Great Estates v Digby: A Cautionary Tale

Why is it a cautionary tale?

In recent years there have been a number of cases going through the Courts about estate agents’ rights to receive commission. These have often arisen out of the property boom with the Courts having to cast their minds back to a time when there were competing purchasers trying to buy a residential property. One such case is Great Estates v Digby however this differs from the typical case where the seller hadn’t read their agency agreement properly. In Great Estates the Court of Appeal had to grapple with what should be in an estate agency agreement and critically whether the Court had the power to declare the contract signed unenforceable. This necessitated a detailed consideration of the Estate Agents Act 1979 and the 1991 Regulations made under it.

What happened?

On 1 August 2007 Mr Digby signed an agreement with Great Estates for it to market 151 Old Brompton Road, South West London for him. The agreement was described as a “Sole Agency Agreement”. The asking price was £2,850,000.00 and on the first day of marketing Mr Digby had three offers including one at the asking price. That may have been that but for an encounter between Mr Digby and Mr Murray on 2 August 2007. Mr Murray offered £2,950,000.00 for the property and Mr Digby readily accepted. Mr Digby then brought in a rival firm of estates agents, Marsh & Parsons (apparently at Mr Murray’s suggestion), who prepared the Memorandum of Sale. The transaction exchanged contracts by mid-August and completed in September. On completion Mr Digby paid Marsh & Parsons a commission.

In reliance on its agency agreement Great Estates claimed that there was a breach of contract and that it was entitled to damages equal to the commission it would have received had it been allowed to pursue the sale negotiations.

What did Mr Digby agree with Great Estates?

The agreement that Mr Digby signed with Great Estates had a section headed “Sole Agency Fees” and “Fees Payable for Sole Agency”. These provided that 2% of the selling price would become due at exchange of contracts. There was also a section entitled “Sole Agency”. Under the terms of that section the phrase “sole agency” wasn’t defined. It also didn’t prevent Mr Digby from instructing another agent on the sale at the same time as Great Estates. This seemed to be because there was an obligation under the agreement to inform Great Estates of all enquiries or discussions with a prospective purchaser not made through them.

On a strict reading of the agency agreement one might expect Mr Digby to have been liable for damages but the Court found that the agreement had to be considered in light of section 18 of the Estate Agents Act 1979.

Estate Agents Act 1979

Section 18 obliges estate agents to give their clients certain information before entering into a contract with them for estate agency work including strict details of commission, other remuneration and fees for services other than estate agency work. In the case the judges found that this reporting obligation included telling their clients about liability to pay contractual damages for breach of contract.

There are also regulations made under the section, the Estate Agents (Provision of Information) Regulations 1991. They set out, in paragraph 5, three key terms linked to a client’s liability to pay commission which were commonly used but not always defined in agency agreements. These terms are “ready, willing and able purchaser”, “sole selling rights” and crucially, for this case, “sole agency”. The Regulations state that if the terms are used in an estate agency contract they are to be explained in the way set out in paragraph 5. In the agreement Mr Digby signed with Great Estates the explanation of “Sole Agency” didn’t come directly from the Regulations as amendments had been made to it.

What difference does it make?

This is important because section 18 also states that where a contract does not comply with the legislation it will not be enforceable unless there is a Court order making it valid. Great Estates made the appropriate application in the case and so the Court had to consider whether to dismiss the application or reduce the commission by reference to the prejudice suffered by the customer.

In Mr Digby’s case the judges followed the trial judge in finding that Great Estates couldn’t enforce the contract under section 18. The assumption was that the trial judge felt that it was necessary to reduce or discharge the sum payable by way of damages in its entirety due to the prejudice suffered by Mr Digby as a result of Great Estates not complying with its statutory obligations.

What can Estate Agents do?

There are a number of lessons which can be learnt from the case:

  • review your standard agency agreement to ensure that the description of the terms in paragraph 5 of the 1991 Regulations match the wording you use;
  • review your standard agency agreement to confirm that all the different types of commission and other payments you may receive are set out in accordance with section 18 of the Estate Agents Act 1979 and that this includes contractual damages for breaches of the agreement;
  • consider using an industry standard agency agreement that is kept up to date.