Is Commission Due?



Enhanced pressure on agents is leading to disputes about whether or not any commission is actually due even where it is evident that an agent has committed a significant amount of time and effort in researching a property, advising on its financial prospects and negotiating terms for a deal.

Whilst an agent may “introduce” a party (whether it be the buyer or a seller) to the possibility of a property deal, there is much greater chance in this market for the deal that actually takes place to be fundamentally different from the deal envisaged at the outset.

It is also more likely for the parties to the transaction to alter (the seller may, for example, become insolvent before the property is sold with the result that the sale is finally agreed by the administrators or liquidators for the seller) or the price for the property may alter significantly depending upon the period over which the transaction is negotiated.

In such cases, the agent may struggle to recover a fee if he or she was not the effective cause of the transaction that ultimately completed.

In this market, buyers, sellers and agents are exposed to enhanced risks of litigation and this article considers the issues that can typically arise and the steps that buyers, vendors and agents should take to protect their own interests.

Is there a contract?

The starting point in any dispute for payment of an agency fee is to establish whether or not a contract actually exists between the buyer or seller and the agent. If there is no contract, no fee is payable to the agent. A contract can be in writing, oral or it can be implied from the conduct of the parties.

If, for example, the parties have simply agreed agency terms on a subject to contract basis then it will be difficult for an agent to show that a concluded contract actually exists.

Estate Agents Act 1979 and the Estate Agents (Provisions of Information) Regulations 1991

Most sophisticated agents will have their own agency terms but it should not be assumed that these are not open to challenge.

Whether a property transaction is commercial or residential, and whether the agent is acting for the buyer or the seller, the provisions of the Estate Agents Act 1979 and the Estate Agents (Provision of Information) Regulations 1991 will apply to any agency contract.

Section 18 of the Act requires specified information to be provided to the client before a contract is entered into, including details of the agent’s remuneration, how it is calculated and the circumstances in which it will become payable.

Regulation 5 and the Schedule to the Regulations further requires that prescribed information must be given in order to define certain terms that have been held to be particularly confusing for consumers. These include the terms “sole selling rights”, “sole agency” and “ready, willing and able purchaser”.

“a purchaser is a “ready, willing and able purchaser” if he is prepared and is able to exchange unconditional contracts for the purchase of your property. You will be liable to pay remuneration to us, in addition to any other costs or charges agreed, if such a purchaser is introduced by us in accordance with your instructions and this must be paid even if you subsequently withdraw and unconditional contracts for sale are not exchanged, irrespective of your reasons.”

A recent example of an agency contract being unenforceable because of a breach of the terms of the Estate Agents Act 1979 is Great Estates Group Ltd v Digby [2011]

This Court of Appeal case related to the £2.95 million sale of a residential property in SW5 during 2007.

The agent claimed damages for breach of contract because its client had sold the property through another agent during a “sole agency” exclusivity period.

The agent had included the term “sole agency” in its contract, but it had failed to include a full explanation of that term, and it had also failed to include an obligation to pay damages in the event that the “sole agency” exclusivity period was breached by the seller. Because of this, the Court held that the agent was not entitled to recover damages.

In the Court’s view, damages for breach of contract were to be regarded as ‘remuneration’ for the purpose of the Act. The contract should have provided for the potential liability to pay damages as well as commission, and the circumstances in which those damages would be payable.

To have allowed the agent to recover payment under the contract without having provided these details would have defeated the object of the legislation, which seeks to ensure that estate agents’ contracts are clear and comprehensive in relation to the payment of remuneration.

Effective cause

For an agent to be entitled to a commission payment, the agent must show that he/she was the effective cause of the transaction that has completed. This stems from the principle that the agent must have “earned” the commission payment.

Even if the contract between the parties does not require the agent to be the effective cause, such a requirement is likely to be implied unless there are clear provisions excluding it.

If the agent introduced the party to the transaction that ultimately completes, it is more than likely that the agent will have been the effective cause. As Lord Neuberger put it in Foxtons Limited v Pelkey Bicknell [2008] EWCA Civ 419 “The notion that an estate agent can only recover commission if he introduces someone who becomes a purchaser as a result of the introduction sits well with the normal principle that an agent, whose commission is received on the basis of a successful transaction, must normally be the effective cause of the transaction if he is to receive his commission.”

Difficulties will often arise where more than one agent is involved or there is a change in the identity of the seller or the buyer.