Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. As always, my observations are based on current Ontario laws; you are cautioned not to rely on the information provided herein and that you should do your own due diligent on present and applicable Ontario laws.
Ever wonder about the legality and ethics of referral fees between Ontario realtors (note: I use the term “realtors” throughout this blog to mean real estate sales representatives) and lawyers? Say, for example, your realtor recommends a lawyer to close your deal. If you end up going with that lawyer, is it legal and ethical for the lawyer to pay a referral fee to the realtor?
The bottom line is that referral fees are prohibited as between a realtor and a lawyer. While the issue of whether a realtor can make a referral fee may be somewhat unclear, the Real Estate Council of Ontario has made a strong case that such fees are prohibited. A realtor is, however, capable of receiving a referral fee from a third party provided that such fees are first disclosed by the third party to the client and the client agrees (preferably in writing). In such a case, the third party would pay the referral fee to the realtor’s employer (i.e. the broker), who would in turn pay the realtor. Much like a realtor, however, a lawyer is not capable of making a referral fee to non-lawyers, but is capable of receiving such fees under the same conditions as would a realtor. Therefore, since neither a realtor nor a lawyer are capable of making referral fees (notwithstanding that they’re capable of receiving them) to one another, referral fees are prohibited as between them. Breach of this rule is both illegal and unethical.
The following analysis shows how I came to these conclusions.
Realtors and so-called “Bird-Dog” or Referral Fees
The combined effects of ss. 30(b) and (c) of the Real Estate Business and Brokers Act, 2002 provide that a broker shall not “pay any commission or other remuneration” to “employ or engage an unregistered person to trade in real estate”.
Here, a number of terms require further clarification.
Section 1 defines a broker as “a person who, for another or others, for compensation, gain or reward or hope or promise thereof, either alone or through one or more officials or salespersons, trades in real estate, or a person who holds himself, herself or itself out as such”.
Moreover, s. 1 defines a salesperson as “a person employed, appointed or authorized by a broker to trade in real estate”. Here, the word “employ” means “to employ, appoint, authorize or otherwise arrange to have another person act on one’s behalf, including as an independent contractor”.
Finally, s. 1 defines a trade as including “a disposition or acquisition of or transaction in real estate by sale, purchase, agreement for sale, exchange, option, lease, rental or otherwise and any offer or attempt to list real estate for the purpose of such a disposition or transaction, and any act, advertisement, conduct or negotiation, directly or indirectly, in furtherance of any disposition, acquisition, transaction, offer or attempt, and the verb ‘trade’ has a corresponding meaning”.
Clearly, while no broker may pay any form of compensation to unregistered persons in furtherance of a trade in real estate, it is somewhat unclear whether salespersons (i.e. realtors) are also prohibited from doing so (because salespersons are not mentioned in s. 30). As Allan Johnson, Registrar of the Real Estate Council of Ontario, mentioned in a now expired Registrar’s Bulletin: “A question posed recently dealt with the salesperson and his or her right to pay some form of compensation in gratitude for leads provided. This issue may not be as clear.” Interestingly, RECO’s new Registrar’s Bulletin on Bird-Dog fees states that, “where a brokerage is aware of, or more obviously where the brokerage were to use an employee/salesperson as a conduit to pay some form of compensation, in an attempt to avoid the appropriate sanctions of the Act, this activity would be construed to be a violation”. So if a salesperson acted alone without the knowledge of the brokerage, would the latter be immune from liability? In the expired Registrar’s Bulletin, Mr. Johnson suggested two caveats which would seem to prohibit salespersons from providing referral fees:
“1. In light of the fact that salespersons are registered and employed by a specific broker and in fact act with the expressed authority of their broker employer, it may be argued that a salesperson’s action in paying compensation with either before or after tax dollars, may in fact be tantamount to the broker breaching section [30(b)] and/or
2. Payment of this type of compensation to an unregistered person, for what could likely be defined as ‘in furtherance of a trade’, may very well put the salesperson in the position of ‘counseling to commit an offence’ wherein the person receiving the compensation is determined to be in contravention of the Act, by virtue of trading in real estate without benefit of registration.”
Mr. Johnson also went on to write that the form of the referral fee (e.g. a bottle of wine, a cash payment, etc.) would not matter: “As far as the type of compensation, it would not appear to matter the ‘coin of the realm.'”
While Mr. Johnson’s suggested caveats were discussed in a now expired Registrar’s Bulletin (and the new bulletin does not explicitly reiterate these views), these caveats nevertheless seem sensible given the purpose of the Real Estate Business and Brokers Act, 2002 (namely, to prevent unregistered persons from trading in real estate) and the doctrine of vicarious liability.
Accordingly, a realtor that makes a referral fee could get fined up to $25,000 and/or sentenced to imprisonment for up to one year. The broker may also be found vicariously liable and subject to the same penalties for failing to take reasonable steps to prevent the brokerage – through the actions of the salesperson – from contravening theReal Estate Business and Brokers Act, 2002. Worth noting here is that s. 40(4) of the Real Estate Business and Brokers Act, 2002 precludes any action being commenced by the Director against a salesperson or broker after two years from the date on which the offence was first known to the Director.
Can a Realtor accept a referral fee from a third party? Yes
Prima facie, nothing in the Real Estate Business and Brokers Act, 2002, the associated regulations, or the Real Estate Council of Ontario’s interpretation bulletin on referral fees seem to preclude a lawyer or any other third party from providing a referral fee to a salesperson. Presumably, so long as no ethical obligations are being violated either by the lawyer or the salesperson, referral fees from the former to the latter would be permissible.
As had at one point been noted in Jim Marhsall’s (a broker) Parry Sound Real Estate Blog: “Referral fees are only acceptable when being paid to a registrant, through their brokerage” . This statement was confirmed via a telephone conversation with Charles (a compliance officer with the Real Estate Council of Ontario – phone number: 416-207-4850) on April 20th, 2007: so long as the salesperson previously disclosed to their client that they would be paid a referral fee from a lawyer by recommending their client to that lawyer, and the client agreed (recommended to be writing) and subsequently retained that lawyer, then the lawyer would make payment to the brokerage, which would in turn make payment to the salesperson. This would coincide with the brokerage/salesperson’s obligation under s. 25 of the Code of Ethics to disclose to a potential buyer/seller the existence and details relating to a commission or other remuneration that may affect whether an offer to buy/offer to sell is accepted at the earliest practicable opportunity and before any offer is accepted.
Can a Lawyer provide a referral fee to a Realtor? No
With a few exceptions, a lawyer cannot provide a referral fee to a non-lawyer such as a realtor. Rule 2.08(8) of the Law Society of Upper Canada’s Rules of Professional Conduct provide that a lawyer shall not:
(a) directly or indirectly share, split, or divide his or her fees with any person who is not a lawyer, or
(b) give any financial or other reward to any person who is not a lawyer for the referral of clients or client matters.
Moreover, pursuant to the Law Society of Upper Canada’s Practice Management Guidelines, a lawyer may only pay a referral fee if, among other things, such a fee “is given to a person who is a lawyer” .
Can a Lawyer accept a referral fee from a third party? Yes
Pursuant to the Law Society of Upper Canada’s Practice Management Guidelines, a lawyer can receive a referral fee if certain conditions are met: a lawyer can only take “fees, reward, costs, commission, interest, rebate, agency or forwarding allowance, or other compensation related to employment from…someone other than the client, but only with full disclosure to and with the consent of the client”. Here, the consent of the client, other person or agency shall be either in writing or reduced to writing. Moreover, a lawyer may only generally accept a referral fee if various conditions are met.