Land and buildings, whether domestic or commercial, continue to increase in value as demand outstrips supply.
Sellers naturally look to save money wherever they can, and avoiding an agent’s fee is occasionally seen as one possibility.
With the increase in the use of online marketing methods, low-cost commissions and self-help, estate agents are under threat from competition and financial/economic pressures.
Being able to recover a contractual fee in law and practice are inevitably then of paramount importance.
Relevance
The relevant law is a combination of common law of contract and direct legislation, in the form of the Estate Agent’s Act 1979 (the 1979 Act) and The Estate Agents (Provision of Information) Regulations 1991 (the 1991 Regulations).
Outside of any alternative dispute resolution process, the forum for recovery of unpaid fees is the county court, although claims over £100,000 may be brought in the High Court.
The procedure is governed by the Civil Procedure Rules 1998 (as amended).
Legislative context
The 1979 Act is the central Act that governs the activities of persons in business as estate agents.
It does not require estate agents to be licensed, nor does a person need to register in order to practice as an estate agent.
Under the Act, the First-tier Tribunal (General Regulatory Chamber) can investigate, make prohibition orders, and govern enforcement and appeal procedures.
The Act lays down the minimum information that must be given to prospective clients, extended by the 1991 Regulations, and what personal interests must be disclosed, extended by the Estate Agents (Undesirable Practices) (No 2) Order 1991.
Contract claims and potential pitfalls
An agent will be engaged under a contract which will specify, among other things, the basis on which the agent is entitled to its fee.
However, there are numerous pitfalls that might prevent an agent from recovering its fee.
A failure to reduce to writing the terms of the agreement or include the necessary terms
The 1979 Act and 1991 Regulations impose various requirements for an estate agency contract to be valid. These include, among others, the requirement to set out in writing at the outset the:
- circumstances in which the vendor will become liable for the agent’s fee;
- amount of the fee, or how it is calculated;
- circumstances in which other payments may also fall due under the agent’s contract;
- amount of these other payments, or an estimate; and
- the intention and effect of words such as “sole agency”, “sole selling rights” or “ready, willing and able purchaser”. Note that such definitions should include at least the minimum prescribed statutory wording.
If you fail to comply with the above, it is likely that your contract will be unenforceable without the permission of the court.
Different types of contract and the best protection
A sole selling rights agreement affords the agent the most protection in respect of its fees.
Generally speaking, if there is a sale during the sole selling rights period the agent gets its fee, regardless of who effected the introduction, including the vendor himself.
In contrast, with sole agency contracts, if the vendor introduces the buyer and negotiates the sale with the buyer directly, the agent will not be entitled to a fee.
An agent should take particular care in defining and distinguishing between the terms; sole agency and sole selling rights.
Where several agents market a property for sale, an agent has even less protection as they may be required to split the fee even if there is a sale (joint sole agency), or may lose the right to claim a fee if another agent sells the property (multiple agency).
If more than one agent is appointed, it should be made clear how and when the fee will be shared with the other agent(s).
Failing to draw any unusual terms to the attention of the client
It is important that an agent draws a client’s attention to any onerous or unusual terms in the agreement at the outset, before the agreement is signed.
Otherwise, the client may say they were not aware of them, so they were not incorporated into the agreement and the client is not bound by them.
The agent should explain the payment terms to the client (including the circumstances when a fee will be payable and how the fee is calculated).
The agent should keep evidence of having done so (whether a diary entry, attendance note, and/or follow up email). The agent should ensure the agreement is legible and easy to understand and that the client has had time to properly read it. The client should always sign the agreement.
Failing to keep proper records of marketing activity
Situations can arise where a sole agency or sole selling rights agreement is terminated; the property is remarketed via other agents and then sold.
However, in certain circumstances the original agent may still be entitled to a fee.
With a sole agency agreement, the original agent is entitled to a fee if it can show that it was the effective cause of the eventual sale (Foxtons Ltd v Pelkey Bicknell [2008] EWCA Civ 419).
An effective introduction is one that is likely to assist in the bringing of a purchaser to the transaction, and the effective introduction is the one that in truth brought about the sale.
With a sole selling rights agreement, the original agent is entitled to a fee if it can show that it was an effective cause of the eventual sale. Here, it does not necessarily matter whether the agent proved to be the effective introduction (Fleurets Ltd v Dashwood D [2007] EWHC 1610 (QB); [2007] 2 EGLR 7).
It is therefore vital that an estate agent keeps detailed and accurate information in respect of its marketing activity of a property including introductions, negotiations and the dissemination of marketing information.
This will be critical when claiming a fee after termination of the agreement.
Failing to plan ahead
The estate agency contract needs to be drafted at the outset with commercial considerations in mind. For example:
■ Who is liable for the fee? The contract should specify the persons liable, which might include the owner, the directors of any owning company, the person signing the agreement, etc, and the basis of such liability (for example, joint and several liability).
■ How long does the agreement last and how may it be terminated? The agreement may run for a minimum period and the agent might be entitled to an early termination fee. If so, this should be clearly explained at the outset.
■ What happens if the agent introduces a ready, willing and able purchaser? If the contract refers to a “ready, willing and able purchaser” it should be defined and include (at least) the statutory definition (see above). Assuming that the contract provides that an agent can claim a fee on introducing a ready, willing and able purchaser, a fee may be due if the agent can show at the moment the vendor pulled out the buyer was able to effect an immediate and unconditional exchange of contracts.
■ What happens if there is a sale for very little or no consideration? This might happen if a property is of very little value or there is a disposal of a business that has significant liabilities. The agreement may therefore want to provide that the estate agent is entitled to a minimum fee. If so, this should be clearly explained at the outset.
Getting your written contract right at the outset is key. An agent must comply with the 1979 Act and 1991 Regulations and ensure that the client is given all due information, when and how.
This will avoid confusion, disputes over commission fees and/or issues of enforceability.
Stephen Welfare is a partner and Jack Pestill is a solicitor in the dispute resolution team at Royds Withy King LLP
