In this month’s potted guide, Jonathan Seitler QC guides practitioners through the basics of the law relating to recovery of estate agent’s commission
Estate agent’s commission checklist
- What hurdles does an estate agent have to clear in order to prove a right to payment?
- Hurdle 1: Is there a contract?
- Hurdle 2: What are the statutory requirements?
- What information must be given?
- What happens to the claim for commission if an estate agent fails to comply with the statutory obligations?
- Hurdle 3: What makes an agreement respond to a commission-triggering event?
- What is the nature of a “trigger”?
- Hurdle 4: How does the estate agent prove that its efforts are the “effective cause” of the transaction?
What hurdles does an estate agent have to clear in order to prove a right to payment?
In most cases the agent has to clear four hurdles: the first is to show a contract for the payment of commission with the client (usually the vendor of the property). The second is to show compliance with the statutory information required to be given relating to commission. The third is an agreement with the client, be it vendor or purchaser, which pre-dates (and then responds to) a commission-triggering event (usually a sale). The fourth is to prove that its efforts are the “effective cause” of the transaction.
Hurdle 1: Is there a contract?
The starting point in any dispute for payment of an estate agent’s commission is for the estate agent to prove that a contract exists between the agent and the vendor (or purchaser). If there is no contract, nothing is payable to the agent. A contract can be in writing or it can be oral or it can be implied from the conduct of the parties.
It was stated in RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] UKSC 14 that:
“The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.”
Hurdle 2: What are the statutory requirements?
Because (i) estate agents traditionally charge fees not by the hour or on the basis of a profit margin on cost, but by reference to success, and (ii) such fees have traditionally been at a level which, whether or not fixed by reference to a percentage, are in absolute terms quite large, statute has intervened to ensure that those who do successfully acquire property with the assistance of an estate agent are clear about the fees to which they are being exposed.
The provisions of the Estate Agents Act 1979 (“the 1979 Act”) and the Estate Agents (Provision of Information) Regulations 1991 (“the 1991 Regulations”) apply to any estate agency contract and require certain information to be given.
What information must be given?
Under section 18 of the 1979 Act, an estate agent must provide a client with certain written information before entering into any estate agency contract. The information must be: (i) particulars of the circumstances in which the client must pay remuneration to the estate agent for carrying out estate agency work; (ii) the amount of that remuneration or, if the amount is unknown, how it will be calculated (ie whether on a percentage or flat-fee basis); (iii) particulars of any payments that do not form part of the estate agent’s remuneration for carrying out estate agency work and the circumstances in which those other payments will become payable; and (iv) the amount of those other payments or, if the amount is unknown, an estimate of the amount and how it will be calculated.
There are also requirements under the 1991 Regulations for certain terms, such as “sole agency”, “sole selling rights” and “ready, willing and able purchaser”, to be defined in such pre-agreement documentation. The schedule to the 1991 Regulations sets out definitions of these terms, for use in estate agency agreements.
What happens to the claim for commission if an estate agent fails to comply with the statutory obligations?
A failure to comply with section 18 of the 1979 Act renders a contract unenforceable, although the court does have the power, pursuant to section 18(6), to permit a contract to be enforced at its discretion. Whether that discretion is exercised in favour of the estate agent will depend on the prejudice caused to the client by, and the estate agent’s degree of culpability for, the failure to comply with the information obligations.
One circumstance in which an agreement that does not comply with section 18 might nevertheless be enforced is where the client does not suffer prejudice from the estate agent not having set out the information required in writing because that client has seen such terms regularly, as part of a course of dealing: see Benhams Ltd v Kythira Investments Ltd and another [2004] EWHC 2973 (QB); [2004] PLSCS 307.
The court can also order the client to be compensated for prejudice caused by the estate agent’s failure to comply with the information obligations, by reducing or discharging any sum otherwise payable by the client: see Great Estates Group Ltd v Digby [2011] EWCA Civ 1120; [2011] 3 EGLR 101.
Hurdle 3: What makes an agreement respond to a commission-triggering event?
A commission agent only earns a fee if the agreement which pre-dates it describes an event which triggers the fee and that event later occurs. In the field of estate agents, this was spelt out and applied by the House of Lords in the leading case of Luxor (Eastbourne) Ltd v Cooper [1941] AC 108. See also MSM Consulting Ltd v United Republic of Tanzania [2009] EWHC 121 (QB).
It all therefore depends on when and whether the trigger event has occurred. The agreement to pay commission must come before the event which triggers that commission to avoid the “consideration” being past. That is why unsolicited information about a property cannot give rise to a commission even if it leads the client to purchase that property. The agreement must be in place first: see, for example, Lady Manor Ltd v Fat Cat Café Bars Ltd [2001] 2 EGLR 1.
What is the nature of a ‘trigger’?
Familiar triggers include: the introduction of a person ready, willing and able to complete; exchange of contracts; or completion of a sale. Under a traditional multi-agency agreement, where the agent is one of several agents, the trigger is usually the introduction of a purchaser who completes; in a sole-agency agreement, it is usually the occurrence of the sale during the period of the sole agency, however that sale occurs, other than by the actions of the vendor.
In most cases, the trigger event is the unconditional exchange of a legally binding contract. Following the making of a binding contract, commission is payable even if the client breaches the contract and decides not to complete the sale: Alpha Trading Ltd v Dunnshaw-Patten Ltd [1981] 1 QB 290. Of course, a contract liable to be set aside for mistake or misrepresentation will not be legally binding for these purposes: Peter Long & Partners v Burns [1956] 1 WLR 1083.
There may, however, be a different outcome where it is the client itself making the misrepresentation and rendering the sale contract void: in such a case the estate agent might well have a claim for damages for having lost out on its commission (see John D Wood (Residential & Agricultural) Ltd v Craze [2008] 1 EGLR 17).
There will certainly be a different outcome where the trigger is the introduction of a purchaser “ready, willing and able” to complete where the client is the reason for the sale not proceeding. In such a case it is enough if the estate agent can show that a purchaser has made an unconditional offer to purchase: see Christie Owen & Davies Ltd v Rapacioli [1974] 2 All ER 311.
Hurdle 4: How does the estate agent prove that its efforts are the ‘effective cause of the transaction’?
The general rule, in most usual cases where the estate agent’s commission is based on a percentage of the purchase price, is that unless the express terms of the contract clearly state otherwise, an estate agent must prove (the burden being on the agent – see Chasen Ryder & Co v Hedges [1993] 1 EGLR 47) that its efforts are the effective cause of the commission-triggering event: Foxtons Ltd v Bicknell [2008] EWCA Civ 419; [2008] 2 EGLR 23.
Accordingly, even if the contract between the estate agent and the client does not expressly require the agent to be the effective cause of the transaction, such a requirement is likely to be implied. The law views an implied term to that effect as likely to minimise the risk of a vendor being liable for two estate agents’ commission: see The County Homesearch Co (Thames & Chilterns) Ltd v Cowham [2008] EWCA Civ 26; [2008] 1 EGLR 24.
Further, as Lord Neuberger held in Foxtons v Bicknell, an express reading of the expression “a purchaser introduced by us” as meaning “a person who becomes a purchaser as a result of our introduction” is both sensible and consistent with the intent of the 1991 Regulations
To be an “effective cause” of the transaction, there must be a causal link between the agent’s efforts and the coming into existence of the transaction. The agent must show that it actually brought about the triggering event. Normally, if the agent introduces the successful purchaser to the transaction, that agent is likely to be regarded as the effective cause.
Leading authorities
Luxor (Eastbourne) Ltd v Cooper [1941] AC 108
Alpha Trading Ltd v Dunnshaw-Patten Ltd [1981] 1 QB 290
Chasen Ryder & Co v Hedges [1993] 1 EGLR 47
Foxtons Ltd v Bicknell [2008] EWCA Civ 419; [2008] 2 EGLR 23
John D Wood (Residential & Agricultural) Ltd v Craze [2008] 1 EGLR 17
MSM Consulting Ltd v United Republic of Tanzania [2009] EWHC 121 (QB)
Great Estates Group Ltd v Digby [2011] EWCA Civ 1120; [2011] 3 EGLR 101
Useful resources
Chitty on Contracts 32nd edition (2015), chapter 31 (Sweet & Maxwell)
Law of Estate Agency, John Murdoch (Estates Gazette)
Seitler’s leading practitioners
Charlotte Bijlani, Norton Rose Fulbright
Craig Emden, Howard Kennedy
Siobhan Jones, Farrer & Co
Mark O’Shea, Rawlison Butler
Stephen Schneider, Blake Morgan
Ally Tow, Boyes Turner
