An agent will be entitled to a termination payment when his
agency is terminated unless the principal can show the agent has fundamentally
breached the agency agreement. A termination payment is also payable when an
agency agreement reaches the end of a fixed term, or if the agent retires or
This article explores how compensation payments are
calculated under Regulation 17 of the Commercial Agents Regulations following
the leading case of Lonsdale v Howard and Hallam.
There are two types of termination payments: compensation
and indemnity. Compensation is payable unless the parties have agreed that an
indemnity should be payable instead.
A compensation payment under Regulation 17 will reflect the
value of the agency to a hypothetical purchaser at the date of termination. It
must be assumed that the agency would have continued, and hypothetical
purchaser would have been able to take over the agency and perform it properly.
Whilst this is not a straightforward calculation and many different factors
must be considered, the valuation will always be related to the income stream
which was likely to be generated by the agent.
There are various methodologies which can be used to carry
out the valuation, and advice from an expert forensic accountant will be
required on the appropriate method of valuation if court proceedings are
A common methodology which is applied is the capitalised
earnings approach. This looks at the net maintainable earnings of the agent, to
which an appropriate multiplier is applied. The net maintainable earnings take
into account historic commission income in order to assess the likely future
trading performance of the agency.
The expenses the agent incurs in running his agency have to
be taken into account during the valuation process. Those expenses include
overhead costs and a notional labour cost which takes into account the overall
time devoted by the agent to the agency.
Future earnings are discounted by an appropriate rate of
interest, and account must be taken of whether the market for the products in
which the agent dealt was expanding or declining. The value of the agency will
be reduced if the principal's business is expected to cease, since no
hypothetical purchaser would pay anything for the right to earn future
commission on sales if those sales would be nil. The ability of the agent to
compete with the hypothetical purchaser after termination will also be a
The appropriate multiple will reflect the specific risks
associated with the agency, and in particular, the risk that the projected
income stream will not continue. The lower the risk associated with the
projected income stream, the higher the multiple which is likely to be applied.
Typically, the court has applied multiples of between two and five.
The capitalised earnings approach may not be appropriate is
method of valuation for all agencies, particularly where the agent earns a low
level of commissions, and an alternative methodology may be more appropriate.
Understanding the agent’s business and the industry within which the agent and
principal operate is critical to the valuation.
An agent whose contract has been terminated is advised to
seek specialist advice on their individual circumstances.