Commission fees: potential pitfalls for estate agents

A failure to put in writing the terms of the agreement or include the necessary terms

The Estate Agents Act 1979 and Estate Agents (Provision of Information) Regulations 1991 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
• the amount of the fee, or how it is calculated
• the circumstances in which other payments may also fall due under the agent’s contract
• the amount of these other payments, or an estimate
• 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 permission of the court.

Choosing a type of contractual arrangement that affords lesser protection to the estate agent

There are various forms of contractual arrangement that you can enter into with a vendor. These include, for example, sole agency, sole selling rights, joint sole agency and multiple agency.

A sole selling rights agreement affords you, the agent, the most protection in respect of your fees. Generally speaking, if there is a sale during the sole selling rights period, you get your fee, regardless of who affected 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, you will not be entitled to a fee. You 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 you 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 you draw your 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.

You should explain the payment terms to the client (including the circumstances when a fee will be payable and how the fee is calculated). You should keep evidence of having done so (whether a diary entry, attendance note, and/or follow up email). You should also 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. 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.

It is therefore vital that you keep detailed and accurate information in respect of your 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 you are entitled to an early termination fee. If so, this should be clearly explained at the outset.
• What happens if you introduce 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 section 1 above). Assuming the contract provides that you can claim a fee upon introducing a ready, willing and able purchaser, a fee may be due if you can show that 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 you are entitled to a minimum fee. If so, this should be clearly explained at the outset.

Conclusion

Getting your written contract right at the outset is key. An agent must comply with the Estate Agents Act 1979 and Estate Agents (Provision of Information) Regulations 1991 and so 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.