Report from Council, May 2005

Many licensees are aware that the first set of Council Rules, which came into effect January 1, 2005, contained a transition provision that allowed for compliance with certain aspects of the Rules to be implemented as soon as practicable, but in any event by no later than June 30, 2005.

The sections of the Rules that are affected by this transition provision relate to the required content of written service agreements (section 5-1) and the requirement under section 5-8 that there be written disclosure of ·remuneration not paid by a client (section 5-11), ·benefits in relation to rental management services (section 5-12), and ·known material latent defects (section 5- 13).

The transition provision also applies to the portion of section 5-9 requiring written disclosure of an interest in trade when a licensee, or an associate of that licensee, is disposing of that interest. Many licensees have voiced concerns about the impact these changes in practice will have on the way they do business, and the Council has recognized the importance of allowing enough time for individual practitioners and brokerages to understand these changes and integrate them into their style of doing business. At its meeting held on April 26th, the Council approved an amendment to its Rules that extends this transition provision from June 30, 2005 to January 1, 2006. This extension will provide more time for licensees to become familiar with these sections of the Rules and to determine the most effective way in which they will comply.

The Council published an article in the February 2005 Report from Council under the heading ‘An Agent’s Obligation to Disclose Remuneration’, outlining one possible method of timely and effective disclosure. The Council now intends to invite representatives from various industry organizations to participate in a task force to consider additional possible methods of written disclosure that will satisfy the requirements of the Council Rules. The Council is also aware that BCREA and its member boards have amended their standard form written service agreements to comply with section 5-1 of the Rules. The Council commends these associations for their initiative in this regard and encourages them to move forward with the introduction of these new forms as soon as practicable.

Several other relatively minor changes to the first set of Council Rules were also made at the April 26th meeting. These changes are outlined on pages 3-6 of this Report.

This third Special Report to Licensees on the Real Estate Services Act (RESA) contains important information on a number of items, including amendments to the Council Rules, a revision to the Council’s Brokerage Trust Account Policy Statement, and the operation of commission trust accounts.

Licensees will note that the amendments to the Rules extend the transition period relating to the requirement for written service agreements to January 1, 2006. Having said that, the Council encourages licensees to utilize written service agreements at the earliest possible date.

Managing brokers should note that the Brokerage Trust Account Policy Statement #1 (Payment of Licensee Remuneration) has been revised as outlined on page 6 of this Special Report and that the amended Policy Statement can be found on the Council’s website at www.recbc.ca.

This Report also seeks licensees’ feedback on the structure and operation of commission trust accounts. It is hoped that a significant number of licensees will take the time necessary to provide thoughtful responses to the questions posed by the Council. In closing, I cannot stress enough to you the importance of familiarizing yourself with the Real Estate Services Act, Regulations, Rules and Bylaws which may be found on the main page of the Council’s website at www.recbc.ca. Reviewing these items will help you to better serve your clients and do the right thing.

On behalf of Council,

Rosemary Barnes, Chair

Section 3-2 of the Council Rules requires licensees to promptly deliver to their managing broker copies or originals of documents prepared by them in the course of providing real estate services. This section also requires licensees to keep their managing broker informed of the real estate services being provided. Licensees should not be waiting until the “subject to” conditions have been satisfied before providing a copy of a Contract of Purchase and Sale to the brokerage.

They must be provided to the brokerage promptly once the seller and buyer have entered into an agreement. This allows the managing broker to fulfill his or her obligation to be in active charge of the business of the brokerage. Section 8-5 of the Council Rules details the records to be kept by a brokerage related to trades in real estate.

The section states: 8-5 Trading records(1) A brokerage must keep copies of the following records with respect to trades in real estate in relation to which it provides trading services: (a) the contracts for the acquisition or disposition of real estate; (b) any financial statements provided to a party by the brokerage in relation to the trade in real estate; (c) any written service agreements; (d) the real estate trade record sheets required under subsection (2).

(2) If a brokerage or a related licensee holds or receives money in relation to a trade in real estate, the brokerage must keep a record sheet respecting the trade, in a form approved by the council, that includes the following information: (a) the nature of the trade in real estate; (b) a description sufficient to identify the real estate involved in the trade in real estate; (c) the sale price or other consideration for the trade in real estate; (d) the name and address of every party to the trade in real estate; (e) the amount of money received that is required by section 27 [payment into trust account] of the Act to be paid into the brokerage’s trust account and details of every disbursement of that money; (f) the amount of remuneration paid or payable to any licensee or other person, the name of the party paying the remuneration and the name of the person who has received or is to receive it.

The trade record sheet referred to in section 8-5 is essentially the same document as the transaction record sheet under the former Real Estate Act. A trade record sheet form approved by the Council may be found on the Council’s web site at www.recbc.ca.

Brokerages should be aware that other versions of this form would be acceptable to the Council so long as they contain the information contained in the approved form. Questions about the acceptability of an alternate form should be directed to Lisa Holst, Manager, Accounting & Audit by email at [email protected] or by telephone 604-683-9664 or toll free 1-877-683-9664.

The February 2005 Report from Council included the Brokerage Trust Account Policy Statement #1 on Payment Of Licensee Remuneration. This policy statement was revised on April 7, 2005 to provide further clarification to assist brokerages in determining how related licensees are to be paid depending on the nature of their remuneration and how they are engaged by their related brokerage.

Licensees who receive remuneration in the form of commission must, in accordance with section 31(2)(b) of RESA, be paid from either 1) the brokerage’s trust account, or 2) the brokerage’s commission trust account.

Where there is an independent contractor relationship between the licensee and the brokerage and in the event that the brokerage advances remuneration to the licensee in the form of a commission advance or the payment of expenses, and once the remuneration is earned in accordance with section 5-15 of the Council Rules, the brokerage may then deduct its share of the remuneration, including these advances, from the total remuneration. This amount may then be paid into the brokerage’s general account. The remaining net share of the remuneration that is payable by the brokerage to the licensee must then be paid, at the brokerage’s option, either directly out of the brokerage’s trust account to the licensee or into a commission trust account and, from that account, to or on behalf of the licensee.

Where there is an employee employer relationship between the licensee and the brokerage, and in the event that the brokerage advances remuneraton, as above, expenses may include any deductions that the employer has a legal obligation to remit, i.e.: the employee portion of CPP, EI, income tax, etc. This amount may then be paid into the brokerage’s general account. The remaining net share of the remuneration that is payable is the same as above.

Licensees may find the amended Brokerage Trust Account Policy Statement on the Real Estate Services Act page within the Licensee Info section on the Council’s website at www.recbc.ca.

At its April 26, 2005 meeting, the Council decided to seek the views of licensees with respect to commission trust arrangements. The original need for commission trust arrangements arose from brokerage bankruptcies that occurred some years ago, which left some licensees’ commissions unprotected from claims of the brokerages’ creditors. It was determined that by holding funds in a commission trust account, the trust nature of the arrangement would be respected and licensees’ commissions would be protected from third party claims.

The Real Estate Services Act (RESA) has incorporated the requirement for all remuneration to be treated as trust funds and for a brokerage to maintain a commission trust account in some circumstances. Brokerages are required by section 27(2)(b) of RESA to pay into a brokerage trust account all money held or received on account of remuneration. As a result of section 31(2)(b)(ii) of RESA, should a brokerage elect to make third party payments (e.g. GST etc.) on behalf of any of its licensees, these payments would need to be transferred from the brokerage trust account to the commission trust account and made from the commission trust account.

Brokerages are not required to maintain a commission trust account if they do not make third party payments on behalf of their licensees. Some brokerages may elect to avoid a commission trust account as this process can increase bookkeeping and accounting expenses. Others may elect to introduce or continue a commission trust account and consider whether to pass the additional expense required to provide this service on to their licensees. In either event, a commission trust account is optional and is only required if the brokerage accepts – as a business model – to make third party payments for its licensees.

Like the brokerage trust account, a commission trust account involves trust funds and, as a result of section 4-9 of the Council Bylaws, they must be audited annually. Unlike the brokerage trust account, the funds in a commission trust account are not by their nature public trust funds; rather they are funds that are held beneficially for licensees and distributed as licensees direct.

The Council is interested in receiving licensees’ feedback on the following questions with respect to commission trust accounts.

Question #1 Are commission trust account requirements appropriate as presently structured under RESA?

Question #2 Should the Council Bylaws (section 4-9 as noted above) be amended to exclude the requirement that commission trust accounts be included in the annual Accountant’s Report?

Question #3 Does the Council’s revised Brokerage Policy Statement #1 – Payment of Licensee Remuneration adequately deal with the payment of remuneration to licensees involved in rental and strata property management activities?

Question #4 Do you have any further recommendations with respect to the operation of either brokerage or commission trust accounts under RESA?

Licensees may email their responses to [email protected] on or before June 14, 2005.