Canadian Real Estate Association

A class action lawsuit filed at Toronto’s Federal Court of Canada alleges that several of the country’s top brokerages and real estate associations have been price fixing realtor commission rates.

Toronto resident Mark Sunderland filed the lawsuit after he paid a five per cent commission rate when he sold his home in August 2020, 2.5 per cent of which went to the brokerage representing the buyer. Sunderland claims that buyer brokerages have price fixed their commission rate at 2.5 per cent or higher by steering clients away from properties that offer lower commission rates. Sellers who offer a lower commission rate are allegedly put at a disadvantage because fewer potential buyers see the property.

Eleven brokerages are named in the lawsuit, including Royal LePage, Century 21, Sutton Group Realty, and Chestnut Park Real Estate, as well as the Toronto Regional Real Estate Board and The Canadian Real Estate Association. As a class action lawsuit, the claim is filed on behalf of anyone who sold residential real estate listed on the Toronto Regional Real Estate Board’s Multiple Listing Service (MLS) from March 11, 2010 onwards.

The defence, representing both brokerages and real estate associations, is seeking a dismissal, arguing that the claim is baseless.

The court has yet to deliver a ruling. In the meantime, here’s everything you need to know to understand the claim.

How did our real estate process develop?

Going back 50 years ago, brokerages only sold their own listings, says David Fleming, a Toronto broker. If you wanted to buy a house, you had to walk into a brokerage and see what they had for sale. This is now called multiple representation, where both the buyer and seller are represented by the same brokerage. It tends to result in a conflict of interest as the seller is trying to get the most for their home while the buyer is trying to pay as little as possible.

That’s one of the reasons Ontario moved away from this model, instead adopting a system of cooperation where one brokerage represents the seller and another the buyer, Fleming says.

This is where the splitting of commissions came from. “You have a six per cent commission signed with a seller, but the property’s not selling well. What if somebody at a different brokerage had a buyer and they could sell it for you?” Fleming says. “Would you be willing to cooperate? This idea of cooperation began a long time ago, way before MLS, and way before the internet.”

How does the commission process work?

Commission rates vary between sellers and their brokerage. In Toronto, where houses are going for around $1 million, Fleming says you’ll typically see commission rates range from four to six per cent of the total sale.

Once the seller and their brokerage have agreed on a commission rate, that brokerage may then turn around and offer a certain percentage of its commission to a buyer brokerage that has a client willing to buy. Typically the commission is split 50/50, but this can be negotiated. ““Outside of Toronto, you rarely see a 2.5 per cent buyer brokerage commission,” Fleming says. “Most of the commissions are two per cent.”

The catch with this system is that the seller ends up paying for the services of both their brokerage and the buyer’s brokerage.

Does the lawsuit have any merit?

The short answer, according to Fleming, is no, he doesn’t think so. “I think it’s very creative. And I think that it is one of many cases we’ll see going after the cash that is being held by different organized real estate boards, but I don’t think it has any merit whatsoever, because a quick survey of MLS will show you all kinds of buyer brokerage commissions that are not two and a half per cent.”

He admits that on the MLS, 2.5 per cent might statistically be most common, but it’s not a fixed commission. Over the last year, Fleming says he’s received two per cent commissions and 2.25 per cent commissions.

Frank Clayton, a professor at Toronto Metropolitan University’s Centre for Urban Research and Land Development, agrees with Fleming that it isn’t likely any price fixing is happening. “If rates get out of whack, somebody else can come in and set up a buyer brokerage and undercut other companies’ rates if they want to,” he says. “As long as the board isn’t reinforcing a certain rate, but I don’t think they are.”

If a seller is unhappy with the commission offered by their brokerage, Clayton points out that they can always sell the property themselves or use a discount brokerage that offers lower commission rates, such as one per cent or half a per cent.

“The selling realtor and buying realtor have to get paid for their efforts,” he says. “I don’t think splitting commissions is anything worth having a court case about.”

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The Canadian Real Estate Association (CREA) is launching a pilot project that will allow buyers to see registered offers placed on a property as they are submitted.

In partnership with Australian software company Openn Negotiation, CREA, which is in charge of setting national standards for Canadian realtors, has created Openn Offers; a management software that will track real estate offers in real-time, displaying them on a property’s REALTOR.ca listing.

The goal of Openn Offers is to increase transparency and provide buyers with more information when purchasing a property, says Pierre Leduc, media relations spokesperson for CREA. The project is still in the planning process, but Leduc says the association’s aim is to test Openn Offers in select markets across Canada this summer.

Which markets will be selected is still up in the air. Since Canadian real estate is governed at a provincial level each province has its own rules around how a real estate transaction is conducted and what information is allowed to be disclosed. CREA is currently in talks with 11 real estate regulators across the country to determine how Openn Offers will operate in each province.

“Our first step is to define the provincial [regulations] that actually allow this project to be more transparent,” Leduc says. “Then it’s finding boards within the province that are willing to host.”

If Ontario is selected as a host, Leduc says that at a minimum, Openn Offers will show buyers how many offers have been made on a property and what the highest offer is. A recent announcement made by the Ontario government could expand these parameters, though. As of April 1, 2023, sellers in Ontario will have the option to disclose offer amounts in a multi-offer scenario. This option will be voluntary, but it could give buyers a sense of where they rank among the bids and ensure they don’t overpay for the property. This feature wouldn’t kick in on Openn Offers until next year.

Leduc adds that for an offer to be recognized by Open Offers, the buyer needs to be working with a licensed realtor who can process their bid through the system.

CREA’s announcement came only a week after the federal government released its 2022 Budget, in which the feds pledged to eliminate blind bidding from real estate transactions in an effort to make housing prices more affordable.

Blind bidding is the default practice used by real estate agents across Canada in multi-offer scenarios. It requires buyers to bid for a property without knowing the amout of competing offers—a common scenario seen in Ontario’s cottage country over the last two years. The crackdown on blind bidding comes after some critics have pointed to it as a culprit in driving up real estate prices. But Katie Steinfeld, broker of record for real estate agency On The Block, disagrees.

“There are situations where one buyer will significantly overpay versus everybody else, and in those situations, I would say for sure that will not help decrease prices.” But this tends to be an exception, Steinfeld says. On The Block operates its own auction platform, providing similar information to what Openn Offers plans to disclose. When the size of competing bids are disclosed in auctions, Steinfeld says she found that prices jumped higher.

“A lot of buyers, their argument is when they’re in a blind bidding situation, they don’t want to go up any higher because they don’t know what the next highest offer is. They don’t want to overpay,” she says. “But if they know what they need to pay in order to get the home, that can push them up even higher.”

Steinfeld says she doesn’t believe eliminating blind bidding will suddenly tame Ontario’s runaway real estate prices, but she does think that CREA’s attempt to provide buyers with more information is a step in the right direction.

“I don’t think this will have an immediate impact. I think opening things up and making things more transparent is going to be a process. But I think it will start helping [the market] out and bring more opportunities and options to buyers and sellers,” she says. “Having more information at their disposal is always a good thing.”