Court slams real estate campaign 'puffery'
The High Court has overturned a Real Estate Agents Disciplinary Tribunal charge of negligence, but warns that changes to real estate marketing schemes are needed.
The High Court in Auckland upheld the appeal of licensed real estate agent Daphne Brown against a tribunal decision that found her guilty of serious misconduct by creating the impression her company was acting in the complainants' best interests.
Brown, the principal officer of City Investment Services (CISL), a franchise of L J Hooker, cold-called Mary Wealleans and her husband in 2006 with a marketing pitch for an investment seminar.
The Hamilton couple, in their late 50s, attended the seminar and subsequently bought an inner-city Auckland apartment purportedly worth $248,000.
The couple paid a $1000 deposit and borrowed a further $253,500.
After the global financial crisis struck, the Wealleans discovered their apartment was worth only $143,000.
"This, as many property owners after the 2008 crisis in the developed world found, was a classic case of negative equity," Justice John Priestley said.
Mary Wealleans said the reason the couple had signed up to buy the apartment was because they were told they could make a profit of $70,000 after only three years.
The Wealleanses said they had been led to believe CISL was acting in their interests.
The High Court overturned the tribunal's decision of serious negligence against Brown because the tribunal "failed to grapple" with the essential evidence of industry standards and practice.
The perceptions of an "unsophisticated investor" did not constitute unacceptable conduct, Justice Priestley said.
The High Court also quashed the $450 fine imposed by the tribunal on Brown.
However, the High Court did not award costs to Brown because it considered aspects of the marketing scheme were of "dubious merit".
Justice Priestley said while the marketing scheme was consistent with industry practice at the time, it ran the risk of placing consumers, particularly the unsophisticated, on "an escalator travelling towards an unconditional agreement for sale and purchase which might not necessarily have been in their best interests.
"For the unsophisticated and gullible, as is the case with so many advertising and schemes aimed at the consumer, the escalator might have been difficult to jump off," Justice Priestley said.
Such a marketing scheme was designed to entice and encourage members of the public to buy a property as an investment.
The Wealleanses had been led to believe that buying the apartment was a sensible investment decision. It might have been but for the 2008 global financial crisis, Justice Priestley said.
However, it was "surprising and undesirable" that established real estate agencies would use "exaggeration" or "puffery" to lead unsophisticated investors to believe the client was their sole focus of concentration, he said.
Issues arising from such schemes could lead to a loss of trust and respect for real estate agents, Justice Priestley said.
It was up to the Real Estate Agents Authority to address marketing standards, he said.
These "important issues" were not the sole responsibility of the tribunal and sporadic prosecutions would not provide a satisfactory or permanent solution, he said.