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Estate agents should review their standard agency agreements

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Posted by Mary Rouse on 07 September 2012

Mary Rouse - Property Litigation Lawyer
Mary Rouse Partner

In October 2011 the Court of Appeal heard the case of The Great Estates Group Limited –v- Michael John Digby.

In the case the Court of Appeal had to consider what should be in an estate agency agreement and critically whether the court had the power to declare that the contract signed was unenforceable. The case looks in detail at the Estate Agents’ Act 1979 and the 1991 Regulations made under it.

The Great Estates Group Limited –v- Michael John Digby

On 1 August 2007 Mr Digby had signed an Agreement with Great Estates for it to market a property in South West London for him. The agreement was entitled “sole agency agreement”. The asking price for the property was £2,850,000 and on the first day of marketing Mr Digby had three offers including one at the asking price. However, on 2 August 2007 Mr Digby met a Mr Murray who offered £2,950,000 for the property, which Mr Digby readily accepted. Mr Digby then brought in a rival firm of estate agents, Marsh and Parsons, at Mr Murray’s suggestion who prepared the memorandum of sale. The transaction exchanged contracts by mid-August and completed in September. On completion Mr Digby paid Marsh and Parsons a commission. However, in reliance on the agency agreement, Great Estates claimed that there was a breach of contract and that it was entitled to damages equal to the commission it would have received had it been allowed to pursue the sale negotiations.

The agreement was that Mr Digby signed with Great Estates had clauses covering “sole agency fees” and “fees payable for sole agency”. The clauses provided that 2% of the selling price would become due upon exchange of contracts. There was also a further clause entitled “sole agency”, though the term “sole agency” was not defined in the agreement. The agreement appeared not to restrict Mr Digby from instructing another agent on the sale at the same time as Great Estates. There was also no requirement under the agreement to inform Great Estates of any enquiries or discussions with the prospective purchaser not made through them. On a strict reading of the agency agreement Mr Digby was liable to pay damages but the court felt that it was necessary to consider the agreement in the light of section 18 of the Estate Agents Act 1979.

Section 18 requires estate agents to give clients information before entering into a contract for estate agency work including strict details of commission, other remuneration and fees for services other than estate agency work. The court felt that this included the requirement to tell clients about liability to pay contractual damages for breach of contract.

In addition the estates agents (Provision of Information) Regulations 1991 sets out at paragraph 5 three key terms concerning a client’s liability to pay commissions which are commonly used but not always defined in agency agreements. These terms are “ready, willing and able purchaser”, “sole selling rights” and crucially in this case “sole agency”. The regulations state that if the terms are used in the estate agency contract they are to be explained in the way set out in paragraph 5 of the regulations. In the agreement Mr Digby signed with great estates the explanation of “sole agency” did not come directly from the regulations as amendments had been made to it.

It is important to note that section 18 also states that where a contract does not comply with the legislation it will not be enforceable unless there is a court order making it valid. Great Estates made the appropriate application in this case. In this case the Court did not find in favour of Great Estates, who then appealed the decision.

The Court of Appeal followed the trial judge in finding the Great Estates could not enforce the contract under Section 18. The assumption made by the Court of Appeal was that the trial judge felt that it was necessary to reduce the sum payable by way of damages in its entirety due to the prejudice suffered by Mr Digby as a result of Great Estates not complying with its statutory obligations.

Implications

There are a number of lessons that can be learned from this case. Estate agents should review their standard agency agreement to ensure the description of the terms in paragraph 5 of the 1991 Regulations match the wording that they use. They should also check that agency agreements confirm all the different types of commission and other payments that they might receive and as set out in accordance with section 18 of the Estate Agents Act 1979. It may be easier for them to consider using an industry standard agency agreement, which is regularly kept up to date.

About the author

Mary Rouse

Partner

Mary is an experienced property litigation lawyer.

Mary Rouse

Mary is an experienced property litigation lawyer.

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