By Alex Liu
Hong Kong, 8 December 2023: In an unprecedented move, the Competition Commission has accused real estate agency Midland and five of its executives of conspiring with arch-rival Centaline to fix sales commissions. The antitrust watchdog says the agreement ultimately affected the prices that buyers paid for their properties and, as such, amounted to serious anti-competitive conduct.
This intervention by the regulator is not only a first for the industry in Hong Kong – which has the most expensive real estate market in the world – it opens up the possibility of aggrieved home buyers taking further legal action.
How did the matter come to light?
Last January, the Commission became aware of media reports that Midland Realty International and Hong Kong Property Services – both subsidiaries of Midland Holdings – as well as Centaline and its subsidiary Ricacorp Properties, each issued internal memos directing their respective agents to observe a minimum net commission rate of 2% in first-hand residential property transactions. Net commission is the amount paid by property developers to agencies after deduction of all expenses, including rebates to property buyers, set against the listed sale price of properties. The regulator decided to investigate.
What is alleged?
The Commission says senior management of Midland and Centaline met six times between October and December 2022 to discuss how to improve business environments and ways to reduce costs. At the sixth meeting, they agreed to fix the minimum net commission rate. Subsequently, each issued internal memos, with almost identical wording, directing their agents to observe the rate unless director’s approval was obtained.
Why is it considered anti-competitive?
When newly built homes go on the market, the developer pays a commission to the agency for each successful sale. The commission percentage is set by the developer. The agencies then compete for business by offering rebates to home buyers out of the commission. Hence, the net commission the agencies receive is the commission minus the rebate. By setting a minimum net commission rate – in this instance, 2% – the maximum level of rebate is restricted. This can result in purchasers paying more than they would if such an agreement did not exist.
According to the First Conduct Rule of the Competition Ordinance (Cap 619), price fixing is when competitors agree on pricing rather than compete against each other. The legislation refers to any price element in relation to the supply of products or services, including any discount or rebate. Thus, says the Commission, an agreement that results in the limiting of rebate amounts to price fixing.
Why is Centaline not charged?
It is subject to the Commission’s Leniency Policy. Under this framework, the first cartel member which agrees to provide substantial assistance to the investigation and adopts a corporate compliance programme is spared legal proceedings. But this does not mean Centaline is off the hook. The Commission can issue an infringement notice requiring the agency to admit liability for contravening the First Conduct Rule, thus paving the way for affected customers to take legal action.
The Commission insists the Leniency Policy “strengthens enforcement and enhances deterrence by offering a strong, clear, and transparent incentive to cartel members to report and cease their anticompetitive conduct”.
What does the Commission say?
CEO Rasul Butt insists: “Home ownership is a much cherished dream for many families and individuals in Hong Kong, and it is by far the most significant financial commitment one can ever have. Intermediaries like real estate agencies have a vital role in facilitating the buying and selling of properties and by tackling a cartel formed between leading real estate agencies, the Commission aims to drive home the message that prices of residential properties, and any element that affects the prices that purchasers will ultimately pay for the properties, should be determined by market forces and be free from manipulation by industry players.”
What happens next?
The case will be heard by the Competition Tribunal, which comes under the Judiciary. The Commission is seeking remedies which include: a declaration that Midland and the five executives contravened the First Conduct Rule; disqualification orders against the five; imposition of fines; orders for payment of the Commission’s costs; and orders requiring Midland to adopt an effective compliance programme. No date for the hearing has been set.
Summary
While this is the Competition Commission’s first action against the property sector, it may not be the last. The regulator insists it “will spare no effort in disrupting hardcore cartels that affect people’s livelihood, particularly in sectors such as the property market”. Midland now faces costly legal proceedings while both it and Centaline are vulnerable to follow-up lawsuits. Both firms, who between them are involved in 90% of property transactions in Hong Kong, must also deal with the reputational damage. The case is certain to be followed with great interest by sector stakeholders and the public.
Alex Liu is Managing Partner of BC&C. His key areas of practice include commercial and corporate litigation, investigations by governmental bodies such as the SFC, ICAC and Commercial Crime Bureau, insolvency and debt restructuring, intellectual property and employment matters. He can be contacted at alex@boasecohencollins.com.
