A real estate agent is entitled to sales commission if they sell a property. But what if one agent introduces a buyer, the buyer goes away, and another agent ends up selling the same property to that buyer? Must the seller pay sales commission to the first agent as well as to the second agent?

The Court of Appeal, Supreme Court of New South Wales has shed new light on this situation.

The decision isOuterbridge trading as Century 21 Plateau Lifestyle Real Estate v Hall [2020] NSWCA 205 (3 September 2020) (Beech-Jones J, Leeming JA and Emmett AJA agreeing).

Background

The Property– The property was relatively unique. It was a 55-acre property situated in Brooklet, NSW “having panoramic views of Lennox Head and the Byron Bay hinterland”. It had a prestige house and was “a working macadamia plantation with a number of thousands of mature trees”. The sellers had purchased the property in January 2008 and had paid $4.18 million.

The Agency Agreement– The sellers (the “Principal”) signed a “Sales Inspection Report and Open Selling Agency Agreement” with Century 21 Plateau Lifestyle Real Estate on 10 August 2015. Clause 3.1 provided for an agent’s commission of 2.2% of the final sale price to be payable as follows:

3.1 Remuneration – The Licensee shall be entitled to the remuneration … (where the Licensee is the effective cause of the sale):

(a) If a person has been effectively introduced to the Principal or the Property by the Licensee during the Agency Period … and that person … enters into a contract to purchase the property...

The agent’s estimate of selling price in the Agency Agreement was $5 million, the minimum price the seller wanted.

The Purchaser’s introduction by Century 21 –The purchaser contacted Century 21 on 4 December 2017. She conducted due diligence – the seller supplied soil tests, equipment lists, grower summary reports, a map, the irrigation licence and farm management agreement. 

On 21 December the purchaser offered $4.5 million. The seller counter-offered $4.8 million. The purchaser counter-offered $4.7 million. Theselleraccepted, but on 25 December withdrew their acceptance as the price was too low.

On 27 December, the purchaser attempted to contact Century 21to arrange a meeting with the seller but was told by the agent’s staff that the agent was overseas on holiday, that he would return in a few weeks, and that there was no one else who could attend a meeting.

The Court found that this left “the potential purchaser doubting the seller’s bona fides and concluding the transaction was over”.

The Purchaser’s introduction by Unique Real Estate – Unique Estates Australia were appointed to sell the property in November 2012. Their agency agreement had continued as an open (non-exclusive) agency. The property was to be offered for sale at a price of “$5 million plus”. They had shown the propertyto 12 potential purchasers since their appointment.

On 28 December 2017, the purchaser contacted Unique. After price negotiations, on 30 December 2017, the price was agreed at $4,913,000 for the land and $200,000 for the plant and equipment. This was $413,000 more than the sale price agreed in principle on 22 December.

Unique issued a sales advice on 2 January 2018. Contracts were exchanged on 11 January 2018 and completion took place on 15 March 2018. Unique received its sales commission.

The commission claim - Century 21 claimed $108,086 for sales commission from the sellers.

The primary judge decided that Century 21 “were not the effective cause of the sale of the Property and therefore under the agency Agreement they were not entitled to the commission on the sale of the property in circumstances where [Unique] …brought about the sale”.

The primary judge ordered the proceedings be dismissed with costs. Century 21 appealed that decision.

The Court of Appeal

The Court of Appeal focused on the two key phrases in clause 3.1, effective cause of the sale and effectively introduced.

The Court’s reasoning was as follows:

  • What does effectively introduced to the Principal mean? The Court decided that clause 3.1(a) required more than an introduction:“the mere introduction of a purchaser is usually … insufficient”. It must be effective: “Unless an ‘introduction” was the, or an, ‘effective cause of the sale’ then it was not an ‘effective introduction’.” [Judgment, paragraphs 59& 80]
  • Was it enough to demonstrate that an agent’s actions were ‘an effective cause of the sale’ or must they be ‘the effective cause of the sale’? The Court decided “it does not mean the sole cause … it is possible that two agents acting independently of each other can both be an effective cause of a sale” (if there is a ‘chain of causation’). [Judgment, paragraph 60]
  • In this case, it was accepted that Unique did a relatively small amount of work. But the amount of work did not matter: a claim for commission “cannot be disposed of … simply by comparing the amount of work which each agent may have done towards bringing about the ultimate sale”. [Judgment, paragraph 63]
  • The Court said that facts of Emmons Mount Gambier Pty Ltd v Specialist Solicitors Network Pty Ltd [2005] NSWCA 117 “are broadly analogous to this case”.

The facts were that first agent introduced a potential buyer for a hotel and provided trading figures and occupancy rate information. The potential buyer offered $25 million. The seller wanted $30 million. The first agent was unsuccessful in bridging the gap and ceased. Shortly afterwards, a second agent brokered a purchase by the potential buyer for $29.7 million.

  • The Court observed that in Emmons, the first agent had given up on the issue of price; the second agent had bridged the gap. The first agent’s introduction was not an effective cause of sale because there was no evidence that the first agent’s efforts flowed through to the purchaser; the second agent’s introduction of the buyer to the property was independent of the first agent. [Judgment, paragraph 63]
  • The Court appliedEmmons to the facts in this case:

Unique’s actions were not “some form of intervening act breaking the chain of causation” between the purchaser’s introduction and the sale. The Court found that: the Century 21 agent’s “introduction was effectively exhausted at least so far as consummating a sale was concerned”because he was overseas and uncontactable, and had not arranged for anyone from his office to assist on the sale in his absence. [Judgment, paragraphs 65, 66, 67& 72]

The Court concluded with this statement of the law:

This case was not simply a scenario where one agent introduced a potential buyer to a relatively unique property, generated their interest in the property, secured an offer and another agent then completed the negotiations to the point of sale.

Instead, it was a case where, before the intervention of the second agent, the first agent left the country and could not be contacted leaving the potential purchaser doubting the seller’s bona fides and concluding the transaction was over. The second agent did not just continue the negotiation; they resurrected the transaction, restored trust between the parties and bridged a significant price gap.

The Court of Appeal rejected Century 21’s claim for commission anddismissed the appeal with costs.

Analysis

The Court of Appeal said that a person must be more than introduced, they must be effectively introduced. By doing so, the Court took a commercial approach –to effectively introduce, the agent must not only find a potential buyer but must also play a role in the negotiationsto conclude (or as the Court put it, ‘consummate’) the sale.

Therefore, in situations where a potential buyer has inspected a property through a first agent, but goes onto purchase the property through a second agent, the first agent must demonstrate they did more than record the potential buyer’s details on their list of people who had inspected the property.

The first agent must have submitted an offer to purchase by the potential buyerto the sellerandbe ready to continue and conclude the negotiations. If so, they may be considered to have effectively introduced the buyer and be entitled to their sales commission. 

Century 21 did submit offers but failed in its claim for commission because they were not available to continue and conclude the negotiations.

The advice for real estate agents is to record every offer put to the seller. If the offer is verbal, confirm it by SMS or email. That written record will be invaluable in proving an effective introduction, and therefore an entitlement to commission if the property is sold through another real estate agent. And, the agent must stay contactable and be ready to continue and conclude the negotiations.

The advice for vendors is to include a special condition in the Contract for Sale which provides that the purchaser warrants they have not been introduced to the property through another real estate agent and indemnifies the vendor in the event of a claim for commission.