Agent’s commission – could a purchaser’s inspection of a property with an agent entitle that agent to the commission?

Often agents claim commission payable to that agent merely as a result of an enquiry that may have been made by a purchaser or a purchaser having inspected the property whilst the property was listed with that agent. But is that enough to entitle the agent to the commission?

 

In most, if not all, contracts for sale of land contain terms that provide a warranty (promise) that the purchaser was not introduced to the property by an agent other than the agent listed on the front page of the contract, and the purchaser indemnifies the vendor for any commission payable to any other agent as a result of a breach of that warranty.

The intended effect of including the warranty is to hold the purchaser liable to reimburse the vendor if any other agent claims commission against the vendor in circumstances where that other agent introduced that purchaser to the property.

Purchasers would want to delete such clauses. On the other hand, vendors would want such terms to remain in the contract, particularly when a vendor has appointed more than one agent and would not know if a particular purchaser has had any dealings with any of the former agents.

Often agents claim commission payable to that agent merely as a result of an enquiry that may have been made by a purchaser or a purchaser merely having inspected the property whilst the property was listed with that agent.

But is that enough to entitle the agent to the commission?

There is a long line of authorities that require the agent's intervention to be the 'effective cause' of the sale.

Effective cause

In the leading case of LJ Hooker v Adams (1977) (LJ Hooker) the High Court determined that for an agent to be entitled to a commission the agent must substantiate that their introduction was the 'effective cause' of the sale.

Following LJ Hooker, in Rasmussen & Russo Pty Ltd v Gavigilic (1982), it was established that if the sale could not have occurred until the vendor or another agent arranged finance on terms, not otherwise available to the purchaser and not contemplated at the time of the introduction, the proper construction will be, that the introducing agent was not the effective cause of sale.

Then in Moneywood v Salamon (2001) the High Court held that if an agent is the effective cause of the sale, the agent is entitled to commission even if the final contract is significantly different from that originally contemplated. That is, on the facts the initial sale of contract was rescinded, and a secondary contract was entered into with the same purchaser (the purchaser was introduced by the agent). The Court determined that, the initial work done by the agent flowed through to the second contract, therefore the agent was consequently an effective cause of the sale.

What is considered the 'effective cause' is often a factual inquiry resulting in varying conclusions. But, in Outerbridge trading as Century 21 Plateau Lifestyle Real Estate v Hall (2019) (Outerbridge) the Court summarised the general principles that flowed from the case law in assessing whether an agent's conduct is the 'effective cause' of the sale.

The Court determined that the general principles that emerged were:

  1. The effective introduction of a purchaser to a property requires more than the proof of the fact of introduction of the purchaser to the property by a real estate agent and of the subsequent contract to purchase;
  2. The real estate agent must establish that it was an or the effective cause of the sale;
  3. The enquiry is a factual one and it does not matter whether the test is stated as the effective cause or an effective cause;
  4. “Effective cause” means more than simply “cause”. The enquiry is whether the actions of the real estate agent really brought about the relation of buyer and seller;
  5. All the circumstances must be considered. The law looks at the substance of the matter. If the sale could not have occurred until the vendor or another agent undertook tasks not otherwise available to the purchaser and not contemplated at the time of the introduction, the proper conclusion will ordinarily be that the introducing agent was not the effective cause of the sale; and
  6. The essential issue is whether the agent brought about a state of affairs giving rise to the contractual right to the commission.

How were the principles applied?

In Outerbridge, the Court in applying the principles held that despite the first agent playing a 'significant causal role' by introducing the eventual buyer to the property, holding inspections and even reaching the point of a sale of contract the agent was not the 'effective cause of sale'.

That is, the Court found that the intervention of a second agent which clarified the vendor's position on the price and allowed the buyer to make a more effective offer meant that the secondary agent was entitled to the commission.

On the facts, the vendor had gone back on the initial sale of contract because they were unsatisfied with the sale price being offered and the second agent was able to relay this information to the purchaser and reassure the purchaser that the vendors were serious sellers. The purchaser, following the intervention by the second agent increased their offer, resulting in a completed sale.

The intervention of the second agent was viewed by the Court as 'crucial' and brought about the 'state of affairs' that resulted in the sale, giving rise to the second agent's contractual right to the commission over the initial agent.

Implications

Whether or not commission is payable will depend on the facts and circumstances in each case.

As the case law has progressed, the Courts have considered that a mere introduction by an agent may not suffice if there are other acts undertaken by a second agent, that were not undertaken by the initial agent that did result in the sale being finalised.

The Court will look at the whole transaction to identify and determine whether if it was not for the conduct or intervention of a second agent, would the sale have proceeded?

If the answer is negative, it is likely that the Court would find that the second agent's conduct was the 'effective cause' of the sale despite the initial agent making an introduction or even carrying out inspections.

Many agents may be entitled to their commission where their efforts can evidence the effective cause of the sale. A review of the facts and application of the principles referred to above should be considered before claiming the commission.

On the other hand, purchasers may be able to resist an agent's claim where they can show that the agent's claim was merely an enquiry, an inspection or even an offer that was not properly negotiated to cause the sale.

It is important for purchasers to choose their Solicitors carefully to ensure that they are properly advised of the terms in a contract that contain warranties and indemnities of this nature and Solicitors should obtain adequate instructions in respect of the warranty to properly consider whether or not such terms should be deleted before the purchaser enters into the contract.

This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.

Contributors

Andrew Gouveia Law Graduate