Referral fee demands widespread

The pernicious practice of real estate agents demanding referral fees is becoming concerningly widespread.

Practitioners of a particular vintage will recall a time when relations between solicitors and real estate agents were more circumspect, with great care taken to ensure that independence on both sides was overt and robust. Agents referred matters to solicitors based on mutual confidence in their respective abilities, usually developed over time.

It appears those days have been consigned to history. A recent investigation by the ABC into the practice revealed widespread concern among clients and solicitors. The ABC was also kind enough to reach out to the Society for comment (Watch the ABC News story featuring Shane. or Read Shane’s interview with ABC News.), as many practitioners will appreciate the Society’s general position is that the payment of such fees is best avoided.

Unfortunately, based on the calls received in the Ethics Centre, this practice has not only become widespread – at its worst it has morphed into outright demands from real estate agents. Some agents brazenly advise law firms that they will only refer work to those who pay the fee, leading to a bidding war inconsistent with the professional standards to which both disciplines claim to aspire.

There is also an open question about whether taking such a referral fee by a real estate agent is inconsistent with s89(1)(c) Property Occupations Act 2014, but that perhaps is a question for the agents. 

To be clear, solicitors paying referral fees to real estate agents is not illegal in Queensland, but the practice is fraught with peril and not recommended. If it must be done, there are certain steps which must be taken.

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Full details of these steps and the risks around this practice are comprehensively covered in the Society’s Guidance Statement Number 3: Paying Referral Fees , but at minimum it must be the case that:

• The client is fully aware of the fact that a fee is being paid, and of the complete details of the relationship between the agent and the Solicitor;
• The client gives fully informed written consent – and fully informed includes understanding the risks and consequences surrounding engaging a solicitor in these circumstances; and
• The client needs to understand they do not have to follow the agent’s recommendation.

Given the final dot-point above, solicitors should not pay a referral fee unless and until the client signs a retainer.

Even with all proper precautions being taken, the solicitor remains at risk should settlement fail. The client may seek compensation if, say, a deposit is lost, and may suggest the solicitor looked after the business relationship with the Agent rather than the client’s interest. While that surely will not be the case, the reputational damage arising from even winning the argument will outweigh any profits from the referral relationship with the agent.

In addition, further problems can arise should a solicitor determine it is in the client’s best interests that a contract be terminated. A real estate agent who is prepared to demand a referral fee might well be prepared to threaten the end of the relationship if the solicitor advises the client to terminate. It is also possible a client may conclude down the track that the solicitor should have suggested terminating – and again, the relationship with the agent will assume prominence in any action on that issue.

Clearly, this is a situation which requires addressing, and that will likely mean legislative intervention. In a perfect world that would not be necessary, but agents prepared to demand referral fees are unlikely to voluntarily cease the practice. The Society has made representations to the government about whether these fees should be banned by law, but with an election looming action in the near term is unlikely.

The best way for practitioners to deal with this is to be proactive. Many firms offer cheap or free appointments for people thinking of buying or selling, to take them through the process and let them know what to expect – and to let them know some real estate agents recommend lawyers based solely on the payment of a kickback.

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While the majority of those recommended will be competent, it is important for consumers to know that merit is not the only basis of the agent’s recommendation. Most people will recognise the dangers and be happy to have a solicitor on their side already, and thus avoid the referral fee altogether.

It may even be worth District Law Associations putting on community education sessions on this issue. If consumers know the risks associated with going with a real estate agent’s recommendation, they will probably ensure they have a lawyer lined up long before any property changes hands, and that can only be a good thing.