One of the most important tools a licensee can use to reduce liability risk when dealing with clients is making proper referrals to other professionals. Real estate transactions can involve a number of different professionals performing different roles.
Commonly, you may make referrals to mortgage brokers, lawyers, notaries, accountants, home inspectors, appraisers, or other specialists. You may also refer clients to another licensee who has expertise in an area outside of your own practice.
A proper referral begins with explaining to the client that there is a limit on the advice you can offer and identifying when it is important to obtain outside advice. You may advise a client to include a subject clause in an offer or counteroffer for the benefit of the buyer or seller to allow time for them to obtain the relevant advice. If a client doesn’t wish to make the offer conditional on the receipt of advice from an outside professional, you should write to the client to specifically alert them as to the nature of the risk that might arise if they don’t seek outside advice and the type of outside professional opinion that would assist them in the circumstances. Either way, you should keep detailed records of any referral to outside professionals in writing.
Referrals gone wrong
While making referrals is a normal part of a licensee’s practice, there is a wrong way to go about making referrals.
A case in point is the 2019 Supreme Court of Canada case, Salomon v. Matte-Thompson [Salomon][i]. The Salomon case involved a finding of professional liability against a lawyer in Quebec who referred clients to a financial advisor. The lawyer also had a personal financial interest in the same investments he recommended to his clients and the financial advisor was the lawyer’s close friend.
The lawyer did not simply stop with a referral to the advisor, though. He also recommended, promoted and/or endorsed some of the financial advisor’s specific investments on various occasions and made reassurances about investments after his clients expressed concerns. The financial advisor turned out to be a fraudster, and the lawyer’s clients lost a significant amount of money.
The court made the following statements about lawyers’ obligations when referring clients:
- Generally, there’s a high threshold for establishing liability against a lawyer in a case in which the lawyer has merely referred a client.
- “Although lawyers do not guarantee the services rendered by professionals or advisors to whom they refer their clients, they must nevertheless act competently, prudently and diligently in making such referrals, which must be based on reasonable knowledge of the professionals or advisors in question.”
- “Referring lawyers must be convinced that the professionals or advisors to whom they refer clients are sufficiently competent to fulfill the contemplated mandates.”
- “Just as a referral is not a guarantee of the services rendered by the professional or advisor to whom the client is referred; it is also not a shield against liability for other wrongful acts committed by the referring lawyer.”
The lawyer in the Salomon case was found to have given improper financial advice and had not performed due diligence or asked questions before giving such advice.
In addition, the court found that given his personal and financial relationship with the financial advisor, the lawyer had breached his duty of loyalty to his clients. The court pointed to three examples:
- the lawyer repeatedly disclosed confidential communications he had received from his clients to the financial advisor without the clients’ authorization;
- the lawyer “teamed up” with the financial advisor in an attempt to convince his clients not to withdraw certain investments; and
- the lawyer received what he characterized as monetary gifts of $20,000 from the financial advisor, in addition to $10,000 in commissions. The court found that, “irrespective of whether they were characterized as gifts or commissions, the payments raised serious doubts regarding the independence of the lawyer who had received them.” The lawyer did not disclose the payments to his clients.
The lawyer and his firm were found liable for the clients’ financial losses, to the tune of approximately $8 million.
The BC courts have not yet interpreted how the Salomon case would apply in a court action involving a real estate agent. In our view, it is likely that similar principles of liability would apply to a real estate agent in similar circumstances.
Practical tips for making referrals
Each real estate transaction is unique and presents its own set of challenges for licensees and clients, but here are some practices that you may wish to adopt when you are making referrals to other professionals:
- avoid making referrals to anyone unless you are confident they are capable of completing the job – confirm they are licensed to perform the required work and have experience successfully performing similar work in the past;
- where possible, provide a client with a list of competent referrals to choose from rather than selecting one in particular for them;
- don’t make promises or representations about what outcome a client can expect when making referrals;
- avoid crossing the line into giving advice that falls within the referred professional’s area of expertise, either before or after making the referral;
- do not deal directly with the referred professional on behalf of the client unless the client specifically directs you to do so;
- if a client asks you to deal directly with a referred professional, copy the client on all communications with that professional;
- avoid accepting compensation (i.e. gifts, referral fees, or commissions) from professionals you refer clients to, but if you do, remember your obligation as a licensee to disclose to your client any remuneration or benefits you receive or anticipate receiving (Real Estate Services Rules, Rule 56);
- maintain an arm’s-length relationship with those on your referral list – if you have a personal relationship with a referred professional, make sure you disclose the relationship to your client in advance;
- if a client expresses concern about a referred professional,
- do not dismiss their concern,
- advise the client to raise their concerns with the referred professional directly; and
- offer to refer the client to another professional; and
- document the referral, and any related communications, in writing.
[i] Salomon v Matte-Thompson, 2019 SCC,  1 S.C.R. 729