If there
is one particular area of estate agency work which has always given rise to
difficulties in relation to commission, it is surely the sale or other transfer
of small businesses. It is axiomatic that, in order to qualify for commission,
an estate agent must bring about whatever transaction is stated in the agent’s
terms of engagement.
The problem
with this kind of work is that, while the agent’s terms may well have been
drafted with a freehold sale in mind (hence references to ‘purchasers’,
‘exchange of contracts’, ‘completion’ and the like), persons acquiring a small
business frequently enter into some other arrangement with their ‘vendor’. They
may, for instance, take a lease of the premises (either with or without a
premium), or they may purchase the bricks and mortar at an artificially low
price (compensated for by a high payment for fixtures and fittings, stock
and/or goodwill). Or, if the business is carried on by a company, they may
simply purchase all or a majority of its shares (in which case the ownership of
the property itself does not change hands at all). In all such situations, the
crucial question is whether the agent’s terms of business, as properly
interpreted, provide for the payment of commission on the event which has in
fact occurred.
requirements
The recent
case of Dowling Kerr Ltd v Scott [1996] EGCS 177 is a good
example of this type of problem. The defendant was the owner of a terraced
property in Harrogate consisting of a shop on the ground floor and living
accommodation over, where he carried on the business of a newsagent and a café.
In March 1992 the defendant, who wished to dispose of both the property and the
business, instructed the plaintiff agents and, following their inspection of
the premises, an agreement drawn up by the agents was signed by both parties on
May 20 1992.
This
agreement, which gave the agents sole selling rights, was expressed to be for
six months initially and to continue thereafter unless determined by either
side on 14 days’ notice. The crucial terms of the commission agreement were as
follows:
1 The agents’ fees would become payable ‘when either a sale is made
to a purchaser or a ready, willing and able purchaser is found’.
2 The fees would be calculated on the eventual sale price of the business
(however apportioned between goodwill, fixtures and fittings, leasehold or
freehold). The various percentages (of freehold sale price, leasehold premium
and first year’s rent) were all stated. In the event that commission became
payable, there would be a minimum fee of £3,000.
3 No fees would be payable in respect of transfer of stock in trade.
4 Since the agreement contained the terms ‘sole selling rights’ and
‘ready, willing and able purchaser’, the plaintiffs, as they were required to
do by the Estate Agents (Provision of Information) Regulations 1991, provided a
definition of each of these terms. These definitions followed the wording laid
down in the regulations.
As
originally drafted, the agreement clearly contemplated that the property would
be disposed of by way of a lease (the agents suggested 21 years) at a premium
in excess of £50,000. Between May and November 1992, however, the defendant
wavered between this course of action and the alternative of a sale of the
freehold at about £135,000 and, with each change of mind, the agency agreement
was duly amended.
In February
1993, without ever having terminated the plaintiffs’ sole selling rights, the
defendant disposed of his business by way of a 12-year lease, taking no premium
but selling the fixtures and fittings to the tenant for £1,300 and the stock
for £1,700. On learning of this transaction, the plaintiffs immediately claimed
to be entitled to their minimum fee and, when this was not forthcoming, brought
legal proceedings to recover it. Their claim succeeded first before the
district judge, who held that there had been a ‘sale’, albeit of only the
fixtures and fittings. On appeal, the agents also satisfied the county court
judge, on the somewhat different ground that the commission clause comprehended
letting arrangements as well as outright sales. The defendant thereupon
appealed further.
a sale
In allowing
the appeal, the Court of Appeal ruled that the plaintiffs, by incorporating the
statutory definition of ‘sole selling rights’ (as they were of course obliged
to do), had effectively made that definition part of their commission terms. In
order to qualify for their fees, the agents must accordingly come within what
the draftsman of the regulations understood by this term. As Morritt LJ put it:
‘It is necessary to satisfy the first part of Clause 6 in order to generate a
right to commission and that requires that it may be said that unconditional
contracts for the sale of the property have been exchanged. ‘The property’, on
the construction of this agreement, appears to me to be the premises. What was
to be sold was either the freehold or a 21-year lease at a premium. There was
also to be sold as ancillary to it, but not separately, the fixtures and
fittings and the stock at valuation. What I cannot accept is that whilst a sale
of the property with the ancillaries, for instance the fixtures and fittings,
would generate a right to commission, the sale of the fixtures and fittings
alone can generate a right to commission when there is no sale of the property
for either of the interests which the contract evidently contemplated.’
the tale
It would seem
in the light of this decision that any estate agent operating in the business
transfer field should check his commission terms and ensure that these cover
each and every potential transfer of the business, whether the property is
included.
The
definitions laid down by the 1991 Provision of Information Regulations simply
do not apply to such deals and so, unless special terms are added, the agent
runs the risk of being frozen out, despite having produced a deal which the
client is quite happy to accept.
