“Residential” or “Commercial” Brokerage: Ethical obligations are the same for all
Some real estate brokers and agencies offer services in more than one field of practice, i.e. residential and commercial and do not carry out only commercial transactions.
In this regard, the OACIQ is often asked about the main differences between these two fields of practice. Is there one way to work for residential and another for commercial? From a legal standpoint, the answer is NO. Regardless of the field of practice chosen, real estate brokers and agencies all have the same ethical obligations.
In the day-to-day activities however, there are significant differences in the practices depending on the area of practice, including the following points:
1. Mandatory and recommended forms
Certainly the first basic difference has to do with the use of mandatory forms.
When a brokerage contract is concluded between a natural person and an agency or a real estate broker acting on his own account who undertakes to act as intermediary for the sale of a part or all of a chiefly residential immovable containing less than five dwellings or a co-ownership, the use of forms developed by the OACIQ is then mandatory. For properties containing five dwellings and more and for commercial or industrial properties, the parties are allowed to use their own forms although the OACIQ developed recommended forms that may be used in these different situations.
It should be noted that although the use of forms developed by the OACIQ is not mandatory in commercial brokerage, licensees must ensure that the content of their brokerage contracts and transaction proposals complies at all times with the regulations governing real estate brokerage.
2. Cancelation of the promise to purchase
The second difference is in the way in which a promise to purchase can be terminated. A residential promise to purchase, with its various annexes, usually includes inspection and financing conditions. Mechanisms connected to these conditions allow the buyer, in certain cases, to cancel a promise to purchase following a strict procedure. For example, in the case of an inspection condition, the buyer may terminate his promise to purchase only if the inspection reveals the existence of a factor relating to the immovable that is liable to significantly reduce the value thereof or the income generated thereby, or to increase the expenses related thereto. In commercial real estate brokerage, the cancellation of a promise to purchase is much more discretionary for the buyer. The promise is followed by a due diligence period during which the buyer reserves the right to make the necessary verifications, including financial results, condition of the premises, environmental inspections, zoning, obtainment of permits, etc. Following this, he may terminate his promise to purchase if he is not ''fully'' satisfied with the outcome of the verifications.
3. Visiting the property
A third difference concerns access to the immovable for a visit. In residential real estate, it is normal for the buyer to visit the property before drafting a promise to purchase. The interior aspect of the property, which he will normally occupy, is a key factor in his selection. With an income property, the buyer is usually more interested in the investment value. A visit of the premises is often conditional upon the acceptance of a promise to purchase. The parties agree on the price, and the visit takes place afterwards. This also avoids disturbing the tenants several times.
4. Information and the duty to collaborate
The fourth difference is in the conveying of information regarding the object of the brokerage contract and the duty to collaborate. Everybody knows the rules: a real estate broker has a duty to collaborate with any other licence holder upon request. All information relevant to the transaction must be given to a potential collaborator without delay. However, one exception to this principle is sometimes necessary on the commercial side. A seller may, with good reason, refuse to disclose financial information regarding his income property or business for fear that the information will fall into the hands of a competitor. In such cases, a confidentiality agreement will have to be used. The signing of this document by a prospective buyer will reassure the seller regarding the potential use of the information given. Signing such an agreement before any information is given does not go against a broker’s ethical obligations.
5. Methods used to put a property on the market
In addition, the methods used to put a property on the market may differ, with residential using traditional methods (newspaper ads, signs, etc.) whereas commercial is often done by a call for bidders. The same goes for the granting of the brokerage contract, where commercial favours calls for bidders and sales pitches.
These are only a few, non-exhaustive examples of differences between the professional practices used by both sectors. However, from an ethical point of view, some practices clearly must be avoided, including the ones mentioned below.
1. Denial of access to information
A broker or agency of course may not withhold access to information on the pretext that the immovable is undergoing “due diligence”, that a promise to purchase has been accepted or for any reason whatsoever.
2. Absence of verification of the information provided
Taking up a brokerage contract without verifying the information provided (or without first obtaining that information), assuming that all the information will become available anyway during the due diligence process, is also a bad practice. Section 5 of the Regulation respecting brokerage requirements, professional conduct of brokers and advertising of the OACIQ requires that the broker verify, according to generally accepted practice, the information provided to the public or to another licence holder. He must be able to prove the accuracy of this information at all times. He must therefore obtain and verify documents (invoices for taxes, heating, electricity, snow removal, major repairs, insurance, etc.) as soon as he takes up the brokerage contract. Under section 11 of the Regulation respecting records, books and registers, trust accounting and inspection of brokers and agencies, these documents must be kept on record. By so doing, the broker will also avoid unpleasant surprises and a potential dramatic reduction in the selling price after a pre-purchase inspection or due diligence.
In summary, although the paths may differ slightly between residential and commercial real estate practices, they converge into one ethical obligation: all real estate brokers and agencies are governed by the same ethical duties and obligations, regardless of their field of practice.
For any questions, feel free to contact Info OACIQ.
