Court ruling on joint mandates: Who gets the commission when a buyer is introduced by both agents?

Image source: Susan Richey-Schmitz – 123RF.com

This case involved two estate agencies, City and Atlantic Real Estate CC t/a Re/Max (Re/Max) and Kapstadt International Properties CC (Kapstadt).

Anyone who has bought or sold a house will know the feeling: if it looks as though an agent has a serious buyer, you don’t want the chance to slip through your fingers. And if there might be awkward issues about who gets the commission, you feel you can work that out later. And then ‘later’ arrives…

A case heard by the High Court, and decided just before the holiday season break, illustrates how easily a problem like this can arise, the difficulties and expense involved in resolving it – and the inevitable disappointment for one of the agents dealing with the sale.

Micheal and Alison Smith (the Smiths) decided to sell their Camps Bay home (the property) and concluded a written joint mandate with Re/Max and Kapstadt on 21 September 2021 to market the property. The mandate did not specify a purchase price and would remain in force until 5pm on 30 April 2022.

The mandate included that if the property was sold by Re/Max or was sold to anyone introduced by Re/Max during the mandate period, Re/Max would be entitled to the commission being 3.5% plus VAT of the purchase price.

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Two offers for the property fail

Re/Max approached one of their existing clients, James Pears, during the period of the mandate, inviting him to view the property. They facilitated several viewings with him, including viewings to which Pears brought his advisor, and his parents.

Negotiations were entered, and an offer was made by Pears, which offer fell short of the asking price. Re/Max subsequently informed Pears that the Smiths had accepted another offer made by an American purchaser introduced by Kapstadt, and Pears then returned to London indicating that he would not increase his offer.

The transaction with the American purchaser was subsequently abandoned as he could not fulfil the terms of the transaction.

First bidder tries again, through the other agent

Around February 2023, the Smiths accepted a second offer from Pears. Mrs Smith informed the agent from Re/Max via a voice message that an agent of Kapstadt had contacted her to arrange for a client to view the property and that the client was indeed Pears. Mrs Smith confirmed to the Re/Max agent that she did inform the agent from Kapstad that Pears had been introduced to the property by Re/Max.

The Smiths were happy that they had secured a buyer, and Pears was happy to have the property at a price he was prepared to pay. But which agent should get the rather large commission of R966,000 (VAT inclusive)?

Since Re/Max believed it was the agency that had introduced Pears to the property, it now claimed the commission from the Smiths. Kapstadt’s view was that the joint mandate had expired, and that the property was no longer listed for sale on the Re/Max website nor being marketed by them, though these were claims that Re/Max disputed.

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Which of the two agencies was the ‘effective cause’ of the sale?

It’s interesting that the Smiths obviously had some concern about who should get the commission, and when they negotiated with Kapstadt, the Smiths insisted on an indemnity from Kapstadt that they, as the sellers, would not be liable for any claim brought by Re/Max or commission. This indemnity seems to have alleviated any fears the Smiths may have had about subsequent claims from Re/Max.

The main fact in dispute was which agency’s actions was the effective and primary cause of the sale of the property?

The judge pointed out that many previous decisions by the courts have confirmed that the main factor to determine whether an estate agent is entitled to commission is whether they were the effective cause of the sale and importantly, whether such agent was mandated at that time.

If an agent, properly mandated at the time, introduces a client to a property and that client later buys it, then the agent is entitled to commission, and this was so, the courts have held, even if the sellers cancelled the agent’s mandate in the meantime.

What counts is whether there was a valid mandate at the time the introduction was made.

Failed previous negotiations and an expired mandate don’t change things

This will thus involve a factual determination of whether the agent made the introduction of the purchaser to the property and whether the agent was mandated at the time.

Kapstadt argued that the property was eventually sold to Pears more than 90 days after the initial mandate period had expired and consequently it has a “direct financial and legal interest in the commission, which it claims is owed and due to it”. This was not disputed by the Smiths.

However, Kapstadt had indemnified the Smiths against any claim that Re/Max might have against them for commission. The High Court also noted that Kapstad’s reliance that the negotiations between Pears and Re/Max had broken down was not sufficient.

Given the long-standing principles laid down by the courts regarding the effective cause of a sale, the decision confirmed that case law favours Re/Max and therefore found that the commission had to be paid to them and found them to be the effective cause of the sale.

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Should the sellers have rejected the offer from the second agent?

First, the judge said that, with hindsight, the Smiths ought to have insisted “that Pears engage with Re/Max rather than accepting the offer via Kapstadt, especially since they were fully aware of the prior involvement of Re/Max.”

What the judge says here is true, and if the Smiths had pointed Pears back to Re/Max it would have avoided subsequent litigation. But it’s also easy to understand that the Smiths feared losing the sale. It had, after all, been a very long time that they had been trying to sell the property and there had been no other offers.

For them, then, the indemnity that they asked for and obtained from Kapstadt, must have seemed like the best way forward at the time.

What about trying mediation to solve the dispute?

It is clear from the above case that it is pivotal that mandates be clear and unambiguous, especially in cases where joint mandates are involved. Sellers can protect themselves by requesting an attorney to check the wording of the mandate before signing it and they could possibly request a list of all potential purchasers introduced to the property by a specific agent.

Estate agents also need to take special care and need to ensure that they document their efforts in introducing parties to a property as this will be vital in determining the effective cause of the sale at a later stage. As demonstrated in the judgment, they need to be able to prove that their efforts were the primary factor in effecting the sale and that there was a valid mandate at the time.

It is important to mention that the judge noted that this dispute would have been better suited to alternate dispute resolution mechanisms, which means that a skilled mediator with experience in property matters may have been able to resolve the dispute in a cost-effective manner.