Manage your risk when trust funds fall into dispute

In most instances, the management of trust funds is a relatively simple affair: an agent is engaged by the registered owner of the property and holds authority to receive monies into its trust account for and on behalf of that owner. When the owner provides written direction to disburse funds from trust for a stated purpose, the agent is required to act accordingly.

However, on occasion, the issue of who is entitled to the monies held on trust can become complicated by external factors.

Once such example can be found in a recent decision[1] of the Queensland Civil and Administrative Tribunal (the Tribunal), the facts of which are set out below.

THE FACTS

When a formerly married couple settled their divorce, they agreed that the wife would keep two residential properties, one situated in Robina and the other in Ormeau (properties).

The Federal Circuit Court subsequently made orders on 10 October 2017 (Court Order) reflecting the parties' agreement. The Court Order stated, relevantly:

"That [the wife] forthwith indemnify [the husband] in respect to all liabilities associated with the entities retained by [the wife] including the loans of approximately $270,000 and $66,000 on Robina, $420,000 on Ormeau, ... and be solely entitled to the rental income of Robina and Ormeau and liabilities for all outgoings and taxation."[2]

At the time, the appointed agent managed both properties. The property management agreements for the properties were between the husband and the agent. The wife was not a party to the agreements. The husband was also the sole registered proprietor of the properties. The mortgages for the properties were also only in the husband's name.

When the Court Order was made, the husband and the wife intended that the wife would secure finance to pay out the mortgages in the husband's name and arrange transfer of the titles of the properties from the husband to herself. These things did not happen until some six months later, in or around April 2018.

In the meantime, the agent continued to receive rental monies from the properties. Being on notice of the Court Order, the agent retained the rental monies in its trust account, pending transfers of the titles to the wife.

Toward the end of 2017, the husband directed the agent to pay him $24,378.97 in accumulated rental monies that the agent was holding in its trust account.

The wife subsequently lodged a claim against the claim fund with the Office of Fair Trading (OFT). The wife sought $24,378.97 from the claim fund established by the Agents Financial Administration Act 2014 (Qld) (AFA Act), arguing that the agent should have paid the accumulated rent monies to her in accordance with the Court Order.

The OFT:

1. allowed the wife's claim and paid her $24,661.49 from the claim fund set up under the AFA Act; and

2. required that the agent reimburse the claim fund $24,661.49.

(OFT Decision)

Upon receiving the OFT Decision, the agent filed an application with the Tribunal for a review of that decision.

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CENTRAL ISSUE FOR DETERMINATION

The wife made her claim to the OFT under section 82 of the AFA Act. Section 82 allows a person to make a claim against the claim fund if that person suffers financial loss in the event of a contravention of section 21 or section 22, among others.

Section 21 states that an amount paid into an agent's trust account must be kept in that account until it is paid out in accordance with the AFA Act.

Section 22 sets out the parameters under which an agent may pay out monies from its trust account.

Relevantly, section 22(3) states that an agent is authorised to draw an amount from its trust account "to pay the person entitled to the amount" [emphasis added].[3]

The central issue before the QCAT was whether the wife was "the person entitled to" the rental monies.

The OFT argued that the Court Order bound the agent and by virtue of that Court Order, the wife was the "person entitled" to the rental monies.

The agent submitted that it was not bound by the Court Order because it was not a party to the Court Order and that the husband was the "person entitled" to the rental monies by virtue of the agent's property management agreements with the husband as the registered proprietor of the properties.

THE DECISION

The Tribunal agreed that the Court Order did not bind the agent because it was not a party to that proceeding.

The Tribunal then found that the wife was not "a person entitled" to the rental monies because the agent was obligated to pay the rental monies to the husband under the property management agreements.

The Tribunal therefore set aside the OFT Decision.

In reaching its decision, the Tribunal looked at the purpose of the AFA Act - that being to protect consumers from financial loss when dealing with agents.

The Tribunal said that "it is obvious that there must be a 'principal/agent' relationship established for the Act to apply".[4]

The Tribunal commented that the wife had no contractual right to recover any rent from the tenants until she became the registered proprietor of the properties (and until she then entered into leases with each of the tenants). In the same vein, the Tribunal commented that the agent had no authority to collect rent, carry out inspections or do any other task in relation to the properties on the wife's behalf until she entered into a property management agreement with it.

The Tribunal said that while the Court Order entitled the wife to immediately transfer into her name the titles to the properties, she did not in fact become the registered proprietor of those properties until 13 April 2018. As a result, the property management agreements between the husband and the agent prevailed and the Court Order did not interfere with those property management agreements.

KEY TAKEAWAY FOR REAL ESTATE AGENTS

This decision is a reminder that agents must exercise great caution when dealing with trust monies to ensure strict compliance with the AFA Act.

While, in most cases, the entitlement to trust monies will be very clear, there may be instances in which that entitlement becomes complicated by external factors which are outside an agent's knowledge or control.

The AFA Act provides a clear mechanism for dealing with trust monies which are the subject of a dispute.[5] However, if an agent is in any doubt as to who holds an entitlement to monies held on trust, the agent should first seek independent legal advice before releasing those funds.

[1] Owen & Coastal Keys Pty Ltd v Chief Executive, Office of Fair Trading, Department of Justice and Attorney-General & Anor [2021] QCAT 31.

[2] Ibid [1].

[3] AFA Act section 22(3).

[4] Owen & Coastal Keys Pty Ltd v Chief Executive, Office of Fair Trading, Department of Justice and Attorney-General & Anor [2021] QCAT 31 [27].

[5] AFA Act ss 25-28.