In the past disputes over cancellation of real estate agency contracts and payment of commission have not been uncommon. Sellers often pay little attention to the terms of the standard agency contract or choose to ignore them and some have paid dearly as a result.
Disputes have arisen in some cases because the sellers did not realise that a sole agency rolled over to a general agency at the end of the sole agency period and they continued to be liable for commission. In other cases it has not been clear how long a seller had to wait after the contract ended before the seller could sell to a buyer introduced by the agent without being liable for commission. Agency contracts commonly include a standard clause stating that the seller must pay commission if the property is sold to anyone introduced by the agent - even if the property is sold after the agency has ended. In all fairness, an agent who puts time and effort into finding a buyer should not be deprived of commission if the seller sells to the buyer introduced by the agent after the agency contract has ended. On the other hand, should a seller be liable to pay commission indefinitely after an agency contract has ended?
Seller liable to pay agent’s commission after agency contract ends
In a typical case a seller listed his property with an agent. The agent introduced a buyer to the property who presented an offer. The seller was not happy with the offer and turned it down. After the agency contract ended the seller took the property off the market. A year later the seller advertised the property for sale privately and sold to the buyer who had made the offer which had been turned down. The seller negotiated the price in the mistaken belief he did not have to pay commission to the agent because the agency contract had ended. The agent heard of the sale and successfully claimed commission.
REAA and REINZ introduce clauses to reduce disputes
In order to reduce the likelihood of disputes, the Real Estate Agents Authority and the Real Estate Institute of New Zealand have developed some standard clauses for agency contracts. The use of the clauses by an agency is voluntary, but sellers are encouraged to only sign agreements with agencies that use these clauses
Key features of the standard clauses are:
- The seller must choose either a sole or general agency, not both. The REAA considers automatic rollover clauses bad practice because sellers often misunderstand their liability for commission when they are used.
- After 12 months from end of an agency for the sale of a rural property and six months from the end of an agency for a residential property the seller can sell privately and won’t be liable to pay commission to the agent who previously introduced that buyer.
Check the agency contract before signing
With tens and even hundreds of thousands of dollars payable in commission on the sale of a property, it is surprising that sellers don’t pay more attention to the terms of the agency agreement before they sign it. If you are selling a property make sure you fully understand the agency contract and check whether the standard clauses are included.
Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.
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.
