Picture: Marlon Shevelew, director Marlon Shevelew and Associates.
It happens often that tenants may default on their rental, even more so in the past few months in the aftermath of the COVID-19 pandemic and ensuing lockdown. The question that is often asked is, if the landlord is losing out on income, is the agent entitled to full commission?
What is the legal position of a landlord and of an estate agent in respect of commission payable where a tenant defaults on rental or only pays part of the rental? This question mostly comes about in the context of management rental mandates. Where a mandate given to an estate agent is only a procurement mandate, any commission will be payable once a willing and able tenant is found.
The relationship between the agent and the landlord
The nature of the relationship between the agent and the landlord is one where the agent has certain duties in respect of managing the property which it then carries out in exchange for payment by the landlord. The payment is normally done in the form of commission.
One of the duties which the agent is often saddled with is the collection of rental. The agent collects the rental from the tenant, deducts its commission, and pays the balance to the landlord. This relationship sometimes leads people to operate under the (incorrect) assumption that the tenant is actually paying the agent’s commission. This is a misperception.
The mechanism by which an agent deducts its payment from rental collected prior to paying it over to the landlord is that of set-off. When the agent receives payment, it is obliged to pay the rental over to the landlord. Simultaneously the landlord is obliged to pay the agent commission. These two obligations can be set-off against each other. Therefore, instead of the agent paying the full amount of rental over and the landlord paying the agent’s commission to it, the agent simply deducts the commission due it and pays the balance to the landlord.
In order to answer the question posed, three common formulations of the commission clause will be discussed, and the impact the wording will have on a defaulting tenant assessed, respectively.
Dealing with defaulting tenants
A situation that often arises, and all the more in the wake of the COVID-19 pandemic and ensuing lockdown, is one where tenants default on their rental. The question must then, and often is, asked “Is the agent entitled to commission?”
The simple answer is, perhaps quite unsatisfactorily, that it all depends on the wording of the agreement between the landlord and the agency. This agreement can be contained in the lease itself or in a separate mandate. If a separate mandate has been concluded, then the two documents need to be read together.
There are a few different scenarios which are common: the first is a clause which simply states that commission is earned on rental collected by the agent. This is the most common wording, and its effect is that in such a case the clause would have the effect that it is only due once rental is collected by the agent. Therefore, if the tenant does not pay its rent, the agent will not be entitled to claim commission.
The second is where the agreement states that even where the tenant does not pay, that commission is payable by the landlord. One such example is the following clause: “…Should the tenant fail to pay the rental due to the landlord, the agent would be entitled to claim the commission directly from the landlord”. The effect of this clause is quite plainly that the landlord will be liable for commission regardless of whether the tenant pays rental or not.
The third case is one that is slightly more ambiguous: where the agreement states that commission will be payable on the monthly rental amount for the duration of the lease. In such a case, and although it is not spelled out in so many words, the fact that the tenant is in arrears or is defaulting will not absolve the landlord from paying the commission each month. Such a clause may be coupled with a clause that states that any commission payable will form part of the reasonable cancellation penalty. In such a case the landlord will be responsible for the commission but may be able to recover some of it from the tenant if the tenant terminates early.
Fundamentally, whether an agent is entitled to commission despite a tenant being in arrears all comes down to the way in which the clause is worded. How this is done will be decisive. The different possible formulations of commission clauses are endless, and each one will have to be evaluated individually. In the event of any uncertainty the first port of call should be a legal practitioner; attorneys and advocates can lend an unbiased perspective, and combined with the legal expertise they possess, this will stand any agent (or landlord) in good stead as a first step. Additionally, it should be noted that it may be worthwhile running a lease by an attorney prior to having it signed, so as to avoid getting a nasty surprise later down the line.
Listen: The matter of agents’ commission and defaulting tenants was also raised during a recent interview with Marlon Shevelew on the CapeTalk radio show
About the author: Marlon Shevelew is the director of law firm Marlon Shevelew and Associates Inc. Shevelew is a well-known expert authority on residential property law in South Africa.