Legal notes Appeal Court throws light on estate agency regulations
| Key points |
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| An estate agent’s terms of business must warn the client of potential liability for remuneration |
| “Remuneration” includes potential liability to pay damages for breach of sole agency |
Once upon a time, in parts of the country at least, people who wished to sell their house would put it in the hands of more than one estate agent, leaving those agents to compete with each other to find a purchaser. So long as the client’s agreement with each of the agents was on a “no sale, no fee” basis, this meant that the client would only be liable to pay commission to the successful agent; the others would be left to lick their wounds and hope for a better outcome from their next instruction.
Of course, the “multiple agency” scenario described above was only ever part of the picture. In some areas, “sole agency” was the norm. Under this system, the client would commit, at least for a specified period, to a single estate agent, who would be given the exclusive right to sell the property. [Whether the client was prevented from selling privately, or merely from selling through the medium of another agent, would depend on whether the agreement was for “sole agency” or the more extensive “sole selling rights”.]
It is important to appreciate that, at common law (before the waters were muddied by the poorly drafted Estate Agents (Provision of Information) Regulations 1991), a sale by a client in breach of a sole agency agreement did not entitle the sole agent to commission. How could it, when the agent had by definition not brought about the sale needed to trigger the right to commission? Instead, the sole agent’s claim was one for damages, based on the client’s breach of contract in selling the property through a prohibited channel. And, since the effect of this breach was to deprive the sole agent of the chance of earning commission, the damages were made to reflect a court’s assessment of that chance – anything up to 100% of the potential commission.
The statutory dimension
This clear and simple legal analysis (simple, that is, unless one embarks on the task of identifying precisely what contractual service the sole agent gives return for the right of exclusivity!) provides an interesting background against which to consider the statutory controls introduced by the Estate Agents Act 1979. Section 18 of that Act makes it compulsory for an estate agent to provide the client with certain information about the client’s potential liability to pay the agent. Non-compliance by the agent carries various sanctions; one of these is to render the agent’s claim to payment unenforceable without a court order, which may be refused where the agent’s “culpable” failure has caused “prejudice” to the client.
The information required by section 18 includes, most importantly, the circumstances in which the agent will become entitled to “remuneration” for carrying out estate agency work and the amount of that remuneration. It also includes details of any other payments to which the agent will or may become entitled. This would cover, for example, advertising and other expenses incurred by the agent, in cases where these are not simply part of the agent’s commission, but are to be paid separately by the client.
The Estate Agents (Provision of Information) Regulations 1991 enhance and extend section 18 in two very important respects. First, it is made clear that the agent must provide the required information in writing and at a very early stage in the client-agent relationship. Second, an agent whose terms of business include certain hallowed phrases (including “sole agency” or “sole selling rights”) must give the client a written explanation of the meaning of the relevant term – the Regulations themselves provide such an explanation, which the agent is expected to use so far as possible.
What is interesting about the definition of “sole agency” contained in these Regulations is that it defines the agent’s entitlement, where the client sells the property in breach of the sole agency, as “remuneration”. Such confusion of thought on the part of the statutory draftsman (surely “remuneration” means a payment for services rendered?) can only cause problems of interpretation, and such problems have duly arrived in the Court of Appeal.
The meaning of the 1991 Regulations
The case of Great Estates Group Ltd v Digby [2011] EWCA Civ 1120; [2011] 43 EG 104 (CS) concerned the sale of a London property in 2007. On 1 August the defendant owner signed a “sole agency” agreement with the claimant who, on the same day, introduced a purchaser at the asking price of £2.85m.
The following day the defendant met another prospective purchaser, agreed to sell the property to him for £2.95m, and paid commission to another firm of estate agents for their involvement in this transaction. At this point the claimants brought an action against the defendant based on their sole agency agreement.
In considering, first, the meaning of the claimant’s standard terms of business, the Court of Appeal noted that these (unlike the statutory explanation of sole agency) did not state that the client would be liable to pay remuneration if the client entered into a contract of sale “with a purchaser introduced by another agent”. Why on earth an agent would leave out this phrase, which is of course the very essence of sole agency, is not clear. However, two members of the Court of Appeal expressed serious doubts as to whether, without it, the contract was really one of sole agency at all (the third ruled that, since the phrase “sole agency” appeared on numerous occasions, the contract did have the desired effect).
Whatever the true construction of the agreement, its drafting forced the claimant to frame its claim as one for damages rather than commission. The question which then divided the court was whether the 1991 Regulations required the agent to explain to the client that, if the sole agency was breached, the client would be liable to pay damages. The minority judge held that there was no such requirement, in that damages could not be regarded as either “remuneration” or other sums becoming payable “under the contract”. However, the majority were not prepared to accept what would amount to a major loophole in the statutory protection for consumers (being informed by estate agents as to their potential liabilities) and held that the agents were indeed in breach of their obligations.
All three judges agreed that, if the agents were indeed in breach, the prejudice to the client (who would be unaware of a potential liability to pay commission to one agent and damages to another) was such that the agents’ claim must be dismissed.
John Murdoch
