Toronto real estate class-action could affect billions of dollars in commissions

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?

Buyer brokerage refers to a real estate agreement where a broker represents the buyer in a property transaction, in contrast to the traditional setup in which brokers primarily represented sellers. The shift toward buyer representation began in the 1990s in Canada, leading to the development of buyer agency agreements, allowing buyers to have exclusive representation in the homebuying process.

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.

In Toronto, the prevalent rate is five per cent on the entire sale amount and it is customary for the seller to pay the commission on a property sale, which is subsequently divided between the representatives of the seller and the buyer.

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.

While five per cent is considered the “standard” commission in Ontario, the origins of that figure are unclear.

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.

In a study sponsored by Kalloghlian Myers LLP — the legal firm that submitted Sunderland’s lawsuit — expert witness Dr. Panle Jia Barwick, a specialist in the economic structure of real estate commissions, argues that the “buyer brokerage commission rule” incentivizes buyer brokerages to direct buyers away from properties where sellers offer below-average commissions.

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.

However, this issue has not yet been litigated in Canada and isn’t addressed in the most-recent decision.

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.

The next step will likely involve an appeal from the defendants against the decision to proceed with the lawsuit, followed by a motion for class-action certification. The defendants have 30 days to appeal the verdict. Absent an appeal, the court will determine whether the case qualifies for class action certification. Succeeding here would lead to a trial to determine whether the brokerage agreement constituted an illicit conspiracy.

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