Brokerage fees or compensation for services rendered?

In its judgment on 15 July 2019, delivered in the names of Central Real Estate Limited vs Michael William Orr et, the First Hall Civil Court, presided by Mr Justice Joseph Zammit McKeon held, inter alia, that an estate agent may, if the legal requirements to claim brokerage fees do not subsist, still be entitled to compensation for services rendered.

On 30 October 2017, Central Real Estate Limited (the “plaintiff company”) filed a sworn application before the First Hall Civil Court, whereby it claimed, inter alia, that:

The defendants (also “the sellers”), Michael William Orr and his wife, Anna Orr, had entered into a promise of sale agreement dated 18 February 2015 for the sale of their property in San Pawl tat-Tarġa, Naxxar, and in terms of which the plaintiff company was entitled to €37,170 in terms of brokerage fees;

Since the sellers and buyers (the “contracting parties”) had failed to enter into a final sale and purchase contract within the timeframe stipulated by the promise of sale agreement, the buyers decided to rent the property from the defendants, and then to purchase the property, of which purchase the plaintiff company had not been notified;

The sale and purchase contract was completed on 31 August 2016 between the same parties which the plaintiff company had brought together for the purposes of the sale of the defendants’ property;

The parties to the current proceedings had signed two agreements:

an indefinite Open Agency Agreement dated 6 November 2014, in terms of which a commission agency fee of 5% was due by the sellers; and

a Sole Agency Agreement (in force from 12 February 2015 to 12 August 2015), in terms of which a fee of 3.5% was due by the sellers. Given that the Sole Agency Agreement had expired, the fee applicable was that which had been agreed upon in the Open Agency Agreement above.

It was the plaintiff company which, as a broker, had identified and approached a third party willing to purchase the defendants’ property, which third party had eventually gone on to rent and purchase the defendants’ property;

The defendants refused to pay the brokerage fees due despite the fact that they were repeatedly called upon to do so. Moreover, the plaintiff company only discovered that a final sale and purchase contract had been entered into between the buyers it had approached and the sellers when it had carried out research on the matter;

Therefore, the plaintiff company requested the Court to, inter alia:

declare that it had rendered brokerage services and acted as a commission agent in the sale of the defendants’ property;

declare that the defendants are obliged to honour the Open Agency Agreement, and that therefore, they had to pay to the plaintiff company the commission agency fee of 5% as specified in the said agreement; and

order the defendants to pay to the plaintiff company the fees due.

On the other hand, the defendants argued that, inter alia:

the plaintiff company had no right to claim brokerage or commission agency fees because it had failed to satisfy the elements required at law for brokerage to subsist; and

if the Court held that the plaintiff company had rendered services to the defendants, the plaintiff company was only entitled to compensation, and not to brokerage or commission agency fees as claimed by the latter.

In examining the defendants’ abovementioned pleas, the Court discussed the elements required in order to claim brokerage fees. Reference was made to a Court of Appeal judgment delivered on 27 November 2009 in the names of KB Real Estate Ltd vs Silvio Felice Limited. In this case, the Court of Appeal held that the following three prerequisites must be cumulatively satisfied in order to claim brokerage:

conclusion of the proposed transaction;

the intervention of the broker, which must have been requested (or at the very least, accepted) by both contracting parties; and

the broker’s efforts must have been conducive to the parties reaching a consensus.

The Court also went on to cite a second Court of Appeal judgment in the names of Legend Real Estate Limited vs Paul Pisani, delivered on 25 May 2007, whereby the Court held that:

The broker must ensure that its intervention was conducive to the agreement of the interested parties over the substantial and ancillary elements of the contract, in such a way that the proposed business is concluded. In this case, even if the broker’s work does not lead to the conclusion of the said business (for any reason which is not attributable to its fault or actions), the broker remains entitled to payment. Such payment would not be due in terms of a brokerage penalty, but rather in terms of compensation due for services rendered.

In view of the foregoing requirements, it cannot be said that brokerage subsists when the so-called ‘broker’ is engaged by only one of the parties.

In the case at hand, the plaintiff company had introduced the buyers to the sellers of the property. Moreover, various negotiations had taken place between the contracting parties, during which the estate agents were actively involved. The Court noted that the buyers had also acquired the property from the defendants for the same price which the parties, through the estate agents, had agreed upon - even though the estate agents themselves had been excluded from the final sale and purchase contract.

However, the Court observed that the property had been withdrawn by the defendants on 5 October 2015 and that as a result, the plaintiff company was no longer authorised to act as mandatory for the defendants from that date onwards. On this basis, the Court upheld the defendants’ plea that the plaintiff company was not entitled to claim brokerage fees.

Therefore, what remained to be determined was whether the plaintiff company had a right to alternatively claim compensation for services rendered. Reference was made to a 2004 judgment of the First Hall Civil Court in the names of whereby the Court had to determine whether the plaintiff company was entitled to brokerage fees, or at the very least, compensation for services rendered:

Brokerage fees would not be due unless the parties agree on the substantial and ancillary elements of the sale and purchase contract. However, the estate agent could still be entitled to compensation. If a contract fails to materialise (or is frustrated) through no fault of the broker itself, the latter would still be entitled to compensation for services rendered, the amount of which would be fixed by the Court. The amount of compensation can equal the sum which would have been due in terms of brokerage fees.

In this case, the first promise of sale agreement had been concluded by the contracting parties after the decisive intervention of the plaintiff company. The fact that the final sale and purchase contract had not been entered into was not attributable to any act or omission on the part of the estate agents. Indeed, the buyers (which had been introduced to the defendants by the plaintiff company) had gone on to rent and purchase the property from the defendants.

The Court noted that the sale and purchase roadmap had been entirely laid out by the estate agents. The latter had been excluded from the final contract not because they defaulted on their obligations, but because it was convenient for the defendants to bypass the broker and deal directly with the interested buyers.

In determining the amount of compensation due to the plaintiff company, the Court observed that the sale of the property had been carried out under the same conditions which had been previously agreed upon by the contracting parties when negotiations were being conducted by the plaintiff company even the purchase price had remained the same!

Finally, the Court made reference to Article 1881(1) of the Civil Code, Chapter 16 of the Laws of Malta:

(1) The mandator must repay to the mandatary the advances and expenses made or incurred by him in carrying out the mandate; and he must pay him the remuneration if promised to him, or if it is presumed to have been tacitly agreed upon, regard being had to the profession of the mandatary and to other circumstances.

The Court held that had it not been for the intervention of the plaintiff company, there would never have been any final sale and purchase contract.

In light of the above, the Court: i) declared that the plaintiff company had a right to compensation for services rendered, which services had been conducive to the sale of the defendants’ property;

ii) liquidated the compensation due to the plaintiff company in the amount of €21,000;

iii) ordered the defendants to pay to the plaintiff company the sum of €21,000, with legal interest as from the date of judgment; and

iv) ordered the plaintiff company and the defendants to bear the costs and expenses of the judicial proceedings in equal measure.