The saga of the contorted definition of “real estate” under the Ontario’s Real Estate and Business Brokers Act (REBBA) continues.
In 2013 I wrote an article about my win in Geofre v Ki Kit Li. In that case, Li hired Geofre, his accountant, to find a buyer for his two licenses and agreed to pay Geofre a consulting fee on closing based on a selling price of $1.75 million. Geofre found a buyer for the licenses. The transaction closed. The buyer paid for the licenses. The licenses were transferred and future revenues from the licenses were directed to the buyer’s bank account. Geofre sought payment of his consulting fee.
Geofre invoiced Li for his consulting fee. Li refused to pay. Geofre sued Li for payment. Li brought a motion to stay the lawsuit under section nine of REBBA, which states that a person cannot bring an action for commission or remuneration for services in connection with a “trade in real estate” unless that person was registered or exempt under REBBA. Li took the position that the licenses were “real estate” under REBBA. Li argued that because Geofre is not registered or exempt, the consulting fee was illegal and the court should strike Geofre’s lawsuit.
The court denied Li’s motion. The court held that the license fell outside the definition of real estate in REBBA. The court also found that this would hold true even if the rest of the business sold has little independent value from the licenses.
From a practical perspective, the result was not surprising; a license is not real estate under the ordinary meaning of the term. Geofre and Li entered an agreement and Geofre discharged his services. However, the definition of “real estate” in REBBA is not ordinary.
In 2016, the Superior Court of Justice, Ontario addressed a related question. In Windrock Associates Ltd. v Minicucci the defendant, Ludy, held a half interest in a multi-unit residential apartment building and the defendant’s partner held the remaining half. A dispute arose after Ludy’s partner died and the partner’s family was dissatisfied with Ludy’s work. As a result of the conflict, the partnership could not continue and Ludy retained the plaintiff, John, to resolve the dispute.
Ludy and John entered into an agreement whereby John would provide advisory services in relation to the resolution of the partnership dispute. Although technically framed as an agreement for dispute resolution, John’s advice mainly centred on either selling Ludy’s position in the property, purchasing his partner’s interest in the property or selling the whole property to a third party.
Upon extensive negotiations in which John played an important role, the partnership dispute was resolved whereby Ludy purchased his deceased partner’s half interest in the property. The ultimate transaction was a transfer of the deceased partner’s interest in the property, rather than a transfer of the shares held by the deceased partner’s family. The significance of this nuance comes from an early 1951 Supreme Court decision where the court held that REBBA does not apply to the sale of shares in a business. Put differently, had Ludy purchased his partner’s shares, John’s advisory services would not be captured by REBBA and he would be entitled to compensation.
After the deal closed, John demanded payment but Ludy relied on the same argument used by Li in Geofre: the consultant is not licensed under REBBA so the action should be stayed.
In Windrock, the court granted summary judgment in favor of Ludy and dismissed the action. Although John did not market the property or introduce any potential buyers to Ludy or take any steps to initiate or effect a sale or purchase of the property, John’s involvement was ultimately tied to a trade in real estate; selling Ludy’s interest in the property or acquiring the interests of the partner’s family. As such, section nine of REBBA applied and it prevented recovery.
The court in Windrock also clarified that labels attached to remuneration will not allow individuals to escape the application of REBBA. For example, referring to remuneration as a “consulting fee”, “success fee” or “commission” will not defy the application of section nine of REBBA if the fee is based on or dependent on a trade in real estate. In other words, if the fee depends on a sale of property and is calculated as a percentage of the sale price, the transaction will be considered a trade in real estate and as such, recovery of remuneration is barred by section nine of REBBA if the service provider is not registered under REBBA.
In 1951, the Supreme Court of Canada narrowed the application of REBBA when it held that the legislation does not apply to the sale of shares of a business. In 2013, the Superior Court of Justice, Ontario continued the narrowing pattern when it found that licenses are not real estate and as such selling licenses is not captured by section nine of REBBA. In 2016, the Ontario Superior Court of Justice, Ontario echoed the 1951 Supreme Court decision and reaffirmed that purchases and sales of shares are not captured by REBBA, whereas purchases and sales of an interest in a property is captured by the definition of real estate in REBBA.
Section nine of REBBA continues to be a trap for the unwary in which one individual is barred from receiving compensation while another enjoys a windfall. If you are retained or considering a retainer to provide services that may be captured by section nine of REBBA, consult with a lawyer before investing valuable time and effort and to avoid costly litigation to seek remuneration for your services. I am regularly consulted in this area and would be pleased to hear from you.