Rogue Estate Agent’s Commission

Raymundo Larraín Nesbitt, November, 18. 2016

By Raymundo Larraín Nesbitt
Lawyer – Abogado
18th of November 2016

I was stunned to learn the other day from a client the commission structure of a high-profile real estate agency in Marbella. We are talking of a leading agency that operates in dozens of countries, employing thousands of staff worldwide. In their defence, maybe this was just a one-off contract from one of their branches, as these operate autonomously within the umbrella of a global brand.

At first I thought either the client or myself had misunderstood the agency’s contract. On being forwarded the contract I confirmed it was as I feared. This prompted me to write this short blog post as a warning to all sellers not to sign such a contract and have it amended (or even change the estate agent).

In Spain, an estate agent is legally due his commission when the sale takes place. From a legal point of view, and with no intention of going into esoterics, this takes place on completion on signing a Title deed before a Notary Public which changes the ownership and it is when all the associated property transfer taxes are due.

In the Costa del Sol, as a norm, the generally accepted commission on selling is 5% plus VAT (this varies for rural property and for very high-end property). Typically, how it plays out is that the buyer’s lawyer will bring a cheque for the estate agency at completion. If there is no sale, some agencies may agree to withhold a small percentage of the initial reservation deposit to cover their costs as a token of compensation which is perfectly acceptable as they have invested time and money chasing a lead.

Now the contract I was given had two dangerous clauses:

  • One clause defined contractually what was understood by a sale. It actually went on to define a sale as either the signing of a private purchase contract (contrato privado de compraventa) or else completion at a Notary Public. The latter is fine; it is the former that is unacceptable. The former understood that signing a private contract was a final sale and so a sales commission was due. From a legal point of view signing a private purchase contract should have associated no sales commission as effectively no change of ownership has taken place. Moreover, no taxes are due precisely because there has been no change in ownership.
  • The second clause specifically stated that “immediately” upon signing a private contract 50% of the sales commission was due (or overall 2.5% plus VAT). This, for want of a better word, is simply ludicrous.

 

When these two clauses work together they can create a perverse scenario whereby a seller has signed with a buyer a private purchase contract to sell a property within a deadline but the sale may fall through for myriad reasons i.e. buyer is unable to secure finance from a lender or he simply pulls out because he gets cold feet.

Even if the sale is not completed, and the buyer backs away, the seller would still have to honour the agency´s commission and pay them 2.5% plus VAT as a ‘sales’ commission (!). Picture the case of an upmarket property worth a substantial amount. You may be talking of a five or six-figure agent’s commission when no sale has taken place!

Such an agency contract clearly damages the seller’s interests and should not be signed, period. A seller should request the agency to remove both clauses and add the typical clause whereby the 5% sales commission is due at the signing of a Title Deed before a Notary Public, not a moment before.

To avoid being taken for a ride, it is strongly recommended that sellers appoint legal representation on selling property in Spain to protect their interests and avoid such blatant abuses.

 

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