When is a real estate agent lawfully entitled to commission? What is required to "effectively introduce" a purchaser?

In brief - If you are a real estate agent or developer, the Court of Appeal in New South Wales has considered the circumstances in which an "effective introduction" has been made and ultimately determined who was lawfully entitled to commission from the sale.

The common law generally provides for a real estate agent to be entitled to commission, it is for the agent to establish the necessary causal relationship between the agent's actions and the sale - see LJ Hooker Ltd v WJ Adams Estates Pty Ltd (1977) 138 CLR 52 at 66; [1977] HCA 13.

The case

The Court of Appeal in New South Wales recently decided that an agent was not entitled to commission from a property developer because, under the agency agreement, the agent did not "effectively introduce" the actual purchaser: Freedom Development Group Pty Limited v D'Ettorre Properties Pty Limited T/as D'Ettorre Real Estate [2023] NSWCA 81 (Freedom Development).

After negotiations with a "prospective purchaser" fell through, the developer sold the property to the "actual purchaser". The sole director of the prospective purchaser was with his uncle, and was also a director of the actual purchaser. 

The Court of Appeal held that the agent was not entitled to a commission because the sale was not "brought about through its agency" and "was a new and independent transaction" through another agent.

Background

On 8 November 2019, the owner of call options over two adjoining properties at Randwick (Developer) entered into a written agency agreement with D'Ettorre Properties (Original Agent). 

On about 27 November 2019, the Original Agent introduced a prospective purchaser to the Developer, whose sole director was Ben Ingham (Ben). Ben having been introduced to the Original Agent by a "spotter", Mr Rosa Criola (Spotter).

On 15 January 2020, after significant negotiation, the deal with a "prospective purchaser" fell through.

On about 11 February 2020 a second agent, Mr Ippolito (Ippolito), with approval from the Spotter, telephoned John Ingham (John) and negotiated a sale with him. The Spotter and Ippolito both knew John and Ben to be related, John being Ben's nephew, and that Ben's negotiation had fallen through.

On 19 February 2020, the Developer and Ippolito entered into an agency agreement and issued a sales advice that named the actual purchaser. 

On 28 February 2020, sale agreements were entered into. In accordance with the sale agreements, the actual purchaser completed the purchase of the two properties, one in April 2020 and the other in May 2020. 

Ippolito's evidence was that:

• Ippolito spoke only to John about the sale, and never spoke to Ben 
• John did not mention he was purchasing with anyone and did not mention Ben's involvement
• Ippolito knew the actual purchaser's name but not the name of the directors of the actual purchaser, who were both Ben and John
• Ippolito did not know that Ben guaranteed performance of the obligations of the actual purchaser (which he did).

In addition to the above, the sale was completed in circumstances where:

• shareholders of the prospective purchaser and the actual purchaser were the same
• Ippolito knew that (as agent for the Developer):
  • John is Ben's nephew
  • the sale to the prospective purchaser, that Ben was involved in, had fallen through
• ​ the actual purchaser was a trustee of a unit trust - there was no evidence that Ben was a beneficiary of the trust or directly or indirectly benefited from the trust
• the actual purchaser paid $20,000 more than the best offer of the prospective purchaser and the commission paid to Ippolito was about $50,000 less than that claimed by the first Original Agent.

For the commission to be paid, the Agent must "effectively introduce" the purchaser 

The Original Agent claimed commission from the Developer under the agency agreement that promised payment of a commission if the Original Agent "effectively introduced" a purchaser. The sale occurred during the term of the Agency Agreement.

The District Court found for the Original Agent

The District Court found that, consistent with the requirements of the agency agreement, the Original Agent had "effectively introduced" the actual purchaser, awarding the Original Agent a commission of $154,275 plus interest plus court costs. 

The Court of Appeal found for the Developer

Freedom appealed, claiming that it was the "independent efforts" of Ippolito that resulted in the sale to the actual purchaser.

The Court of Appeal confirmed that to be entitled to commission, the agent must:

"… establish the necessary causal relationship between its actions and the sale, or, in other words, that the sale was brought about through its agency… [and] that, [l]ike all questions of causation this is ultimately a question of fact" see Freedom Development at [40].

The Court then allowed the Developer's appeal because, in its opinion, on the facts of the case, the Original Agent "played no part in influencing the actual purchaser to enter into binding contracts …" - see Freedom Development at [61]. 

Similarly, the Court held that on the facts there was not: 

"… any continuing effect of the initial introduction by … [the Original Agent] because the ultimate sale was a new and independent transaction following … [Ippolito's] introduction of John … to the properties". 

The Court held that to earn a commission, an agent must do more than "merely acquaint" the purchaser and the vendor. There must be a sufficient "causal nexus" between the introduction of the purchaser and the ultimate sale of the property. What is a sufficient causal nexus is a question of fact in each case. The onus of proof is on the agent - see Prestige Residential Marketing Pty Ltd v Depune Pty Ltd [2008] NSWCA 179.

The Developer ultimately had no liability to the Original Agent for payment of any commission and the Original Agent was responsible for all court costs.

What is not explained is that, even if Ippolito did not know, the developer likely knew, of Ben's direct involvement in both the prospective purchaser and actual purchaser. It is standard practice for a developer's solicitor to obtain a company search of a purchaser like the actual purchaser, that would have disclosed to the Developer that Ben and John were both directors. To some, it may seem that the Developer is liable to the Original Agent given the Original Agent introduced Ben. It shows how important the facts are in a case like this.

Consider your agency agreement

If you are a real estate agent or developer, consider the circumstances in which an "effective introduction" has been made. Consider whether the terms of your agency agreement are sufficiently clear to reduce the risk of a serious dispute arising in similar circumstances.

For a real estate agent seeking to avoid loss in similar circumstances, consider including express provisions in your agency agreement that make commission payable:

• if you introduce a person "related" to the actual purchaser, with an appropriate definition of when persons are "related"

• regardless of whether you "influence" the purchaser to enter into a binding contract, it is not necessary for you to prove that you caused the sale.