Padding is a term famously used in budget. It is a practice that some people use in business when submitting a budget for approval. It artificially inflates the proposed budget in order to give the project room to expand or to cover unexpected costs. When a budget is padded, it makes the budget proposal larger than the actual estimates for the project. This is done either by increasing a project’s expenses or decreasing its expected revenue. The goal of budget padding is to get an approval committee to grant an artificially high level of funding to the budget maker’s proposed project. Some sees padding as unethical, as an increase beyond current estimated price. While some sees it as ethical, it is seen as a way of fixing unexpected expenses that might arise in the course of the project.

This same padding happens in property transaction but in most cases, the term usually used in real estate law is SECRET PROFIT. I will explain further with the help of an illustration.

An Agent facilitating a property transaction: the owner of a property handed over his property to the agent for the purpose of sale at an agreed price of 5Million Naira. The agent sold the land for more than 5Million Naira without surrendering the excess to the owner of the land. This later came to the owners notice. The owner did not only terminate the agency agreement, he also recovered the secret profit made by the agent on the sold land.

A secret profit means any bribe or secret commission or any financial advantage which is over and above the commission agreed under the agency contract. An agent is not allowed to receive any amount of secret profit from any third party when dealing on behalf of his Principal without his knowledge. However, if the principal knows of the profit gained by the agent, and the principal consents to it, it is no longer ‘secret’ and therefore no breach of duty by the agent.

It is a well-known principle that an agent must account to his principal, and that an agent who holds or receives money on behalf of his principal is bound to pay over or account for that money.

It is also a general principle that an agent owes a fiduciary duty to his principal because he is someone who has undertaken to act for or on behalf of the principal in circumstances that give rise to a relationship of trust and confidence, and as a result the agent must not make a profit out of his trust

In a 1904 Pennsylvania Supreme Court case Graham v. Cummings, the shareholders of a corporation had authorized the defendant shareholder to sell their stock. The defendant secretly negotiated to receive a higher amount for his stock than for that of his fellow shareholders. The Court concluded that an agent “cannot make profits out of his principal in the business of his agency. This same principle applies where there is a land transaction.

Once an agent receives a secret profit, the principal may repudiate the contract, particularly if he feels that it is disadvantageous to him. All the Principal need to show is any material facts that the agents have dishonestly hid from him, profits so accrued. For example, Lawal directs Victor to sell his estate. Victor sells the estate double the agreed amount and kept the profit for himself. Lawal may repudiate the sale when he discovered that Victor dishonestly sold the estate at a higher price. This is because he has acted against the wishes of his principal. As an alternative, the principal may also recover the amount of the secret profit from the agent, if an agent deals in the business of the agency on his own account instead of on account of his principal and at the same time without the awareness of his principal, the principal is entitled to claim from the agent any benefit which may have belong to him from the transaction.

Lastly, the principal may refuse to pay the agent his commission or other remuneration. In the case of ANDREWS V. RAMSAY AND CO [1903] 2 KB 635, the principal successfully recovered both the commission paid to the agent plus the secret commission received by his agent from a third party. In that case, the plaintiff directed the defendant to sell a property and agreed to pay him commission of 50 pounds. The defendant received 100 pounds from a purchaser as deposit for the property. The defendant paid 50 pounds to the plaintiff and kept the other 50 pounds in payment of his commission with the plaintiff’s knowledge. However the plaintiff learnt that the defendant had also received another 20 pounds as commission from the purchaser. He sued his agent to recover this 20 pounds and also the 50 pounds he had paid the defendant initially. The court held that he could recover both of them.

It is so sad that the issue of acquiring secret profit by an agent in Nigeria is a rather widespread occurrence. Owners of property are usually tricked into believing that the property they have given to their agents is sold at the amount agreed upon while in the real sense, the property is usually sold for a higher amount without delivering to its owner the extra profit on the land.

It is therefore important for all agents and land owners to know the consequences and effect of making secret profit on a land transaction without the consent of the principal or its owner(s)

For further assistance, explanation, or consultation on this subject matter or any other land/property related issues, do not hesitate to contact me via [email protected] or Call 08034869295.