Realtor signs on a lawn outside townhomes in Scarborough, Ont., on April 5, 2021.Fred Lum/The Globe and Mail
A proposed class-action lawsuit that takes aim at real estate commissions in Canada’s largest home-sales market that have affected billions of dollars worth of transactions over the past decade has survived a first test in court.
A judge ruled earlier this week against an attempt by the local real estate board and several large brokerages to have the case thrown out.
At issue is the practice of a seller listing their home for sale and offering a co-operating commission to the buyer’s agent.
The practice is widely used in real estate around the world, but the proposed lawsuit argues that the rules imposed by the Toronto Regional Real Estate Board (TRREB) and the Canadian Real Estate Association (CREA) create anti-competitive controls and limit how those commissions can be negotiated. The suit was filed by class-action specialists Kalloghlian Myers.
The case centres on the Toronto market where traditionally home sellers can expect to pay a 2.5-per-cent commission on a sale to a buyer’s agent, while listing agents could expect to receive the same or less.
In recent years, those percentages have shifted, with buyer agents sometimes accepting 2 per cent and listing agents accepting as low as 1 per cent or 1.5 per cent. But while the percentages are small the dollar amounts can be huge: A 2.5-per-cent commission on an average detached home sale in 2013 was about $17,144; rising prices have pushed a 2.5-per-cent commission to $35,409 on the same type of home in August.
The lawsuit names TRREB, CREA, seven major real estate brokerages and five franchisors of real estate brokerages as defendants. A Toronto man named Mark Sunderland, who sold a property in 2020 and paid the standard commission, is the representative plaintiff. The case has yet to be certified as a class action.
The defendants sought to block the case, but Federal Court Chief Justice Paul Crampton issued a ruling on Monday that allows the proposed lawsuit to proceed to the certification phase.
Chief Justice Crampton concluded that the plaintiff’s arguments, that rules created by TRREB and CREA “control” buyer commissions in violation of the Competition Act, were not “doomed to fail.” He dismissed the defendants’ motion to strike those arguments.
However, the judge said there was not enough evidence that the defendants attempted to “fix” or “increase” prices, and he also ruled that there wasn’t enough evidence to include the country’s largest real estate franchisors as defendants.
The judgment pointed to specific “buyer commission rules” at TRREB and CREA that specify that the seller must pay those commissions. The rules don’t allow buyer commissions to be modified or negotiated by the seller in an agreement of purchase and sale.
“I consider it arguable that these aspects of the buyer broker commission rule are unambiguously harmful to competition and purchasers of co-operating brokerage services in the GTA,” the ruling reads.
The initial statement of claim also included the large national franchising companies, or franchisors – RE/Max Integra, Century 21 Canada Limited Partnership, Residential Income Fund L.P. (Royal LePage), HomeLife Realty Services Inc. and Sutton Group Realty Services Ltd. The argument was that by opening new brokerages that agreed to TRREB’s rules, they were aiding and abetting the conspiracy to violate the Competition Act with the buyer commission structure.
However, Chief Justice Crampton excluded them from the action in his ruling, saying their conduct appears to fall short of the legal definition of aiding and abetting.
“Merely requiring franchisees to sign a Franchise Agreement, which in turn requires them to comply with and implement TRREB and CREA’s Rules, implicitly including the Buyer Brokerage Commission Rule, does not arguably rise to the level of deliberately encouraging or actively inducing the commission of a criminal offence,” the ruling reads.
However, many of the city’s largest brokerages will remain defendants because they explicitly agreed to follow TRREB’s rules on commissions while operating their businesses. They include Royal LePage Real Estate Services Ltd., Right at Home Realty Inc., Forest Hill Real Estate Inc., iPro Realty Ltd., Harvey Kalles Real Estate Ltd., Chestnut Park Real Estate Limited and Max Wright Real Estate Corporation (operating as Sotheby’s International Realty).
The ruling means a case on the “control” elements of the claim can proceed to the next phase, in which the court would rule on whether to certify the class of victims. The lawsuit seeks to have the class defined as anyone in the Toronto region who paid a buyer commission when they sold their home in the past decade.
However, one of the lawyers for the plaintiff predicted that the remaining defendants will appeal the ruling, which could take months if not another year and push back the certification phase of the case even further.
“Quite frankly, this is the business model of the real estate industry so I expect they will fight it,” said Garth Myers, partner with Kalloghlian Myers.
Royal LePage and Peerage Capital (which owns Chestnut Park and Sotheby’s Canada) declined to comment as the matter is still before the courts.
Pierre Leduc, spokesperson for CREA, said: “We are reviewing the decision, and continue to believe that the claims are without merit.”
Other defendants did not respond to request for comment.