Letting agents should be mindful of the duty to account for commission earned while acting on behalf of landlord clients and are advised to make simple changes to their terms of business to avoid punitive action.
The issue has caught the media’s attention recently due to a potentially multi-million pound class action against Foxtons Estate Agents in London for receiving commission from contractors without obtaining the fully informed consent of the landlord client. Interestingly, commentary on the action referred to Foxtons’ conduct as “against industry codes of practice”.
This comes as the Scottish Government has passed the first Statutory Code of Practice for Letting Agents in Scotlandafter long calls for regulation of the industry. Under the Code, which comes into force in January 2018, lettings agents must, on the request of the landlord, provide written disclosure of any commission received, and include a statement to this effect in their terms of business.
This duty stems from the law of agency. In general, an agent (the letting agent) should not derive benefits without the knowledge of their principal (the landlord) while acting under an agency agreement. Breach of this duty can result in a court action being brought against the agent for recovery of the commission or other benefits earned.
Failure to account for retained commission may also be a breach of consumer law. More specifically, it is an ‘unfair commercial practice’ under the Consumer Protection from Unfair Trading Regulations 2008 when one of the parties to the contract is a consumer. A letting agent who is found to engage in an unfair commercial practice is guilty of a criminal offence.
However, it should first be determined whether or not a landlord is a consumer which is not always clear. In light of the criminal implications, agents are advised to err on the side of caution and assume that landlords are consumers unless there is strong evidence to the contrary. Then there is the question of whether an agent’s conduct amounts to an ‘unfair commercial practice’. This generally depends on whether the letting agent’s behaviour, either by way of an omission or otherwise, is misleading.
In summary, letting agents are not forbidden from obtaining commission on condition that the arrangement is acknowledged and accepted by the landlords they act for. This is easily achieved by inserting a commission clause into the agent’s terms of business. The clause should be as transparent as possible to avoid threats to its validity on the ground of unfairness. Ideally, the clause should include:
A definitive list of circumstances in which commission may be receivedThe likely rate of commissionA statement that further information is available on reques
If you are a letting agent and would like some advice on your obligations, or to discuss a review of an agency agreement or terms of business, please feel free to contact us. If you are not already a member, please join the Scottish Private Letting Forum on LinkedIn where we post regularly about these and other issues.
