Beware of misapplying deposits in trust accounts

One of the key functions of the Agents Financial Administration Act 2014 (Qld) (AFA Act) is to establish a Claim Fund (the Fund) [1] against which a person may make a claim for compensation if they have suffered financial loss because of an agent’s contravention of the AFA Act or other relevant legislation in accordance with section 82 of the AFA Act. [2]

This case concerned a review by the Queensland Civil and Administrative Tribunal (QCAT) of a decision by the Office of Fair Trading (OFT) to determine whether the applicant, Ms Lin, was entitled to claim against the Fund because she had suffered financial loss as a result of the happening of one or both of the events set out in sections 82(1)(a) and (b) of the AFA Act.

Background facts

In 2016, the applicant paid $179,500 in deposit monies to Ralan Property Services QLD Pty Ltd (Ralan Property) for the purchase of two off-the-plan apartments.

Ralan Property paid the deposit monies into its general trust account but subsequently transferred $179,300 to Ralan Capital Investment Pty Ltd (Ralan Investments) pursuant to side agreements signed by the applicant, which purported to loan the deposit monies to Ralan Investments to be invested into two separate development projects.

The apartment developments were never constructed and, in July 2019, both companies involved in the proposed developments entered administration and, subsequently, liquidation. The administrator’s preliminary investigations revealed that the companies had been trading whilst insolvent from at least 30 June 2014.

The applicant lodged a claim against the Fund established under the AFA Act for $179,300. At first instance, the OFT declared the applicant’s claim on the Fund was invalid because it was not lodged within the timeframe required under section 90 of the AFA Act. This decision was affirmed by the Chief Executive following an internal review of the decision.

The applicant appealed the Chief Executive’s decision to QCAT.

Applicable Law

QCAT’s review process involves a fresh hearing on the merits, considering any information that was or could have been considered by the original decision maker, the OFT.

In determining the applicant’s entitlement to make a claim on the Fund, QCAT had to consider whether one or more of the following events had happened:

1. a contravention of s 21 or s 22 of the AFA Act; or
2. stealing, misappropriation or misapplication within the meaning of s82(1)(b) of the AFA Act.

The applicant contended that both events had occurred.

The Chief Executive contended that there was no contravention of section 21 because the payment out of the agent’s trust account was ‘non-trust money’ and consequently permitted by s 18 of the AFA Act.

Sections 21 and 22 of the AFA Act provide that real estate agents can only pay money or draw money from a trust account in certain ways permitted by the AFA Act.

Section 21 of the AFA Act provides:

  (1) An amount paid to a trust account must be kept in the account until it is paid out under this Act.

  (2) An amount may be paid from a trust account only in a way permitted under this Act.

In order to address the Chief Executive’s argument, it is necessary to consider the legislative provisions of the AFA Act which govern the process for payment of money into a trust account.

Section 15 of the AFA Act provides:

  (1) Sections 16 and 17 apply if an amount is received by an agent—

  (a) for a transaction; or

  (b)  with a written direction for its use.

  (2) In this section—

  amount, received by an agent for a transaction—

  (a)  includes deposit and purchase monies for the transaction; but

  (b)  does not include an amount payable to the agent for the transaction in refund of an expense the agent was authorised to incur and did incur and for which the agent holds a receipt.

Pursuant to section 16 of the AFA Act, an agent must, before the end of the first business day after receiving the ‘amount’, pay it into the agent’s general trust account or, if section 17(1) applies, invest it under section 17(2) of the AFA Act. In the present case, Ralan Property paid the whole amount of the applicant’s deposit monies into its trust account.

Section 18 of the AFA Act provides:

(1) An agent must not pay to a trust account an amount other than an amount that must be paid to the account under section 16 or 17.

  (2) However, if the agent receives an amount consisting of trust money and other money (the non-trust money) that cannot be divided, the agent must—

  (a) pay the whole amount to the agent’s general trust account; and

  (b) draw the non-trust money from the account within 14 days after the money becomes available for drawing.

Schedule 1 of the AFA Act contains a definition of ‘trust money’ which includes ‘an amount that was, or ought, under this Act, to have been, deposited in a trust account by an agent’.

QCAT’s decision

Tribunal Member Lumb found that the deposit monies were paid to Ralan Property, which was both the ‘agent’ and the “deposit holder” under the terms of the contract documents signed by the applicant, and that the deposit monies were paid for a ‘transaction’ and constituted an ‘amount’ within the meaning of section 15 of the AFA Act, being a transaction involving the purchase of two apartments.

Trust account receipts showed that Ralan Property treated the whole of the amount received by it ($179,500) in the nature of a deposit and, therefore, section 16 of the AFA Act required Ralan Property to pay the deposit monies into its trust account or invest the monies under section 17. However, Member Lumb found that section 17 was not enlivened or applicable to this case.

Member Lumb was satisfied that Ralan Property paid the whole of the deposit monies into its trust account pursuant to section 16 of the AFAA.

Member Lumb concluded that:

1. the whole amount of $179,500.00 paid into the trust account was ‘trust money’ within the meaning of the AFA Act;
2. the deposit monies constituted a ‘transaction fund’ [3] within the meaning of section 22(6) of the AFA Act;
3. section 21 of the AFA Act required Ralan Property to keep the whole $179,500.00 in its trust account and not pay it from the trust account, save as permitted under the AFA Act.

Member Lumb went further, stating that regardless of the operation of the AFA Act, Ralan Property, in its capacity as agent and deposit holder, was bound to hold (and apply) the deposit monies in accordance with the terms and conditions of the contract documents (being the terms of the relevant ‘transaction’), rather than the side agreements for several reasons, but most importantly because:

1. the deposit monies formed part of the purchase price and were paid as an assurance for the applicant’s performance of her obligations under the contract;
2. the contract documents did not contemplate a loan to any third party; and
3. the side agreements did not purport to constitute an express variation to the contract documents.

Finally, Member Lumb also found that the payment of trust monies in contravention of section 21 of the AFA Act also constituted a misapplication of those monies for the purposes of section 82(1)(b) of the AFA Act.

It was uncontroversial that the applicant had suffered a financial loss as a result of the Ralan Property’s misapplication of the deposit monies.

QCAT allowed the applicant’s claim against the Fund and held Ralan Property liable for the applicant’s financial loss. However, likely consequent to the futility of recovering against a potential bankrupt, orders included that no amount is to be reimbursed to the Fund by Ralan Property (externally administrated).

Conclusion

This case underscores the critical importance of adhering to the legal requirements for handling deposit monies in accordance with Part Two of the AFA Act. 

Agents must ensure that all deposit monies are kept in trust accounts and are not misapplied or transferred in contravention of the AFA Act.

A buyer’s prior consent or mutual agreement does not abrogate the agent’s ultimate responsibility to only deal with trust monies in accordance with Part Two of the AFA Act.

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