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Real Estate Commission: Effective Cause Test

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I had lunch recently with a real estate colleague who was very upset with a client who he had known for nine years.

The client was a vendor who had engaged my colleague to sell his property on a prime street. Having only received one offer 'which fell through' during the exclusive listings period, the vendor was then poached by a rival agent with whom the property was subsequently listed.

real estateMy colleague asked me for advice as to whether he would be entitled to claim any commission should the eventual purchaser be someone to whom he had previously shown the property.

This is an all too familiar scenario involving real estate agents in a highly competitive market where potential listing are literally considered gold.

The law in this area has been largely settled by the High Court in LJ Hooker Ltd v Adams Estates Pty Ltd (1977) 138 CLR 52. In this case, the High Court defined what is known as the “Effective Cause Test”. The High Court found that an agent can still be entitled to a sales commission notwithstanding if the purchaser has purchased the property through another agent. This is provided the first agent’s introduction of the vendor or property to the buyer was the effective cause of the eventual sale. The sale must have been caused by more than a mere introduction. This, crucially, is where the problem lies. As we know, there are no commercial or proprietary rights of an agent with respect to buyers who are just ordinary citizens looking to purchase a property.

While the Effective Cause Test appears straightforward, it can be very difficult to carry out in practice. It is difficult to prove from an evidentiary basis and destroys any goodwill between not only the agents involved, but with the vendor and often even the purchaser.

Returning to my colleague’s case, he would now have to sue the former client, whom he has known for some years, by alleging some sort of underhand conduct. The new agent will naturally not want to give up any claim to the full commission as the sale has already proceeded through his or her agency. The purchaser may naturally be uncomfortable by having to admit that they were initially shown the property by the first agent.

In any case, my advice to my colleague was that the decision was his whether he wanted to sue for his lost commission, in which case Forge Legal could certainly help him prepare a case. As commissions for real estate sales are not insignificant, in the scheme of things, it may be worthwhile as the money recovered would well and truly cover his legal costs.

While my colleague appreciated my advice, he did however eventually decide to let the matter drop. On the upside, my colleague recently received an inquiry from a neighbour of the ex-client who may have seen the previous for sale signboards. In matters like this, Forge Legal has a free real estate hotline where agents can call us for complimentary advice from one of our property lawyers.

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