When is a selling agent entitled to commission?

In April this year two prominent Perth real estate agents were reprimanded and fined by the State Administrative Tribunal after unlawful arrangements were made for payments, described as “consultancy fees”.  These “consultancy fees” were paid for services provided in relation to several major residential property developments, prior to settlement of those transactions (Limnios Case).

The law in Western Australia regarding remuneration of a selling agent prior to settlement of the transaction is clear.  The Real Estate and Business Agents Act 1978 (WA) (Act) regulates persons acting in real estate and business transactions.  A selling agent is only entitled to receive remuneration if settlement of a transaction is effected and not before, unless the failure to settle is due to the fault of the seller (section 61(4) of the Act).  The Act prohibits a selling agent demanding, receiving, or holding any commission or other remuneration in its capacity as selling agent, prior to settlement of the transaction (section 61(5) of the Act).

When commenting on the Limnios Case, Commissioner for Consumer Protection, Anne Driscoll said:

The purpose of this prohibition is to ensure that sellers cannot be pressured into agreeing to early release of payments in the midst of negotiations for a transaction, and a blanket ban on early payments of commission and remuneration was parliament’s preferred way to achieve that.

The prohibition on remuneration where settlement has not taken place is in relation to remuneration for the services provided by an agent, even if they are described as “consulting fees” or “marketing fees”.  Agents are entitled to a reimbursement of “out of pocket” expenses such as advertising costs actually incurred.

In Maddison Group Pty Ltd v Goldstein, the seller of a business appointed an agent pursuant to an agency agreement which provided that the selling agent was entitled to payment of a commission in a number of circumstances, none of which were conditional on settlement being completed.  A contract for the sale of the business was entered into but settlement never took place and the selling agent retained the commission from the deposit held.  The court held that the provisions of the agency agreement which provided for the remuneration of the agent regardless of whether settlement took place conflicted with section 61(4) of the Act and must give way to section 61(4).  Alternative claims brought by the agent based on implied terms in the agency agreement, quantum meruit and restitution, also failed on the basis that settlement was not completed.

In the case of selling agents engaged for developers to procure presales for proposed developments (off the plan sales), their entitlement to a commission is at high risk as the developer generally reserves its right to terminate the sale contract where it does not achieve the requisite presales or the development does not get the required approvals.  In such cases, termination of the sale contract by the developer is within its rights under the terms of the sale contract.  Consequently, a failure to proceed to settlement due to termination is not a fault of the seller and, therefore, the Act prescribes that no commission is payable.

There is definitely an argument that work undertaken by selling agents in these circumstances is not adequately provided for under the Act.  There can be significant amounts of work done by a selling agent for which it will not be entitled to remuneration where a contract does not proceed to settlement due to the operation of section 61(4) of the Act.  Selling agents need to recognise that this cannot be overcome by entering into agency agreements which provide for remuneration in a manner that conflicts with section 61(4) of the Act.  Such agreements are open to challenge by sellers.  Agents also leave themselves open to disciplinary action if they enter into arrangements for payments prior to, or not contingent on, settlement.

For more information, please contact:

Peter BeekinkTamara Heng
PartnerSenior Associate
(08) 9288 6751(08) 9288 6869
peter.beekink@lavanlegal.com.autamara.heng@lavanlegal.com.au