Selling your property? Avoid payment of commission to more than one agent

It’s surprising that when selling property, the seller often pays little attention to the terms of the real estate agent’s listing agreement – particularly when there may a substantial sum of commission involved.

Seller of farm could be liable for commission to two agents: The sellers of a farm in a recent case¹ could be liable for commission to a former agent despite the seller’s understanding that the former agent would not charge them commission because it was committed to a ‘protocol’ in the district. Under the protocol the agents agreed they would not charge commission unless a successful sale was made within seven days of cancellation of their agency agreement.

Mr Smith had become dissatisfied with the first agent’s progress on selling his farm, so he cancelled the agency agreement and engaged another agent. The second agent sold the property to a buyer who had originally been introduced by the first agent. Before signing the sale Agreement, the second agent had assured Mr Smith that the first agent was bound by the ‘protocol’.

The first agent disagreed that it was bound by the protocol. The matter escalated and ended up in court. The first agent sought an order, without having to prove its case at a formal trial, that Mr Smith pay its commission. The judge refused to grant the order because he said that Mr Smith might be able to rely on the protocol. In order to successfully claim its commission the first agent will now have to prove its case by going through a successful trial process. If the first agent is successful at trial Mr Smith will end up paying commission to two agents – the second agent who actually concluded the sale and the first agent who introduced the buyer.

Standard clauses designed to reduce disputes: In order to help prevent disputes over the cancellation of agency agreements and the payment of commission, the Real Estate Agents Authority (REAA) and the Real Estate Institute of New Zealand have developed some standard clauses for agency agreements. Whilst it’s voluntary for a real estate agency to use these clauses, we would certainly encourage sellers to only sign agreements with agencies that include these clauses in their agency agreements.

Key features of the standard clauses are:

• The seller must choose either a sole or general agency, not both. The REAA disapproves of the commonly used automatic rollover clause where the sole agency automatically becomes a general agency at the end of the sole agency period. This is 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.
• After six months from the end of the agency agreement in a residential sale situation, the seller can sell privately and won’t be liable to pay commission to the agent who previously introduced the purchaser; it’s 12 months in the case of a rural sale.

If you are selling a property it pays to check whether the standard clauses are included in your agency agreement. It also pays to talk with us if you wish to change agents to check you don’t end up paying commission twice.

(This is a condensed version of an article first published in New Zealand Farmer magazine in May 2015.)

¹ Coast to Coast Limited v Smith [2015] NZHC 687.