Property Focus | The buying and selling game

Estate agents are not the most popular figures in the public estimation. Then neither are journalists, politicians, bankers, and even lawyers.

Estate agency is governed by the Estate Agents Act 1979 and regulations, and regulated by the Office of Fair Trading. Relatively little litigation comes before the First Tier Tribunal (Land) and the courts. But there are recurrent problems. The OFT provides a useful guide to the statute and regulations, such as the information to be given to clients, the duty to declare any personal interest, the handling of client money, enforcement and redress schemes.

Fiduciary duty

By the very nature of the contract the agent owes a fiduciary duty to the principal and must not allow himself to fall into a situation of conflict of interest or to gain any form of secret commission or other benefit. In such circumstances the principal is entitled to refuse to pay commission, to treat the contract as breached, and to sue for damages. Although this would be unlikely if the principal knew about the side benefits and agreed to them, which would put an entirely different complexion on the relationship (FHR European Ventures LLP v Mankavious [2011] EWHC 2308 (Ch)).

Take this scenario. The principal instructs an agent to sell his property Blackacre. He knows that the agent acts for many different sellers. As it happened an adjoining property, Whiteacre, came up for sale with the same agent. The agent sold both properties to a single purchaser but did not tell the owner of Blackacre about Whiteacre. If the owner of Blackacre had been aware that Whiteacre was simultaneously on the market and one prospective purchaser was interested in purchasing both properties, there might have been a market advantage to be exploited.

These issues were considered in the case of Kelly v Cooper [1993] AC 205. The court found that the agent owed a duty of confidentiality to both his clients respectively, and therefore was under a duty not to disclose confidential information obtained from one principal to another and therefore was not in breach of his fiduciary duty to either.

Client money

Client money must be held on trust in a proper professional manner (Sorrell v Finch [1977] AC 728 (deposit) and Maloney v Hard [1971] 2 QB 442).

Compliance requirements with the money laundering regulations are very strict. Under the Money Laundering Regulations 2007/2157 estate agent must make staff aware, introduce proper policies and procedures, identify all clients, and keep full records.

At the beginning of the year, the OFT fined IPS Estate Agents Ltd operating in Leicester nearly £12,000 for failure to comply.

Actual and ostensible authority

A seller instructing an agent runs certain risks, namely that the estate agent may exceed his actual authority, for instance by misdescribing the property. In such circumstances, the seller may find himself liable for what the estate agent did acting under ostensible but not actual authority.

In Gregor Homes Ltd v Emlick 2012 SLT (Sh Ct) 5 the court held that the principal cannot disown his estate agent so far as any third party is concerned. The seller will be liable to the third party; though he can seek damages for breach of contract from the agent.

Sole agency and effective cause

A number of the cases turn on the role of a sole agency and on the presence and meaning of the phrase 'effective cause'.

In Foxtons Ltd v Bicknell [2008] EWCA Civ 419 the seller refused to pay the agent's commission.

The sole agency contract provided for commission to be payable if the agent introduced a purchaser or so did any other agent during the period of the sole agency. The agent showed the house to a buyer who did not like it. After the end of the sole agency and under a subsequent multiple agency arrangement some months later the buyer changed his mind and purchased the house as a result of being shown the house by a different agent, who was paid commission. The first agent claimed commission having originally introduced the buyer to the house, albeit unsuccessfully at the time.

The court held that in a multiple agency situation the parties normally expected that only one commission would ultimately be payable and paid; introduction to the property was not enough, there had to be introduction to a purchaser who actually purchased.

After the termination of the sole agency, the first agent could not be said to be the 'effective cause' of the purchase, as the purchaser originally refused the house, and after the termination of the sole agency the agent had done nothing. Somewhat curiously, the wording of the contract followed the wording in the regulations.

It is also not enough for the agent simply to put the phrase sole agency in the contract, he must accurately inform the principal of prospective liabilities as per the 1979 Act and the Estate Agents (Provision of Information) Regulations 1991 SI 859.

A culpable failure by the agent may well prejudice the seller. The contract may depart from the regulations, but must be clear in doing so. The intent and effect of the phrase must be explained, and when and how much disbursements will need to be indemnified.

The use of the word 'remuneration' in this context is ambiguous. A sole agency does not prevent the principal selling directly or through another agent, but if properly explained may render the seller liable for commission to the sole agent (see Great Estates Group Ltd v Digby [2011] EWCA Civ 1120).

The case of Glentree Estates Ltd v Favermead Ltd [2010] EWCA Civ 1473 concerned an unusual property which was difficult to sell. The vendor was a company; both vendor and agent were knowledgeable and experienced with access to sophisticated legal advice. Under the contract, commission was payable for the introduction of a purchaser, less if the vendor sold the property himself, which he did, two years later. The court held that the terms of the contract covered the situation, there was no express or implied condition that the agent should be the effective cause of the sale (though the agent probably was), and the commission was payable.

Acting for the purchaser

Usually the estate agent is acting for the vendor, but may sometimes be acting for the purchaser. There must be a contract before the agent is entitled to commission.

In MSM Consulting Ltd v Tanzania [2009] EWHC 121 (QB) the agent knew that the principal was looking for a property, or perhaps the principal had intimated or approached the agent about his intention. No contract was made. The agent sent details of possible properties, hoping for business. The principal in fact bought one of the properties, either directly from the owner or through another estate agent. The court held that the first agent had no remedy. He was simply trying for business, which he did not obtain.

The vendor is usually keen to obtain the best price for his property, and to stimulate as many competing potential purchasers, but to avoid having to pay more than one commission. Similarly the agent is normally keen to obtain his commission, and acutely aware that the vendor may sell privately or through another agent, who obtains the commission, thereby depriving the original agent.

The statutory law relating to both selling and buying agents is the same; though the contract may alter the situation. The case of County Homesearch Co (Thames and Chilterns) Ltd v Cowham [2008] EWCA Civ 26 considered a situation where the buyer has instructed two agents. He first approached one agent and paid him a fee and agreed commission. The contact said that the agent would be deemed to have introduced a property if he had provided the particulars. The agent duly showed the buyer a property, but the buyer wasn't interested. Subsequently another agent showed the buyer the property, suggested how it could be adapted to the buyer's needs, and the buyer purchased the original property through the second agent. He had concealed the arrangement with the second agent from the first agent. The court held that the first agent was entitled to his commission, as he was deemed to have introduced the property to the buyer, albeit that he was not the effective cause.

Redress

A reputable estate agency will have joined an OFT-approved redress scheme, and the Secretary of State may make such a scheme compulsory in respect of residential property (see the 1979 Act ss 23A-C and schedule 3).

In addition, the Property Ombudsman requires members to have professional indemnity insurance, a complaints system, and agree to comply with any decision, up to £25,000. The Code of Practice for Residential Estate Agents (1 August 2011) requires a duty of care, financial checks, full information on terms and fees, accurate descriptions, energy performance certificate, accompanied viewings, disclosure of offers. In practice the Ombudsman expects the agent to disclose the history of the property, the planning regime, and known future develop-ments in the area; any structural problems; the local school situation; accurate detail, and non-misleading images and photographs; and all offers, and why potential buyers did not pursue a sale. Obviously the vendor's lowest acceptable price should not be disclosed to potential purchasers.

Unfair

A seller trying to resist a claim by the agent may be able to rely on 'unfairness' under the Unfair Terms in Consumer Contracts Regulations 1999/2083). The leading case under the regulations is Office of Fair Trading v Abbey National plc [2009] UKSC 6 (charges for unauthorised overdrawings found not unfair). But where an estate agent's standard terms are unintelligible or unclear the court may make a declaration that they are unfair and make an injunction in proportionate terms, applying to both future and existing contracts (Office of Fair Trading v Foxtons [2009] EWCA Civ 288). SJ