When a sales agency is terminated, the agent is usually entitled to compensation for the value of the agency they have built up, whether or not they ever signed a written contract. This article explains where that right comes from and how the payment is worked out.
Compensation on termination
Following the case of Lonsdale v Howard & Hallam in the House of Lords, it was established that the amount of compensation will be equal to that which the agent would receive if selling the agency on the open market. This means that every case is judged on its own merits and is subject to an agreed valuation.
A note on the figures
This article dates from 2009. The core principle still holds: since Lonsdale, compensation is the open-market value of the agency, assessed case by case. But the rule of thumb mentioned below, that claims settle at around two years’ commission, is not a reliable guide, and multiples of commission like this were in fact rejected in Lonsdale. For how compensation is valued today, including a worked example, see how a court values a compensation claim. This is general information, not advice on your situation.
At the time this was written, such cases were being settled at around two years’ commission less expenses. That figure is no longer a reliable guide: because the value depends on the state of the agency at the point of termination, which you cannot know when signing the agreement, the eventual amount is difficult to predict in advance, and fighting over it is expensive.
It must be noted that, except where the contract says otherwise, the agent shall be compensated rather than indemnified. There is no change in the legal position if your agreement provides for an indemnity instead: the indemnity is capped at a figure of around one year’s commission, based on the average of the last five years’ commission.
In our experience, and based on feedback from the agents we work with, approximately 80% of self-employed agents do not have a formal written agreement.
Even if you do not have a formal agreement with your principal or principals, you have a degree of protection under the Commercial Agents Regulations 1993. The Regulations are in force whether or not you have a formal agreement and, in many cases, will override what might be written in one. If you are weighing up whether to get something in writing, see agency agreement: written or unwritten?
Every agent should have a copy of the Regulations, which can be read in full on legislation.gov.uk. Many agents have dealt with their principals for many years and prefer to work on the “gentleman’s handshake” principle, and it works well in many cases. However, in interviewing many agents, we come across many instances of unprincipled principals who use agents as easily disposable labour.
Your independent role
As an agent you must do all you can to stress your independence. Most buyers in the UK are used to being called on mainly by employed salespeople and, if not told otherwise, will treat you in the same light. They expect employed salespeople to give them a biased view, and they make their assessments on this view.
Find every opportunity to reinforce your role as an advisor rather than a salesperson. A useful tactic is to tell him of your other agencies, even if they are of no interest to him as a buyer. Always say “they” rather than “we” when talking to him about any of the agencies you hold. Always be ready to take the customer’s side, assuming he is correct, in any dispute with your principal. Remember, they are your customers! They are your main asset.
Further Reading
The figure an agent settles for turns on how the agency is valued. For the method the courts use today, including a worked example, see how a court values a compensation claim.
Whether you are due compensation or an indemnity changes both the sum and the deadline. For the difference between them, see compensation versus an indemnity.
A few early steps protect what you are owed once an agency ends. For that checklist, see the roadmap to a compensatory pay-off.