When a Brokerage Shuts Down
| March 22, 2016
Let’s imagine ACER Realty, a large real estate brokerage, ceases operations suddenly; the reasons for it doing so are unclear. It may be because of financial reasons, but it may not be. The closure leaves hundreds of associates and clients in an uncertain situation. ACER’s real estate professionals have their registrations cancelled, and consumers who have been working with ACER real estate professionals are not sure what will happen with their home purchase or sale.
What is RECA’s role when this happens?
Even after a brokerage ceases, it continues to have a number of responsibilities to RECA. First, the brokerage/broker must keep all brokerage records for a minimum of three years after their creation, and second, the brokerage is required to complete a closing audit.
As part of the process of ceasing operations, the brokerage must also advise RECA of its trust account arrangements and any other brokerage obligations – such as assigning matters to another brokerage and managing unconditional purchase agreements – that don’t require brokerage services.
These requirements apply regardless of why a brokerage is shutting down. In the event that a brokerage shuts down because of financial reasons or bankruptcy, how creditors or the courts deal with that brokerage is generally beyond RECA’s jurisdiction.
RECA’s primary role and primary concern during a brokerage shut down is consumer protection. Most brokerages hold trust funds on behalf of clients, so we enforce the rules concerning brokerage trust accounts as outlined in the Real Estate Act Rules. RECA’s role is to make every effort to ensure consumer funds are whole and protected.
The case of fictional ACER Realty is no different. If it employs hundreds of registered associates and numerous unlicensed office staff, it likely holds significant consumer trust funds. RECA trust assurance officers, if aware of potential brokerage solvency issues, will immediately review the brokerage’s real estate trust accounts, ensuring the brokerage disburses clients’ money in accordance with the terms of trust and funds any shortfalls.
If RECA finds trust account irregularities, the responsible parties—typically the broker—will be under investigation. The Consumer Protection Fund (also known as the Real Estate Assurance Fund) provides financial protection to persons who suffer a financial loss as a result of fraud, breach of trust, or a failure to disburse or account for money held in trust by an industry member.
If a brokerage fails to disburse or account for consumer money held in trust, the affected consumer can apply for compensation from the Consumer Protection Fund.
What about commissions owed to the brokerage’s professionals?
It is important to first understand how commissions become payable to real estate professionals after a transaction closes. The commissions earned on a transaction are brokerage funds. When funds are releasable from trust, the brokerage holding the funds forwards them from its trust account to the cooperating brokerage to deposit in their general account. The cooperating brokerage can make commission payments to its industry professionals.
The originating brokerage will pay itself the monies owing from its trust account into its general account and it pays its real estate professionals from the general account. The real estate professional doesn’t receive his or her commission payment from the brokerage’s trust account.
The employment contract or independent contractor agreement should state the terms and conditions for payment of remuneration from the brokerage to the industry professional. If the brokerage breaches the terms of the agreement, it is a civil matter between the brokerage and industry professional.
When a brokerage is in receivership, the trustee in bankruptcy typically will not allow payment of funds from the general account unless you can prove priority on those funds. Typically, commissions owing to industry professionals do not have priority.
RECA’s statutory authority is with respect to the brokerage’s trust account(s). RECA currently does not have a role in ensuring a brokerage pays their real estate professionals.
RECA administers the Real Estate Act and enforces the Real Estate Act Rules. RECA may investigate allegations of wrongdoing but cannot levy a sanction if there is no breach of real estate legislation. Alberta real estate legislation does not contemplate the employment relationship between a brokerage and its industry professionals other than from a regulatory perspective such as record keeping, reporting, etc.
When fictional ACER Realty ceased operations, it cancelled associate and associate broker registrations in order to facilitate the professionals re-registering at a different brokerage. If the reason ACER Realty ceased operations is that it was having financial difficulties, real estate professionals might wonder how they can ensure payment for outstanding commissions owed to them.
The relationship between a brokerage and its registrants is a contractual one. Compensation arrangements and agreements are between the professionals and his or her brokerage. The non-payment of commissions is a civil matter between the two business entities, the brokerage and its industry professionals.
RECA, along with other industry stakeholders, is reviewing the issue of commissions owing when a brokerage runs into financial difficulties.