Misleading and deceptive conduct from a sales agent advertising a dual income investment property

The recent New South Wales District Court decision of Kumar v Sydney Western Realty Pty Ltd & Anor (No. 2) [2021] NSWDC 446 is instructive for real estate agents. It examines a buyer's claim for damages in relation to allegations of misleading and deceptive conduct against a sales agent, as well as a claim for professional negligence from her conveyancing solicitor, after discovering the 'dual income' investment property she purchased did not have the necessary council approval.

Background

In or around May 2019, Century 21 Eternity (agent) was engaged by a deceased estate to sell a residential property in Toongabbie, Sydney (property). In May 2019, the plaintiff purchased the property for the sum of $720,000 for investment purposes. The property comprised a main house and a granny flat and it was purchased with the intention of being a dual income investment. The plaintiff later discovered that approval had never been obtained from the local council, the Blacktown City Council (council), for the granny flat.

In February 2020, the plaintiff commenced proceedings against the agent and her conveyancing solicitor, alleging that they were responsible for loss and damage arising from an order by the council requiring the granny flat to be reinstated as a garage. As against the agent, the plaintiff pleaded three causes of action - misleading or deceptive conduct, unconscionable conduct and negligence. As against the solicitor, she pleaded an action in professional negligence.

The plaintiff alleged the diminution in the value of her property of $100,000 in comparison to the price she paid, the cost of rectification works ($15,675), the fine paid to the council ($1,500), stamp duty that would not have been paid if the property was bought with an uninhabitable garage ($14,690), and a claim for lost rent.

The sale of the property

The property was advertised on RealEstate.com as a 'fantastic opportunity for an astute investor to secure a dual income property investment' and stated that the house could provide rent of $440 to $460 per week and the granny flat $400 to $420 per week. The agent, during cross examination, stated that she was merely acting as a conduit of information for the seller and had not made any enquiries about the estimated rental or of the accuracy of the information in the advertisement at all.

Around a week prior to advertising the property for sale, the agent received a copy of the contract of sale from the seller's solicitors. The contract documentation included a notice from the council, which stated, inter alia, 'the garage is not permitted for habitable uses as the slab floor level has insufficient freeboard protection against flooding'.

After inspecting the property, where she observed that the house and granny flat were both independently occupied (and also observing that the granny flat was clearly previously a single car garage), the plaintiff submitted her offer of $720,000. The seller accepted her offer that same day. After signing the contract and paying her deposit, the agent introduced the plaintiff to the solicitor, whom the plaintiff subsequently engaged to act for her in the conveyance of the property.

The purchase was completed on 1 July 2019. In September 2019, the plaintiff received a letter from the council attaching a Development Control Order. In January 2020, the plaintiff received a $1,500 fine issued by the state revenue authority for development without development consent.

The plaintiff's case against the agent

As noted above, the plaintiff pleaded three causes of action against the agent - misleading or deceptive conduct, unconscionable conduct and negligence. The plaintiff alleged that the agent became aware prior to marketing the property that the granny flat was unhabitable, and with that knowledge, it was misleading and unconscionable to represent the garage as a granny flat, as well as representing that the granny flat had a rental return of $400 to $420 per week, and that it would be easy to find tenants for the main house and granny flat.

In relation to the action in negligence, the plaintiff alleged the agent had a duty of care in making representations, and that the risk of harm that she would suffer loss if the granny flat was not habitable was foreseeable.

The Court observed that whether conduct is misleading and deceptive is to be determined by deciding whether the conduct, in all the circumstances, could be characterised as misleading or deceptive. This is a question of fact, to be viewed objectively. The Court considered that the advertisement stating that the plaintiff could obtain an income from the house and granny flat was an opinion from the agent who expressly or implicitly professed the expertise to supply an opinion. The Court also noted that there was no express disclaimer provided in the advertisement.

The Court concluded that in circumstances where the agent had knowledge that the granny flat might not have been, and the agent's failure to qualify the opinion provided in the advertisement, the agent had no reasonable basis for expressing the opinion about the dual income streams and use of the granny flat in the way it did. The Court therefore concluded that the agent engaged in misleading and deceptive conduct and did not proceed to consider the other pleaded causes of action.

The plaintiff's case against the solicitor

The Court also considered at length the plaintiff's allegations against the solicitor, namely that the solicitor failed to exercise his duty of care to make enquiries about whether the granny flat was habitable, and then subsequently advise the plaintiff that the granny flat was not habitable.

The Court considered the credibility of the plaintiff and the solicitor as witnesses and concluded that the plaintiff was a generally trustworthy witness, whereas the solicitor was not a reliable witness.

The Court also considered the solicitor's duty of care to the plaintiff, which importantly included a duty to read and consider the contract of sale, identify features within the contract that were unusual, and which may be detrimental to the plaintiff's interests. The Court also found that the solicitor's failure to properly advise the plaintiff about the granny flat meant that he did not take reasonable precautions that a reasonable person in his position would have taken to prevent the foreseeable risk of harm. The Court therefore concluded that the solicitor breached his duty of care to the plaintiff.

Damages

The plaintiff claimed a loss of value in the amount of $100,000, after obtaining a valuation report that stated the value of the house (with the granny flat being considered to be a single garage) as being $620,000. However, the agent and solicitor argued that the amount of rental income received by the plaintiff (of $25,598.86) should be taken into account, so the loss in value was adjusted to $74,401.14.

The Court also accepted the plaintiff's evidence that rectification works to restore the garage cost $15,675, as well as the loss of the additional stamp duty paid in the amount of $27,990, and the fine from the Blacktown City Council for $1,500. The plaintiff attempted to claim a future loss of rent; however, this was rejected.

The agent and solicitor also pleaded a defence of contributory negligence, alleging that the plaintiff failed to act reasonably to protect her interests by executing a contract without legal advice, and by also failing to instruct the solicitor to request an extension to the cooling off period. The Court reduced the amount of damages by 15% for contributory negligence, reducing the total claim of $101,631.22.

In consideration of all the circumstances of the sale, and particularly where the solicitor's involvement was more significant than the agent's, the Court apportioned the compensation to be paid at 25% from the agent and 75% from the solicitor.

Conclusion

This decision serves as a timely reminder for agents to ensure that their advertising material is accurate, and in accordance with the information received from their seller clients. Agents should also include comprehensive disclaimers in all advertisements and encourage buyers to seek their own legal advice before entering into a contract to purchase a property.

Further reading: A resounding win for a real estate agent in the QCAT appeal tribunal

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