KEY POINTS:
A major court ruling will reassure the 100,000 people every year who sell houses through real estate agents about the transparency of the industry, says New Zealand's largest agency.
But others say it could lead to higher insurance premiums and make selling houses more expensive.
Bryan Thomson, head of Harcourts, said there were few complaints against agents compared with the number of sales they made and the Premium Real Estate decision from the High Court at Auckland last week would not change the industry.
The court found that Takapuna-based Premium Real Estate had engaged in misleading and deceptive conduct when a couple it represented sold their Milford house in 2004 for $2.5 million. Five months later the buyer, Mahoenui Valley Trust, sold it for $3.2 million. Premium was ordered to pay $900,000 in compensation and costs.
Thomson said that the decision should reassure buyers and sellers.
"This should give the public confidence because we have nowhere to hide."
He rejected suggestions that it would result in a flood of complaints or in rising agency insurance premiums, but said the ruling sent a message to agents to be diligent.
"Every agent needs to have processes in place to make sure they do the best for their clients," he said.
Real estate ethics crusader Neil Jenman welcomed the Premium court decision, saying it was "fantastic news for property consumers".
Jenman, an Australian, said it would force the industry to clean itself up.
"I note how the boss of the offending agency said that what they do is done every day throughout New Zealand. What an astonishing admission," he said.
"Yes, every day agents take the crooked-carrot-commission bait from developers. Too many agents work for the interests of the agents and then the agents' pals.
"The High Court decision should make all agents wake up and realise for whom they are always supposed to be working - the mum-and-dad sellers who trust and then pay them.
"I note also that the industry seems scared of this decision. Any decision that frightens the real estate industry obviously means good news for real estate consumers."
Chris Ryan, chief executive of the Insurance Council, said a flood of large claims against any sector could change its risk profile and push up premiums.
But he doubted the Premium case would alter the real estate sector's risk profile, unless it set a precedent for others to take court action.
Consumer Institute head David Russell said if the case sparked further claims against agents, premiums could rise and people could end up paying more to sell a house.
The private building certification sector had collapsed when it could not get insurance cover which was mandatory for carrying out the business of making house inspections, Russell said. When the scope of the leaky building crisis was revealed, insurers had simply abandoned the business, which brought down the industry.
Although he does not expect the Premium case to have such a drastic effect on the real estate sector, he said there were some parallels and the court ruling would make agencies extremely nervous about the future.
Merv Lowe, an agent with Barfoot & Thompson in Mt Eden, questioned the outcome of the case.
"If the Stevens' property was initially sold by auction/tender after an extensive marketing campaign, then it's patently unjust that Premium be held culpable when, after a few months, it is resold for substantially more," he said.
But Gordon Meyer, former professional standards manager with the Real Estate Institute and now head of Rotorua's Tuatara Realty - part of the Go Gecko Group - said some agents could pass rising professional indemnity insurance fees to the general public.
Meyer said premiums would need to climb after the case because of rising risks. These fees would inevitably be passed on to the public, he predicted, but disguised within the commission.
"Those charges will just go into the costs of doing business which agents use to justify their high commission charges," Meyer said.
He also issued a warning to people to check if an agency had professional indemnity insurance before signing an agreement to sell a property.
Many agencies carried risk cover against claims of up to $1 million or more, but dozens had no professional indemnity insurance cover against potentially massive claims, he said.
This left the public at risk because recovering costs by suing those agencies for any losses would be virtually impossible, he said.
Institute statistics show that of the 200,000 real estate deals completed annually by 17,500 agents, around half are house sales. The median house sale price is $324,000 so the industry makes sales of around $32.4 billion annually.
Institute president Murray Cleland said the Premium ruling sent a strong warning to agents to beware of conflicts of interest and promised that agents who broke the law could expect the strongest penalties.
But Meyer said many agencies settled complaints and financial claims in secret, keeping them away from the institute's more formal complaints process.
"Most deserving claims are settled, with those settlements inevitably requiring an undertaking that no complaint will be made to the institute," he said.
And one insurance firm that provides professional indemnity insurance for around 500 agencies confirmed this, saying of the 200 inquiries it got annually, payments were made in about 50 cases for $50,000 to $100,000.
Associate Justice Minister Clayton Cosgrove said most agents were "good, honest souls" but the industry also had "ratbags", many of whom would leave next year when a new regime was ushered in.
Cosgrove will meet institute officials tomorrow to hear suggestions for reform. He hopes to announce an industry overhaul and a more independent, transparent and robust process complaints and discipline procedure. The institute could be stripped of its powers to hear complaints against its own agents, but nothing has yet been decided.
The prospect of appointing a real estate ombudsman similar to those of the banking and insurance sectors will be discussed.
Cosgrove said a house was most people's single most valuable asset and they had a right to expect agents would act honestly and with integrity.
Crossley Gates, special counsel at law firm DLA Phillips Fox in Auckland, said if there was a flood of court action against agents, it could have drastic consequences for both them and the public, potentially pushing up costs and leaving agents with far less financial protection.
"If it goes through the roof, the sector would become uninsurable and leaky buildings are a good example of this," he said. But he doubted the Premium case would have such a damaging effect, saying it was only one case.
What Premium did wrong
The High Court at Auckland found the agency guilty of misleading and deceptive conduct.
It failed to disclose its agent had a conflict of interest over a North Shore house sale:
Mark and Deborah Stevens sold their house in 2004 for $2.5 million.
Five months later, Mahoenui Valley Trust sold it again for $3.2 million.
Premium agent Pamela Riley was closely associated with Mahoenui.
She had acted for it on many other deals and family members had worked for the trust.
Premium has a judgment against it for around $900,000.
