A look at the effective cause requirement with estate agent commission

October 1st, 2020
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In terms of South African law of agency (Basil Elk Estates (Pty) Ltd v Curzon 1990 (2) SA 1 (T)), before estate agents can be entitled to a commission for successfully finding a purchaser of the property of their principal, they must first prove on a balance of probabilities that they are the effective cause of the sale. It is against this backdrop that in this article I discuss the effective cause requirement in depth by analysing how South African courts have interpreted the requirement. Furthermore, I discuss the statutory requirements in the Estate Agency Affairs Act 112 of 1976 (the Act) that estate agents must comply with in order to successfully claim commission.

Eloff DJP in the Basil Elk Estates case stated that the primary determinative issue of whether an estate agent is entitled to a commission for a successful sale of the property is whether the estate agent was the ‘effective cause’ of the sale. What is important to establish is that South African courts, as seen in cases such as Barnard & Parry Ltd v Strydom 1946 AD 931, have continuously echoed the fact that the estate agent who introduced the buyer to the property first, or who succeeded in closing the deal, is not necessarily the effective cause of the sale. All the facts and circumstances must be weighed to determine which estate agent’s efforts were the causa causans of the sale (Basil Elk Estates). Thus, an estate agent must prove that their efforts were the causa causans (effective cause) of the sale in order to successfully claim a commission.

Eloff DJP further stated that this involves a factual determination of whether the estate agent introduced the purchaser to the property and whether or not the agent was mandated at the relevant time. In essence, the court simplified the effective cause requirement by stating that it is met when, first, the estate agent introduces the purchaser to the property, and, secondly, when the agent is mandated at the relevant time. Therefore, an estate agent, in order to claim commission, needs to prove that they introduced the purchaser to the property, and that they were mandated by the principal.

In Wakefields Real Estate (Pty) Ltd v Attree and Others 2011 (6) SA 557 (SCA), the Supreme Court of Appeal was faced with a situation wherein the principal had mandated an estate agent to secure a property for him but thereafter cancelled the mandate but subsequently mandated another estate agent to complete the deal or sale of the property. The court thus had to determine whether the former or latter estate agent was responsible for introducing the purchaser to the property and if that introduction was an effective cause of the sale. In determining this, the court used the ‘but-for’ test. Lewis JA held that if the first estate agent (Walker) had not shown the principal (Howards) the property first – the initial introduction – the property would not have been sold to the principal through the agency of the latter estate agent. The court noted that: ‘But for that introduction, De Marigny would not have known that the Howards were interested in the property (and that, as I have said, she discovered quite fortuitously). She would not have found a willing and able purchaser before Remax’s show day. She reaped where she had not sown. Despite De Marigny’s later intervention, in my view Walker’s introduction was the effective cause of the sale.’

In essence, the court concluded that if it was not for the initial introduction by the former agent, the latter agent would have not have had knowledge of the purchaser’s intention to purchase a house and thus the introduction by the former agent qualifies as the effective cause. What is equally important to note is that the court in Basil Elk Estates further stated that the failure to act immediately on an introduction or for the competing negotiators to place the introduction in temporary abeyance does not necessarily disqualify the introduction from being the effective cause of the sale. Therefore, a delay in finalising the purchase of the property after the introduction does not negate the presence of an effective cause. The court looks beyond the delay and it assesses whether, regardless of the delay, the primary introduction by the former agent was the effective cause of the purchase of the property.

The second aspect of effective cause is that the agent must have been mandated at the relevant time. However, as far as this element is concerned, Eloff DJP noted that one ought to keep in mind that an ‘unempowered agent’ (Henk Delport ‘Estate agents’ commission: “Effective cause” explained (1)’ (2010) 73 THRHR 414) may still be the effective cause of the sale and, therefore, be entitled to receive commission. The court in Le Grange v Metter 1925 OPD 76 went further to state that the inquiry in such a case (the case of an unempowered agent) is normally whether despite the termination or non-existence of a prior mandate, the work done by the unempowered agent was sufficiently significant to meet the award of commission even though not constituting the proximate or immediate cause of the ultimate transaction. Therefore, even if a mandate might be terminated by the principal and if the work of the agent, regardless of the absence of a mandate, is the effective cause of the sale or purchase of the property, they will still be entitled to a commission. It is important to note, though, that there must be a mandate. Without a mandate or contract an estate agent cannot claim compensation in the form of a commission. This is where one of the major contradictions lie, as far as the effective cause requirement is concerned. On the one hand, courts seem to be of the strong view that estate agents are not entitled to commission without a mandate. On the other hand, they seem to accept the argument that suggests you can claim commission without a mandate if you were the effective cause of the sale. However, it is of general legal knowledge that a contract between parties (ie, between estate agent and principal) is formed on the basis of an agreement, which gives rise to a mandate. Therefore, how can a party claim commission on a contract or agreement that does not exist or has since been terminated by revocation of a mandate by the principal? It is clear that the law ought to be developed to iron out the contradiction.

Although most of the case law in South Africa (SA) focuses on effective cause being an imperative requirement, there are other requirements that ought to be met in order for an estate agent to be entitled to a commission. One of the requirements is a statutory one, which is encapsulated in the Act. The Act requires that all estate agents be registered with the Estate Agency Affairs Board (the Board) before operating as estate agents in SA. Thereafter, on successful registration with the Board, every estate agent must apply to the Board for a Fidelity Fund Certificate (FFC). Without the aforementioned requirements being met, an estate agent cannot claim commission from their clients. An FFC is renewable each year and serves as proof of registration and confirmation that a person is legally entitled to carry out the activities of an estate agent.

Therefore, the requirements emphasised by the courts in various judgments must be coupled with the statutory requirements encapsulated in the Act and only once these requirements are met an estate agent can claim compensation in the form of a commission.

Conclusion

It is clear (based on the Wakefields judgment) that South African courts, insofar as estate agencies are concerned, seek to protect the interests of an agent who uses their skills to yield results but could easily be overtaken by another agent who is a competitor. For example, agent A can make an effective introduction but agent B, by chance or coincidence, stumbles on and partakes of the benefit of the introduction by agent A.

Lastly, in order for estate agents to protect themselves, they ought to ensure that they, at all material times, are the effective cause of the sale as compared to other competing agents. This means that, they must ensure that the successful sale or purchase of a property is a by-product of the introduction of the purchaser to the property and the mandate that they have been given by the principal. Equally, estate agents must ensure that they have adhered to the statutory requirements of the Act and have a valid FFC, which serves as proof of both registration and entitlement to a commission.

Sibabalo Mtonga LLB (UWC) is a candidate legal practitioner at Herold Gie Attorneys in Cape Town and is currently completing his Masters in Employment Law.

This article was first published in De Rebus in 2020 (Oct) DR 18.