Estate Agents that Make Misrepresentations Are Liable for Compensation Depending on the Agreement Owners May Also Be Liable Purchasers Should Verify the Information Before Signing the Contract to Avoid Being Misled into Making the Wrong Decision

Whether it is buying a property for self-use or for investment purposes, it is nonetheless a monumental decision with major costs involved. During the process, the estate agent plays a pivotal role and acts as an important communication channel between the buyer and seller. In addition to providing the buyer with information on the property, estate agents also assist the vendor or property developer to liaise with potential purchasers in pitching the property, in order to complete the sale and receive the commission as a reward. If the estate agent makes false representations of fact during the sales process, the purchaser could easily make a wrong decision and incur losses.

Having analysed precedent cases, the Consumer Council wishes to remind consumers that the role played by estate agents in property transactions could be complicated to a certain extent. If estate agents make misrepresentations without the authorisation of the sellers, consumers may not be able to rescind the transaction and could only allow the deposit to be forfeited by the seller or proceed to complete the transaction, and only thereafter seek compensation from the estate agent. The respective liabilities of the estate agents and both vendors and purchasers are often dependent on the specific facts and the agreement between them. Even if the estate agents or their employees had made misrepresentations, they may not necessarily have to bear the losses or damages arising from the ultimate legal liabilities of the purchasers, and consumers would have to bear huge costs and pursue complicated legal proceedings in any attempt to seek compensation or legal redress. Even though estate agents are regulated in Hong Kong, consumers should be extra cautious in conducting property transactions. Apart from using licensed estate agents only, consumers should also verify their sources of information or representations, and seek independent legal advice where necessary, in order to protect their rights and interests.             

Estate Agents Have Important but Limited Responsibilities and May Not Have to Bear the Full Losses Suffered By the Buyers

There are more than 38,000 licensed estate agents and salespersons and about 4,000 licensed estate agency companies in Hong Kong, all of whom are regulated by the Estate Agents Authority (EAA). According to the Code of Conduct issued by the EAA, estate agents are required to exercise due diligence and due care in carrying out their duties, and should keep themselves informed of all relevant laws, government regulations, and the essential facts and developments of the property market, and then provide services and advice to clients based on knowledge, training, qualifications and experience in the field. In accordance with the common law, estate agents should first make reasonable enquiries themselves before responding to enquiries from purchasers. If an estate agent makes false representations regarding the condition of a property and consequently induces a buyer into purchasing the property and suffer losses as a result, the purchaser is entitled to seek compensation under the Misrepresentation Ordinance, including recovering the deposits forfeited by the seller, or (if the transaction is completed) the price difference between the purchase price and the property’s actual market value. The purchaser may also be able to rescind the transaction depending on the actual facts. As for the estate agency companies, they generally have to bear vicarious liability for the negligence, misrepresentation, etc. of their employees in the course of their employment.            

Precedent Case 1: Estate Agent Failed to Disclose the Occurrence of an Incident Involving a Person Falling off the Building from the Flat and Had to Compensate the Buyer the Amount of the Deposit  

In inspecting a second-hand property, the purchaser had enquired with the estate agent whether there was anything weird or unusual, and the reply he received was “no”, meaning there was nothing untoward. However, after signing the provisional agreement for sales & purchase, the purchaser discovered the occurrence of an incident in the property involving a person falling from height from the flat. Hence the purchaser decided to terminate the transaction and to seek compensation from the estate agent. The judge held that the estate agency agreement had stipulated that the estate agent would obtain information concerning the property for the purchaser, and it must be implied that the estate agent had a duty of care in providing information to the purchaser. When the purchaser enquired with the estate agent whether there was anything weird or unusual about the flat, the estate agent should have undertaken reasonable inquiry before answering his client’s query, and not simply answering “no”. Ultimately, the court ruled that the estate agent should compensate the purchaser the amount of the deposit that was forfeited by the seller.

Yet, consumers in making the decision to purchase a property would normally consider a basket of factors, rather than solely based on the representations of an estate agent. Therefore, even if an estate agent or his employees had made misrepresentations, unless they were of a fraudulent nature, the scope of duty would not generally extend to cover the purchase decision made by the purchaser after thorough consideration of all factors, and the estate agent may not necessarily have to bear the full losses or damages suffered by the purchaser. For example, if a property developer fails to deliver a first-hand property on time due to cash flow problems, or fails to complete the project at all, then even if the purchaser had relied on the negligent misrepresentation of the estate agent in buying the property, the estate agent may not have to bear the liability for the losses suffered by the purchaser due to the delay or failure to deliver the property by the developer, as such losses may be beyond the scope of the estate agent’s duty.

Vendor May Be Liable Depending on Whether Authority Had Been Conferred on the Estate Agent to Make Misrepresentation

In accordance with the Estate Agents Practice (General Duties and Residential Properties in Hong Kong) Regulation (“Practice Rules”), estate agents are required to enter into an agreement with the vendor in a prescribed form commonly referred to as a “listing document” to set out the obligations between the estate agent and the vendor. If an estate agent makes a misrepresentation, whether the vendor is liable would depend on the actual facts.

In law, an “agent” refers to someone with the authority to affect the legal relationship between the principal (e.g. the vendor) and a third party (e.g. the buyer), such as through making binding representations, conducting negotiations and agreeing to contracts on behalf of the principal. If an agent makes a misrepresentation within the actual[1] or apparent [2] authority granted by the principal and induces a third party to enter into a transaction, the third party may not only make a claim for compensation against the agent, but also may have the right to rescind the transaction and claim compensation from the principal in accordance with the Misrepresentation Ordinance. However, estate agents may not necessarily be agents under the law, but rather act as “brokers” or “introducers”, earning commissions from both parties after facilitating a transaction. Other precedent cases had indicated that estate agents could have different roles at different stages during a transaction.

In precedent case 1, apart from claiming against the estate agent, the purchaser also sought to rescind the transaction based on the vendor’s misrepresentation. The court pointed out that the estate agency agreement did not confer authority on the agent to furnish to the purchaser any information not supplied to the agent by the vendor, and even without such authority, the estate agent could still have performed his contractual obligations. Hence the court rejected the purchaser’s claim against the vendor, and the purchaser could only seek compensation from the estate agent for the amount of the deposit that he had paid which was forfeited to the seller.             

Precedent Case 2: Inaccurate Sketch Did Not Originate from Seller – Transaction Cannot Be Rescinded

Prior to the purchase, the buyer had obtained from the estate agent a sketch that indicated the area of the flat that was larger than its actual size, hence the buyer requested to rescind the transaction and asked for the return of the deposit money on the ground that the vendor had made misrepresentation. The court pointed out that the vendor had merely appointed the estate agent to sell his property and had not given the estate agent any actual or apparent authority to provide the buyer with the said sketch that did not originate from the vendor nor to make any related misrepresentation. In providing such a plan, the estate agent was acting on behalf of the purchaser, and not the vendor. The court ruled that the purchaser cannot sue the vendor based on the misrepresentation made by the estate agent. There was no evidence that the vendor had conducted himself in any manner to mislead the purchaser, hence the ruling against the purchaser.

Precedent Case 3: Owner Was Present When the Estate Agent Made a Misrepresentation. The Transaction Was Rescinded and the Deposit Had to Be Returned

The estate agent had arranged for the purchaser to inspect a village house with a garden, but omitted to inform the purchaser that the property only consisted of the village house and the garden was subject to a short-term tenancy with the Government. The court ruled that the estate agent had made a misrepresentation by conduct. Since the vendor was present during the property inspection, but failed to disclose the status of the  garden, such conduct also amounted to misrepresentation. The court ruled that the transaction could be rescinded and the deposits should be returned to the purchaser by the vendor and the estate agent.

The above precedent cases fully illustrate the complexities of the roles played by the estate agent during a property transaction, and in the event of a dispute, it may not be easy or straightforward for consumers to seek redress. Therefore, in conducting property transactions, extra attention should be paid to the following matters:

• Should engage an estate agent licensed by the EAA and never engage an unlicensed agent. If in doubt, request to see the estate agent or salesperson’s “estate agent card” or check the website of the EAA (www.eaa.org.hk) for the licence list;
• Sign an Estate Agency Agreement with the estate agent to set out in writing the rights and liabilities of each party, the prescribed forms for second-hand residential properties, with important provisions including the list price, duties of the estate agent, the commission payable, single (represent only the owner/purchaser/tenant) or dual agency (simultaneously represent the owner and purchaser or landlord and tenant) etc.;
• Consumers should verify the representations made by estate agents from multiple sources and seek to understand the pertinent information of the property in question, such as sales brochures (for first-hand property), and also through other channels such as the Land Registry (https://www.landreg.gov.hk/en/services/services_b.htm) and the Buildings Department (https://www.bd.gov.hk/tc/resources/online-tools/BRAVO-online-building-records/index.html), for the owner’s information and floor plans etc.;
• Should not believe dubious promises such as guaranteed loans or guaranteed profit. Should draw up agreements in writing with specific details of any incentives. If in doubt, seek independent legal advice to protect one’s interests.