Introduction

Like many other professions, the practice and conduct of estate agents is coming under mounting scrutiny from regulatory bodies and consumers alike.

In a recession clients are increasingly reluctant to pay professional fees, including commission, which they may have paid without question before the credit crunch. A number of recent cases demonstrate that clients are looking to find loopholes in their agreements with estate agents in order to avoid paying these fees. In addition the OFT is becoming increasingly active in the property sector, and the recent judgement against Foxtons shows that they are willing to go to court to ensure that agents’ standard terms and conditions are fair to the consumer.

The regulatory background is as follows:

  1. OFT has launched a new investigation into home buying and selling with results expected at the end of 2009.
  2. Since October 2008 estate agents must belong to an approved redress system, with the power to make financial awards of up to £25,000.
  3. Estate Agents must now meet OFT Money Laundering Regulations requirements.

So what can you do to ensure that your fees and commission are protected? This paper is going to consider some of the recent judgements concerning agents’ commission and discuss how to avoid the pitfalls.

Dealing with Consumers

The law recognises that there is an imbalance in the bargaining position between supplier and consumer and legislation affords extra protection to consumers when they sign standard terms and conditions.

It is important to remember that the majority of clients that you deal with, even if professionals themselves and commercially savvy, will be “consumers” in the eyes of the law as they are acting outside their usual trade business or profession.

The relevant legislation is the Unfair Contract Terms In Consumer Contracts Regulations 1999 and the key principles are that:

  1. If a provision in a supplier’s standard Ts & Cs, contrary to the requirement of good faith, causes significant imbalance in the parties’ rights and obligations to the detriment of the consumer it will be deemed unfair and therefore unenforceable.
  2. The supplier must ensure that written Ts & Cs are expressed in plain and intelligible language.
  3. However, the core terms of the contract, for example if you are acting on a sale, your percentage of commission of the initial sale price, will not be tested for fairness. The reasoning being that the consumer is considered able to have considered the merits and demerits of such a key term when deciding whether to contract with a supplier.

In summary, the legislation prevents you hiding onerous liabilities and additional costs in the small print of your Ts & Cs.

OFT’s recent action against Foxtons  

Following a claim brought by the OFT, the High Court has recently ruled that the following clauses in Foxtons’ contracts for tenanted properties (some of which were amended by Foxtons before the hearing) were unfair:

  1. On top of the initial commission of 11% Foxtons could charge renewal commission if a tenant introduced by them renewed or extended their tenancy, even when Foxtons did not negotiate the renewal.
  2. Foxtons was entitled to full sales commission of 2.5% where a landlord sold to a tenant introduced by Foxtons, even though they did not negotiate or have any involvement with the sale.
  3. Foxtons could recover commission from a landlord even when they had sold their interest and it was the subsequent landlord that renewed without any involvement from Foxtons.

In reaching the decision that these terms were unfair the court considered that:

  1. The commission was disproportionate to the service offered, especially as time went on, and Foxtons did not provide any commensurate services.
  2. The terms were hidden away in the Ts and Cs, without being flagged up. A small typeface was used and the headings were not sufficiently clear.
  3. In the advertising material the renewal commission “was nowhere even hinted at, much less referred to”.
  4. The wording used was unclear and ambiguous.
  5. In relation to the sales commission the Ts and Cs imposes a potentially large financial liability on the landlord, where Foxtons played no material part in the sale. This commission was due on exchange before the seller had received the sales money and potentially still due if the sale fell through. This created an obvious imbalance in favour of the agent.

The Estate Agents (Provision of Information) Regulations 1991

There is an additional obligation under these Regulations to explain the terms “sole selling rights”, “sole agency” and “ready, willing and able to purchase” using definitions in the form and content to those set out in the Schedule to the Regulations.

Top Tips for drafting your Ts & Cs:

  1. Ensure that they are drafted in language that is clear and intelligible to the lay-person.
  2. Make the commission terms prominent. Putting it in the recitals may mean that the term becomes part of the “core bargain” and not subject to scrutiny.
  3. Use a large type face and clear headings for any commission conditions.  
  4. If you feel that they need to be hidden away so that the consumer does not question their fairness… that probably means they are unfair.
  5. Draw attention to any commission which may be due in sales literature and at the initial meeting.
  6. Ensure compliance with the 1991 Regulations.

Interestingly, the Property Ombudsman service has reported a significant increase in complaints against letting agents, and this appears to be an area of increased animosity and dispute.

Are your commission conditions watertight?

In addition to ensuring that there is no element of unfairness in your standard terms you also need to take care that your remuneration clauses make it clear when exactly commission is payable and leave no room for disputes over interpretation.

A recent example of when the courts have decided that commission is not due under the agency contract is Estafnous v London & Leeds Business Centres Limited.

This case concerned a commission agreement which provided for a payment of £2 million commission to the agent upon the intending buyer completing a purchase of the property.

After being introduced to the seller by the agent, the buyer later decided to proceed by buying shares in the company that owned the property, rather than purchasing the property itself.

The High Court held that no commission was due as there had not been a purchase of the land, which was what was required under the commission agreement. The judge stated that the purchase of shares in a company that owns the land is “self evidently a different transaction” from the purchase of land.

Top Tips for drafting your Ts & Cs:

  1. Make sure your commission clause clearly defines the range of situations when commission may be due, covering all eventualities, including where the buyer buys the shares in a company (or interest in an LLP that owns the property).
  2. If it does become clear that a sale is to proceed other than by a purchase of the property, then remind the seller that this does not avoid liability for your commission.

Causation

When acting for a seller, to what extent do you as agent need to be involved in bringing about the sale in order to be entitled to commission?

In Foxtons Ltd v Bicknell the seller appointed Foxtons on a sole agency basis to sell her house. Foxtons twice showed the house to a man who was looking for a property on behalf of his ex-wife. After the expiry of Foxtons’ sole agency period the wife visited the house again after arrangements were made with a second agent. By this time she had decided she did actually like the property and contracts were exchanged. The seller paid commission to the second agent and Foxtons sued.

The terms of Foxtons’ standard conditions made the seller liable to pay commission if at any time contracts were exchanged with a purchaser introduced by Foxtons during the period of sole agency or with whom Foxtons had negotiations during that period.

The case went all the way to the Court of Appeal, where it was ruled that Foxtons was not entitled to the commission. The Court of Appeal interpreted the wording “a purchaser introduced by Foxtons” as requiring Foxtons to have introduced the person to the purchase, rather than the property.

This is another way of saying that the agent had to be the “effective cause” of the purchase, i.e. to be entitled to commission the agent must introduce someone who purchased the property as a result of that introduction. This is in line with the statutory position. The need for the agent to be the “effective cause” of the sale will be implied into a sole agency contract unless it is clearly excluded to avoid multiple agents being able to claim for commission.

Conversely, the case of County Homesearch Co. (Thames & Chilters) Ltd v Cowham considered the “effective cause” principle in relation to an agency agreement for a property search agency.

The agent sent the client a list of properties, which included Hunter’s Moon, at which point the client had no interest and never actually visited the property, instead he focussed his attentions on another property which he visited four times. There turned out to be planning problems with this second property and the planner advised the client that he knew of another property upon which the desired developments would be possible… Hunter’s Moon.

The client did not recall that Hunter’s Moon had been suggested by Homesearch. The planner put the two parties in touch and contracts exchanged. Homesearch predictably claimed a commission.

The agency agreement in this case made it very clear that “We shall be deemed to have introduced a property to you if you have either received the particulars of a property:

  1. from Homesearch directly or indirectly
  2. from any of the agents with whom Homesearch had regular contact
  3. from any agents or individuals with whom C had instructed Homesearch to negotiate on their behalf.”

The court was satisfied in this case that the wording made it sufficiently clear when an introduction would be deemed and clearly did not require a causative connection. Even if this was not the case the judgement suggests that the courts are less likely to imply the need for the agent to be the “effective cause” when dealing with buyers’ agents as opposed to sellers’ agents as it is less likely that more than one agent would be appointed, especially in a residential context.

Top Tips for drafting your Ts & Cs:

  1. Keep notes of which properties have been introduced to clients and what actions have been taken about a sale or purchase in case there should be any dispute.
  2. If you do intend to exclude the “effective cause” principle make sure that the wording is sufficiently clear and that it is brought to the attention of clients so that there is no question of unfairness.
  3. If performing agency services for the buyer ensure Ts & Cs make clear when an introduction is deemed.

Conclusion

Regulation against estate agents is hotting up. Judges are often minded to take the side of the individual to the extent permitted by the law, and unless the contractual position is clear, fair and obvious, you may not be able to enforce the terms that you thought were a given. Don’t let bad drafting open up your standard conditions to scrutiny.

Considering the increased litigation surrounding agents’ terms and conditions we would advise you to review your standard terms to ensure that there can be no room for dispute.