Commission Payable To Estate Agents [ 17 Apr 2008]

(Construction and Engineering )

We recently reported on the case of Pettigrew v George Wimpey UK Limited [2007] EWHC 2559 (QB), a case where the High Court held that there should be an implied term in the contract between the agent and the client that the introduction had to be an effective cause of the purchase in order for the agent to claim commission.  On the particular facts of that case, the High Court held that a house builder was not required to pay commission to a commercial property agent because the agent was not able to show it was the "effective cause" of the sale.

In a recent case, The County Homesearch Company (Thames & Chilterns) Ltd v Cowham [2008] EWCA Civ 26, the Court of Appeal has held that the main rationale for implying a term that an agent has to be the effective cause of the transaction is so that the client does not have to pay commission to more than one agent.  The court looked at the difference between a selling agency contract and a buying agency contract.  The contract in this case was a buying agency contract.  The court felt that although property sellers often use more than one agent, buyers were unlikely to appoint more than one agent to find a property because of the cost and duplication of work involved.  It held, therefore, that the rationale for implying the term into the buying agency contract was therefore absent. The court also held that such an implied term would be inconsistent with the express provisions in the contract.

Facts

In July 2005, C instructed the respondent (Homesearch) to find a suitable house for C to buy. C paid a registration fee of £500 and agreed to pay a commission if C exchanged contracts to buy a property during the term of the agreement or within one year afterwards.

The agreement provided that Homesearch would be deemed to have introduced a property to C if the particulars of a property were received by C through any of the following means:

• from Homesearch directly or indirectly;
• from any of the firms of agents with whom Homesearch had regular contact; and
• through agents or individuals whom C had instructed Homesearch to negotiate with on C's behalf.

Homesearch sent C details of two properties, amongst others, known as "Hunter's Moon" and "Stivers". C visited Stivers and investigated the possibility of obtaining planning permission for an extension.  In October 2005, C was advised by a planning consultant that planning permission would not be granted. C's planning consultant suggested C look at Hunter's Moon.

C did not, at that stage, recall that Hunter's Moon had been suggested by Homesearch and having been put in touch with the seller by C's planning consultant, contracts on the sale and purchase proceeded to exchange in November 2005, with completion in January 2006.

Homesearch claimed it was entitled to commission. C argued that Homesearch was not the effective cause of the purchase.

The county court held that:

• the provision of the list of properties by Homesearch constituted an introduction for the purposes of the agreement;
• commission was due unless there was an implied term that Homesearch had to be the effective cause of the purchase;
• Homesearch was not the effective cause, but no such term could be implied because:
• it would be inconsistent with the express terms of the agreement; and
• the reasoning behind such an implied term was to avoid commission having to be paid to more than one agent, which was not relevant in this case.

C appealed.

Decision

The Court of Appeal dismissed the appeal.

Having considered the differences between selling and buying agency contracts, and whilst acknowledging that Bowstead & Reynolds on Agency (2006 Edition) made no distinction between the two, the rationale behind implying an "effective cause" term into a contract, unless the contract indicated otherwise, was so that the client did not have to pay commission to more than one agent.

Whilst it was common for property sellers to use more than one agent, it would be unusual for a prospective buyer to do so, because of the cost and likely duplication of work by the agents.  Therefore, although selling and buying agency contracts had similarities, there might also be differences reflected in the terms of the contract. The contract in this case did not prohibit C from using a further agent, but its terms would inhibit any sensible person from doing so. Therefore it was fair to say that the contract contemplated that there would be no other agents. The rationale for implying an "effective cause" term was, therefore, absent.

In addition, the concept of a "deemed introduction" in the contract was inconsistent with the implied term. The contract envisaged commission being due where there had been no true introduction by Homesearch itself (for example, where the property details were from another agency).

Comment

After this decision, the courts may be less willing to imply an "effective cause" term into a buying agency contract than into a selling agency contract.  However, clients should consider the different circumstances that may exist for a residential purchase (where it seems unlikely that more than one agent would be appointed to find a house within a specific area, especially if registration fees are payable) and a commercial purchase (where developers may appoint more than one agent to find sites over a much wider area). The court's decision in this case does not consider commercial transactions and so it is unclear whether an "effective cause" term is also less likely to be implied into a buying agency contract in this type of situation.

In practical terms, and so as to avoid situations where clients become liable to pay a commission that they did not realise was due, clients will need to carefully check the terms of any agency agreement and ensure that the conditions for payment of a commission to the agent are clear, fair and transparent.  Both clients and agents should keep careful notes of all introductions made.  Agents are advised to keep additional notes of actions they have taken to help bring about a sale and purchase.