Firm and principal solicitor clash over allegations of financial instability, privacy breaches

The dispute centres on Agency Settlements’ business model, described by Justice James Hmelnitsky as assisting real estate agents with “their basic obligations” under the 1 July regime changes to the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (AML-CTF).

“It does this by advising real estate agents to encourage vendors and purchasers to include a special condition in the standard form contract of sale of land which has the effect the plaintiff – and not its real estate agent client – is nominated as the deposit holder and stakeholder under the contract,” Justice Hmelnitsky said in Agency Settlements v Zak.

Zak has been “openly sceptical” about whether Agency Settlements’ practice of receiving their clients’ deposit – and therefore, taking on the compliance obligations under the AML-CTF Act – is lawful under section 86 of the Property and Stock Agents Act 2002 (PSA Act).

Section 86 provides:

Trust money to be paid into trust account (1) Money received for or on behalf of any person by a licensee in connection with the licensee’s business as a licensee – VIEW ALL a. Is to be held by the licensee or (if the licensee is employed by a corporation) by the corporation, exclusively for that person, and b. Is to be paid to the person or disbursed as the person directs, and c. Until so paid or disbursed is to be paid into and retained in a trust account (whether general or separate) at an authorised deposit-taking institution in New South Wales and approved by the Secretary for the purposes of this Part. (2) If the licensee is held by a corporation, the trust account is to be in the name of the corporation and in any other case is to be in the name of the licensee or of the firm of licensees of which the licensee is a member.

In conversation with Lawyers Weekly, McEntee said that because of Agency Settlements’ special condition, section 86 “doesn’t actually apply”.

“The vendor consents and signs off on us collecting the deposit in the agency agreement, usually before the sale contract has been procured, and then we get added into the sale contract as a stakeholder.

“We’re not a third party; we are the stakeholder to the contract, we have a legal right to be there,” McEntee said.

The special condition is set out below:

“When the buyer pays the deposit, they confirm in writing and consent to us paying the deposit through our law firm’s trust account. That’s the key. Adding us in as a special condition gives us the legal right to collect and hold the deposit as a stakeholder,” McEntee said.

Also speaking to Lawyers Weekly, Zak claimed there was “definitely a solid interpretation” of the PSA that demonstrates a breach.

“Paraphrasing that proposition … it basically says the deposit, when transferred to the agent’s trust account, must be kept there – and there’s very good reason for that. That’s someone’s livelihood there, and I think the notion of ‘oh no, we don’t breach section 86 because it never actually goes to the agent’s trust account in the first place’, well, that’s just cute.

“That’s a cute way of trying to get around the idea that an agent – and this is not a new thing, it’s been around for time immemorial – that an agent’s solemn and sacred duty to hold the deposit in their trust account,” Zak said.

Agency Settlements filed proceedings in the NSW Supreme Court seeking a declaration that its business model is lawful and does not breach section 86. It also sought final relief for declarations and orders under the Competition and Consumer Act 2010 (Cth) that Zak engaged in misleading or deceptive conduct regarding representations he made.

This included the Change.org petition, which was taken down after a complaint Riverstone Partners’ internal lawyers made to the platform.

At an initial hearing, Agency Settlements pushed for interim relief to restrain Zak from making further representations about its business model, but Justice Hmelnitsky declined to make this order.

Shortly afterwards, Agency Settlements filed a notice of discontinuance that included a condition to pay Zak’s costs in the agreed sum of $60,000.

Zak said he “didn’t necessarily mind” the notice of discontinuance but stressed it was not something he or his lawyers agitated for: “We were very confident that, if it was to proceed, then we would win.”

“You can infer from the initial judgment that [the judge] struck out quite a couple of the limbs they were hoping to pursue. The injurious falsehood, I think, he completely struck out,” Zak said of the Supreme Court decision.

“That would be quite rare to completely strike out a claim with such a short interim hearing, but even then, he did that with all but one of the limbs.

“On that limb, to say a petition on a genuinely held concern by a solicitor constitutes false and misleading conduct under the [Australian Consumer Law], that would be new territory as far as I’m concerned.

“Even if they were able to establish that, which would be a massive threshold, how would you ascertain any damages at all?”

On what the notice means for him now, Zak said it would change “very little in terms of how I’m going to operate”. As of writing, submissions were before the Law Society, PEXA, and Fair Trading, complete with the signatures added to Zak’s Change.org petition.

McEntee told Lawyers Weekly his company was motivated to take legal action after the Change.org petition appeared, but he also cited Zak’s alleged “commercially motivated reasons to make the comments”.

Justice Hmelnitsky’s decision said that while Zak founded Dott & Crossitt – itself a property conveyancing firm – he is no longer the owner and has no shareholding in it. According to the judgment, Zak is employed only as a principal solicitor and an executive member of the board.

Dott & Crossitt does not have a business of holding deposits, and so the firms do not appear to be in “direct competition”, Justice Hmelnitsky said.

McEntee said Agency Settlements “takes a lot of comfort in the judge’s comments around the legality and our systems and processes.”

Referring to the possibility that Agency Settlements would have contended it does not breach section 86 because of the special condition, Justice Hmelnitsky said: “I consider this proposition to be sufficiently arguable to make good this aspect of Agency Settlements’ case at a final hearing.”

McEntee said: “As well as relying on our own legal advice, His Honour’s comments were very much in line with everything we’ve been working on for the last two years. Although we didn’t get the injunction, we got the commentary … so that was a benefit provided to us.”

While McEntee said media attention initially had an impact on Agency Settlements’ business, it has ended up having the “reverse effect”.

“Running a damages claim when the business has actually grown didn’t make a lot of sense. There’s no point continuing legal action to prove we’re right; we already know we are, we’ve got the legal advice, and now the judge’s commentary around our business.

“That was enough for us,” McEntee said.

Ongoing criticisms and the responses to them

McEntee said Agency Settlements has “done everything we can” to engage with the legal and conveyancing community, but Dott & Crossitt and another firm based in Maitland, NSW, “have really gone out of their way to either not engage or refuse to sit down with us to run through how we operate and what we do”.

“We have tried to sit down with Jared since January or February, asked to meet with him in March, was very rudely rejected. Then, again in May and June, rejected again,” McEntee said.

“It was around this time we started to hear Jared was going out of his way to make some pretty aggressive comments around our business and integrity, having never taken the time to sit down and meet with us.”

In response to McEntee’s comments, Zak told Lawyers Weekly: “I’d take objection (yet again) to his gaslighting that I (and ‘some firm in Maitland’) are the only ones who have a problem with this.

“This was one of the reasons why I did the petition: to show to Lucas what he still seems completely unwilling to believe – that no one likes this. 150 conveyancers signed the petition in 24 hours.”

Zak also claimed the Australian Institute of Conveyancers (AIC) has “actively lobbied against their model”, and the Real Estate Institute of NSW has “warned their real estate members against this product”.

“It is, and there’s no other way to put it, extremely unpopular because of the risks it presents,” Zak said.

One of those alleged risks concerns financial constraints, with Zak pointing to Agency Settlements’ failure to comply with a notice to produce bank statements, balance sheets, income statements, and cash flow statements. Some were “selectively produced”, including part of a bank statement for what it said was an operating account.

Zak alleged that a big portion of the funds in that account were deposited in the prior 24-48 hours from an “affiliate company”.

“There is a massive financial question mark there, which, I guess I sort of say, how confident are we with a deposit holder that does have – based on the information they were able to give the court – financial constraints.

“These are real concerns for consumers when they are proposing to hold deposits for all these people. That would be a big question mark, and hopefully the regulators turn their minds to [it],” Zak said.

McEntee said it was “perfectly normal” for others to be sceptical and ask questions of new contenders in the market, but critics need to rest assured “that we’re very well-funded, we’re very well organised, we’ve been doing this for a long time, and once they sit down and see the efforts we’ve gone to … it builds a lot of confidence and that’s resulting in the amount of conveyancers and law firms we’re working with”.

Zak was also concerned for his customers’ privacy, alleging Agency Settlements has a desire to “interject themselves” into PEXA in order to see sensitive information, including the borrowers’ bank, the borrower’s loan amount, the vendor’s bank, and the vendor’s loan amount.

He pointed to Agency Settlements’ affiliation with SaleFunder and a clause in the agreement regarding the sharing of information.

The clause in full, sighted by Lawyers Weekly:

In direct response to Zak’s allegations, McEntee said: “That’s absolutely ridiculous and highly offensive. There is zero evidence of this.

“Riverstone Partners owns a number of companies, and we’ve got many other companies within our group, and it’s clear that Agency Settlements is an incorporated law firm.”

He said the legal work for the lending arm is done by Piper Alderman and Douros Jackson Lawyers, and Agency Settlements is “completely separate, completely independent, nothing at all in terms of any crossover or visibility of how that process works”.

Further, McEntee said Agency Settlements cannot take or sell data, and their view of the PEXA workspace is “extremely limited”. The information the firm can see, it would “see anyway in the sale contract, which the agent provides us [with] as part of their normal processes”.

McEntee said this can be checked directly with PEXA.

“The things you have mentioned to me are complete fabrication. It’s amazing how loud insecurity and jealousy gets the more successful we become,” McEntee said.

“Those comments are from narcissistic people in closed, poisonous WhatsApp groups. We have never made any comments about those sorts of things, nothing of the sort in any documentation or on our website.”

A third concern from Agency Settlements’ critics is the risk of technology outages or attracting phishing scams, given the firm is seeking to hold “presumably hundreds of millions, if not billions” in consumers’ deposits.

“You’ve heard of the concept of a single point of failure, now just imagine if there is a cyber fraud or whether it’s a simple bank outage on any particular day. Can you imagine if one deposit can’t be paid?

“We’ve seen similar things before where one bank goes down overnight, and that can have massive flow-on effects,” Zak said.

On the “notion of a honeypot”, Zak added scammers are sending “heaps and heaps of those emails” in the hopes that one conveyancer will be gullible or inattentive enough to fall for it.

“Imagine a doomsday scenario where this institution is holding all the deposits that took place in NSW – well, guess what? You can just write to any single consumer and say, ‘I represent so and so from Agency Settlements’, and ‘oh yeah, Agency Settlements, we’re expecting to get an email from those guys’. It makes it easier for this honeypot scam,” Zak said.

McEntee said in addition to providing high levels of security around sensitive financial information – including only permitting payments via BPAY and PayTo and holding deposits in a “fidelity fund protected, a Law Society-regulated trust account” – his firm has “taken a lot of time” during the onboarding process to advise real estate agents of the risks.

In an effort to “stop the misinformation”, McEntee said he is continuing to have “open dialogue” with Fair Trading and is hoping to have further conversations with regulatory bodies and conveyancers.

As for the submissions before the Law Society and Fair Trading, McEntee said he has received “a lot of really good legal advice”, particularly from Thomsons and other national firms. He said one partner is also on the property council of the Law Society of NSW.

“I kind of feel it’s a dead end now for Jared, and he can continue to waste his time on this endeavour, and he is clearly entitled to have his own legal opinion, the seller market is voting with their feet as it’s clearly their choice what they want in their contracts,” McEntee said.

“It will play itself out. He’s been complaining for months. We just need to be patient, as the longer it goes on, the more right we are.”