A Chilling Clause
Category Financial Mail
Not only is it taking much longer for sellers to find buyers for their homes - more often than not at below asking price - but sellers are also increasingly being exposed to the threat of paying a double commission.
That's because sellers are often not aware of what some refer to as the "freeze" clause, usually included in a sole mandate. The clause entitles the agent to commission if someone they introduced to the house ends up buying the property after their mandate expires.
The freeze clause is normally effective for three to six months after the sole mandate lapses. In theory, the implications can be as follows:
Joe Bloch views house Kramer on agent Smith's show day. Bloch doesn't put in an offer but two months later decides to take another look at house Kramer, this time while agent Brown has the sole mandate. Bloch ends up buying the house for R3m. Kramer thus owes Brown commission of R180000 (6%). But Smith invokes his legal claim to commission, forcing Kramer to pay both Brown and Smith commission of R180000 each.
Because it took an average two months to sell a house during the boom (FNB figures), back then the freeze clause seldom came into play.
But today it can take six months or more to sell a house, which means the deal is often only concluded once the second agent is appointed by the seller.
Originally, the intent of the freeze clause was to prevent buyers and sellers from signing a private deal with each other once the mandate expired to avoid paying agent commission.
But given the current softer market, where the pool of potential buyers has shrunk significantly, "freezing'' out potential buyers simply because they viewed the property during the tenure of a previous agent appears to be unfair. That begs the question whether the practice should be abolished.
Adrian Goslett, CEO of RE/MAX of Southern Africa, says though the issue certainly makes for an interesting debate, the freeze clause will be unfair only in a case where the first agent did not disclose all prospective buyers in writing to the seller once his mandate expires.
Similarly, the second agent can put the seller at risk if he knows the buyer has viewed the property during the tenure of the first agent but fails to disclose this to the seller.
Goslett believes the freeze clause has a place, given how much time, effort and expense is incurred with respect to the marketing of a property throughout the mandate period. Besides, Goslett notes, it is left to the discretion of the first agent as to whether to invoke the right to commission.
"And in many cases the agent concerned will split the commission on a 50/50 basis with the second agent to accommodate both buyer and seller.''
However, Ronald Ennik, CEO of Christie's-affiliated Ennik Estates, is entirely opposed to exposing sellers and prospective buyers to the constraints of the sole mandate freeze clause. Ennik believes free-market forces should prevail.
"Estate agents who fail to sell a home within the period of a sole mandate should step aside and make way for another agent to do the job - with no strings attached to either the buyer or the commission involved in the subsequent sale of the property.''
Ennik maintains that the widely used freeze clause has strayed way beyond its original intention and now serves only to compromise sellers' and estate agents' ability to achieve an optimum result in a free-market environment. It also freezes out buyers simply because they have viewed the house before.
He concedes that in the case where one or two potential buyers are still involved in active negotiations when the original sole mandate expires, it makes sense for the seller to give the first agent no more than two to three weeks to complete negotiations.
But Ennik advises sellers to ensure the clause dealing with the issue is amended accordingly before signing the sole mandate. Ennik stresses that selling a home on sole mandate will almost always achieve better prices than going the open mandate route, but the inclusion of the freeze clause could leave unwary sellers out of pocket.
"Sellers are often forced to accept lower offers simply to avoid the threat of double commission. Or worse, they get embroiled in lengthy and costly legal battles.''
Author: Joan Muller
