Certain questions may frequently arise regarding the payment of a commission to property agents. For instance, under which circumstances may a commission be payable when real estate investors receive from property agents unsolicited introductions pertaining to real estate assets? When more than one agent introduces the same property, which agent should receive a commission? How can investors avoid multiple commission claims arising in connection with a same single transaction?
In France, answers to these practical questions can be found in the public policy provisions (“dispositions d’ordre public”) of the “Hoguet Law” No. 70-9 dated 2 January 1970 and Decree No. 72-678 dated 20 July 1972, substantially amended by the “ALUR Law” dated 24 June 20141.
Under French legislation, property agents are entitled to the payment of a commission only if they can fulfil certain strict requirements. It is important to bear these requirements in mind from the outset of any relationship with agents in order to ensure the legal certainty of any prospective real estate transaction and to avoid possible litigation.
1 - The property agent must hold a valid licence (“carte professionnelle”)
In order to obtain the licence, the applicant needs to justify his/her professional aptitude, to be registered with the Commerce and Companies Registry, and to have taken out a financial guarantee and a professional liability insurance policy and finally may not be subject to any disqualification or prohibition to deal or assist in transactions involving real estate assets owned by others.
It is important to note that the “ALUR Law” materially altered the procedure for obtaining this licence. Since 1 July 2015, the licence is issued by the President of the territorially competent Chamber of Commerce and Industry and is valid for a three-year period (before this date, the licence was issued by local authorities, i.e. the “Prefecture”).
This change could raise new difficulties in case of divergent interpretations of the “Hoguet Law” between the Prefecture and the different Chambers of Commerce and Industry across the country.
If the agent does not hold such valid licence, he/she will be deprived of any right to the payment of his/her commission.
2 - A written mandate must be executed in compliance with the provisions of the “Hoguet Law” prior to any negotiation
Mandates are strictly regulated as to their form and content.
First and foremost, the mandate must be made in writing. Also:
- The term of the mandate must be limited, and the mandate must provide for a specific expiration date. A mandate providing for tacit renewal is valid only if the renewal is limited to a specific period provided for in the mandate. According to case law, a mandate tacitly renewable for an unspecified period of time is deemed null (Cass. Civ.1st 18 October 2005 No. 02-16.046, Porcher vs. EURL Hall de Presse des Vallées).
- The mandate imperatively needs to be registered in chronological order in a specific bound book maintained by the agent called the “mandate register” (“registre des mandats”). The number of the mandate must also appear on the mandate.
- Terms governing escrow arrangements: failure to provide for the terms governing escrow arrangements will not invalidate the mandate; however, the agent shall not be entitled to manage any funds or to act as an escrow agent on behalf of the principal.
- The mandate must detail the actions that the agent covenants to undertake in order to perform the mandate, as well as the terms and frequency of the reporting to the principal.
- The mandate must specify the amount of the commission or its determination terms, as well as the identity of the person responsible for the payment of the commission.
- If the mandate contains an exclusivity/penalty clause or a clause under which a fee is payable by the principal, then the mandate will only be valid if such clause is approved expressly and is printed in a very legible font. In order for the mandate (which contains such type of clause) to be valid, a copy of the mandate must be provided to the principal.
Moreover, according to case law, the agent must be able to provide the original of the mandate in order to obtain payment of his/her commission.
It is necessary to sign the mandate before any work is actually started by the agent, even though we may note that such is not always the case in practice.
3 - The agent must actively participate in the negotiation of the transaction
French legislation distinguishes between two types of mandate: the non-exclusive mandate and the exclusive mandate.
The agent needs to participate actively in the negotiation in order to complete the transaction.
For example, if the principal has, for the same transaction, executed non-exclusive mandates with more than one agent, then according to case law, the commission only accrues to the agent whose participation led to the completion of the transaction, even though the buyer was introduced beforehand by another agent (Cass. Civ. 1st, 9 July 2002, No. 00-13.410). In such case, the applicable test is whether the services of the agent were essential and crucial to the completion of the transaction (or were the effective cause thereof). Courts assess, on a case-by-case basis, depending on the facts of each case whether the real estate agent’s services were the actual cause of the completion of the transaction.
An agent who is deprived of a commission can only seek damages in court if he/she can prove the fault of the seller or the existence between the parties of any agreement aimed at eliminating the agent’s commission. In addition, the mandate may lawfully provide for a penalty clause or a clause by which a fee would be payable by the principal, even where the transaction is completed without the agent’s support.
The agent with whom the exclusive mandate was entered into will be entitled to the payment of the commission, even though the negotiation was actually conducted by another agent.
4 - The transaction needs to be completed
The agent will only be entitled to his/her commission if the transaction is completed. If the sale/purchase or lease agreement is not executed, then the agent will not be entitled to the payment of his/her commission.
The agent has a duty to inform the principal within eight days following completion of the transaction, by registered letter with acknowledgement of receipt or by hand delivery against signature.
However, if the principal is acting in a professional capacity, the “Hoguet Law” provides that the mandate may contain a provision by which the principal agrees to pay a commission and to reimburse any fees advanced by the agent prior to completion of the transaction. In order to be valid, such clause must describe the mode of determination and payment of the sums due to the agent and is to be printed in a very legible font.
France differs from most countries across Europe, such as the United Kingdom, Germany and Spain, where the contents of contracts entered into with property agents are less highly regulated. For instance, in these jurisdictions, a verbal mandate entered into with a property agent can be enforceable. In France, any mandate entered into with an agent needs to comply with very specific provisions contained in the “Hoguet Law” in order to be enforceable. It is therefore important to carefully review the terms of any contract proposed by an agent so as to ensure that it complies with French legislation.
Indeed, failure to comply with the requirements imposed by the “Hoguet Law” may lead to criminal sanctions (e.g. payment of a fine) and/or civil sanctions (e.g. loss of the right to collect any commission).
Overall, the public’s general mistrust towards the property agent profession has caused Government authorities to increasingly regulate this profession. The hurdles faced by agents in order to obtain the payment of a commission are just one example of the specificity of French legislation. Money laundering and professional ethics will now become the most pressing topics to watch.