estate agent.

It is widely known, but less often mentioned, that unless some estate agents (mercifully not all) are ‘persuaded’ with free lunches, gifts, even holidays, hunting trips, sponsored school fees, marketing or rental expenses, the attorney will not get conveyancing mandates via the estate agent.

Although estate agents are ethically and legally bound to inform the seller that it is the seller’s prerogative to appoint a conveyancer of his choice, this rarely happens in practice.

The problem is compounded by the seller being ignorant of their rights and by relying on the estate agent to recommend a conveyancer.

It is, therefore, understandable that estate agents began to believe that they control the entire supply chain in a property transaction – including the appointment of a conveyancer.

The reliance on the estate agent is misplaced and abused. Sellers should always have the right to appoint legal practitioners of their choice to protect the interests of the seller without a conflict of interest between legal practitioners and estate agents.

This is acknowledged in the Estate Agency Affairs Board Code of Conduct,  which forbids estate agents from influencing seller to refer a transfer to such agent’s preferred legal practitioner.

The return of the attorney as estate agent

Legal practitioners became increasingly aware of this dilemma. Approximately 20 years ago and probably borne from the frustration of receiving mandates through estate agents, legal practitioners began to sell properties themselves.

And so, an age-old trade and practice that has been plied by the legal profession for hundreds of years, was re-dusted, polished, and put to use again.

I submit that legal practitioners, by reason of their knowledge, training, and practical experience, are ideally suited to fulfil both the role of estate agent and conveyancer.

There are many benefits to the selling and buying public when an attorney fulfils the role of both estate agent and transferring conveyancer.

Legal practitioners can do it at a lower sales commission. By using their law offices as the business hub from which to run their estate agency, a huge cost is saved. This saving is passed on to the seller by lowering the sales commission. (Interestingly, the estate agent’s commission structure in SA is of the highest in the world. Worldwide the going rate is between 2% – 3% of the sale price. In SA it is between 5% and 10% of the sale price.) By reducing the sales commission, the seller can reduce the price, which in turn benefits the purchaser.

Practising legal practitioners, through their comprehensive knowledge of the law, skills, and experience also provide legal advice and ensure legal compliance.

Transformation

More importantly, legal practitioners are in an ideal position to provide a cost-effective platform to train and qualify aspirant estate agents within their law practices. Legal practitioners have been training candidate legal practitioners for centuries. It, therefore, makes perfect sense to take on would-be estate agents and to train them as well.

Thus, practising legal practitioners can offer an ideal and unique opportunity to accelerate transformation in the estate agency industry. (The preamble of the New Act notes that ‘transformation of the property market is a necessary intervention that will benefit the historically disadvantaged individuals.’)

The proposed regulations

Sadly, as noble, and well-intended as the New Act may be, should the proposed regulations, stand unamended, it will seriously frustrate the goals of the New Act, not to mention a loss of benefits to and rights of the members of the public who will be deprived of a cost-effective and comprehensive property law service exclusively provided by practising attorneys.

This potential threat has been brought about by legal practitioners, inexplicably and irrationally, in the regulations.

The regulations (the disputed regulations) that affect the attorneys are:

  • Regulation 34(a)(vi):

‘34. Code of conduct: Residential property practitioners

General duty to protect the public’s interest

  1. a) In terms of a property practitioners’ general duty to members of the public and other persons or bodies, a property practitioner –

  1. vi) shall not have any interest, whether directly or indirectly in any legal practice that provides conveyancing services to the clients and customers of such property practitioner or any sole proprietorship, partnership, company, close corporation, business trust or similar entity in which that property practitioner holds a direct or indirect interest.’
  • Regulations 35(a)(i) and 35(a)(ii):

‘35. Undesirable business practices

  1. a) Pursuant to the provisions of section 63(1) of the Act, the following business practices are prohibited –
  2. i) The soliciting or acceptance of mandates for the sale of properties from members of the public by an attorneys’ practice (whether such practice is on the attorney’s own account, as a partner in a firm of attorneys or as a member of a professional company), save that this shall not apply to the existing clients of the practice;
  3. ii) Any arrangement in terms of which any attorney or attorney’s practice provides conveyancing services to any parties to a property transaction which has in any way been brokered or arranged either by such attorney or attorneys [sic] practice or by any property practitioner in which such attorney or any member of such attorney’s practice or any person related to such attorney or member of an attorney’s practice has any direct or indirect interest’.

The shocking reality is, should the disputed regulations stand, it will not only affect legal practitioners, acting as estate agents, but most legal practitioners, whether they trade as estate agents or not.

This means that any legal practitioner, instructed by either a seller or a purchaser to prepare a sale agreement, and who has negotiated and finalised (brokered or arranged) the terms of such an agreement, will be precluded from attending to the conveyancing services and the transfer of property that flow from this property transaction.

I submit that the disputed regulations are not only irrational and unconstitutional but also ultra vires.

It begs the question why attorneys, who are already supervised by the Legal Practice Act 28 of 2014, the regulations published thereunder and the Legal Practice Council, must now be subjected to these regulations.

Add to this the fact that legal practitioners, per se, are expressly excluded (see the definition of respectively an ‘estate agent’ in the Act and ‘property practitioner’ in the New Act) from both the Act and the New Act, and the inclusion of attorneys in the regulations, become even more bizarre.

I submit that the disputed regulations do not offer a single benefit to the public who will, inter alia, be deprived of their constitutional right to appoint an attorney of their choice. However, it would hugely benefit estate agents, as competition from the legal practitioners, acting as estate agents, would be virtually non-existent.

Time for action

I suggest that the legal profession should at all costs, oppose these disputed regulations. Although many legal practitioners have submitted objections to the Minister for Human Settlements, Water and Sanitation and have requested that the disputed regulations be removed from the final regulations, there is no guarantee that the minister will heed to these requests. Should the disputed regulations stand the legal profession will have no choice but to take the matter to court.

I suggest that the time has come for legal practitioners, who practise both as attorneys and estate agents, to form an independent association to promote and protect the specific interests of these legal practitioners.

This is critically important, not only to the legal profession and the public, but also to historically disadvantaged individuals.

Maartens Heynike BCom LLB (Stell) LLM (UJ) is a legal practitioner at Heynike Inc Attorneys in Randburg.

This article was first published in De Rebus in 2020 (Oct) DR 43.