It is not uncommon for an agent to attempt to claim commission from a vendor for having introduced the purchaser to the property even though the purchaser had ultimately signed a contract through a different agent after the initial agent's exclusive agency period.
Often in a contract for sale of property, the vendor will insist on a warranty from the purchaser that the purchaser was not introduced to the property by any agent other than the agent named on the front page of the contract, as well as an indemnity for any breach of the warranty. The vendor in such circumstances is attempting to avoid being out of pocket in paying another agent commission should another agent successfully claim commission for introducing the ultimate purchaser to the vendor or property.
But does the mere act of the agent showing the purchaser the property allow the agent to claim commission for the eventual sale?
Most recently, in West Property Solutions t/as Century 21 West Property Group v Lewis & Anor  QCATA 42, during the exclusive agency period, West (the First Agent) presented a contract for sale of land signed by the purchasers to the vendors. The contract was not accepted by the vendors.
After the First Agent's exclusive agency period expired, the vendors signed a contract with the same purchasers through a subsequent agent. The First Agent then claimed commission on the sale.
At first instance, the Adjudicator found that West was not entitled to its commission on the basis that there was an insufficient connection between the terms of the contract West presented and the contract which ultimately settled. There was a cessation of negotiations between the purchaser and the vendor because the terms of the contract West presented were unsatisfactory to the vendor. The Adjudicator found that this severed the nexus between the contract West presented and the eventual sale.
On appeal, the Appeals Tribunal held that the Adjudicator failed to employ the proper test. The Tribunal found that the Adjudicator should have employed the effective cause test as expressed by the High Court in LJ Hooker Ltd v Adams Estates Pty Ltd (1977) 138 CLR 52.
EFFECTIVE CAUSE TEST
In LJ Hooker v Adams, the High Court found that an agent will be entitled to commission where the agent introduces a person to the vendor or property who ultimately becomes the purchaser of that property. However, the agent must show that the introduction was the effective cause of the sale.
Effective cause means more than merely being a cause of the sale. The question is whether the actions of the agent really brought about the relation of buyer and seller: Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) NSW ConvR 55-978.
Where the agent has shown a prospective buyer the property or even procured an offer to the vendor which is unsatisfactory to the vendor, the agent's performance may not be the effective cause of the sale. Disputes as to whether the effective cause test is satisfied can arise in various circumstances.
The following cases illustrate the effective cause of a sale:
- In Moneywood v Salamon, the vendor sought to exclude the agent from a subsequent contract. The vendor and Purchaser executed a contract (First Contract) procured by the agent, which acknowledged the agent as the vendor's agent. The First Contract contained terms making it conditional upon council's approval of a rezoning application. Following council's failure to rezone the land, the vendor rescinded the First contract and entered in to a new contract with the Purchaser for a lesser sum for part of the land, which did not acknowledge the agent (Second Contract). In formulating the Second Contract, the vendor sought to retain as much of the benefits it could from the First Contract. The Court found that the initial work done by the agent, including introducing the purchaser to the land, "flowed through" to the Second Contract and remained influential in the formation of the Second Contract, the agent was consequently an effective cause of the sale.
- By contrast, in Rasmussen & Russo Pty Ltd v Gaviglio  Qd R 571, there was an insufficient causal link between the actions of the agent and the relation between the buyer and seller. In that case, an agent introduced the purchaser to the vendor, and arranged for the purchaser to execute a contract for the property. However, the contract was rescinded because the purchaser was unable to obtain finance. A second agent subsequently arranged for the same purchaser to execute a contract with the vendor and obtained finance which the purchaser could not have otherwise obtained. On its facts, the agent's work was not an effective cause of the ultimate sale.
Wests case is reminder that even if the agent's exclusive agency period has expired, an agent will be entitled to its commission where it has been the effective cause of the sale. However, the mere introduction of the purchaser to the vendor, without more, may be insufficient to establish that an agent's work was the effective cause of the sale.
It is also evident that the circumstances in which an agent will be entitled to commission can be uncertain and really depends on the agent's performance at the time.
Whilst purchasers entering into a contract for sale of land may consider resisting any indemnity in respect of any other agent's commission, often such an indemnity clause may prompt the purchaser to disclose any previous connections to other real estate agents that may attempt to claim commission from the vendor, which may be addressed at the relevant time.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.