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Legal implications of a High Court ruling on agent's commission agreements

publication date: Dec 19, 2007
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author/source: David Smith
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A recent case in the High Court has brought the issue of estate agent’s commission arrangements to the fore and the decision will also be applicable to agency fees charged by lettings agents.

Commission and Effective Cause

In the case of Fleurets Ltd v Dashwood [2007] 34 EG 84, Fleurets were engaged to act as an agent in the sale of a commercial property on a sole agency basis. The relationship between them and Ms Dashwood broke down and she ignored their letters in which they introduced a number of prospective purchasers including a Mr Akhter.

Ultimately Ms Dashwood terminated her agreement with Fleurets and the property was placed with another agent. Mr Akhter approached the new agent again and ultimately the sale was concluded through this agent. Fleurets sued for their commission.

It is a common principle of agency that an agent is not entitled to a fee unless they are the ‘effective cause’ of the transaction. This is a poorly defined principle in England and Wales law and each case will turn on the facts.

However, in this case Fleurets had incorporated a clause in their terms of engagement with their client which set out that Fleurets were to be paid if unconditional contracts for the sale of the property are exchanged after the expiry of the period during which Fleurets have sole selling rights but to a purchaser who was introduced to you during that period whether by us or any other person including yourself or with whom we had negotiations about the property during that period.

This clause meant that there was absolutely no requirement for Fleurets to be the ‘effective cause’ of the transaction although, in this case, the Court ruled that this was also true.

It is notable that the Court was entirely uninterested in the fact that Ms Dashwood had paid the other agent for its work and was effectively being forced to pay twice for the same deal. Although Ms Dashwood appealed to the High Court it remained satisfied with and confirmed the original ruling.

What does this mean in practice? First, it is important that agents have a clause in their Terms of Business setting out that they are entitled to charge commission in any situation where they introduce a tenant or purchaser or where that individual is introduced during the term of their engagement. Second, agents should keep their eyes open for situations where they are disinstructed unexpectedly, especially after they have introduced a tenant or purchaser. If the deal goes ahead and the agent is cut out then they may well be able to claim a commission.

Finally, agents should be wary where they are instructed where a previous agent has previously been involved as if they subsequently let or sell the property to individuals who were previously introduced by the other agent then the client could well be liable for fees to both agents.

Although the issue was not raised directly both Judges commented that they did not consider that the clause used by Fleurets was unfair and it therefore seems that it would not fall foul of the Unfair Terms in Consumer Contract Regulations 1999 (UTCCR).

Sale and Let

It is not uncommon for Lettings Agents to charge a commission in situations where a tenant they have introduced subsequently buys the property from the landlord. This has been the cause of a great deal of controversy of late. Landlords have increasingly started to resist such fees and have frequently threatened to contest the matter in Court on the basis of the UTCCR. Generally, agents have taken the view that it is better to back off in these cases rather than risk a judgement which will prevent such a charge being levied across the board. It is worth noting, however, that the matter was considered in the case of Tomlin v Millar in the nineteenth century.

In this case an agent sought to charge a commission on the sale of a property to a tenant on the basis that they were the ‘effective cause’ of that transaction. The Courts declined to support this view on the basis that there was an insufficient causal relationship. However, in that case there was no contractual provision that sought such a payment. Where such a clause does exist in an agency agreement the decision in Fleurets suggests that the Courts would lean towards the view that it should be enforced.

Although such a clause may still be deemed by the Courts to be unfair, after the Fleurets decision and the fairly tough attitude of the Court in enforcing the agency contract it is not as certain as it might previously have been that the Court would not side with the agent.

David Smith, PainSmith Solicitors, email: david@painsmith.co.uk

ACTION ITEMS

● Have an appropriate clause in the agency agreement to ensure commission is payable even after disinstruction where the party is introduced during the instruction period
● Keep an eye on clients who disinstruct without good cause.
● Keep under review the enforcement of a commission on sale clause.
● When accepting an instruction where the matter has previously been with another agent take care with the applicants and be sure they have not previously been to the other agent.