Report from Council, December 2004 Special Report

The provincial government has approved an Order that will bring the new Real Estate Services Act and Regulation into force on January 1, 2005. The new Real Estate Services Act (RESA) and the new Real Estate Development Marketing Act (REDMA) will respectively replace Parts I and II of the current Real Estate Act.

The following information in this Special Report is designed to assist licensees in understanding the new legislation and its impact effective January 1, 2005. Licensees have an obligation to familiarize themselves with RESA, its Regulation, Bylaws and Rules. These documents are posted on the Council’s website at www.recbc.ca.

Expanded Role of Council

Under RESA, the Council will become a self-regulating organization giving it direct jurisdiction over the regulation of licensees. This will ensure that the Council can quickly respond to changes in the marketplace in order to better serve consumers. The legislation also provides the Council with the power to make bylaws and rules that will, among other things, govern all aspects of licensing, establish standards of conduct and enable the introduction of a mandatory relicensing education program.

Terminology

One of the most apparent changes contained in RESA is new terminology for the various levels of licensing. The new terminology closely reflects what is used by other regulatory jurisdictions in Canada and will be phased in upon licence renewal, i.e. as individuals and companies renew their licences, the new licence certificate will reflect the new terminology. In addition, the terminology for the various licence categories is also changing. An existing licence restricted to sales will become a licence to provide trading services and an existing licence restricted to property management will become a licence to provide rental property management services. An unrestricted licence will become a licence to provide both trading and rental property management services. A representative, associate broker or managing broker may, therefore, be licensed to provide trading services and/or rental property management services.

The names for the various licensing courses are also changing to reflect RESA. The Salesperson’s and Sub-Mortgage Broker’s Pre-Licensing Course will now be called the Real Estate Trading Services Licensing Course. The Applied Course will now be called the Residential Trading Services Applied Practice Course. As well, the Agent’s Pre-Licensing Course will now be called the Broker’s Licensing Course. At the present time, the Property Management Licensing Course will retain the same name.

Composition of Council

The number of members of Council elected to represent districts will be reduced from the current 17 members to 12 members. This will result in a re-distribution of several counties for the purposes of Council elections. In addition, one member will be elected from the strata/rental property management sector. Further, the number of government appointed public members will increase from two to three, bringing the total number of Council members to 16.

Registration
RESA allows the Council to have control over the registration process. Under the new legislation, the Council may, for example, issue a temporary licence that could be cancelled if a specified condition is not met, such as failing to complete the Residential Trading Services Applied Practice Course within the prescribed time period. In addition, RESA contains an inoperative status for situations where a brokerage licence may be suspended. Instead of the automatic suspension of all of the licensees at that office, the licensees would be considered inoperative until the licence of the brokerage is restored to active status.

New Fees

Effective January 1, 2005, first time licence applicants will be required to pay a non-refundable $50 application fee, bringing the total licensing fee to $450. In addition, applications for licence renewal will be subject to a nonrefundable $25 application fee, bringing this total to $425. Any licence re-instatement within the two-year licensing period, and licence amendments such as a change of licence category, will now cost $125 instead of the previous $100. The fees for a change of name for an individual and change of name or address for a brokerage will decrease from $100 to $25. As described on page 6 in this Special Report, the Real Estate Special Compensation Fund requires a fee of $100 for individuals and $250 for brokerages.

Section 5(3) of the Real Estate Services Act states that “unless permitted by the regulations, a partnership or corporation may be licensed only as a brokerage.”

During the consultation period leading up to the passing of the legislation, industry representatives encouraged government to allow ‘personal service corporations’ owned by individual licensees to operate under a permit without being licensed as a brokerage. The model proposed was similar to that utilized by lawyers, doctors, and other professionals. It would allow an individual licensee to incorporate a company, to which remuneration could be paid by the individual’s brokerage. Such a model could provide some high-income individual licensees with an opportunity to benefit from certain tax advantages that may be available to such corporations.

This opportunity does not exist under the current Real Estate Act, which characterizes all licensees as employees and does not allow remuneration to be paid to an unlicensed entity for any activity that requires licensing; nor does it allow a corporation or a partnership to be licensed as a salesperson or an agent under regulation 9.15. Section 5(3) of RESA creates the possibility of such a model where permitted by regulation; however, no regulation has yet been developed in this regard. It is a matter for future consideration.

The Real Estate Services Regulation will come into force January 1, 2005, at the same time as the Real Estate Services Act and the first set of Council Rules and Bylaws. The Regulation is divided into the following eight parts: Introductory Provisions (definitions); Licensing; Trust Accounts and Other Financial Matters; Discipline Proceedings and Other Regulatory Enforcement; Payments from Special Compensation Fund; Real Estate Council, Foundation, Insurance and Compensation Corporations; General Provisions; and Transitional Regulations.

Part 2 – Licensing contains various exemptions from the requirement to be licensed. These exemptions relate to certain groups of people (e.g. notaries, auctioneers, caretakers, appraisers, property inspectors, etc.) and are broken down into exemptions in relation to real estate services generally, in relation to trading services, in relation to rental property management services, and in relation to strata management services. Many of these exemptions are subject to specific requirements being met, or specific restrictions. It is important for licensees to be aware that section 2(2)(c) of the Act states that “…subject to the rules, the Act applies to every licensee who provides real estate services, even if the licensee…would otherwise be exempted by this Act or the regulations…”. The effect of this is that licensees will not be able to act under any of the exemptions as if they were not licensees. Their obligations and responsibilities under RESA continue to apply. The two exceptions to this, as established in the Rules, are when a licensee is managing rental real estate owned by the licensee, or owned by the licensee’s family (see Rules 9-1 and 9-2).

Division 3 of Part 4 details the ‘designated contraventions’ (i.e. specific Council Rules) that may be the subject of Administrative Penalties, and establishes the maximum amount of such administrative penalties. Part 5 establishes that the maximum amount that may be paid to a single claimant from the real estate special compensation fund is $100,000, and that the maximum amount that may be paid with respect to all claims against a responsible brokerage is $350,000. Part 9 details the transitional manner in which three aspects of the Real Estate Services Act will be brought into force. The first is the manner in which the total number of Council members will be reduced from the current 19 members to the eventual 16 over the course of the next three elections, commencing in 2005. The manner in which rental property management and strata management representation on the Council will be established is also provided. The second matter is a transitional exemption for manufactured home dealers until June 30, 2005. The third stipulates that the licensing of those who wish to provide strata management services will be required as of January 1, 2006.

Section 86 of the Real Estate Services Act authorizes the Council to make rules respecting licensing and regulating licensees in relation to the provision of real estate services. The first set of Council Rules are posted on Council’s website (www.recbc.ca).

The Rules establish standards in relation to requirements placed on licensees. They are divided into the following ten parts: General; Licensing; General Responsibilities of Licensees; Business Practice; Relationships with Principals and Parties; Dealings with Other Licensees and Unlicensed Persons; Brokerage Accounts and Financial Statements; Brokerage Records; Licensee Exemptions; and Transition.

While the Rules place some new requirements on licensees that are consistent with RESA and its Regulation, both the Council and government have attempted to have the first set of Rules mirror current requirements, as detailed in the Licensee Practice Manual and Office Practice Manual. Several obligations contained in the current Real Estate Act and its regulations have also been moved into the Rules.

The Rules establish expectations with respect to conduct and licensees should be aware that the Council has the authority to impose an administrative penalty or disciplinary sanction in situations where a licensee has failed to act in accordance with the Rules. The Council encourages all licensees to familiarize themselves with the Rules at the earliest possible date to ensure that they are aware of the expected standards of conduct.

Sections 84 and 85 of the Real Estate Services Act authorize the Council to make bylaws it considers necessary and advisable for the conduct of its business and affairs, including licensing fees and assessments.

Under section 84, the Council may make bylaws dealing with: a) the conduct of Council members b) the qualifications required for a person to be eligible for election as a Council member c) the qualifications required to vote for a particular elected Council member position d) the establishment of Council committees e)the remuneration and allowances for expenses of Council members f) procedures for the making of bylaws or the making of rules g) the practice and procedure of a hearing committee h) the form, content, and manner in submitting applications, reports, and other submissions to the Council i) any other matter for which bylaws are contemplated by the Act j) any other matters provided for in the Regulations.

The Bylaws are divided into four parts, including Part 1 – General (includes Definitions), Part 2 – Election of Council Members, Part 3 – Council Proceedings, Part 4 – Licence Applications and Other Submissions to Council.

Part 2 – Election of Council Members deals with the election of Council members, including qualifications, nomination, the date of the election, voting procedure, the counting of ballots, and the taking of office. Most sections of this Part of the Bylaws are predicated on the early sections of Regulation 75/61 of the existing Real Estate Act.

Part 3 – Council Proceedings deals with the election of the Chair and Vice-Chair of the Council, Council meetings and procedures, a code of conduct for Council members, and the establishment of Council committees. This Part of the Bylaw is also derived from Regulation 75/61, as well as the existing Council policy.

Part 4 – Licence Applications and Other Submissions to Council outlines the fees, assessments and information that must accompany licence applications for individuals and brokerages. It also includes the required information for other reports to Council, such as the Accountant’s Report.

The Real Estate Services Act contains a significant change with respect to how commissions or other forms of remuneration are to be accounted for. Section 27(2) states: “A brokerage must promptly pay into a brokerage trust account (a) all money held or received from, for or on behalf of a principal in relation to real estate services, and (b) all money held or received on account of remuneration for real estate services, including a share of remuneration received from another brokerage and whether or not the remuneration has already been earned.”

This section, therefore, requires that all forms of remuneration related to the provision of real estate services must first be paid into a brokerage trust account. The Council is aware that some brokerages currently deposit remuneration received after a transaction has completed into the general account. This practice will have to change to ensure compliance with RESA.

There are also new requirements with respect to paying out remuneration. Section 31 states: “(1) Money in a brokerage trust account that is intended as remuneration for a licensee may be withdrawn from the account when it has been earned in accordance with the rules. (2) Money withdrawn from a brokerage trust account under subsection (1) must be paid by the brokerage as follows: (a) any share of the remuneration that is payable by the brokerage to another brokerage must be paid to the other brokerage directly out of the brokerage trust account; (b) any net share of the remuneration that is payable by the brokerage to a licensee engaged by the brokerage must be paid, at the brokerage’s option, (i) to that licensee directly out of the brokerage trust account, or (ii) into a commission trust account maintained by the brokerage in accordance with the Rules and, from the account, to or on behalf of the licensee.”

Under the current Real Estate Act, cooperating agents may be paid directly out of the trust account or out of the general account, whereas under RESA, other brokerages must be paid out of the brokerage trust account. Section 31(2)(b) establishes that a brokerage may pay the net remuneration owing to a licensee either directly out of the trust account or into a commission trust account. This section provides further protection for licensees’ commissions. Any share of the remuneration that has been earned by the brokerage may be transferred to the general bank account maintained by the brokerage. Brokerages should become familiar with the Rule regarding the payment of remuneration (Rule 5-15) and the requirements found in Parts 7 and 8 of the Rules under the headings “Brokerage Accounts and Financial Requirements” and “Brokerage Records” respectively. Brokerages should also be aware that interest earned on funds held in a commission trust account is not payable to the Real Estate Foundation.

The Real Estate Services Act contains a number of new requirements for maintaining the proper books and records of a brokerage. In addition to the existing requirements under the Real Estate Act, the following significant changes should be noted.

Under the Rules, Part 7 deals with Brokerage Accounts and Financial Requirements. The six most significant changes to note are the following:

7-2 A brokerage may maintain one or more commission trust accounts.

7-4(1) At least one related managing broker must be a signing authority on each trust account maintained by a brokerage.

7-4(2) Monthly trust asset and liability reconciliations must be reviewed, dated, and initialed by a related managing broker or by a person designated by a related managing broker.

7-5(3) The brokerage must notify the Council of a negative balance

(a) immediately, if a related managing broker considers that the negative balance may result in a person having a claim of a compensable loss in relation to the brokerage (see information under heading “Real Estate Special Compensation Fund”)

(b) in any other case, within 10 working days after the negative balance arises, unless the brokerage is able to eliminate the negative balance in that time.

7-7(1)(c) A brokerage activity report is a required filing with the Accountant’s Report and financial statements.

7-7(4) The brokerage must disclose every savings institution account that was opened, closed or maintained by the brokerage during the fiscal year. Previously, only trust accounts had to be disclosed on the Accountant’s Report.

7-8(2) Where there is a concern about a brokerage’s solvency, or a trust fund shortage, the Council may require the brokerage to do one or more of the following:

(a) explain why the shortage or other deficiency arose

(b) pay money into a trust account to cover a shortage in the trust account

(c) re-establish the brokerage to a state of solvency

(d) provide a bond or other form of security

Under the Rules, Part 8 deals with Brokerage Records. Four significant changes to note are the following:

8-3(c) and (d) Monthly reconciliations of bank statements to the cash record must be prepared no later than 5 weeks after the monthly account cut-off date regardless of whether it is a trust account or not.

8-7(2) Transfer of rental property management records:

(a) in the case of financial records, copies of the records must be provided to the client or the new management brokerage within 14 days after the last reconciliation of bank statements to the cash record is completed under section 8-2(c)

(b) in the case of records, the originals of the records must be provided within 14 days of the request, but the brokerage must retain copies. 8-10 Records must be retained by a brokerage for at least seven years after their creation unless a shorter period is authorized in writing by the Council. This is an increase from the Council’s former policy of keeping books and records for six years.

One of the main initiatives undertaken in the development of the Real Estate Services Act is to include the requirement for those who provide strata management services to be licensed. This requirement will come into effect January 1, 2006.

Under RESA, ‘strata management services’ means any of the following services provided to or on behalf of a strata corporation: (a) collecting or holding strata fees, contributions, levies or other amounts levied by, or due to, the strata corporation under the Strata Property Act; (b) exercising delegated powers and duties of a strata corporation or strata council, including (i) making payments to third parties on behalf of the strata corporation, (ii) negotiating or entering into contracts on behalf of the strata corporation, or (iii) supervising employees or contractors hired or engaged by the strata corporation but does not include any activity excluded by Regulation.

The Regulation exempts certain groups from the requirement to be licensed, under certain circumstances, including owners of a strata lot within the strata corporation, caretakers employed by the strata corporation, and owner developers until such time as the strata corporation’s money is required to be transferred under section 22 of the Strata Property Act. While full details have not yet been finalized, those who wish to provide strata management services after December 31, 2005 will be required to be licensed. They will be required to go through the same application process as any other person applying to be licensed. Once approved, they will be issued a temporary licence, conditional on them completing any further education or training courses deemed necessary within a specified period of time.

Another of the important changes to come into effect with the Real Estate Services Act relates to the current requirement that all companies provide a bond as security against a member of the public suffering a loss as a result of the ‘wrongful or dishonest’ actions of a licensee. For nearly a decade, the Council has been recommending to government that bonding be replaced by a compensation fund.

There were three main reasons for this recommendation: ·Current bond levels are too low in comparison to the amount of money often held in trust by a brokerage (formerly called ‘agent’). Bond amounts now range between $10,000 and $100,000, depending on the number of licensees licensed in relation to a brokerage. ·The cost of bonds and the underwriting policies of bonding companies are often cyclical. Like many other forms of insurance, the cost of bonds is increasing rapidly and some brokerages are experiencing difficulty obtaining bonds. In some jurisdictions, the number of bonding companies is decreasing, resulting in less competition and even higher costs. ·Given the relatively few claims that have historically been made against brokerages’ bonds in British Columbia, a self-administered fund may be able to create sufficient reserves so that future assessments could be reduced or perhaps even eliminated for all but first time licensees. This has been the experience in Alberta, where a similar fund has been in operation since 1986 and, since 1999, only newly licensed individuals and companies currently pay assessments.

Brokerages need to be aware of the following features of the Real Estate Special Compensation Fund: ·The fund will come into effect on January 1, 2005, the same day as RESA. ·The compensation fund replaces the requirement under the current Real Estate Act that every brokerage maintains a bond. Brokerages must maintain the currency of their bond up to and including December 31, 2004. Brokerages may wish to review the refund policy of their bond provider. ·The compensation fund provides protection for a member of the public who has entrusted a licensee (or an unlicensed individual related to the brokerage, e.g. receptionist, director or officer etc.) with money that was either -obtained by the fraud of that licensee or individual, or -misappropriated or wrongfully converted, or -intentionally not paid over or accounted for. ·The fund does not provide protection for remuneration being held by a brokerage on behalf of a licensee, or for money that does not relate to the provision of real estate services. ·The maximum amount that may be paid to a single claimant will be $100,000 and the maximum amount that may be paid in respect of claims related to a single brokerage will be $350,000. ·Participation in the compensation fund is mandatory and a condition of licensing; i.e. the same as participation in the Real Estate Errors and Omissions Insurance program. ·All licensees will be covered by the compensation fund commencing January 1, 2005. Initial assessments for the two-year licence cycle have been set at $100 for individuals and $250 for brokerages. Payment of the assessment will be a condition of licensing. It should be noted, however, that current licensees will not be required to pay a compensation fund assessment until their first licence renewal after December 31, 2004.

·The initial funding for the Compensation Fund has been provided by a grant of $500,000 by the Council. The Real Estate Foundation has also provided a grant of up to $100,000 plus an indemnification of the compensation fund for up to $1.5 million for a period of 3 years. ·Oversight of the fund is the responsibility of the Real Estate Compensation Fund Corporation. Its Board of Directors consists of 3 directors appointed by the Council (currently Barry Clark, Jordy Higgins, and Bev Highton), and 2 directors appointed by the British Columbia Real Estate Association (currently Ken MacKenzie and Andrew Peck). Bev Highton has been elected the Corporation’s first Chair, and Barry Clark its Vice-Chair.

·As it does on behalf of the Real Estate Errors and Omissions Insurance Corporation, the Council is collecting assessments on behalf of the Compensation Fund Corporation. Council staff members are also providing subsidized administrative support services to the Corporation. ·Oversight of the claims process is the responsibility of the Council. Claims must be submitted to the Council, which has the authority to determine if a claimant has suffered a “compensable loss” and the amount of that loss, or which can require claimants to obtain a court “finding on evidence” – i.e. no default judgments – that they have suffered a compensable loss. The Corporation has the authority to become a party to either a Council proceeding or a court proceeding that is intended to determine if a claimant has suffered a compensable loss.

Part 4 of the Real Estate Services Act details the Council’s powers to investigate licensee conduct, issue administrative penalties, order disciplinary sanctions, and to act in urgent circumstances. Typically these powers are exercised when the Council receives a complaint.

Investigations

When the Council initiates an investigation, the purpose is to determine whether a licensee may have committed (1) professional misconduct within the meaning of the Act by doing one or more of the following: (a) contravening the Act, Regulations, or the Rules; (b) breaching a restriction or condition of their licence; (c) demonstrating incompetence in performing any activity for which a licence is required; (d) misappropriating or wrongfully converting money or other property entrusted to or received by the licensee in relation to the provision of real estate services; (e) failing to comply with an order of the Council, a discipline committee, or the Superintendent of Real Estate, or (2) conduct unbecoming a licensee by engaging in conduct that: (a) is contrary to the best interests of the public; (b) undermines public confidence in the real estate industry; or (c) brings the real estate industry into disrepute.

Administrative Penalties

The ability to issue an administrative penalty is a new authority for the Council. Section 4.7 of the Regulation designates certain Council rules, which, if breached by a licensee, may lead to an administrative penalty being imposed by the Council. These penalties range from $250 for a first infraction to $1,000 for a third infraction. Administrative penalties may be levied in circumstances where specified Rules have been breached in a manner that has not caused any direct harm to the public.

Disciplinary Orders

RESA provides for a wide range of disciplinary sanctions that may be ordered by a Council discipline committee. Whether as the result of a licensee entering into a Consent Order, or as the result of a disciplinary hearing, the Council may reprimand, suspend or cancel a licence, impose restrictions or conditions on a licence, require a licensee to cease or to carry out specified activities, require a course of study or training, require payment of a disciplinary penalty of not more than $20,000 for a brokerage or $10,000 for an individual licensee, and prohibit a licensee from applying for a licence for a specified period of time or until specified conditions are fulfilled. A licensee may also be ordered to pay the costs of an investigation and hearing where they have resulted in a discipline order.

Orders in Urgent Circumstances

If it is determined that a licensee may have acted in a way that could result in a disciplinary order, that the length of time it would take to make such an order would be detrimental to the public interest, and that it is in the public interest to make an order, a discipline committee may suspend a licensee’s licence, impose restrictions or conditions on the licensee’s licence, or require the licensee to cease or to carry out specified activities related to the licensee’s real estate business. RESA also provides the Council with the authority to freeze property if it considers such action to be in the public interest, e.g. where there is evidence that trust funds have been misappropriated.

Appeals of a Disciplinary Order

Licensees continue to have the right to appeal disciplinary orders. Such appeals are made to the Financial Services Tribunal. Information respecting this process was published in the June 2004 Report from Council.

The Real Estate Development Marketing Act (REDMA) streamlines and addresses inconsistencies in the current Act’s disclosure requirements for developments. It gives purchasers an express right to rescind for not receiving a disclosure statement as well as a standardized seven-day cooling off period during which purchasers who received a disclosure statement can rescind the purchase contract. REDMA provides the Superintendent with the ability to impose administrative penalties and to act against a developer who makes misrepresentations or fails to provide a disclosure statement to buyers.

As a result of changes contained in RESA, all forms, brochures, and related publications produced by the Council will be changing. These changes are being phased in over the next few months, beginning with disclosure and licensing forms, followed by various brochures, the Licensee Practice Manual and the Office Practice Manual. Licensing application forms that are currently in circulation will continue to be accepted by the Council for the time being. However, updated application forms, containing the new licence levels and categories will be available on the Council’s website or from the Council’s office. All brokerages are requested to visit the Council’s website in January, 2005 to obtain copies of the most recent application forms.

New Individual licensing fees:

First time licences:

-$450 payable to the Real Estate Council

-$500 payable to Real Estate E&O Insurance Corp.

-$100 payable to the Real Estate Compensation Fund Corp.

Re-Licensing (for applicants previously licensed):

-$450 payable to the Real Estate Council

-$500 payable to the Real Estate E&O Insurance Corp.

-$100 payable to the Real Estate Compensation Fund Corp.

Licence renewal:

-$425 payable to the Real Estate Council

-$500 payable to the Real Estate E&O Insurance Corp.

-$100 payable to the Real Estate Compensation Fund Corp.

Note: If a renewal application has not been received at the Council’s office by the renewal due date, the application will be treated as a Re-licensing application. The fee for a Relicensing application is $450.

Reinstatement of licence (within a licence period)

-$125 payable to the Real Estate Council

Changes of licence category:

-$125 payable to the Real Estate Council Individual name change:

-$25 payable to the Real Estate Council

New Brokerage licensing fees:

First time brokerage licence:

-$450 payable to the Real Estate Council

-$500 payable to the Real Estate E&O Insurance Corp.

-$250 payable to the Real Estate Compensation Fund Corp.

First time Branch office licence:

-$450 payable to the Real Estate Council

Brokerage licence renewal:

-$425 payable to the Real Estate Council

-$500 payable to the Real Estate E&O Insurance Corp.

-$250 payable to the Real Estate Compensation Fund Corp.

Note: If any renewal application has not been received at the Council’s office by the renewal due date, the application will be treated as a Re-licensing application. The fee for a Relicensing application is $450.

Branch office licence renewal:

-$425 payable to the Real Estate Council Licence Amendment (name change, trade name change, address change):

-$25 payable to the Real Estate Council Please note: Licensing fees are nonrefundable once a licence is issued. If an application is withdrawn for any reason prior to licence issuance, the application fee of $25 or $50, as the case may be, is not refundable.