We’ve all experienced a bad breakup.
Perhaps your ex didn’t want to let you go.
Or if they did, they wanted their pound of flesh too.
Maybe you had to block their number from your phone and deal with the awkwardness that comes when you unexpectedly bump into them on the street.
There are breakups in the real estate world too.
Sure, some go smoothly, and agents leave an agency easily to move on to greener pastures.
Some still keep in touch with their former bosses, colleagues and mentors.
And some don’t.
Some wish they could block certain numbers from their phone, but that’s hard to do when the lawyers have been called in.
It’s safe to say, when some agents breakup with their agency, things can get messy.
Sometimes, agents find themselves leaving a company because their business ethics don’t match up like they thought they would.
And, sometimes, the reasons are worse – think bullying, intimidation and harassment.
All of a sudden, those non-compete clauses, restraints and restrictions around if and when you can get the money back you invested in the business, come into play.
You thought you’d never have to worry about them, but now you do, and it’s not black and white.
There are a lot of grey areas. So, what can you do when that bridge is burnt, to stop yourself from drowning in the fast current below?
The following case studies are all real life examples of what went wrong when Australian agents left the agency they were working at.
They explain changes they’d like to see in the real estate industry and what they’d advise other agents to do, or not do, to avoid being in a similar situation.
We’ve also taken these scenarios to real estate legal experts, Kristen Porter, of O*No Legal, and Lisa Jemmeson, of JemmesonFisher, to get their thoughts on how best to manage and avoid such situations.
Kristen says agents need to examine contracts closely and have a clear exit plan from the beginning.
“Breakups are inevitable,” she says.
“It is very rare that an agent will work for the same agency forever.
“What becomes important is the rules that govern these types of relationships.
“When you sign your employment or contractor agreement, the rules, in relation to restraints, are agreed at that point.
“Often you’re so excited and eager to start, that you sign the contract and don’t pay too much attention to these things until you decide to leave.”
Lisa implores agents to turn to the experts before putting pen to paper.
“The best advice is to always take legal advice on any business document you sign,” she says.
“Know that whatever you sign, it will be interpreted at the time you sign the contract, not at the end.
“The catch cry that restraints are invalid is plain wrong.”
CASE STUDY A: WHEN AND WHERE CAN I WORK?
THE SITUATION: Agent A had worked for their agency successfully, at several offices, for a number of years.
They then bought into the business and became a director.
Things went south when they caught their business partner in some unethical practices and wanted to seek legal advice, on various issues, before signing a new contract.
Agent A has since been cut off from the business and is in a legal battle to recoup the money they invested in it.
Even though they are no longer a director, they are still a unit holder in the business, and the agency is taking action against Agent A for working at another agency.
“I haven’t gone anywhere near my old farm area, but they’re saying I shouldn’t legally be working,” Agent A says.
“They won’t give me my money, but I’m not supposed to be working. How does that work?”
Agent A says there were multiple ambiguous clauses in their contract, such as not working within three kilometres or five kilometres of their office and not working for six, 12 or 24 months once they left the company.
“They’ve come back and said I can’t work for nine months once I’m no longer a unit holder,” Agent A says.
“So they could not give me my money for however long and then it would be nine months on top of that.
“I don’t even know where that nine months figure came from.”
AGENT A’S ADVICE: Agent A is urging fellow real estate agents to scrutinise their contracts carefully and to seek legal advice.
They say they had their documents checked over, but didn’t go through it with “a fine-tooth comb”, and wish they had.
“I got the documentation checked by a lawyer, and they said ‘that looks good’, because I was planning on staying there forever,” Agent A says.
“I didn’t think I had to fine-tooth comb it and nut out ‘what if I leave?’ because I was buying in.”
They urge other agents to be particularly cautious regarding non compete timeframes and distances.
KRISTEN SAYS: When we buy into an agency, it is usual for the restraints to be heftier than when we were just an employee or a contractor.
These restraints are usually dealt with in your shareholder’s agreement.
These types of restraints are generally more enforceable because when you leave, you get paid out of your ownership interest.
If you do not have a shareholder’s agreement, all hell can break loose, and questions will be raised, such as:
- How do I get out?
- For what price?
- Can I make them buy me out or am I stuck with them?
- What can I do or not do after I’m out?
The ambiguity in the restraint time and distance is often an issue that is misunderstood.
Your contract may say nine months, failing which six months, failing which three months.
You don’t get to pick ‘which one’ you want. Restraints are designed to be cascading as they are often unenforceable.
Your employer will try and restrain you for the maximum time (say, nine months).
However, if the court finds that too long, then, instead of there being no restraint at all, it gets ‘read down’ to the next number, being six months.
The added complexity with Agent A is that we have a shareholder/director who also has an employment contract.
We are wearing two hats in this situation, as an owner and director of the agency and then as an employee. If there was no shareholders’ agreement that set out the restraints, then the employment agreement restraints would apply.
More careful attention needs to be paid when entering into these arrangements because no one stays anywhere forever, and you need to have an exit plan in mind.
LISA SAYS: There are a number of issues here. When Agent A bought into the business and became a director and shareholder, there should be a shareholders’ agreement that defines how the company is to be operated and provides mechanisms for a party to exit the business.
It is common for there to be a restraint of trade within a shareholders’ agreement.
Agent A can resign as a director and continue to hold shares in the company. If you remain an officer of the company, such as a director, and then compete with that business, it would be a breach of the Corporations Act.
It is common for there to be a shareholders’ agreement and an employment agreement in place, and the terms and obligations on Agent A after exiting the business may be inconsistent.
The NSW Supreme Court has recently ruled, in Devine Real Estate Concord Pty Ltd & Ors v Wajih Agha (aka Roger Agha) & Anor [2019] NSWSC 786, that inconsistency between the employment agreement and the shareholders’ agreement does not invalidate one document, and that the two contracts can operate independently of each other.
In the Devine case, there was a Real Estate Employers’ Federation Employment Agreement that had a nine-month post-employment restraint of trade and a shareholder agreement that had a three-year restraint of trade.
The restraint area was also defined in different terms in the two contracts. The defendant is currently appealing this case in the NSW Court of Appeal; our firm awaits the judgment.
In New South Wales, there is state-based legislation in the Restraint of Trade Act 1976, relevantly, section 4 provides:
(1) “A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.“
This means, we start from the position that the restraint of trade is valid, and the employee bears the onus of proving that the restraint is against public policy.
In other jurisdictions, the onus is reversed, and when an employer wishes to enforce a restraint, the employer proves the restraint is valid and not against public policy.
Another issue that arises here, is that a party cannot enforce a covenant (such as the restraint of trade) if that party has repudiated the contract.
This means, if there has been a breach of the express terms of the contract (shareholder agreement and/or employment agreement), such as failing to follow the contract’s buy out provisions or to pay outstanding monies to Agent A, then they cannot enforce the covenant.
Where there is no shareholder’s agreement, then relief can be sought through the Corporations Act; this may be framed in oppression.
In general terms, courts are reluctant to set aside the contracts, or rather the express terms of the contract, that people enter into freely and upon the taking of advice.
It is important that commercial contracts are treated seriously, and business efficacy of a contract is given to commercial contracts by the courts.
A contract’s terms are interpreted at the time the contract is made, not at the end of the relationship.
Except for repudiatory conduct by a party, the courts will look at what the parties agreed to at the beginning, not at the end of the relationship.
CASE STUDY B: WHO MAKES THE BIG DECISIONS?
THE SITUATION: Agent B was a successful selling agent who had run their own business for many years, including a large rent roll.
They merged their business with another and came on board in that business as a director, with a 20 per cent stake.
Going into the business, they were promised an active role in shaping the business for the future, but once they started work, they quickly realised that wasn’t going to happen.
“They made all the right promises and said all the right things,” Agent B says.
“They said they wanted all of my ideas and wanted me to bring my magic to the business.
“But when I got there I learned very quickly that they do business very differently to how I do business.”
After less than a year at the company, Agent B wanted out and has been fighting to get the money they invested in the business and the right to work or contact their past clients ever since.
“They have put a restraint on my working in the farm area and on me contacting clients for up to 18 months,” Agent B says.
AGENT B’S ADVICE: Agent B urges other agents thinking about coming on board as a director at a new company they haven’t worked for previously, to “try before you buy”.
“Work there first, before becoming a director,” Agent B says.
“It all sounds like sunshine and lollipops until you want to get out.
“My contract was very ambiguous and there was no get out of jail free clause.”
Agent B says, going forward, they will push for six or 12-month trials as part of any contract they sign and the ability to leave without restraints and with their database.
“If, for any reason, you’re not happy then, within 12 months, either party could leave and the situation would revert back to how things were before you joined,” they say.
KRISTEN SAYS: The shareholder’s agreement sets out the rules of the relationship early.
It sets out what happens when you leave, and it also sets out things like rules for decision making and what level of votes are needed to pass important decisions.
I like to think of it as a relationship roadmap.
You always need to ensure that your values and vision align before entering into any type of business relationship.
You wouldn’t get married after two coffee dates, so make sure that you pay careful consideration to who you are getting into bed with business-wise.
Business divorces can be messier than real ones.
Also, set up rules about the database.
Once databases are merged, it can be very difficult to pull them apart and identify who owns what.
Set these rules upfront and have a clear exit strategy for client data.
LISA SAYS: This scenario is quite common and can be avoided with a shareholders’ agreement that reflects the scope of the merger, the roles within the organisation and where ultimate power vests.
Agent B only has a 20 per cent interest in the business, so it would be unlikely that they would play a significant role within the business or its operations.
On the premise that there was a merger, then it all depends on how this was done.
One would expect to see that if Agent B’s database was merged and active listings and the rent roll was merged into the agency, that the business would have paid value for that asset.
On that basis, if money was paid for the asset to Agent B, the restraints would likely be upheld as they were purchased and the agency is entitled to protect their legitimate business interests and goodwill.
This looks like another example of where, heading into the deal, the parties did not turn their minds to the exit strategy and the mechanics of the day-to-day operation of the business.
CASE STUDY C: WHO OWNS THE CLIENT?
THE SITUATION: Agent C had worked for their agency for several years with great success.
They had built an excellent reputation with referral-based and repeat clients.
They chose to leave the agency quietly after experiencing what they describe as “intimidation and bullying”.
The agency has since launched legal action against Agent C with some of the bones of contention being taking clients with them and loss of revenue.
“I wouldn’t have left, but they didn’t keep me safe, and that’s why I left,” Agent C says.
Agent C is now facing hefty legal costs to fight the case.
AGENT C’S ADVICE: Agent C says when they started feeling uncomfortable in the workplace, they had no idea if what they were experiencing was acceptable behaviour.
They say they’d like to see an industry-backed body established to provide advice to those in difficult situations, so they know what their options are legally.
“When I went searching there was nothing,” Agent C says.
“What do we have in our industry to protect agents when they’re in such situations? There’s nowhere to go where you can ask, ‘is this appropriate or should I be calling them out on it?’
“Sometimes, in our industry, the lines are really blurred.”
Agent C says they’d also like to see a clearer definition of who, the agent or the agency, owns a client, and whether an agency can require an agent to shut their social media accounts and start from scratch when they leave.
KRISTEN SAYS: When you do leave, even though your employer will try to hold you to the black-and-white writing in your contract, know that often these types of restraints are unenforceable if they are too broad.
Generally, the definition of a ‘client’ will be read down to only those clients that you have had direct contact with, as it’s the relationship the agency is protecting.
Generally speaking, at law, they can’t stop you from making a living, but they can protect the relationships that they have built.
We have two concepts here:
- The restraint of trade
- The protection of the employer’s confidential information
The restraint of trade will only be limited, usually to a time period and geographical area.
The protection of confidential information, including the client database, will usually last forever (depending on how the employment agreement is structured).
When I see things go wrong, it’s always over the client data, as many agents are under the mistaken belief that they own their client database.
However, 90 per cent of the time, it’s really the employer that owns it.
LISA SAYS: In Case Study C, there are a number of discrete issues, with the first being allegations of intimidation and bullying in the workplace.
If an employee feels there have been instances of intimation and/or bullying, they should address their concerns in writing to the employer.
In a small agency, this could mean the licensee in charge or the manager.
In a larger office or company-owned office, there may be a human resources department.
Many offices have separate policies and procedures that address these types of issues.
The first thing to do is to make the employer aware, follow the internal process, and seek to have the matter resolved.
Under the Fair Work Act, if, after making a workplace complaint, the employer deals with the employee in an adverse way, this may give rise to a general protections claim through the Fair Work Commission, which can occur while the employee remains employed.
A Fair Work statement is issued with an employment agreement.
The Fair Work website is an excellent tool for gathering information of a party’s rights and obligations, without the need to revert to a solicitor.
The second issue is that, ordinarily, there is a written contract of employment.
This contract will contain post-employment obligations on the employee relating to confidential information of the employer’s clients, customers and pipeline clients.
These leads belong to the employer, not the employee.
One would also expect to find a post-employment restraint of trade, which prevents the employee from working or being engaged in a competing business within the restraint area for a certain period.
If the employee took up employment with a competitor during the restraint period, the employer could approach the Supreme Court for an urgent court order to prevent the employee from breaching the terms of the employment contract.
If the employee goes down this path, then the employee will need to obtain legal representation very quickly and, ordinarily, that involves engaging a specialist employment law barrister.
Then, tens of thousands of dollars later, Agent C finds themselves at the end of round one.
CASE STUDY D: WHERE’S MY COMMISSION?
THE SITUATION: After just under five years in the industry, Agent D decided to move to another agency to further their career.
There was little animosity with the former company, and the move was based purely on wanting to develop further as an agent and to see how other real estate companies ran.
When they left, Agent D was owed tens of thousands in commission, and they still haven’t received that money several years later.
The agency also sued Agent D for stealing data and clients, whose details they had in notes and spreadsheets on the phone and computer the agent bought when they started at the agency.
After a lot of back and forth in mediation, and spending thousands on legal fees, Agent D had to walk away from the fight.
At the second agency they worked for, Agent D signed a 12-month non-compete agreement. When they left, they were able to negotiate the ability to work in the industry in another capacity, while serving that year-long clause.
AGENT D’S ADVICE: Agent D says real estate, as an industry, needs to clearly define what constitutes a client and who owns that client – the agency or the agent.
“At the end of the day, people buy people,” Agent D says.
“Does the brand sell your home or does the agent?
“The brand helps get you to market, but ultimately it’s the agent that sells your property.”
Agent D says there are many good agencies and operators in the industry.
Still, agents need to be mindful and understand exactly what their contract means and the risks associated with it.
“Everyone would like to think they’ll stay with a company for a long time, but if it doesn’t work out, you need to have already thought about what happens when you’re exiting,” Agent D says.
“Don’t be blasé; you need to protect yourself.”
KRISTEN SAYS: One thing on the commission front that you need to be careful of, is that many agencies will have a clause in their contracts and commission structures that state an agent must be employed by the agency at the time the commission becomes due and payable in order to receive it.
This means an agent must be employed at the time the property settles, or you lose your commission.
Generally, this is a huge problem if you are selling off-the-plan and are owed tens or hundreds of thousands of dollars.
When agreeing to your commission structure, keep this in mind as you may be able to negotiate that if you are still the one who gets the property to settlement, that you can receive the full commission.
Failing which, you could offer your agency an admin fee/commission split.
LISA SAYS: The easiest way to handle this situation is, if you are an employee, then all the clients, customers and pipeline leads are owned by the employer.
It matters not that you have followed this pipeline lead up for five years, and that the potential client has a relationship with you.
If the lead was generated and worked on while you were on the payroll, that lead belongs to the employer.
Conversely, if the agent is an independent contractor, then that pipeline lead is a mutual client of the agency and the contractor.
At the end of the relationship, both the agency and the independent contractor can continue to chase that client for their business.
The lead does not belong solely to the agency, as there is no contract of employment.
An independent contractor is a separate business.
Therefore, it is against public policy to have an anti-competitive term in an independent contractor agreement, and they would likely fail if an agency attempted to enforce a restraint of trade.
However, in an independent contractor agreement, the agency can enforce an express term that deals with the rent roll and exclude rent roll clients from being a mutual client. It can also provide a non-solicitation and non-acceptance of dealing with rent roll clients of the agency.
This is a very specialised area and legal advice should be obtained.
In a standard Real Estate Employers Federation (REEF) employment agreement, a client is defined, a competitor is defined, a rent roll is defined, social media is defined, and the restraint is defined and expressed as a cascading restraint.
This allows the court to determine what is reasonable, and not against public policy, to protect the employer and the employer’s legitimate interests.
Parties should leave the restraint as a cascading restraint and not pick one option when completing the contract.
Some examples of how this may operate are:
- If an agent has worked for an employer for four weeks, it is unlikely a nine-month restraint will be upheld against them.
- If the agent works in the Eastern suburbs of Sydney, it is unlikely that a 25km restraint will be upheld. More likely, a 3km or 5km restraint is all that is needed to protect the employer.
Sometimes there are situations where an agent leaves an employer where they have worked for many years, built up successful relationships, and wants to work for a competitor.
The express terms of the agent’s employment contract may provide a non-solicitation restraint, such as the agent calling or emailing the client to let them know they have moved agencies.
It may also include a non-acceptance or non-dealing restraint, which is where the agent does not solicit the client, but the client tracks them down and asks them to list their property or manage their rental.
Both of these restraints are found in a REEF employment agreement. In this scenario, sometimes deals can be negotiated between the employee and employer, for example:
In return for the employer allowing the employee to work for a competitor within the restraint area, for the next nine months, anything that the employee lists and sells within the restraint area, the employee will pay 60 per cent of the gross commission to the former employer.
The advantages to the employee are:
- The agent can be, by agreement, allowed to compete.\
- The agent takes the benefit of the listing, although not a lot of profit, but it is better than having to turn down the business.
- Listings generate listings, so by taking a smaller commission from the property sale, it generates momentum in the area and the agent obtains other listings.
The advantages to the employer are:
- An agreement can allow the parties to have an ongoing relationship. Often the grass is not always greener on the other side, and there are countless examples of the agent returning to the original employer when things do not work out.
- The employer saves on hefty legal bills when enforcing the employment contract.
- The employer takes 60 per cent of the commission and does not have to expend resources on servicing the listing, but takes the profit from the sale.
The best advice is to always take legal advice on any business document you sign.
Know that whatever you sign it will be interpreted at the time you sign the contract, not at the end.
The catch cry that restraints are invalid is wrong.
Courts will enforce restraints of trade where they protect the legitimate business interests of the employer.
Courts do not like employees “springboarding” into new positions and taking advantage of assets of the former employer. Clients and customers are assets of a business.
Finally, employers can reserve their rights.
They do not necessarily have to obtain an urgent injunction to stop a former employee from competing, they can sit back and wait until the employee has sales accumulated and then litigate on the breach.
After six months, this could be a claim for 100 per cent of the sales commissions earned in breach of the restraint and several hundreds of thousands of dollars.
