It is commonplace for vendors and purchasers to appoint real estate agents to source for potentially interested parties or joint-venture parties to purchase or sell or to enter into a joint-venture to develop its lands. A real estate commission is charged by the real estate agents for this service, payable generally upon the signing of the sale and purchase agreement or tenancy agreement between the vendor or landlord and the purchaser or tenant as the case may be.
Every real estate transaction presents potential legal complications. Buyers and sellers may bring claims against their real estate agents for a variety of reasons, including misrepresentation or nondisclosure of property conditions, negligence, breach of fiduciary duty or breach of contract to name a few. In some circumstances, real estate agents and negotiators may also find themselves unable to collect commissions owing to disputes in respect of appointment as agent, professional services rendered or disagreement regarding quantum of fees agreed.
Situations Which May Giving Rise to Fee Disputes
To avoid legal pitfalls, real estate agents should be vigilant about some of the legal issues surrounding commissions that may arise and take active steps to avoid them. To name a few, the following are some situations where fee disputes may arise:
- The vendor or the purchaser may contend that neither of them has appointed the agent as its real estate agent to sell/buy the property and that there was no agreement whatsoever to pay the commission.
- Clients may claim that an oral agreement existed with the agent that commission are payable only if certain conditions are met (i.e the whole of the properties was sold, the sale is at a minimum price, the sale and purchase is signed within a specified time etc) and that since those conditions were not fulfilled no fees was payable.
- Working with ‘property marketing agencies’ which are not registered real estate agents under the Section 22C of the Valuers, Appraisers and Real Estate Agents Act 1981 and are thus not entitled to collect commission.
- The client may contend that apart from merely introducing the parties, the agent had failed to carry out the scope of duties expected of an estate agent to help conclude the sale. The client had to do substantial amount of work himself to complete the sale.
- The parties may also by-pass the agent after introduction and proceed to directly negotiate to conclude the terms of the sale and purchase of the property.
- The clients may claim that no commission is payable since the sale was subsequently aborted.
- The parties were introduced and brought together by the agents but there were no immediate developments following the meeting. However, the parties came together some time later and had concluded the transaction without the knowledge of the agent.
Avoiding Legal Pitfalls
1. The importance of executing an appointment letter.
The law of agency is governed by Part X of the Contracts Act 1950. An agency is defined as a relationship between two parties, the principal and the agent, whereby the role of the agent is to act as the representative of the principal. The authority to act for and on behalf of the principal is derived from the contract made between the principal and the agent.
The importance of a written appointment letter cannot be overstated. In the High Court case of Singham Sulaiman Sdn Bhd (t/a Jones Lang Wootton) v Mega Palm Sdn Bhd [2014] 7 MLJ 476, the plaintiff claimed that they had been orally appointed as a real estate agent and the professional fees for the service were agreed at 2% of the sale price of lands. The plaintiff was unable to prove its claims as there was no positive evidence to establish a valid oral appointment of the plaintiff as an estate agent by the defendant for the sale of the lands. Further, any agreement, where the meaning of which is not certain, or capable of being made certain, is void under Section 30 of the Contracts Act 1950. The plaintiff had failed in this case to claim for commissions.
The first step that an agent should take to avoid getting entangled in disputes regarding commissions and fees is to ensure that a written appointment letter/contract is signed with the principal being the seller or the buyer whom the real estate agent is representing. The appointment letter will serve as written evidence that the agent has been appointed by the vendor/purchaser to act on its behalf.
2. Appointment letter must reflect the variation or additions agreed between the parties
It is common industry practice for real estate agents to use a template appointment letter. However, if the parties agree to a different commission scale or conditions than those provided in the said template, such agreement must still be put in writing either by incorporating the additional term or variation term into the template or by executing a supplemental agreement. Even though oral agreements can be valid, the absence of written evidence may be an obstacle for the real estate agent to prove that the parties had agreed to vary or add to the terms in the template appointment letter.
In the Court of Appeal case of Inch Kenneth Kajang Rubber Public Ltd Co v Tor Peng Sie (t/a Pacific Landmark Real Estate Agents) [2014] 1 MLJ 118, the court held that there was insufficient evidence that the parties had set as a precondition that the agent had to secure a purchaser at a minimum price to be entitled to claim its fees as no contemporaneous documentary evidence, either before and after the letter of appointment was signed, was tendered in court to support that contention. The court further held that if the minimum price was a pre-condition, it was incumbent on the vendor to have spelt it out in no uncertain terms in the letter of appointment so that the agent would have known in advance what its obligations were. In this instant case, it was the vendor who had contended that there was a variation to the appointment letter signed. The converse would be true if it was the agent who had contended that there was a variation to the terms of the appointment letter/contract.
When negotiating the appointment terms make sure the conditions of the appointment are fully and clearly defined and agreed to by all parties.
3. If you are working with a “marketing agent”, ensure that the marketing agency is also a registered real estate agent.
In the recent High Court case of Ecofirst Hartz Sdn Bhd v Poon Mun Cheong & Anor [2018] MLJU 901, the court held that while the defendant claimed to be marketing agents only, they were engaged pursuant to clearly worded appointment letters, and the marketing efforts included them seeking for potential purchasers, getting them to fill up application forms, collecting deposits, and pocketing commission fees from the plaintiff based on the sales made. The court found that evidence showed that the defendants did engage in estate agency practice and had acted as agents. By virtue of the undertaking of the works of an estate agent, the plaintiff had breached the law without having the status of a registered estate agent. The court held that the defendants are not entitled to recover any fees or commissions for any professional advice or services rendered as an estate agent.
The Court of Appeal in Ong Thean Chye & Ors v Tiew Choy Chai & Anor [2011] 4 MLJ 616 similarly held that the respondents who were not registered agents are not entitled to claim based on or pursuant to any agreement for professional real estate fees and charges.
As such, real estate agents should take note that they may not be able to recover commissions from marketing agents should such agents themselves be unable to recover their commissions from the principals. Generally, contracts that are signed in breach of the law will be rendered void for illegality. It would be advisable for real estate agents to ensure that the marketing agents they intend to work with are similarly registered real estate agents if such marketing agents should be carrying out the works of an estate agent.
Agents’ Right to Commission
1. Rights to commissions are based on contract
In Inch Kenneth Kajang Rubber Public Ltd Co, the court cited Luxor (Eastbourne) Ltd and others v Cooper [1941] AC 108 that commission contracts are subject to no particular rules or principles of their own and that no general rule can be laid down by which the rights of the agent or the liability of the principal under commission contracts are to be determined, the accepted position in cases involving agent's commission is that the principal is only bound to pay a commission if and when the agent has brought about the intended result.
In the Federal Court case of Chew Teng Cheong & Anor v Pang Choon Kong [1981] 1 MLJ 298, the learned judge held that where the agency contract provides that the agent earns his remuneration upon bringing about a certain transaction, he will be entitled to such remuneration if he is effective, not necessarily the immediate cause of the transaction being brought about. Similarly, in the Federal Court case of Tang Chiok Sing v Lian Fatt Sawmill Co [1976] 2 MLJ 241 (FC), the court in delivering the judgment of the court held that the 'principal's liability to pay commission depends on whether, on the proper construction of the contract between him and the agent, the event has happened upon which the commission is to be paid.
Consequently, real estate agents should ensure that their appointment letters and contracts signed with the principals are properly worded so that it is clear that commissions are payable upon the occurrence of a certain event(s) or series of event(s) (i.e. introduction of the parties and thereafter upon signing of the sale and purchase agreement etc.)
2. Rights to commission after lapse of appointment as agent
In Ong Kee Ming (t/a FL Development and Property Consultants) v Quek Yong Kang & Anor [1991] 3 MLJ 294; [1991] SLR 562, the High Court held that an agent was entitled to his commission even after the lapse of his appointment as he was, on the evidence, the effective cause of the ultimate sale. Also, in Cheng Poh Holdings Sdn Bhd v Ernest Jai Kumar Azad [2011] 1 LNS 1728, the Court of Appeal held that notwithstanding a transaction document was executed after the expiry of the agent’s mandate, the agent would still be entitled to fees if they were the effective cause of the transaction.
Accordingly, not paying commission to the agent for the reason that the parties only came together later on their own to conclude the transaction would not stand. An agent is still entitled to his commission if he was the effective cause of the transaction.
Remedies
Real estate agents may pursue an unpaid commission in court if such an amount is substantial.
For any claims under RM5,000, the real estate agent may pursue the claim at the Small Claims Court. All proceedings involving small claim cases will be heard and decided by a Magistrate and parties are generally not allowed to be represented by legal counsel. The procedures for self-representation and filing a claim at the Small Claims Court can be found here.
For Reference: Real Estate Agency Fee Schedule
Pursuant to the Valuers, Appraisers and Estate Agents Act 1981 and Rules 1986, the agent’s commission fees for sale and purchase are set at a maximum of 3% of the property’s sale price. The fees for tenancy ranges from a minimum of 1 month’s rental up to 1.75 month’s rental depending on the duration of the rental. The additional commission may be charged for tenancies exceeding 5 years. Please refer to the fee scale below for details on agency commissions.
Fee scale under Rule 48 and the Seventh Schedule of Valuers, Appraisers and Estate Agents Rules 1986
A) Sale or Purchase
- Land and Buildings Maximum fee of 3%
- Fees for other services such as joint venture, sale of company, property swaps, etc. Maximum fee of 3%
- Chattels including Plant and Machinery 10 % of the proceeds
Minimum fee: As above, subject to a minimum fee shall be RM1,000 per property.
B) Lettings
| Duration of Tenancy | Maximum (Fee equivalent too) |
| Up to 3 years | 1.25 months gross rental |
| Exceeding 3 years up to 4 years | 1.50 months gross rental |
| Exceeding 4 years up to 5 years | 1.75 months gross rental |
| Exceeding 5 years | 1.75 months gross rental |
| Exceeding 5 years (without option for renewal) | 1.75 months gross rental |
| Exceeding 5 years (with option for renewal) | 1.75 months gross rental plus 0.25 months rental for every additional year |
Minimum fee: As above, subject to a minimum fee of 1 month rental.
For tenancies less than one year, the fee may be calculated on a pro-rata basis. The above scale shall not apply to serviced offices/apartments or any other premises of similar nature.