What matters is who induced the sale

By | 30th Jun 2008

Does an estate agent have a right to commission on a property he is mandated to sell, if it ends up being sold to the existing tenant who takes advantage of the first right of refusal clause in his lease? Or, in the likely words of a landlord – why should an agent benefit in circumstances when it was not the effective cause of the sale to the existing tenant.

The general legal position regarding estate agent’s commission is that they should receive remuneration in the form of commission for their services, but only if a sale is made. An estate agent is paid by results and not because of mere good intentions or hard work. The question is whether the estate agent was the effective cause of a sale.

That is to say, but for the agent’s negotiations, the sale would not have happened. Whether or not this occurred depends, of course, on the facts of each case.

An example is illustrative. A landlord advises an agent that, in terms of the agreement of lease which he holds with his existing tenant, the lease makes provision for a right of first refusal in the event of an offer being received on the property. The tenant holds the right of first refusal to acquire the property on no more onerous terms than the landlord would have accepted from any prospective purchaser. The offer submitted from a prospective purchaser triggers the right of first refusal for the tenant who then acquires the property arising from the triggering of the rights of first refusal. Is the estate agent entitled to commission even though the sale being pursued is not as originally contemplated?

The facts in Nach Investments (Pty) Ltd v Knight Frank South Africa (Pty) Ltd involved the same situation.

The court held that the activities of the agent constituted the effective cause of the sale, even through the ultimate purchaser was not the party introduced by the agent. It was, however, the production of the offer procured by the agent which triggered the right of first refusal leading to the purchase of the property by the tenant.

The Supreme Court of Appeal confirmed the decision.

Goldstein JA in his judgement followed the decision of Nelson v Hirschhorn 1927 AD 190, that whether an estate agent is entitled to the payment of commission or not depends upon the agreement reached by the parties and not upon any special rules of law. When the parties agree that the agent will sell the property, it is simply an agreement that the agent will bring about a sale between principals.

In those circumstances, the agent will earn his or her commission if the property is indeed sold to a willing and able purchaser and if the agent was the effective cause of that occurring.

The court held that the fact that the tenant was already acquainted with the property and wished at some time to acquire it and had the right of preemption, were all of no consequence to the landlord unless the tenant was induced to buy. The court held that the effective cause of the sale to the existing tenant was the production by the agent of an offer from an alternative source. Consequently, the agent was entitled to commission.

The position is clear: it is imperative that, when retail premises are sold with existing leases, that any rights of refusals are carefully considered. This is particularly important where the property is being marketed by an agent who furnishes an offer which may well trigger the right of first refusal with a consequent claim for commission against the landlord.

Download a copy of the article as published in Without Prejudice here.