A Federal Court judge on Sept. 25 allowed a class-action lawsuit alleging home sellers in the Toronto area have been forced to pay artificially inflated commissions for years. The lawsuit alleges major brokers and real estate organizations in Toronto implemented rules that essentially stifled competition for buyer brokerage services, leading to higher prices. But what exactly is buyer brokerage and what is its role in the potentially landmark lawsuit? The Financial Post’s Shantaé Campbell explains.

What does ‘buyer brokerage’ mean?

This transformation prompted the creation of specific legislations and regulations by provincial governments and real estate regulatory bodies in Canada, such as the Real Estate Council of Ontario (RECO), the Canadian Real Estate Association (CREA) and the Toronto Regional Real Estate Board (TRREB).

These rules and protocols serve to formalize and oversee buyer brokerage relationships by instituting a framework governing duties, responsibilities, disclosure, consent and confidentiality.

Where do commissions come in?

Nationwide, commission structures for real estate agents and brokerages typically involve a percentage-based commission derived from a home’s sale price, but the rates vary.

For example, if a home sells for $1 million with a commission of five per cent, the total commission amounts to $50,000. This sum, paid by the seller, is generally shared equally between the seller’s and buyer’s agents, each receiving $25,000. However, the precise division can fluctuate, being contingent on the agreement established between the seller and their agent.

Why are commissions split this way?

According to CREA, the organization does not mandate a specific commission split or dictate how commission should be allocated between the listing and buyers’ realtors.

Rule 11.2.1.3 in CREA’s by-laws and rules states: “The listing realtor member agrees to pay to the co-operating (i.e. buyer’s) realtor member compensation for the cooperative selling of the property. An offer of compensation of zero is not acceptable.”

In an email, RECO said commission rates are not fixed. “Commission rates are not set or approved by the Real Estate Council of Ontario, government authorities, real estate associations or real estate boards,” it said.

The splitting of commission between the buyer’s and seller’s agents is nonetheless a well-established practice in real estate designed to promote cooperation, balance and fairness within the industry. The idea is that a shared commission incentivizes buyer agents to introduce more potential buyers to the home, leading to a faster and possibly more profitable sale.

Furthermore, the commission model serves to reduce potential conflicts of interest by eliminating the buyer’s direct financial obligation to their agent, preventing undue pressure on buyers and ensuring accessibility to agent services.

Why is this a problem?

The lawsuit lodged by plaintiff Mark Sunderland against defendants TRREB, CREA and various real estate brokerages contends that an arrangement known as the ‘buyer brokerage commission rule’ has been in effect since at least March 2010.

Sunderland’s lawsuit posits that this arrangement has impeded market competition, compelling sellers to incur costs they would not otherwise bear in the absence of such an agreement. Furthermore, it contends that this setup precludes the negotiation of price and quality of the service.

Barwick says that even without formal policies mandating uniform rates, brokers, reliant on peer co-operation to draw buyers to properties, can help uphold a standard commission rate locally, especially for buyers’ brokers.

Michael G. Osborne, an attorney who specializes in antitrust and competition law at Cozen O’Connor in Toronto, says that from a competition point of view, there is a potential issue pertaining to the mechanism wherein brokerages must become members of CREA and TRREB to operate. Essentially, though Broker A and Broker B have no direct written agreement between them, by aligning with an association’s rules they can be seen by the Competition Bureau to be operating under an indirect “hub and spoke” agreement.

How much is at stake in the lawsuit?

Kalloghlian Myers LLP is seeking compensation for anyone who has sold a home since 2010, though they have not yet put an overall dollar value on what they are seeking.

If every transaction covered by TRREB is affected, the sums involved could be substantial.

According to annual sales and average price figures on TRREB’s website, more than $880 billion in residential real estate changed hands between 2010 and 2022. Five per cent commission on those sales would amount to $44 billion, with as much as half going to buyer brokerages.

Can home sellers participate in the lawsuit?

In a class-action lawsuit, individuals who are similarly affected are generally automatically included, meaning there’s usually no need to actively “get in on” the lawsuit. If the ruling is in favour of the class, affected individuals will be notified about their entitlements. The duration of such lawsuits can vary widely, depending on the complexities involved and the legal pathways taken.

Should compensation be awarded, the distribution could take several years.