Who Gets The Commission: Introducing agents vs. concluding agents in the sales process
O*NO! You’ve just spent a significant amount of time and effort introducing a potential buyer to a property you’re selling for a vendor. Turns out these are the right buyers because they end up purchasing the property – just not from you. So, who is entitled to the sales commission – you or the agent that finished the sale?
Understanding the nuances of real estate commission entitlements is crucial for both agents and property sellers – especially if you want to protect your commission. In this blog, we'll explore recent legal cases that unravel the dynamics between introducing agents and concluding agents, shedding light on who rightfully claims the commission, and how you can avoid commission conflicts.
Case 1: Outerbridge vs. Hall [2019]
The Setup: The Sellers engaged two agents (Agent A and Agent B) with non-exclusive agency agreements to sell their property. According to the agreement between them, commission was payable if the agents were “the effective cause of the sale” and if a purchaser “has been effectively introduced” by them.
The Twist: Agent A showed the property to the Purchaser in 2017, but the initial offer faced rejection. Here's where the plot thickens – when the Purchaser tried to reach out to Agent A, they were informed that they were overseas and uncontactable, leaving them feeling hopeless about the property. Enter Agent B, who not only revived the sale but also sealed the deal in January 2018 at a higher price than Agent A was negotiating. So, who should get the commission?
The Verdict: Agent A sued for commission, arguing they were the effective cause of the sale. The court found that while Agent A played a significant role, it was Agent B who played the more crucial part in bringing about the sale. The court emphasised that the mere introduction of a purchaser is not always sufficient to establish effective cause, and all circumstances surrounding the sale must be considered. Agent A needed to contribute more than just introducing the buyer; they must actively participate in negotiations to claim commission.
Case 2: Freedom Development Group Pty Limited v D’Ettorre Properties Pty Limited T/as D’Ettorre Real Estate [2023]
The Setup: Development group entered into a non-exclusive agency agreement with Agency A, who introduced Buyer 1 to the property. Negotiations between this buyer and the seller were unsuccessful. Agency B then introduced Buyer 2 to the Sellers.
The Twist: Turns out Buyer 2 and Buyer 1 were related, and also directors in the same company. This company was the entity that purchased the property through Agency B, with Buyer 1 also being the guarantor of the sale. Agency A believed that because they introduced Buyer 1 to the property, and the company that eventually bought it included Buyer 1, meant that they deserved the commission.
The Verdict: The court highlighted that a clear connection between introducing the purchaser and the final property sale is crucial. In this instance, introducing Buyer 1 to the properties earlier didn't automatically establish a causal link to the sale that happened later. Moreover, just because Buyer 1 was a director of the purchasing company or provided a guarantee doesn't imply ownership interest in the purchase (remembering that a company is considered its own entity).
So what does this mean for you and how can you protect your commission?
These cases underscore the importance of actively contributing to the sale rather than just introducing the buyer. Real estate agents should be aware that the courts consider the overall impact of an agent's actions in determining commission entitlement.
Here are some ways you can avoid issues with commission entitlements:
Clear Contractual Agreements: Ensure that agency agreements clearly define the terms for commission entitlement, including what constitutes being the effective cause of the sale.
Communication with Clients: Implementing fail-safes, incorporating advanced technology and emergency contact procedures, is crucial to safeguard transactions, nurture client relationships, and prevent potential disruptions in the real estate process.
Interaction Documentation: Maintain detailed records of all interactions with clients, including communications, negotiations, and any significant developments in the sales process. This documentation can serve as evidence in case of disputes and provide a clear timeline of each agent's involvement.
Collaboration and Teamwork: Foster a collaborative environment within the agency, encouraging agents to work together as a team rather than in isolation.
Legal Review of Agreements: Periodically review and update agency agreements to align them with current legal standards and precedents. Seek legal advice when drafting or amending agreements to ensure they are comprehensive and protective of the agency's interests.
It is important to note that both these cases are from NSW. Now, if you're operating in a different jurisdiction, keep in mind that the rules on this matter might be different. However, don't dismiss cases from other states/territories entirely, because they can still be persuasive in your neck of the woods.
Key Takeaways:
It's not just about starting the dance; it's about leading it to a grand finale. Introducing agents need to do more than kick off the sale – they must actively participate in the negotiations.
The courts consider the overall impact of an agent's actions in determining commission entitlement.
Claiming a commission requires a tangible link between the introduction and the ultimate sale.
By implementing proactive measures when dealing with non-exclusive agreements, real estate agencies can minimise the likelihood of disputes over commission entitlements and create a smoother, more efficient sales process for all involved parties.
Your Next Steps
Want to make sure your agency agreements are legally robust, fully compliant, and designed to protect your commissions? Whether you’re looking to review you current agreements or draft them from scratch – our team of real estate agency lawyers have got you covered. Book your free 10 minute chat to find out how.
Want to have a read through of the judgements? Find them here:
Outerbridge trading as Century 21 Plateau Lifestyle Real Estate v Hall [2019] NSWDC 724
Outerbridge trading as Century 21 Plateau Lifestyle Real Estate v Hall [2020] NSWCA 205.
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.