An estate agent lost a £2 million commission when a property sale was restructured as a company purchase.

We often come across cases where contracts do not mean exactly what they appear to say. Sometimes this is because the court implies a term into the contract to deal with a point which is not covered expressly. Sometimes a statutory provision affects the meaning, perhaps because the law has intervened to protect the interests of one of the parties. But in a recent case, the Court of Appeal held that a contract meant exactly what its words said and the result was that an estate agent lost a £2 million commission (plus legal fees).

The case concerned a building in central London where the agent, Mr Estafnous, had his offices. The owner agreed to pay the agent the commission in return for introducing a buyer. A contract provided for the commission to be paid on completion of the sale of the property to the intending buyer or any related or associated party. However, during negotiations it was agreed that the buyer would purchase the shares of the company which owned the property, rather than the property itself. As a result, the seller refused to pay the commission.

The agent accepted that, on a literal interpretation, the obligation to pay the commission was not triggered by the share sale. However, he argued that the commission agreement should be construed more loosely. He had introduced a buyer who had obtained effective control and ownership of the building and, he said, it should make no difference to his right to commission that the deal was structured as a share sale in order to effect a large stamp duty land tax saving.

The court accepted that the purpose of the company purchase was to acquire control of the building, but considered that to be of no relevance and inadmissible to the construction of the commission agreement.

Previous cases have established that the court has no power to improve on the document which it is called upon to construe. It cannot introduce terms to make it fairer or more reasonable. The court’s task is to discover what the document means, which is not always what the parties intended; it is the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably be available to the parties. Usually, if a document does not expressly provide for what is to happen when some event occurs, then nothing is to happen and if that causes loss to one of the parties then “the loss lies where it falls”. Sometimes, however, the reasonable person would understand the document to mean something else because the only meaning consistent with the other provisions of the document, read against the relevant background, is that something is to happen. It is only in those circumstances that the court can imply a term as to what is to happen if the event occurs. Implying a term in those circumstances would not be adding to the document, but just spelling out what it means.

In this case, however, the court decided that there was no room to imply a term as to what should happen if the transaction proceeded by way of a share sale. The parties simply did not think about what was to happen in those circumstances. Nothing more could be read into the agreement than what its words actually said.

The decision emphasises the importance of thinking through all the possibilities when agreeing and documenting a transaction and, so far as possible, providing how they are to be dealt with. In this case the agent’s solicitors had catered in their drafting for the possibility that the purchase might be made through an associated entity and for the possibility that the price might change during the negotiations but, unfortunately, they did not provide for the eventuality which actually occurred.

Source: Estafnous v London & Leeds Business Centres Ltd [2011] EWCA Civ 1157