Weighing up restraint of trade

MAIN IMAGE: Jonathan Davies, Tyson Properties Gauteng regional director, Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, Paul Stevens, CEO Just Property and Adrian Goslett, regional director and CEO of RE/MAX Southern Africa

Restraint of trade is one of the thorny issues in the real estate industry, sometimes leading to the employer and employee ending up in court as recently happened. This is a competitive industry but how fair or even constitutional is imposing a restraint?

The issue of restraint of trade in the industry came to the fore again in December where the High Court in Bloemfontein dismissed application by the estate agency to enforce restraint of trade on the basis that the latter weren’t in possession of valid fidelity fund certificates (case of Tria Real Estate trading (Pty) Ltd as Pam Golding v Mandy Labuschagne).

  • Read more about the case here

Restraint of trade is nothing new in the real estate industry, as one of the commentators in this article said, but does it still have a place in this digital age with easy online access to all kinds of real estate information?

When do restraint of trade become unconstitutional?

Commenting from a legal point of view, Robert Krautkramer, director with law firm Miltons Matsemela, says many people incorrectly think restraints are unconstitutional. “They base this on the incorrect belief that it is aimed at prohibiting people from being able to work, but that is not the real purpose of a restraint. It is to protect a “protectable interest” such as a data base, trade secrets and know how which is particular to an employer,” he explains.

However, continues Krautkramer, restraints which are aimed solely at restricting competition, are indeed unconstitutional and unenforceable.

“As such, restraints remain very much alive and well in our law and across all spectra. A court however always has the discretion to either dismiss a restraint entirely if there is no interest to protect, or if the area of the restraint is indeterminable. Or it may enforce it entirely, or even temper it if for example, the duration and area of the restraint is deemed to be excessive,” he says.

Once the employer can prove a protectable interest, the court must assess whether the restraint is reasonable and fair.

Krautkramer says he would not agree that one can simply write off restraints. “If you employ a rooky, expose him to your entire data base of developers; spec buyers; investors; etc and send him for training and maybe even sponsor NQF and PDE qualification costs, I will be hard pressed to believe that any such agency would not want that agent to be restrained from trading within the agency`s catchment area for a year or two. He can trade elsewhere and approach any other persons, but not those who are clients of the agency, for a limited period of time. After that it becomes fair game,” he explains.

If it concerns an existing and established agent who brings with a client base however, Krautkramer says he might agree that when such an agent leaves, trying to restrain him may be a waste of energy, but not in the scenario he sketched above.

Different camps in real estate on restraints

There appear to be different camps in the real estate industry – those that oppose restraint of trade and those that says it is a necessity in today’s competitive environment but should be done in a transparent, fair and reasonable way.

Jonathan Davies, Tyson Properties regional director for Gauteng last year stated his opposition saying he believes many real estate agents are leaving the profession because of restraints. “That’s often because, when they try to move from one agency to another, punitive restraints of trade kick in. That leaves them with the choice of spending up to six months without any income or remaining with a company where they are unhappy,” he said.

Their only option is a costly court battle with no guarantee of winning. In fact, he mentioned two recent judgements in the High Court where restraints of trade of three months and six months respectively were upheld.

Davies argued that relationships should count more in real estate than protecting trade secrets. After all, “there’s no secret recipe to protect like with Coca Cola,” he said and advised agents to be more careful before signing a contract that contains a clause on restraint of trade.

  • Read Davies full statement here

For Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, restraint of trade is an issue he is well-acquainted with from personal experience in former years in which he pursued restraint of trade on an agent but the court dismissed it with cost. “To cut a long story short, I think that restraint of trade fron an agents point of view in the real estate industry is a totally unfair imposition.

“The only right way to keep a good agent is to make sure you look after an agent and make them un-poachable due to positive factors and not negative,” he says.

Geffen says there is no justification for restraint of trade because the industry does not have trade secrets.

“An agent builds their own good will in an area and if that agent decides to leave the company, the good will goes with the agent. In terms of stock, the company may lay claim to ownership of the stock acquired during the agents employ and that is about as far as it can go as it usually is a term of most agreements that the stock and intellectual property belong to the company,” concludes Geffen.

Paul Stevens, CEO of Just Property, says there exists an unavoidable tension between an employee’s ability to work and a company’s need to protect its commercial interests. “The real estate industry is extremely competitive and the various franchise groups invest significant time, money and expertise in ways of working that allow them to operate effectively in this environment,” he explains.

What is important for him is transparency.

“At Just Property, we endeavour to reconcile this tension within our country’s legal frameworks and according to what is fair and reasonable to all parties concerned by being transparent,” he says.

According to Stevens their restraints of trade clause in their employment contracts clearly outlines how they seek to protect the trade secrets and trade connections that allow them to operate competitively, it is clear about the geographical area and duration of the restraint and outlines exactly what actions are restrained. He says these contracts are individually negotiated and voluntarily signed by their agents.

“We encourage our franchisees to consider all staff resignations individually and within the context of relevant case law, and to refer back to the signed employment contracts so that agent departures can be amicably and fairly negotiated,” he concludes.

For Adrian Goslet, regional director and CEO of RE/MAX Southern Africa, issuing a restraint of trade is something which is up to each real estate principal to decide upon. From a personal point of view, he says he does not entirely stand behind the practice of issuing restraints of trade. “However, from a professional capacity, I do understand the need to protect one’s own interests,” he says.

Goslet says instead of a restraint of trade, he would set up a non-compete agreement which stipulates that an agent may not work for a competing real estate business until all monies owed to the agency is paid in full. Monthly detailed statements should be provided to the agent. “In my opinion, it should not be about blocking an agent from operating, but rather a measure put in place to ensure that the real estate principal receives all outstanding fees and commissions that are owed,” explains Goslett.

“In terms of what is and is not reasonable, it is difficult to define these parameters. However, I would advise real estate agents not to underplay the validity of these agreements when signing a restraint of trade. In a court of law, any written contract signed by both relevant parties is legally binding. If the restraint of trade is unreasonable in terms of its restrictions, a judge might rule that the agreement is not fully enforceable and could therefore reduce the amount of time or distance stipulated in the agreement. However, this is up to the discretion of the judge and is not a guaranteed outcome. If an agent truly feels as though the restraint of trade is too extensive, then they should not sign with that principal unless he/she is willing to renegotiate the terms,” Goslett concludes.

If you have questions or comments about restraint of trade, you can email editor@propertyprofessional.co.za.

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