Three cautionary tales of real estate agents successfully sued

Before any contract was signed, Miller wrote a letter to assist Henry in obtaining finance.

With some 20 years local real estate market experience, Miller's letter described an almost "crisis situation in town with demand for quality units and town houses out-stripping supply." Henry did not proceed further because he could not secure finance.

On Henry's next visit, six months later, Miller showed him another property where the zoning permitted development up to four residential units. During a site inspection, Miller told Henry of a "huge void" at the top end of the market. He often got enquiries, he said, for "luxury top of the range units for investment and retirement", but none were available. There was always a shortage of quality units, he explained.

Pointing out this particular property's excellent views, Miller then suggested that Henry might prefer to build three larger high quality units there, rather than the maximum four. If three such units were built, he continued, they would fetch between $250,000 and $280,000 each. (OK, this all happened some years back when prices were much lower.) Needless to say, Miller had his beady eyes not only on the commission he would make on the sale of this property, but also on future multiple sales commissions when he sold the completed units after ensuring he got himself engaged for that purpose.

Henry took the bait and, after preparing sketches and preliminary profitability calculations, submitted an offer to purchase this property subject to finance.

After this offer was accepted, Miller agreed to write another letter to help with Henry's finance application. He began: "Having studied the plans for the three unit development, I am very excited with this project and predict a very enthusiastic market reception".

He again described a "large void" in the local market and said he was "constantly frustrated" by being unable to satisfy buyer demand for "quality units in prestige locations". Naturally enough, he was "delighted" to be responsible for selling this project (always his main game), was confident of complete success and his marketing plan would see all units sold within six months at prices from $250,000 to $280,000. This letter, together with a feasibility study, was attached to Henry's (subsequently successful) finance application.

The project did not proceed smoothly, with planning and engineering problems significantly increasing construction costs. Henry then had difficulties getting an increase in his overdraft. The consequent delays led to Henry's incurring substantial interest and bank charges.

By the time the units were completed the local property market had slowed dramatically. Miller commenced a marketing program, later described as "singularly unsuccessful", although the lack of sales was not attributable to the units themselves. They were well-designed, well-constructed and well-finished. An initial asking price of $295,000, agreed upon jointly by Henry and Miller, was a serious mistake which probably crueled the opening sales campaign.

Various unsuccessful campaigns were mounted to sell the units but, eventually, Henry's bank pressured him to go to auction. After one unit was knocked down for $175,000 and the other two sold soon after for $185,000 each, Henry sued Miller (all the way to the High Court) for damages for having breached Section 52 of the Trade Practices Act. Henry claimed the mega-amount he was worse off by embarking on the development.

Miller's pre-contract remarks were held to be misleading, deceptive and totally baseless. There had been no unsatisfied demand for quality units, no demand for units in the price range, no shortage of quality units in prestige locations and no "void". Miller had not undertaken any market research, and could not substantiate his representations.

However Henry had relied not only on Miller's misrepresentations but also on his own flawed feasibility study. If selling prices or costs had been accurately estimated, the result would have revealed a potentially unprofitable project which Henry would not have pursued without a sufficient margin of profit to justify the risk.

Was Miller still liable in these circumstances? Although the Trade Practices Act has been since amended in this regard, the High Court ultimately ruled that Miller could not escape or discount his liability on account of Henry's contributory negligence.