When the deposit doesn't cover the agent's commission

It is becoming increasingly common for real estate agents to include a special conditions requiring the buyer to pay the balance commission at settlement when the deposit doesn't cover the agent's full commission. However, unless the terms satisfy specific and narrow elements, they are not worth the paper they're written on, they're completely unenforceable. 

Background

Long story short, the law has long held that a person who is not a party to a contract cannot enforce its terms even if the term is expressly made for their benefit. This is because of two legal rules:

1. you cannot enforce a promise (or rights under a contract) unless you are a party to the promise (or contract) (the privity rule); and
2. you cannot enforce a promise unless you have given valuable consideration (the consideration rule)

Example

It works like this. The seller and the buyer agree that, if the deposit does not cover the real estate agent's commission, the buyer must reduce the balance purchase price payable at settlement by the amount of the balance commission, and write the agent a cheque for the rest of the commission. In the lead up to settlement the seller says that they want the full balance purchase price to be paid.

As it doesn't affect the buyer who receives the proceeds, the buyer agrees to write a cheque for the full balance purchase price. The agent knows from experience that chasing sellers for their commission after settlement is an all too common outcome of a situation like this, so the agent tries to step in.

Can (or should) the agent be able to enforce the agreement between the seller and the buyer and compel the buyer to write them a cheque? The answer is almost always no - the agent was not promised anything by either party and the agent has not given any valuable consideration for the benefit of that clause.

Section 55 of the Property Law Act 1975 (Qld)

The good news? Section 55 of the PLA effectively abolishes the privity rule and allows third parties to enforce a terms for their benefit. However, the section sets out a number of elements that must be satisfied in order for it to apply to a contract. Many agents make the mistake of simply drafting a clause without consideration of these elements, rendering it unenforceable. We've outlined an example clause below to help.

Clause

"In the event that the Deposit held by the Deposit Holder is not sufficient to pay the Seller's Agent its commission (plus GST and advertising expenses) as agreed between the Seller and the Seller's Agent, then the Buyer and Seller agree that the Buyer is hereby irrevocably authorised and directed to pay the balance commission (plus GST and advertising expenses) on behalf of the Seller to the Seller's Agent from the Balance Purchase Price on the Settlement Date. 
This Special Condition is expressed to be for the benefit of the Agent pursuant to section 55 of the Property Law Act 1974 (Qld). The Seller, by executing this contract, accepts the benefit of this Special Condition on the Agent's behalf.

Wrapping up

Unless the special condition satisfies the elements in section 55 of the PLA, it's unenforceable if the agent ever tries to rely on it. With the entire law against agents, section 55 provides a narrow opportunity to enforce terms clearly made for their benefit - agents should make sure they're taking advantage of it.