By Tony Palermo
Calgary-area salesperson Kirby Cox says he is determined to make sure Alberta Realtors know that their commissions are not protected and are at risk.
The former Royal LePage Foothills top-producing agent says he is out over $275,000 after long-time broker Ted Zaharko ran into financial problems and announced in December that he was closing all six of his offices.
Several sources who wish to remain anonymous told REM that, in hindsight, there were some signs months in advance that Zaharko was in financial difficulty, but Cox’s records show the commissions he’s owed are from a five-week period between November and December 2015.
In other words, it can all go to hell in a matter of weeks, leaving agents little time to react to minimize their losses.
To add insult to injury, Cox says none of the big industry associations – CREA, the Real Estate Council of Alberta (RECA), nor the Alberta Real Estate Association (AREA) offered any advice or assistance.
“I didn’t get any guidance, communication or calls from any of them,” says Cox, adding that these associations were all quick to take in their dues over the years but were nowhere to be seen, at least proactively, when the brokerage closed.
Cox says although he feels the sting of losing over $275,000, he has other businesses and investments and will be fine. But it’s not his substantial loss that is the primary force driving him right now.
“Look, I will recover from this, but a lot of people were really hurt when they lost their commission income,” says Cox. “We need to create awareness. Agents need to know that their commissions are not protected – that brokers really know the Alberta Real Estate Act and what they can get away with.”
Realtor Cam Sterns says he’s out about $50,000 between commissions owed and taxes he was paying Zaharko to keep aside on his behalf. When combined with the downturn of Alberta’s economy, he says losing that much money is “crippling.”
Worse, he says, was that he was told by a director at Foothills that his commissions and tax money were “safe and secure” and being held “in trust.”
“Every quarter I paid Ted Zaharko $200 for withholding about 15 per cent of my gross income to keep aside for taxes,” says Sterns. “I was led to believe that my money was safe and protected.”
In an email, Zaharko admitted to Sterns that “we did obviously use commission dollars to keep going” but that “we didn’t take it and pay ourselves a nice large dividend”.
Sterns delivers an angry response when asked to reflect on this email exchange.
“I wasn’t floating his business with my money,” says Sterns. “You know, I’m still trying to recover and lick the wounds.”
Shortly after moving to another Royal LePage brokerage, Sterns filed an official complaint with RECA. They responded in a letter which, he says, indicated that they had no authority to investigate the matter because it was considered a commission dispute and, therefore, wasn’t regulated by RECA.
Self-regulating in the interests of consumers
RECA communications manager Natalie Scollard says while she is not privy to complaint details, generally speaking, if RECA was to receive a complaint that is strictly related to a commission dispute between a registrant and their brokerage, it would be a civil matter outside of RECA’s jurisdiction.
“RECA was set up to regulate the real estate industry in the consumer’s interest,” says Scollard. “An employment relationship between agents and the brokerage is not our purview.”
Scollard says it proactively conducts Trust Assurance and Practice Reviews of brokerages every three to five years, and in the case of new brokerages, within the first year, to make sure they’re in compliance with the Alberta Real Estate Act and its rules. She says these reviews are in addition to other financial reporting requirements such as fiscal year end reports, which are also reviewed by RECA trust assurance and practice review officers.
Specific events such as bankruptcy proceedings, judgements and criminal convictions against an industry member or brokerage can also trigger auditors to examine the brokerage’s records. In the case of Royal LePage Foothills, Scollard says RECA never received such notification, noting that these mandatory notifications are triggered by factual events.
“RECA only heard things about Royal LePage Foothills second-hand, mostly from industry members calling us to get information about what was going on because they heard rumours,” says Scollard. “The information and advice we provided to those individuals was consistent, but we were not in any position to communicate broadly to the industry about what may or may not have been going on at a given brokerage.”
That being said, when the calls from industry members started coming in about Royal LePage Foothills, Scollard says RECA trust assurance and practice review officers went in and examined the integrity of the consumer trust accounts. They did not find any issues.
Calgary Police Service spokesperson Tanja McMorris confirmed that as of June 28, they have not received any complaints to investigate either Foothills or Ted Zaharko.
Scollard says that while auditors will examine a brokerage’s general accounts as well, it does so only with an eye to helping brokers comply with the requirements of the act and its rules, and not to identify things like the timing of payments around agent commissions and employee salaries.
“We had auditors in there every step of the way,” says Scollard. “But again, our focus is on the consumer protection side of things. Commissions earned on a transaction belong to the brokerage and not the individual agent. Agree or not, brokerage agreements are between the brokerage and the consumer.”
As the industry regulator of Alberta’s real estate professionals, RECA, which itself is self-regulated, is the only industry body that has the authority to go into a brokerage and examine its records. In a brochure, RECA says of itself, “RECA is committed to the public interest, by promoting the integrity of the industry and protecting consumers.”
When asked if there appears to be a gap in legislation since, it could be argued, protecting agent commissions and ensuring salespeople are being paid is important to promoting the integrity of the industry, Scollard said no.
“It’s right there in legislation that RECA is for consumer protection,” says Scollard. “There are local and provincial boards (to represent) the members.”
When reminded that RECA is the regulator and remains the only industry authority that can go in to a brokerage to review their records, Scollard says that as much as she is saying there isn’t a gap in legislation, she’s also not saying it will never change.
“RECA wasn’t set up for this but let’s see what’s best for the industry,” she says. “No one wants people to not get paid and the At-Risk Commissions Working Group is a positive step forward.”
At-Risk Commissions Working Group
Only months after Royal LePage Foothills closed its offices, an even larger brokerage, Discover Real Estate, which had offices in Calgary, Edmonton, Red Deer and Strathmore, told its nearly 400 agents that they would have to find work with another brokerage. Several agents who are owed commissions have reportedly started legal proceedings in an attempt to recover their money.
Alberta’s industry leaders took note and came together to form the At-Risk Commissions Working Group to address how to better protect Realtors’ commissions. The group, which has been releasing monthly updates since May, is made up of AREA, RECA, the Real Estate Insurance Exchange (REIX), the Calgary Real Estate Board (CREB) and the Realtors Association of Edmonton.
“We’ve had a significant portion of our membership that has been affected by a broker not paying out the commissions owed to their agents,” says CREB president Cliff Stevenson in an email statement. “This has been a very difficult experience for many of our members, so we are very pleased to have some CREB members and staff as a part of a group trying to find a solution to protect agent commissions in the province of Alberta. This is a significant priority for this industry in this province and time is of the essence.”
The working group is currently researching various options to help protect agents’ commissions, including insurance and bond products, commission trust accounts as a regulatory requirement and employment contract terms between brokers and associates. It has also engaged a third-party survey provider to solicit input from Alberta Realtors on the issue of at-risk commissions and the survey is expected to be emailed sometime in August.
AREA CEO Ian Burns believes there are “challenges” with the existing legislation and says AREA is advocating hard for changes to better protect their members.
“Agents’ livelihoods depend on their commissions and they shouldn’t be jeopardized in this manner,” says Burns. “I think (the At-Risk Commissions Working Group members) are all in agreement though that we’re working together to find a solution because we all believe something is required.”
Burns, who has an insurance background, says an insurance product is a longer-term solution, but is challenging to create. As he says, balancing coverage that meets the needs of all members against the costs of the program isn’t easy. The best information that can be provided to actuaries is examples of past cases, like Foothills and Discovery, to help model a plan. Still, he is optimistic a solution can be found.
Although it’s not a complete solution, Burns would also like to see mandated commission trust accounts. Not only would a trust account act as a deterrent for brokers to use an agent’s commission money for other expenses, but for those who do, he believes it would likely affect their ability to continue working in the profession.
CREA spokesperson Linda Kristal declined REM’s request for an interview, citing that this remains a provincial issue.
Soper: ‘Huge gap’ in legislation
Royal LePage CEO Phil Soper believes there is a “huge gap” in any legislation that allows Zaharko, or any other broker with outstanding significant business issues, to continue practicing.
“That the regulator continues to licence someone with a significant business failure, that affected many people, without anything like a probationary period or a business case showing why they should be allowed to continue to offer services in the real estate marketplace, to me, is a huge failure,” says Soper.
Still, licensing aside, Soper says he doesn’t believe it is the role of the regulator to manage the actual business-to-business relationships between agents and their broker.
“Where there could be a solution on that front is for the industry itself to require, in becoming a member of a real estate board, a greater requirement for disclosure and transparency of the brokerage,” says Soper.
He says there is a lot of misunderstanding about how business works when you have a commercial contract between two parties, such as between an agent and a broker, and what happens when one party doesn’t live up to their end of the contract. As he says, in business, when one party doesn’t honour the arrangement, the option is to stop working with them and take the matter up in civil court. And agents, he says, need to remember they are independent businesses, no different than any other business contractor.
In other professional services though, contractors aren’t generally forced to work with only one client (in the case of agents, a brokerage) and are free to diversify their client-base to minimize the risk associated with having their income come from only one source. But Soper doesn’t see this as a limitation.
“Agents can have multiple sales going through the brokerage,” he says. “As soon as one commission doesn’t go through, the agent can move on.”
Using a different analogy, he says to consider an independent I.T. contractor who works for a large client. As their only client, the I.T. contractor would be in the same position if that client folded or didn’t hold up their end of the payment agreement.
“Again, the remedy would be to stop working with that client, move on and take the matter up in civil court,” he says.
Soper said it was on a Thursday when his team got a hotline call about problems at Foothills. By Monday, a team was on the ground asking what was going on. Then, when it became clear the agents would have to move to another brokerage, Soper says the Royal LePage head office provided assistance to these agents, through their new Royal LePage brokerages, to help them get back on their feet.
“Most of the agents will be made whole by the better arrangements they have with their new Royal LePage brokerage by the end of two years,” says Soper.
Most, but not all. Soper says that for the top producing agent at Foothills, even if he didn’t have to pay any fees to Royal LePage, it would take 150 years to pay back what they are owed.
“There’s no money left to pay that agent back since 99 per cent of the money went to him and not Royal LePage anyways,” says Soper.
Reflecting on the situation, Soper says that while the financial issues at Foothills obviously involved mismanagement, his impression is that Zaharko didn’t realize how serious a financial problem he had and that it “crept up on him very quickly.” Soper says everyone needs to realize that the whole situation unfolded over a matter of weeks – he says it’s a few weeks’ commissions and Royal LePage fees that are outstanding – and that this wasn’t a long, drawn out process.
“Remember, Zaharko didn’t declare bankruptcy or go out of business,” says Soper. “Royal LePage pulled out of our arrangement with him and he co-operated because he felt really bad about the situation. To his credit, he really did put his agents first to make sure they got what was there. I really don’t think Ted knew the extent of his problems.”
Soper says to help protect agents and consumers, Royal LePage offers free broker business advisory services, consisting of financial and operational consulting professionals, to help brokerages with their business. He says the problem though is that Royal LePage corporate can’t mandate that a broker use these services, even if problems become apparent.
These consulting services, says Soper, were offered to Zaharko but were refused.
“He could have had an end-to-end review of his operation with recommendations, and we might have been able to help,” says Soper. “It’s the old saying, you can lead a horse to water, but you can’t make it drink.”
Foothills aside, Soper throws out a caution to the real estate industry, saying that everyone needs to look at the Foothills and Discovery incidents, which both happened in Alberta, and examine why they happened in such a short time apart from each other.
“A brokerage has to be highly managed – you can get into trouble quickly since most of the fees are going back to the agent,” says Soper. “I can see this happening again in the future. There’s a movement to less and less revenue being retained at the brokerage level, and that’s a problem.”
And, it’s a problem Ted Zaharko agrees with as well.
Floating a brokerage
How does a long-time broker with decades of experience – a man well-known in Alberta’s real estate circles, one who held a number of advisory and senior positions with various real estate boards and associations over the years, a broker who grew his office to become the largest Royal LePage office in Western Canada – find himself at 70-years-old with nothing left?
Several former Foothills agents declined to speak to REM on the record, or at all, with some describing Zaharko as, up until this incident, “like a father” or “a valuable mentor” to them.
“I spent (a number of) years at that company and loved every second of it,” said another. “Ted was a mentor to me and I had a huge amount of respect for him.”
So, what happened?
“How can I make any excuses?” says Zaharko. “Listen, it’s a terrible thing for everyone but the buck stops here. I ran that ship into the ground.”
Zaharko says he thinks protecting agents’ commissions is a good thing, but he doesn’t believe mandating a commission trust account is the answer. He says given how little brokerages in western Canada keep from their agents, the reality is agent commissions are used to float the brokerage and are managed and paid out just like any other of the brokerage’s business expenses.
“Brokerages aren’t making enough from Realtors in Western Canada compared to other parts of the country,” says Zaharko. “It’s a real problem. If at the end of the day, regardless of fees, commissions are protected by law, how will that impact the good operator?”
In other words, right or wrong, it’s less money the broker/operator has to help manage their cash flow, and it’s worse for brokers in Western Canada where only a very small percentage of an agent’s annual gross goes back into the brokerage compared to (the business models in) other parts of the country.
Zaharko says this has been a devastating experience. “The Realtors didn’t deserve that at all,” says Zaharko, adding that this has taken more than just a financial toll on both him and his family.
Zaharko acknowledges he hasn’t declared bankruptcy but is pretty much at that point since nothing he has tried to do to make things right for those he owes money to have materialized.
In addressing those who question whether he should still be allowed to practice real estate when he has serious outstanding business commitments with his brokerage, Zaharko is quick to dismiss the concern.
“Well, no one has to worry about it,” says Zaharko. “I can’t keep my licence if I declare bankruptcy and I’m pretty much at that point.”
The following blog posts from the Real Estate Council of Alberta (RECA) provide information and guidance if Realtors find themselves in a situation where their brokerage is shutting down:
Realtors who are interested in learning about how commission protection insurance works in Ontario should read a May 30 REM article on the subject.