Estate agents take note: the different forms of agency contracts explained
Occasionally, however, there is uncertainty, even among well-established estate agents, as to what kind of contractual arrangements can exist, or what terms of art such as “sole agency”, “sole selling rights agency”, “joint sole agency” or “multiple agency” actually mean. There is also uncertainty as to what a contract should actually say. In this article I have set out to explain these terms, and offer some advice on their use.
This is an arrangement where a single estate 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.
It follows that if the vendor himself introduces the buyer and negotiates the sale with the buyer directly, the estate agent will not be entitled to its fee, unless the contract expressly provides for this – see below under sole selling rights.
During a sole agency agreement, the agent will be the sole agent instructed by the vendor to market the property for sale. During this period, the agent will be entitled to a fee even if another agent were to introduce the buyer to the property, although the vendor may also have a liability to the agent who made the introduction.
We’ve seen scenarios where an agent introduces a potential buyer during its sole agency period, but the sale does not go ahead and the sole agency agreement is terminated. If the property is then marketed via other agents and eventually sold to the purchaser introduced by the original agent, that 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]. There has been much said and written about what is an effective introduction which I do not deal with in this article; suffice to say that an effective introduction is one which is likely to assist in the bringing of a purchaser to the transaction [Nahum v Royal Holloway and Bedford New College], and the effective introduction is the one that in truth brought about the sale.
Sole selling rights agency
This is an arrangement where a single estate agent is appointed to market a property for sale. That estate 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.
Sole selling rights agreements offer greater protection to estate agents in respect of their fees. The rules are simple: if there is a sale during the sole selling rights period, the agent gets its fee.
If an agent is instructed under a sole selling rights agreement then, for the duration of the sole selling rights period, only that agent can market the business for sale. It is entirely possible, of course, that a sole selling rights agreement may be terminated, and that a vendor may then go on to instruct a new estate agent to market the property for sale. However, depending on the wording of the original contract, the original agent may still be entitled to a fee if they introduced or had negotiations with the eventual purchaser while its sole selling rights agreement was in force, even though the new agent could be said to have made the effective introduction. Provided that the old agent had made an effective introduction, it does not matter whether it proved to be the effective introduction [Dashwood v Fleurets].
You should take particular care in defining and distinguishing between sole agency and sole selling rights, and to clearly explain the implications to the client.
Joint sole agency
This is an arrangement where a vendor uses two (or more) estate agents to market a property for sale, and the agents agree to split the fee between them if one of them sells the property.
This arrangement can appeal to vendors, particularly when the property market is flat or when the prospects of selling a particular property are lower than usual. By using more than one agent, more potential buyers are likely to become aware of the property.
With the prospect of having to split their fee, however, agents will usually ask for a higher fee at the outset than they might otherwise claim under sole agency or sole selling rights agreements.
Your written contract should say very clearly what you’ve been instructed to do. In particular, it needs to spell out what triggers your fee and how this fee will be shared with the other agent.
This is an arrangement where a vendor uses a number of estate agents to market a property for sale and the vendor pays only the one who sells the property.
Again, this arrangement can appeal to vendors. Not only will more potential buyers become aware of the property, but also the competition between agents may generate higher offers.
With the prospect of no fee if someone else sells the property, however, agents will usually ask for higher fees at the outset than they would otherwise claim under sole agency, sole selling rights or even joint sole agency agreements.
Again, your written contract should say very clearly what you’ve been instructed to do. In particular, it needs to spell out the circumstances when your fee becomes due.
So what should the contract say?
From a legal perspective, the Estate Agents Act 1979 and the Estate Agents (Provision of Information) Regulations 1991 impose various requirements for an estate agency contract to be valid. These include, among other things, 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.
From a commercial perspective as well, it is crucial your estate agency contract contains all the necessary terms in addition to the statutory requirements. Some of the most basic considerations will be:
- who are the parties? and how is the property defined?
- on what basis is the agent instructed (sole agency, sole selling rights agency, etc.)? are these terms sufficiently defined?
- when does the agreement start? and how may it be terminated?
- what is the duration of the agreement? and is there a minimum term?
- if so, is there any fee payable upon early termination? How much?
- in what circumstances will the agent’s fee become payable? and will there be any future liability for the vendor after the termination of the agreement?
- who is liable for the fee? and how is the fee calculated?
- are there any other hidden fees? and how much are they likely to be?
- how may the agreement be varied?
Getting your written contract right at the outset is key. This will avoid confusion, disputes over commission fees and/or issues of enforceability.