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2. Prohibition of conflicts of interest

 

2.1 Obligation to avoid conflicts of interest

2.2 Obligation to avoid the appearance of conflict of interest

2.3 Prohibition from acting as a broker

2.3.1 Direct and indirect interest

2.3.2 Prohibition from representing a seller when purchasing an immovable or enterprise

2.3.3 Obligation to terminate the brokerage contract

2.3.4 Prohibition from representing a buyer or lessee interested in one's immovable or enterprise for sale, lease or exchange

2.4 Combinaison of functions or performance of other professional activities

2.1. Obligation to avoid conflicts of interest

A conflict of interest exists when the licensee’s interests, whether personal or professional,  are incompatible or divergent with those of his clients. The licence holder must protect and promote his client’s interests first and foremost.1 Therefore, he is in conflict of interest when he is likely to favour either his personal interests, or those of another person, rather than the sole interests of his client.

This is the case “where an interest would be likely to affect adversely the judgment of the [real estate broker] on behalf of or his loyalty to a client or prospective client or which [he] might be prompted to prefer to the interests of a client or prospective client.”2

In other words, a conflict of interest is any situation, real or perceived, in which a licence holder has a direct or indirect interest that could compromise the manner and motivation with which he carries out his duties or responsibilities.

The licence holder has an ethical obligation to avoid placing himself in a conflict of interest in all circumstances and at all times3.

The term “avoid” means that the real estate broker is prohibited from placing himself in a conflict-of-interest situation. To do this, the real estate broker must actively take steps to prevent finding himself in any conflict-of-interest situation.4

The licensee must ensure that his own interests and those of his relatives (colleague, friend, family member, business partner, creditor, company of which he or a relative is a shareholder or director, etc.) are separated from those of his client to ensure that there is no conflict between them. He must not act in such a way that his client’s interests are compromised by his own personal interests and those of his relatives.

To fulfil this obligation, the licence holder must go as far as to stop serving a client.

This obligation is in keeping with the licence holder’s ethical obligation to act honestly and fairly. 5 In addition, he must act with integrity and objectivity.6 He must not commit any act that is derogatory to the honour and dignity of the profession. 7

These ethical rules exist to reassure consumers of the integrity of licencees and to ensure that they have trust in the profession.

By avoiding conflicts of interest, the broker reinforces the credibility of the profession and commands respect through his professionalism.

Each client must be assured of their broker’s independence. The client must not fear that the broker’s judgment or actions will be tainted by any other interests that might come into play, whether his own (personal interests) or those of a colleague, friend, family member, business partner, creditor, company of which a family member is a shareholder or director, etc. (relational or indirect interests).

 

EXAMPLE TAKEN FROM THE JURISPRUDENCE

Representing a client whose interests are conflicting with those of his parents 

In this example, which led to a disciplinary complaint against the real estate broker, the latter was bound by a brokerage contract to a selling client for whom he had a duty to protect his interests at all times. The real estate broker's parents (who were not represented by another licensee, nor by their son) made an offer to purchase on a property that included a financing condition with a very long acceptance deadline. The broker advised his selling client to accept the offer to purchase of his parents, without suggesting a change in the deadline for the financing application to be accepted. In the end, the buyers did not manage to obtain the financing they applied for within the prescribed time frame.

The advice given to the seller was not objective and independent, because the real estate broker favoured the interests of his parents over those of his client, the seller.

As a result, the seller has been deprived of the opportunity to receive other potential offers to purchase since he was bound by a conditional promise to purchase during the entire acceptance period.

What the broker should have done in this situation

  • Inform his client that he was in a conflict of interest because the prospective buyers were his parents;
  • Tell his selling client that, for this reason, he is no longer in a position to represent him and therefore terminate his brokerage contract;
  • Suggest that the client seek representation by another broker for this transaction involving his parents.

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2.2 Obligation to avoid the appearance of conflict of interest

Situations that create the appearance of a conflict of interest must be avoided.

Even if the broker is acting in good faith and there is no financial loss or other disadvantage to the client, the mere appearance of a conflict of interest compromises the licensee’s independence and jeopardizes his compliance with his ethical obligations.

The determination of whether a conflict of interest exists must not be based solely on whether there is actual prejudice to the client.

As indicated in this decision, [tr.] “the criterion [is that] of appearance rather than certainty, and possibility rather than probability, of the existence of a conflict of interest.”

Therefore, the real estate broker must not only avoid actual conflicts of interest, but also any situation liable to become one. It’s a matter of perceived conflict.

 

EXAMPLE TAKEN FROM THE JURISPRUDENCE

Because of the costs involved, the delays and the appraisal of the property, a real estate broker advised his selling clients not to subdivide the land he was mandated to sell into two lots.

The real estate broker then presented his selling clients with an offer to purchase from his mother, who bought the property. Shortly thereafter, she subdivided the lot into two and made a large profit by selling the second lot.

Did the real estate broker give objective and independent advice, or did he favour the interests of his mother? It doesn’t matter, because since there was the appearance of conflict of interest, the broker was found guilty of this ethical breach by the Discipline Committee. He should have terminated the brokerage contract with his selling client and advised him to seek representation by another broker.

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2.3. Prohibition from acting as a broker


2.3.1 Direct and indirect interest

The ethical rules on conflicts of interest provide for specific cases where the licence holder is directly or indirectly involved as a party in the real estate transaction, i.e., where he holds or seeks to acquire an interest in the immovable concerned.

In these situations, the licensee cannot represent the other parties to the transaction.

The word “interest” can have many different meanings.

In the regulations it is used to express two different concepts.

When referring to a “conflict of interest,” the term “interest” represents what is of benefit, importance or advantage to someone1.

The concept of “direct or indirect interest” found in sections 18, 20, 21 and 22 of the RBR, refers rather to the right of ownership in an immovable.

In the context of these sections, a licence holder who has a “direct interest” as a natural person is one who holds a personal right of ownership in the immovable concerned.

If, on the other hand, a corporation owns an immovable and the licence holder is a shareholder of that corporation, he is deemed to hold an “indirect interest” in the immovable.

The broker’s interest is also considered to be “indirect” when ownership of the immovable is held by a person who is related to the broker within the meaning of the tax laws2, such as the broker’s spouse or children, or by a legal person or partnership controlled by the broker or the broker’s spouse.

 

1 Section 2 of the Regulation respecting brokerage requirements, professional conduct of brokers and advertising
2 See Taxation Act, CQLR c I-3, s. 19 to 21 and Income Tax Act, RSC 1985, c. 1 (5th Supp.), s. 251.

 

Direct interest 

EXAMPLE 1

The real estate broker presents an offer to purchase on a property on his own behalf. He is bound by a brokerage contract to purchase with a client who is also interested in this property. The broker finds himself in a conflict of interest and must disclose the situation to his client.

What the broker must do in this situation

  • He must explain to his client that he cannot represent him given the circumstances, terminate his brokerage contract to purchase and suggest that the client seek representation by another broker.
  • He must disclose his status as a broker in writing to the prospective contracting party.
  • He may  not  claim  or  receive  remuneration  if  he  is  acting  for  himself.
  • He will have to check the conditions of the FARCIQ's liability insurance coverage.

*In this case it is recommended that the licensee be represented by another broker.

EXAMPLE 2

In the event that the real estate broker has a brokerage contract to sell the business corporation in which he is the majority shareholder, he will have to disclose his status as a broker in writing to the prospective contracting party.  In this case, he can receive remuneration because of the separate juridical personality attributed to the business corporation of which he is the principal shareholder. If the buyer is not represented, the broker must also tell the buyer that he cannot treat him fairly and advise him to enlist the services of another real estate broker.

What the broker must do in this situation

  • He must explain to the buyer that he cannot treat him fairly and advise him to seek representation by another broker.
  • He will have to check the conditions of the FARCIQ's liability insurance coverage.

*In this case it is recommended that the licensee be represented by another broker.

EXAMPLE 3

The real estate broker is a majority shareholder in a management company that owns a commercial rental property.  This real estate broker is also bound by a brokerage contract with a client who wishes to lease one of the spaces in this building. He must explain to the lessee that he cannot represent him in these circumstances, because he himself is indirectly involved in the transaction.

What the broker must do in this situation

  • He must explain to his client that he cannot represent him given the circumstances and advise the client to seek representation by another real estate broker.
  • He will have to check the conditions of the FARCIQ's liability insurance coverage.

*In this case it is recommended that the licensee be represented by another broker.

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2.3.2 Prohibition from representing a seller when purchasing an immovable or enterprise

When the licence holder acquires a direct or indirect interest in an immovable or enterprise, he cannot represent the seller1. In other words, if a real estate broker buys an immovable for himself (direct interest), or if he is a shareholder in a company (indirect interest) that acquires an immovable, he cannot act for the seller as this would place him in a conflict of interest.

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2.3.3 Obligation to terminate the brokerage contract

Before submitting his transaction proposal, the licensee must terminate his brokerage contract to sell or wait until it expires if he or a company in which he is a shareholder wishes to acquire an immovable that he has been mandated to sell, lease or exchange. However, he cannot terminate his brokerage contract as long as there are ongoing transactions on the immovable or as long as he is collaborating with another licence holder to bring a transaction on the immovable to fruition1. Even if the brokerage contract has expired, if a promise to purchase has been presented, the licensee cannot propose to acquire the immovable until this promise to purchase has become null and void.

In the case where the selling client has received an offer to purchase that is conditional upon the sale of the prospective buyer’s property, the licensee must wait for the offer to become null and void before making an offer on the property himself.

It is important to remember that acquiring his own listing can place the licence holder in a conflict of interest. This can be the case even if the licensee terminates the brokerage contract.

Even if he terminates the brokerage contract before making an offer on the property, the licence holder will know the seller’s strategy and, often, his weak points. The licensee must be aware that this puts him in a position of strength with respect to the seller.

In carrying out his brokerage contract, the real estate broker develops a relationship of trust with the seller and thus has access to confidential and strategic information. He knows, for example, the selling price which the seller hopes to obtain, how quickly he needs to sell, his reasons for selling, whether he is experiencing financial difficulties, etc. In short, the licensee has a clear advantage over the seller.

Consequently, it is imperative that the seller’s interests be protected. By being represented by another broker, the seller’s interests will be better protected against those of his initial broker. The real estate broker must therefore not only cease acting on behalf of this client, but he must also recommend that the client seek representation by another broker.

In addition, a perceived conflict of interest may arise from the fact that the real estate broker may not have properly advised his client when setting the asking price, since it is to his advantage to keep it as low as possible. One could also question the level of effort made by the broker to reach as many potential buyers as possible so that the seller could get the best price.

 

EXAMPLE TAKEN FROM THE JURISPRUDENCE

A broker signed a brokerage contract when he knew that he could have an interest in the immovable which he was mandated to sell. A few days later, he terminated his brokerage contract in order to submit an offer to purchase in his own name.

In this situation, the obligation to terminate the brokerage contract before submitting the transaction proposal is not intended to provide a loophole for the broker.

From the outset, the broker should have refused to sign the brokerage contract because he already had a potential interest in the immovable at the time of signing the contract. The broker had to avoid placing himself in a conflict of interest, which he had the opportunity to do, before signing the brokerage contract.

The obligation to terminate the brokerage contract applies to cases where the broker cannot avoid finding himself in a conflict of interest, which is not the case here.

In the case of Gardner v. Lavoie, a broker bound to a seller by a brokerage contract purchased the property which he had been mandated to sell.

The Court indicated that the broker [tr.] “has an ethical obligation to market the seller’s immovable in such a way that the seller benefits the most. This obligation comes in direct conflict with his position as buyer, which necessarily seeks the most advantageous conditions for himself.”

The Court added that [tr.] “the absence of prejudice to the client does not constitute grounds for exemption.” The real estate broker must “avoid placing himself in a conflict of interest. If he puts himself in a situation where, because of his own interests or those of a third party, he cannot advise or represent his client with the necessary objectivity, or otherwise adequately fulfil his ethical obligations toward his client, he is in a conflict of interest.”

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2.3.4 Prohibition from representing a buyer or lessee interested in one’s immovable or enterprise for sale, lease or exchange

When a broker sells, exchanges, or leases an immovable or an enterprise in which he holds a direct or indirect interest1, he cannot represent the buyer or the lessee who is interested in it. It is important to remember that a real estate broker has a direct interest when he himself holds a right of ownership, and an indirect interest when it is through a company of which he is a shareholder.

Although there is no correlation with the specific obligation to terminate the brokerage contract to sell, the fact remains that a licensee who represents a buyer cannot compete with his client for the purchase of a property.

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2.4. Combination of functions or performance of other professional activities

A person can hold both titles and be a member in good standing of two orders or associations. However, this person cannot act in both capacities when carrying out a transaction.

EXAMPLE 1

A broker extends a personal or mortgage loan to his client in order to bring a real estate transaction to fruition. This situation places the broker in a situation where his personal interests and those of his client are linked. This situation could lead the broker to have to choose between his own interests and those of his client. The broker could be tempted to favour his own interests, for example, by recommending that the client accept a lower sale price in order to obtain the repayment of his loan more quickly.

The broker could also take advantage of the client’s vulnerability by charging a higher interest rate.

What the broker must do in this situation

  • He must not act as lender for a client he represents in a real estate transaction.
  • The broker must at all times be able to make recommendations to his client in an objective manner, without regard to any gain by a person (natural or legal) whom he might be tempted to favour, for example, a relative, a client or a company in which he holds a financial interest.

EXAMPLE 2

In addition to his licence issued by the OACIQ, a real estate broker holds a mortgage brokerage certificate issued by the Autorité des marchés financiers. He has a brokerage contract with a seller. When approached by a potential buyer, he offers to represent him to obtain a mortgage loan.

In this situation, the broker may find himself in a conflict of interest because the broker’s advice to his selling client may be biased in favour of his borrowing client. When receiving an offer to purchase from the borrowing client, the broker could present it in an advantageous manner to his selling client in order to benefit from the remuneration resulting from the loan to the buyer, in addition to that of the sale.

This situation is to be distinguished from the one where a broker represents a buyer in a real estate transaction.  In this case, if he also holds a mortgage brokerage certificate issued by the Autorité des marchés financiers, he could also represent him to obtain a mortgage loan. 

What the broker must do in this situation

  • Choose between representing the interests of the selling client or those of the borrowing client.

He must not represent both at once as their interests are conflicting. Nothing prohibits brokers from engaging in professional activities other than their real estate brokerage career. However, these activities must not undermine the core values of the real estate brokerage practice, namely integrity, independence and competence. Furthermore, a licensee who, in addition to his real estate brokerage activities, engages in other professional activities or operates another enterprise must ensure that these do not compromise his integrity and independence.1

The licensee should also discuss any conflict-of-interest situation with his agency executive officer to inform him of the risks that may arise and get help to resolve any issues.

EXAMPLE 3

When a real estate broker is also a city councillor, he risks appearing to favour certain projects over others.

What the broker must do in this situation

  • Disclose his status as either broker or councillor, depending on the hat he is wearing, so that all parties to the transaction can make informed decisions.
  • Declare his conflict of interest in relation to his duties as a city councillor when the situation requires transparency in this regard. It may even be appropriate to withdraw from certain debates or decisions.

EXAMPLE 4

A real estate broker directly pays the fees of a professional who is involved in the real estate transaction, for example the building inspector or the notary. This can give the impression that the actions of these professionals are influenced by the broker.

What the broker must do in this situation

  • Not pay directly any professionals involved in the real estate transaction.
  • Provide his client with a list of professionals and offer to reimburse him for the professional fees upon proof of payment.
  • Whether the professional retained is one of those suggested by the broker or agency or chosen by the client, the offer must apply.
  • A maximum reimbursement can also be set, but this amount must be known to the client beforehand.

EXAMPLE 5

A broker is the mortgage lender or one of the mortgage lenders for an immovable, either directly or through his corporation or partnership. He cannot act as intermediary for the sale of the immovable because he could appear to be favouring his own interests or those of his business to the detriment of the seller’s interests. Similarly, he cannot represent a buyer for the purchase of an immovable for which he, his partnership or corporation is the mortgage lender.

Both situations could result in the broker having to choose between his own interests and those of his client. He could be tempted to favour his own interests, for example, by recommending that his client accept a lower sale price or offer a higher purchase price in order to obtain the repayment of his loan more quickly.

What the broker must do in this situation

  • Not accept a brokerage contract for the transaction involving the immovable.

EXAMPLE 6

A real estate broker completes an offer to purchase for the buyer without mentioning that he is a co-owner of the property.

A real estate broker cannot represent a buyer for the sale of his own property, nor can he represent him for the purchase of a property in a real estate project of which he is the developer, since the interests of the selling real estate broker are opposed to those of the buyer.

What the broker must do in this situation

  • He must refuse to represent a buyer since he holds a direct interest in the immovable. He must recommend that the buyer seek representation by another broker.

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Last updated on: April 25, 2022
Numéro d'article: 208673