Tag Archive for 'unfair terms'

Tenancy Deposits on Sale and Rent Back on Appeal

Published
by
David Smith
on 24/02/2010
in Assured Shorthold tenancy, FLW case note and Housing law - All
. 4 Comments

UK Housing Alliance v Francis [2010] EWCA Civ 117

This is an appeal from a case in Grimsby County Court which we reported on here. It is also the first Court of Appeal decision to touch on tenancy deposit protection.

Briefly, the case involved a sale and rent back arrangement between UK and F whereby F was granted an Assured Shorthold Tenancy for 10 years. A proportion of the purchase sum was to be held back and would be paid over at the end of the term with a proportional deduction if the tenancy ended earlier than the 10 year point. Ultimately, F fell behind with the rent and was evicted and the sum was withheld.

Three arguments were advanced for F as to why the withheld money should be paid in full:

  1. That the final payment was a deposit within the meaning of Chapter 4, part 6 of the Housing Act 2004 and is covered by the protection provisions to be found in that part. It was common ground between the parties that the money had not been dealt with in the manner required by part 6.
  2. That the ability to withhold the final payment was a contractual penalty and therefore unenforceable.
  3. That the withholding provision is in any event an unfair term under the Unfair Terms in Consumer Contract Regulations 1999

The Court of Appeal rejected all three lines of argument.

The Court held that while the definition of a deposit in Chapter 4 seemed to support F’s case, there was a common thread running through Chapter 4 that talked of the deposit monies being paid to the landlord and repaid tot he tenant. This wording was “simply inapt … to describe a situation in which a tenant pays nothing but is the person to whom money is paid, albeit that he is not to be paid some part of the money representing the purchase price of what was his property until some date in the future.”

F had conceded that the withholding of the final payment was not a penalty in the conventional sense but submitted that the same arguments should be held to apply in relief against forfeiture. So, if a sum was forfeited where that sum was not a genuine pre-estimate of loss relief should be granted. This argument failed on the basis of a line of authorities which state that relief can only be granted on the basis of forfeiture of property which a claimant owns or has right to. Therefore relief could not be granted on the basis of forfeiture of a payment which F was not yet entitled to.

On the unfair terms point it had been held at the previous hearing that F and his legal advisors had been able to consider the terms of the contract in detail before it was signed and had had the opportunity to consider the terms. The Court considered that the Recorder was wrong on this point holding that the “fact that a consumer or his legal representative has had the opportunity of considering the terms of an agreement does not mean that any individual term has been individually negotiated. The supplier must prove that the relevant term was individually negotiated.” This is quite an important and far-reaching point as there has previously been a general assumption that if a consumer takes legal advice on a contract it will generally be regarded as fair. The Court held that the taking of advice was not in itself enough and that the fact that there has been an opportunity to influence the substance of a term will not make it fair, that remains a matter for the supplier to prove. However, this decision did not assist F as the Court declined to hold that the contract created a significant imbalance in the circumstances of the case or that it was contrary to the requirements of good faith.

Accordingly the Court dismissed the appeal.

This case is a little sad in that the FSA recently published CP10/4 which contains there planned rules for the regulation of the sale and rent back sector. These rules would have prohibited the setting up of an agreement which contained a retention provision and would also have prevented UK from taking possession of F’s home in the way they did. Whether this should have altered the Court’s decision is debatable but it is positive that this sequence of events will be prohibited in future.

As before our thanks to Neil Wylie for keeping us informed of the progress of this matter.

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Tenancy Deposit Protection on Sale and Leaseback

Published
by
David Smith
on 29/01/2010
in Assured Shorthold tenancy, FLW case note and Possession
. 5 Comments

UK Housing Alliance (North West) Ltd v Michael John Francis, Grimsby County Court, 18 June 2009, unreported

An interesting case this involving issues of tenancy deposit protection, contractual penalties and the Unfair Terms in Consumer Contract Regulations 1999.

UK purchased a house in Grimsby from F in October 2007. They let it back to him on an Assured Shorthold Tenancy for a term of ten years at a rental of £520.83 pcm with annual increases of 5%. The purchase price was £125,000 to be paid in two tranches – the first, in the sum of £87,500 to be paid on completion while the second, of £37,500, on the giving up of possession at the end of the 10 year term. F would not receive the final payment if UK terminated the tenancy under their rights to do so or if he terminated it himself during the first 6 years. If F terminated after that point he would receive a percentage of the final sum on a sliding scale. F fell into arrears and possession proceedings were taken under the usual grounds as set out in Schedule II of the Housing Act 1988. After several adjournments the matter eventually came before Ms Recorder Stocken.

F, through Counsel, advanced three arguments:

  1. The final payment constituted a tenancy deposit as defined by s213 of the Housing Act 2004.
  2. The ability to withhold the final payment was a contractual penalty and was therefore unenforceable under the principles laid down in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1914] UKHL 1.
  3. The provisions of the agreement were unfair pursuant to the Unfair Terms in Consumer Contracts Regulations 1999

To work in reverse order. The Recorder was satisfied that all the terms of the agreement were in plain language and further found that F had been legally represented at the time of entering into the agreement. She was not, therefore, prepared to find the agreement to be unfair.
The Recorder also did not accept that the power to withhold the final payment constituted an unenforceable penalty. She found that the amount of the final payment was similar to the rent that would have been payable in the last four years of the tenancy and therefore found the final payment to be a reasonable estimate of loss and not a penalty.
Turning to the deposit point. The Recorder considered the wording of s212 and particularly the definition of a deposit as:

money intended to be held (by the landlord or otherwise) as security for—
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his

F argued that the deposit was paid in ‘money’s worth’ by the holding back of the final payment and that this final payment was designed as security for the tenant paying his rent and keeping to the terms of the tenancy. The Recorder did not accept this. She found that the final payment could be lost not just through failure to keep to the terms of the tenancy but also by the agreed right of F to terminate the lease after 6 years. After that date the deposit would also, in effect, change in value as F became entitled to receive more of it after termination. Further, the agreement contained no mention of the deposit. Finally sections 213 and 214 of the Act make mention of the deposit having been paid and repaid. The Recorder was not prepared to accept that monies had, in fact, been paid and considered that the attempt to define the final payment in this way was a “strain of the language”.

F accordingly had a possession order made against him. However, permission to appeal was granted and we understand that this matter is to come before the Court of Appeal on the 8th or 9th of February 2010 making it the first tenancy deposit matter to reach that Court.

[by NL - our thanks to Neil Wylie, Counsel for the Defendant/Appellant for letting us know about this case.]

[For all tenancy deposit case posts click here]

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Foxtons' terms unfair

Published
by
Francis Davey
on 13/07/2009
in Assured Shorthold tenancy, FLW case note and Housing law - All
. 2 Comments

In a long awaited decision the High Court has held in Office of Fair Trading v Foxtons [2009] EWHC 1691 (Ch) that some of the terms and conditions contained in Foxtons’ contract with landlords were unfair. While strictly speaking this decision is unrelated to housing law, concerning as it does the fairness of consumer contracts, it will have an impact on the housing sector and the decision itself is instructive in the application of the Unfair Terms in Consumer Contracts Regulations 1999.

The case was brought by the Office of Fair Trading who were claiming injunctive/declarative relief against Foxtons under their power to do so granted by regulation 12. The claim concerned only Foxtons’ terms of business to landlords using the letting only service. In response to the claim Foxtons changed their terms and the court agreed to consider their fairness as well. As a result the decision talks about “old terms” and “new terms”.

Note that, although the regulations only deal with consumer contracts, many landlords are not professional landlords (in that it is not their main business) and so contract with Foxtons as consumers. A witness for the OFT gave examples:

They include individuals who decide to let out their only property whilst travelling temporarily abroad, as a result of relocation by their employer or for other reasons connected to ‘lifestyle’ choice, individuals who let out part of their property in order to fund their mortgage on the remainder, and individuals for whom their property investment represents part of their pension plan or other long term saving….

The court had no hesitation in accepting that the regulations could apply.

Old terms

Foxtons charged a commission for introducing tenants Introduced tenants — the usual way in which letting agents do business. In addition to this a “renewal commission” was charged on tenancy renewals in a very wide range of circumstances:

2.14.3 Renewal commission will become due in respect of renewals, extensions and hold-overs or new agreements where the original tenant remains in occupation. It will also become due where the incoming tenant is a person, company or other entity associated or connected with the original tenant, either personally, or by involvement or connection with any company or other entity with whom the original tenant is or was involved or connected. Where there is more than one tenant, renewal commission will be payable in full where any or all of them remain in occupation. Commission is due whether or not the renewal is negotiated by Foxtons.

As well as questioning its fairness the OFT raised the issue of whether this term was even intelligible. What, precisely, does “associated or connected with” mean in this context? The clause clearly allows Foxtons to take a cut even if it has had no involvement with the property for some considerable time. On every occasion the tenancy is renewed, they are due a commission.

Worse another term provided that, if a tenant, occupier or licensee purchases the property from the landlord, Foxtons wwoud be due 2.5% of the purchase price in commission.
The landlord cannot even avoid a series of commission payments to Foxtons by selling the reversion, beacuse another term provided:

Where a property is sold, transferred or otherwise dealt with, with the benefit of a tenancy, Foxtons’ fees remain the responsibility of the original landlord for the duration of the tenancy and for any extensions, renewals or periods of holding-over, irrespective of whether negotiations were carried out by Foxtons. The landlord should instruct his solicitor to assign responsibility for Foxtons’ fees to the purchaser.

Awesome stuff.

New terms

Only the renewal commission remained (sales commission and third party renewal commission were dropped). The clauses dealing with the renewal commission, included the following:

1.1.4 Where a tenant introduced by Foxtons is replaced as tenant (whether or not under a formal tenancy agreement) by his nominee (whether a natural or legal person) the commission will remain payable for as long as the nominee remains in occupation.

1.1.5 The commission is payable whether or not any tenancy agreement is finalised by Foxtons,

Again an issue of intelligibility was raised over the renewal commission clauses. Indeed one does wonder what the precise meaning of the word “nominee” would be in this context.

Intelligibility and the core — is fairness even in issue?

Regulation 6(2) states that the consideration of fairness shall not relate:

  • to the definition of the main subject matter of the contract, or
  • to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.

In other words: you cannot argue that the price of that Covent Garden theatre ticket is too high, or that it is unfair that you have to watch that particular actor as part of the ensemble. There is a further caveat: regulation 6(2) does not apply to a term that is not in plain and intelligible language.

I cannot do justice to the intricate discussion of the regulation 6(2) point – I strongly urge reading the decision if this ever becomes of importance to you. In very rough summary:

The court found that the renewal commission terms (both old and new) were not in plain and intelligible language. In any event it found that none of the terms related to the main subject matter of the contract (or the adequacy of the price).

The drew the following points from Abbey National plc v Office of Fair Trading [2009] EWCA Civ 116:

  • Regulation 6 deals with things that could not be described as “core” but are rather “ancillary”.
  • The enquiry under regulation 6(2) is one of substance not of form.
  • It protects consumers against terms that the consumer will not have in focus when entering into the bargain.
  • Factors from Abbey National that were relevant included:
    • whether the obligation on the consumer was contingent;
    • whether it was mentioned in advertising material.

The court found the advertising point particularly damning:

Foxtons’ glossy brochure extols the virtues of Foxtons in relation to the activities involved in marketing the property, finding the tenant and negotiating a tenancy, apart from one page referring to managing the property. The accompanying separate leaflet on “Short term lettings” does nothing to suggest that there
will be renewals, let alone commission paid on renewals, and refers to ongoing management activities anyway. The same point can be made about its website, though the website is pretty general and of less significance in this respect.

On the question of fairness, the OFT made the point that Foxtons needed to do nothing to earn their renewal commission and the landlord might be paying a new agency a commission on top of that to Foxtons. Foxtons’ response was that they were not just introducing the tenant to the tenancy in the first place, but to the property so that every renewal was the result of their good work.

In the judge’s view it was a matter of impression but decided that the renewal commission terms were not fair. The lack of any temporal limitation, the steady increase of the commission with rent increases and the lack of any renewal service (new tenancy agreements being paid for separately) all pointed to the terms unfairness. It followed that the sale and third party commission terms were even less likely to be fair for the same reasons.

Foxtons had tried to argue that they would have to increase initial commissions in order to offset the loss created by being unable to collect renewal commission and that their business model relied on renewal commissions to maintain profitability. Despite promptings by the OFT over a considerable time, Foxtons never disclosed their model and the judge rejected this contention.

The judge made it very clear that he was not deciding that all Renewal commissions are unfair. He accepted that renewals avoid a void, but the customer doesn’t realise when contracting with Foxtons that that is being paid for.

What effect this will have on the rental market remains to be seen.

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Stadium Housing to Appeal

Published
by
Francis Davey
on 30/09/2008
in Assured Shorthold tenancy and Housing law - All
. 27 Comments

Regular readers of this blog will have read our comments on (in our view) a fairly poor example of service charge management by an RSL, entitled On the Naughty Step. To my surprise the RSL in question — Stadium Housing — have decided to appeal the decision.

This should prove interesting as they appear (so my information goes) to be appealing against

The first ground will be of particular interest as many LVT’s have one or more HLPA members on the panel. The idea that such membership should normally require recusal would have far reaching consequences. The other two grounds of appeal may also produce interesting comment from the Lands Tribunal.
Doubtless the decision on appeal — when it comes — will be blogged here.
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