Court case determines who was effective cause of sale

In the recent New South Wales Court of Appeal decision of Freedom Development Group Pty Limited v D’Ettorre Properties Pty Limited T/as D’Ettorre Real Estate [2023] NSWCA 81, the Court of Appeal determined who was lawfully entitled to commission for the sale of two properties.

Background

Freedom Development Group Pty Limited (Freedom), a property developer, held call options over two adjoining properties. In September 2019, Freedom obtained development approval to construct a boarding house on the properties.

Freedom engaged a number of agents to sell the properties without success.

On 8 November 2019, Freedom appointed D’Ettorre Real Estate (DRE) as sales agent. The appointment was an open listing with the agency period from 8 November 2019 to when the properties were sold, or the appointment was terminated in writing by either party. The appointment provided that DRE was entitled to commission if during the agency period “the purchaser is effectively introduced by the Agent”.

On 11 November 2019, Mr D’Ettorre introduced Rino Criola (a spotter) to the properties, and subsequently Ben Ingham, a business associate, who expressed interest in purchasing the properties. Mr D’Ettorre negotiated the sale price of the properties with Mr Criola and received an offer to purchase the properties from Ben Ingham for $10.2 million, which was accepted by Freedom on 6 December 2019.

On 9 December 2019, IFM Wansey Road Pty Ltd was nominated as the purchasing entity, of which the sole director was Ben Ingham.

On 14 January 2020, the purchase price was increased from $10.2 million to $10.33 million to cover the costs of obtaining an extension of the option period in the call options.

On 15 January 2020, Mr D’Ettorre advised Freedom that the purchaser would “pull out if not exchanged by tomorrow!” However, Freedom was now seeking a higher price for the properties as it had an extra three months on the option agreement and mentioned it had another buyer willing to pay $11.3 million. Mr D’Ettorre advised that he would see if the prospective purchaser would match that price, but later sent a message that night advising that the prospective purchaser was ‘out’.

In February 2020, another agent, Mr Ippolito, who had a strong commercial relationship with Mr Criola, introduced John Ingham (Ben Ingham’s nephew) to the properties.

On 17 February 2020, John Ingham made an offer to purchase the properties for $10.35 million, which was subsequently accepted by Freedom. The purchaser was identified as Wansey Road Randwick Pty Ltd, with Ben Ingham as the guarantor.

On 28 February 2020, binding contracts for sale were exchanged and the contracts were completed in April 2020 and May 2020. Both John and Ben Ingham were directors of the actual purchaser.

DRE subsequently brought a claim against Freedom for its commission for the sale of the properties.

Issues to be considered

1.         The proper construction of the commission clause; and

2.         Whether the entitlement to commission arises on the facts.

Decision at first instance

The primary judge noted that an agent must establish the necessary causal relationship between its actions and the sale.

Freedom argued that DRE was not entitled to commission because the actual purchaser was not “effectively introduced” by Mr D’Ettorre, rather it was the independent efforts of the second agent, Mr Ippolito, who introduced the actual purchaser, which resulted in the sale.

The primary judge noted that Mr Ippolito secured a better deal for Freedom by fixing his commission at $99,000, which was at least $50,000 less than Mr D’Ettorre could offer, arranged a slightly higher price, and some better terms.

However, the primary judge found that Mr D’Ettorre carried out significantly more work on securing a sale than Mr Ippolito, which is one factor to be taken into consideration. In addition, the Court noted that Mr D’Ettorre introduced Freedom to Mr Criola, there was no need for Mr Ippolito to market the property again, and Mr D’Ettorre told Freedom about Mr Criola and possibly Ben Ingham.

The primary judge concluded that it was more probable than not that there was no break in the causal connection, and that Mr D’Ettorre effectively introduced Freedom to the actual purchaser. As such, Mr D’Ettorre was entitled to commission of $154,275, plus interest and court costs.

Freedom appealed the decision maintaining that the primary judge applied the incorrect test in determining causation for the purposes of the appointment and the primary judge’s finding of causation was wrong on the evidence.

Decision on appeal

The parties diverged as to whether the words “effectively introduced” refer to a causal connection between the agent’s efforts and the sale.

Freedom argued that those words refer to a causal connection between the agent’s efforts and the sale itself and require the agent to be the effective cause of the state of affairs by which the purchaser is introduced to the seller and achieves an agreement as to the purchase of the property.

DRE argued that the words require no more than “acquainting the purchaser and the vendor in relation to the property” and there was no need to consider whether there existed a causal connection when “only an introduction was required”.

However, in the Court of Appeal’s view, to be an “effective introduction” of “the purchaser” within the meaning of the relevant clause of the appointment, there must be a sufficient causal nexus between the “introduction” of the purchaser and the ultimate sale of the property to the purchaser. What is a sufficient connection is a question of fact in each case.

Freedom argued that DRE ceased to be involved with the properties and the prospective purchaser in mid-January 2020 and it was Mr Ippolito’s conduct which brought about the sale.

However, DRE maintained that although the prospective purchaser did not buy the properties, the prospective purchaser and the actual purchaser were “affiliated” because Ben Ingham was a common director of both companies and he gave a guarantee of the actual purchaser’s obligations. Therefore, DRE argued that the ultimate sale was due to Mr D’Ettorre’s introduction of Ben Ingham to the properties.

However, the Court of Appeal concluded that the evidence does not support that there was causal continuity between Mr D’Ettoree’s introduction of Ben Ingham to the properties in November 2019 and the ultimate sale in February 2020 to a corporate purchaser nominated by John Ingham, merely because Ben Ingham was a common director of the actual purchaser or gave a guarantee. The Court of Appeal noted that Ben Ingham could be a director of the actual purchaser without having a direct or indirect ownership interest in the properties.

The Court of Appeal held that the ultimate sale was a new and independent transaction following Mr Ippolito’s introduction of John Ingham to the properties.

The Court of Appeal found that DRE had not effectively introduced the actual purchaser to the properties and played no part in influencing the actual purchaser to enter into binding contracts of sale and, therefore, concluded that DRE was not entitled to its commission.

Conclusion

This decision demonstrates that by merely introducing a purchaser to the property, an agent will not necessarily be considered to be the effective cause of sale and there must be a sufficient causal nexus between the introduction and the ultimate sale of the property. The agent must be actively involved in bringing the contract into existence.

Demonstrating that an agent has been the effective cause of sale will depend on a careful consideration of the individual facts and circumstances of each case.

Agents should ensure that they keep adequate records (including file notes of telephone conversations and meetings, emails and letters) of their dealings with the relevant parties during the course of a transaction as evidence of their role in the sale of the property.

Read more: misleading-and-deceptive-conduct-advertising.

Browse more property sales articles here.