It is surprising that when selling a farm, the seller often pays little attention to the terms of the real estate agent’s listing agreement when there may be hundreds of thousands of dollars in commission involved. The sellers of a Kimbolton farm are probably wishing that that they paid closer attention to their agency agreement when they relied on their agent’s advice they would not be liable for commission to the former agent.
Trust could be liable for double commission on farm sale
In January 2013, Bayleys and the PKS Trust signed an agency agreement for the sale of the Trust’s farm at Kimbolton. The agreement included a standard clause stating that the Trust must pay commission if the farm is sold to anyone introduced by Bayleys.
In mid-2013 Bayleys introduced a purchaser to the property and presented an offer by the purchaser to purchase the farm for $7 million. The Trust was not interested in a sale at that price. The trustees became dissatisfied with the lack of progress by Bayleys so they cancelled Bayleys’ agreement and engaged another agent, Ruraland. The Trust was assured by Ruraland that Bayleys was bound by a “Protocol” among real estate agents in the Manawatu that a “seven day rule” applied. The effect of the protocol was that Bayleys would not charge commission unless a successful offer was made within seven days of its agency agreement being cancelled.
In January 2014 Bayleys became aware that the trustees had sold the property for $8.53 million to a company controlled by the purchaser Bayleys had introduced. Bayleys sued the PKS Trust for commission on that sale – amounting to $106,625 plus GST. If successful the Trust would have to pay two commissions – one to Bayleys and one to Ruraland. The judge refused to grant summary judgment in favour of Bayleys because he found that the trustees might be able to rely on the protocol in some way. Bayleys will now have to prove its case at trial to successfully claim commission.
Standard clauses designed to reduce disputes
In order to reduce disputes over cancellation of agency agreements and payment of commission, the Real Estate Agents Authority (REAA) and the Real Estate Institute of NZ have developed some standard clauses for agency agreements. 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:
1. The seller must choose either a sole or general agency, not both. Commonly used agency agreements include an automatic rollover clause where the sole agency automatically becomes a general agency at the end of the sole agency period. The REAA considers automatic rollover clauses bad practice because sellers don’t usually realise that the agency continues after the sole agency period has ended and they could still be liable for commission.
2. After 12 months from cancellation of the agency agreement the seller can sell privately and won’t be liable to pay commission to the agent who previously introduced that purchaser. (Under the residential standard clauses this period is six months. It can be tricky deciding whether a lifestyle block is residential or rural and therefore what period applies.)
If you are selling a property it pays to check whether the standard clauses are included in your agency agreement. You could also consider how the agreement could be altered so that you do not end up in the same situation as the PKS Trust and face payment of double commission.
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.