Posted by Stephen Welfare, Partner
Contributing authors: Jack Pestill
10 Minute Topic: Estate Agent Fee Recovery
Land and buildings, whether domestic or commercial, continue to increase in value as demand outstrips supply. Sellers will 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 and low cost commissions and self-help, the hard working estate agent has never before been so under threat by competition and financial/economic pressures. Being able to recover his contractual fee in law and in practice must be of paramount importance.
The relevant law is a combination of the common law of contract, and direct legislation, in the form of the Estate Agent’s Act 1979 and 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).
The Estate Agent’s Act 1979 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 General Regulatory Chamber can investigate, make Prohibition Orders, and it may govern enforcement and appeal procedures. The Act lays down the minimum information that must be given to prospective clients, extended by the Estate Agents (Provisions of Information) Regulations 1991, and what personal interests must be disclosed, extended by the Estate Agents’ (Undesirable Practices) (No. 2) Order 1991.
The different contract claims and some potential pitfalls
An agent will be engaged under a contract which will specify, among other things, the basis upon which the agent is entitled to its fee. There are numerous pitfalls however that might prevent an agent from recovering its fee.
There are various forms of contractual arrangements, including:
- Sole agency – where a single agent is appointed to market a property for sale. The agent will only be entitled to its fee if it introduces, or (if the contract permits) has negotiations with, the eventual buyer while the agent’s agreement is in force.
- Sole selling rights – where a single agent is appointed to market a property for sale. In this case the agent will be entitled to its fee if there is any disposal of the property while the agent’s agreement is in force, regardless of who found the buyer or had negotiations with them. The agent may also be entitled to a fee if there is a sale after termination of his agency.
- Joint sole agency – where a vendor uses two (or more) agents to market a property for sale, and the agents agree to split the fee between them if one of them sells the property.
- Multiple agency – where a vendor uses a number of agents to market a property for sale and the vendor pays only the one who sells the property.
A failure to reduce to writing the terms of the agreement or include the necessary terms.
The Estate Agents Act 1979 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;
- 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 permission of the court.
Choosing a type of contractual arrangement that affords lesser protection to the estate agent.
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 onerous 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 be still entitled to a fee.
With a sole agency agreement, the original agent is entitled to a fee if it can show it was the effective cause of the eventual sale [Foxtons Ltd v Pelkey Bicknell and Another]. An effective introduction is one which 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 it was an effective cause of the eventual sale. Here it does not necessarily matter whether the agent proved to be the effective introduction [Dashwood v Fleurets].
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? It may be the agreement runs for a minimum period and the agent is 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 1 above). Assuming the contract provides that an agent can claim a fee upon 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 affect 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 which 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 Act and the Regulations and so ensure the client is given all due information, when and how. This will avoid confusion, disputes over commission fees and/or issues of enforceability.
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