Allyson Colby explains how an estate agent ended up out of pocket despite selling seven flats
Key points
- The court cannot imply a term in order to create a contract where none exists, since it cannot make contracts for parties
- Agreement about the events that will trigger liability for commission is essential to the formation of a contract between estate agents and their clients
Contracts for estate agency services can be made orally, or in writing, or by conduct. However, agents must comply with section 18 of the Estate Agents Act 1979 before entering into such contracts with clients. This requires them to inform potential clients in writing of the circumstances in which clients will be liable to pay their fees, or to make any other payments, and to state the amounts payable, or how such sums will be calculated. Failure to comply renders contracts unenforceable.
The court has the power to make an order enforcing a contract made in breach of section 18, but must first consider the degree to which the agent was culpable for the failure to comply with the requirements and any prejudice suffered by the client as a result. If the court then decides to allow the agent to enforce the contract, it can reduce the amount payable to compensate the client for any prejudice caused.
Wells v Devani [2016] EWCA Civ 1106; [2016] PLSCS 308 reminds us that estate agents must prove that there is actually a contract to enforce before the court can consider the effect of section 18. This is because, if there is no contract, there will be nothing to pay. Furthermore, it is not legitimate, under the guise of implying terms, for the court to make a contract for the parties, since this would put the cart before the horse.
The sale
The case concerned a development of 14 flats in Hackney. The developer sold six of the properties through a local agency and one was under offer. The remaining flats in the development were not selling. Things changed when another agent (Devani), introduced by a mutual acquaintance, appeared on the scene and contacted a housing association. The association made an offer for all the flats that remained unsold and, following completion of the transaction, Devani sent the developer an invoice for commission in the sum of £42,000 plus VAT. The sum claimed was in line with what the parties had agreed on the telephone, but the developer refused to pay.
It seems that the parties had focused on the amount payable to the agent and did not discuss what would actually trigger the developer’s liability to pay commission. To make matters worse, the agent had concentrated on finding a buyer, which he did within a week, and did not send his terms of business to the developer, as required by section 18, until after the housing association’s offer was made and accepted.
The trial judge decided that the parties had entered into a legally binding contract, but reduced the amount that the agent was entitled to recover by a third to compensate the developer for the agent’s failure to comply with section 18. Neither party was happy with the outcome.
No contract
In a judgment that some might consider harsh, the Court of Appeal agreed, by a majority, that the developer was not liable for the commission. Lewison LJ, who delivered the leading judgment, noted that there are many different forms of commission agreement and that events that might trigger an entitlement to commission include the introduction of a willing buyer, the exchange of contracts for a sale and purchase, and legal completion of a transaction. Furthermore, as the House of Lords explained in Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, there is no default rule.
Lewison LJ held that agreement on the event that triggers an agent’s entitlement to commission is essential to the formation of a legally binding contract for the provision of estate agency services. This is because it determines what an agent must do in order to be paid.
The bargain here was incomplete because the parties had not agreed the “commission entitling event”. Could the court imply a term to help the agent out of a hole? No; that was impossible because the court cannot imply terms into a contract if no such contract exists.
There was no legally binding agreement into which a term could be implied in this case and the court could not make a contract for the parties by implying even the most favourable term for the party against whom the purported contract was to be enforced. Indeed, such a term (which was that commission would become payable when the buyer completed the purchase) would be inconsistent with the written terms that the estate agent had belatedly supplied (stating that commission became due when the buyer exchanged contracts to buy the flats).
Section 18
Had section 18 been relevant, the court agreed that the question of whether it is just to enforce a contract is not to be decided by reference only to considerations frozen in time at the date when the contract was made or performed. Furthermore, culpability and prejudice must be considered together, and in the round.
The court noted that the agent had secured a quick offer at the asking price and that, in the events that occurred, the developer had avoided paying commission to anyone. On the flip side of the coin, the developer did not know exactly what his liabilities were or about his exposure to the risk of having to pay commission twice over (since he had previously signed a sole-agency contract with a local agent). These factors would have been sufficient to justify the reduction in commission ordered by the judge. However, because there was no contract between the parties, nothing was payable.
Allyson Colby is a property law consultant
