Risks from not declaring referral fees – money ‘belongs’ to the client

Are agents right to focus on the possibility of letting agency fees being scrapped if Labour wins the election – or is there something more important they are ignoring?

Yesterday, Twitter spread the word about a case we suspect most agents have never heard of – largely because it concerned the purchase of a hotel in Monaco.

Eye hadn’t heard of it either so we looked it up.

And it is clear that the apparently obscure case has important implications for agents’ fiduciary duty to their clients – and specifically income from referral fees and the risks of not revealing them.

Essentially, if you do not reveal the money to your client, it belongs to them.

In FHR European Ventures LLP and others vs Cedar Capital Partners LLC, the Supreme Court last summer ruled that any secret commission that an agent receives is money held on trust for their principal.

In other words, the client has a “proprietary” claim to that money.

A proprietary remedy means that the client, in the event of the agent’s insolvency, has a claim that has priority above the agent’s unsecured creditors. A proprietary claim also gives the principal the right to trace the undisclosed commission and keep tabs on it.

The case applied to the Grand Hotel in Monte Carlo where the agent, Cedar, acted for purchasers FHR.

Unknown to FHR, Cedar also had a brokerage agreement with the seller.

When FHR found out, it took steps to recover the €10m Cedar had received, and the case eventually ended up in the Supreme Court.

Interestingly, in looking at ownership of the undisclosed commission, the court said it had no sympathy with the argument that providing a proprietary remedy would reduce the agent’s estate and therefore be prejudicial to the agent’s unsecured creditors.

The court very firmly said that any secret commission should not have been considered part of the agent’s estate in the first place.

The ruling is regarded as a landmark by lawyers in the UK.

It makes it clear that agents who want to keep their commission fees – for example, those paid by sales agents to conveyancers or by letting agents to contractors – must declare the money that is earned as part of their engagement by the client.

Alistair Spencer, a solicitor in the litigation team at Brethertons, said: “This judgment is an important clarification and expansion of the existing rule that an agent must account to his principal for any secret commission received in the course of his acting as agent for the principal.

“Obtaining the informed consent of the principal to such fees is absolutely key in these situations as without such agreement any commission or benefit would belong to the principal who would be entitled to take action to recover the same.”

There is a good blog on the case here

And another here



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  1. Woodentop

    I despair, are you telling me that agents do not know this? You should have a clause in your agency agreement confirming entitlement to commission as standard practice. You will of course have always had one for arranging financial services/ commission paid.

  2. Peter

    Me too Woodentop; basic stuff that agents should be aware of.


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