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To Pay Or Not To Pay... Real Estate Agent's Commission

09 May 2011

The sale of the Hadlows' farm did not run smoothly[i]. Despite signing several agreements and instituting legal proceedings against the purchaser, the purchaser did not complete the sale. The real estate agent in this case brought legal proceedings against the Hadlows for payment of $78,750 commission on the failed sale.

 

Payment of Real Estate Agents' Commission

Under the Real Estate Agents Act 2008, a real estate agent cannot claim commission unless the purchaser signs a written agency agreement. The standard agreement for sale and purchase of real estate also provides that, if an agent is named in the agreement, that agent will be entitled to commission on the sale. The Real Estate Agents Act imposes extensive obligations on real estate agents' conduct, including the circumstances in which the agent will be entitled to commission.

Typically the agency agreement provides that the agent will be entitled to commission if the agent secures an "unconditional" sale. An unconditional sale is one where both parties are legally committed to complete the transaction. For example, many agreements are expressed to be conditional on the purchaser arranging satisfactory finance. If this is the only condition in the agreement, once the purchaser confirms that satisfactory finance has been arranged, both the seller and the purchaser will be legally committed to complete the transaction. The seller will be obliged to pay the agent commission even if the purchaser does not complete the transaction. i.e. even if the purchaser does not pay for and take ownership of the property.

Sometimes the seller will change the standard agreement so that the agent will not be entitled to commission until the sale is completed (or in lawyers' terms, the sale is "settled"). This is what the Hadlows had sought to do in this case.

 

The Hadlows' Case

The Hadlows argued that commission was not payable to the agent because they had made an agreement with the agent that it would not receive commission unless the sale was completed. They also argued that the agent was not entitled to its commission because it had not done the job properly (i.e. the selling agent had a close personal relationship with the purchaser and he knew that the purchaser had defaulted on other agreements).

 

The Result

The judge did not accept the Hadlows' arguments. The judge found that the agreement regarding payment of commission only if the sale settled did not apply to the final agreement that became legally binding. It had applied to one of the earlier agreements that did not proceed. Under the normal arrangement, commission was payable as the final sale agreement had become unconditional. The judge also found that the agent had done its job properly. The Hadlows were therefore ordered to pay the agent $78,750 commission and interest in respect of the failed agreement.

 

When Should Commission Be Payable?

From the agent's perspective, it is fair that the agent should be paid for all the work that has been done to secure the unconditional sale. The agent is not necessarily at fault if the purchaser does not complete.

From the seller's perspective, the seller wants a completed sale, not just an unconditional one. It is therefore critical that any deposit payable under the agreement is sufficient to cover the agent's commission and any losses the seller could incur if the purchaser does not complete (for example, legal and advertising costs). Then, if the sale is not completed, the seller can retain the deposit which will cover the agent's commission and the seller's losses.

The seller could also consider changing the normal agency agreement so that the agent only receives commission if the agreement settles. This could be considered, particularly if there is any doubt about the purchaser's financial circumstances and the purchaser's ability to complete the transaction.

 

[i] Ask First National Limited v Hadlow (HC, 12/11/10; White J, Auckland, CIV 2010-404-3500)

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.

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Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.