A battle over agents' commission

First published in Estates Gazette on 2 March 2013

A recessionary climate inevitably causes a significant slowdown in the property market both in terms of the number of transactions taking place and the pace at which transactions are completed. This slowdown makes life more of a challenge for a property agent as the ability to earn commission is reduced.

This 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 researching a property, advising on its financial prospects and negotiating terms for a deal.

While an agent may introduce a buyer or a seller to the possibility of a property deal, there is much greater chance in this market for an actual deal that takes place to be fundamentally different from the one 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. Alternatively, the price of the property may change significantly, depending on 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.

The starting point in any dispute over 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 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. Most agents will have their own agency terms but it should not be assumed that these are beyond 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 (the 1979 Act) and the Estate Agents (Provision of Information) Regulations 1991 (the 1991 Regulations) will apply to any agency contract.

Section 18 of the 1979 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 1991 Regulations further require 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 recent example of an agency contract being unenforceable because of a breach of the terms of the 1979 Act is Great Estates Group Ltd v Digby [2011] EWCA Civ 1120; [2011] 3 EGLR 101 concerning the sale of a £2.95m 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 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. As a result, the Court of Appeal 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 1979 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.

For an agent to be entitled to a commission payment, the agent must show that he or 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 Ltd 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.” [24]

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.

In MSM Consulting Ltd v United Republic of Tanzania [2009] EWHC 121 (QB) the buyer’s agent claimed commission on the £6m purchase of 3 Stratford Place in W1.

MSM introduced the property to the representatives of Tanzania, conducted viewings, provided agency terms (which were not signed) and continued to try to interest them in the acquisition of the property for two years. No sale resulted and it was believed that the property was to be sold to another purchaser.

On realising that the property was still available, Knight Frank intervened. They put in place a tight timetable for the exchange of contracts and payment of deposits to ensure that Tanzania acquired the property. They were paid commission, and MSM were not.

The High Court held that there was no contract with MSM. All of MSM’s activities constituted attempts to win a contract, rather than evidence that one existed. Even though assurances were given at one point that MSM’s terms would be signed, they were not.

The court also expressed the view that an effective cause requirement would have been implied into the contract in order to make commercial sense of it and so that Tanzania would not be liable to pay commission twice. MSM would not have been the effective cause in any event. Although MSM introduced Tanzania to the property, it was Knight Frank, not MSM, who managed the deal through to completion.

The court held that no commission was payable on a quantum meruit basis (ie that MSM had earned it even though there was no contract) because MSM’s work was done in the expectation of winning a contract and they had given no prior indication that they intended to charge on that basis.

In Glentree Estates Ltd v Favermead Ltd [2010] EWCA Civ 1473; [2011] 1 EGLR 23 the seller’s agent claimed commission on the second of two successive sales of a property on Kensington Palace Gardens. The first sale was for £50m and included an overage provision whereby the first seller was entitled to a share of the profit on any resale. The second sale was for $105m (£67.8m).

According to Glentree, it was entitled to commission of £1m on the resale by virtue of their agency agreement with the first seller. The court had to consider whether to imply an effective cause requirement into that agency agreement.

The agreement provided for commission on the resale to be payable by the first seller on the introduction of a buyer who subsequently purchased the property. The eventual buyers under the resale were indeed introduced by Glentree, but Glentree did nothing thereafter to suggest that they were the effective cause of the transaction. The negotiations were conducted through a third party.

The Court of Appeal declined to imply an effective cause term because the contract also provided that 20% of the commission would be payable even if the first seller found a buyer himself. Were an effective cause term to have been implied, Glentree would have been entitled to 20% of the commission if they did nothing, but no commission at all if they actually introduced a buyer. It would therefore have made no sense to imply an effective cause term. Glentree was entitled to its commission in full on the resale.

A change in the nature of the transaction may also prevent the agent from being the effective cause. In Estafnous v London & Leeds Business Centres Ltd [2011] EWCA Civ 1157, Mr Estafnous entered into a seller’s agency contract providing for £2m in commission on the sale of Regent House in W1. Instead of acquiring the property interest, the buyer used a related company to acquire the ultimate holding company of the seller. Beneficial ownership of the property was thereby acquired, but Regent House remained vested in the same entity.

The Court of Appeal refused to imply a term whereby Mr Estafnous would be entitled to commission on the transfer of the holding company. The parties could have considered the possibility of a transfer of the holding company and drafted accordingly, but they did not. The transaction that eventually took place was different from that which was provided for in the contract, and no commission was payable.

Finally, in Christie Owen & Davies plc v Raobgle Trust Corporation [2011] EWCA Civ 1151, the sole selling agent introduced a buyer (Mr Kimitri) for a property in Weston-Super-Mare, but due to funding problems the transaction stalled. The property was eventually sold to a Mr Pavlou. At the time when the sale agreement was entered into, Mr Pavlou intended to go into partnership with Mr Kimitri and another and develop and run the property as a commercial venture (which they subsequently did).

It was held that the partnership was liable to pay commission, because the definition of “purchaser” under the contract included anyone acting on behalf of the eventual purchaser, and was therefore wide enough to include Mr Pavlou acting on behalf of the unformed partnership.

• It is better to agree a written contract detailing the terms on which any commission will be payable. Oral contracts are more likely to lead to litigation.
• Check that the statutory requirements have been met in full. If they have not been complied with, the contract may be unenforceable.
• No matter how much work has been done by the agent, commission may not be payable if the agent is not the effective cause of the transaction that eventually takes place.
• It may be difficult for an agent to show that it is the effective cause of a transaction where key terms of the transaction introduced or negotiated by the agent have changed, such as the nature of the transaction, the price or the parties to the contract.