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A stop to Estate Agents commission!?

Competition Commission puts a stop to 7.5% Estate Agents Commission

The Competition Commission has investigated the Institute of Estate Agents of South Africa (“IEASA”), following a complaint initiated by the Commissioner of the Competition Commission. The Commission has found that IEASA has contravened the Competition Act 89 of 1998, in that it indirectly fixed the selling prices of the various services rendered by estate agents.

IEASA is a non-profit organisation representing the interests of affiliated real estate agents in South Africa which consists of a group of eight regional section 21 companies co-ordinated by a national body. IEASA members operate in the market for the supply of estate agent services to consumers.

The investigation revealed that between 1999 and 2002, IEASA recommended professional fees and commissions for estate agents’ services by publishing a Tariff Book for use by its members. The Tariff Book recommends minimum fees, hourly rates and sales commissions to be charged by estate agents who are IEASA members for property administration services, sales of immovable property, sales of business, partnerships and shares in a company, procuring and negotiating leases, administration of Sectional Title Developments and shareblock company Buildings etc. The Tariff Book recommended a 7.5% commission on residential property sales. The 7.5% rate therefore served as a benchmark in the estate agency industry for residential property sales.

In addition to the recommended 7,5% commission, the tariff book also recommended certain charges, miscellaneous fees, management fees and commissions to be charged or paid to managing agents. The tariff book, in most instances, also differentiates between the different regions in respect of the recommended fee structures. Commissions and rates are fixed at different levels for each respective region. The 7,5% commission in respect of residential sales is however the same countrywide.

“The price at which estate agents’ services are available in the market was to a large extent determined or influenced by tariffs contained in the Tariff Book. This resulted in indirect price fixing in contravention of the Act”, said Adv. Menzi Simelane. As competitors, estate agents should have individually determined their prices and those prices should have been based on the service each estate agent offered to the consumer without being influenced by set tariffs of the nature of those contained in the Tariff Book. “Conduct or practices like these eliminate the competitive process in the industry. Through the Tariff Book estate agents were in a position to determine how much their competitors would probably charge for property sales they have. It therefore disinclined estate agents to set individualized fees. Price competition then becomes non-existent in the industry. It also results in firms becoming less innovative as there is no incentive to compete. This is generally bad for economic growth. In addition, consumers are at the receiving end throughout as price fixing by competitors deprives consumers of competitive prices,” said Simelane.

Simelane also said, ”the impugned recommended tariffs, which have no statutory backing, by their very nature have the effect of becoming the ruling prices for the estate agents’ services concerned. The tariffs stifle competition in the relevant market. The prices of goods and services in any given market must be determined by factors of supply and demand and not by collusive schemes (or arrangements) of competitors. The Act is clear, that where a professional association deems it necessary to set prices in the interest of maintaining professional standards or the ordinary functioning of that profession, such a professional body can apply for an exemption,” concluded Adv Simelane.

The Commission has decided to prosecute IEASA for the contravention of the Act, and is presently involved in discussions with IEASA to enter into a consent order incorporating an administrative penalty which could be up to 10% of its annual turnover and the turnovers of its members.

ISSUED BY COMPLIANCE