13/07/2009

Foxtons' terms unfair

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.

2 Comments

  1. S

    On the other side of the fence I’ve always thought that the “administration fee” demanded by letting agents from tenants for entering into a tenancy agreement or a renewal were unfair within the meaning of the Act.

    I knew it was widespread, but hadn’t appreciated it was this widespread: out of 424 letting agents asked 94% of those levied such charges:

    http://www.citizensadvice.org.uk/let_down

    Reply
  2. Jim

    This link to Landlord Law Blog casts a cloud and shows what agents are doing to offset the effect of OFT v Foxtons.

    http://landlordlaw.blogspot.com/2009/07/letting-agents-instead-of-renewal-fees.html

    Apparently, they are doing their utmost to persuade tenants to leave at the end of fixed terms, regardless of the landlord’s wishes and the alternative of the tenancy continuing in statutory periodic form. This is often preferable for all parties except the agents, who stand to collect additional fees for introducing a new tenant.

    Whilst Landlord Law Blog is right to say this is a breach of the agent’s fudiciary duty and hope it will be challenged as soon as possible, such a challenge is likely to depend on evidence from a departed tenant and, at best, there will be some time to wait before one emerges.

    Meantime, the practice will inevitably promote increased “churn” in private rented housing and all “churn” results in spillage -people who cannot replace what they’ve lost for one reason or another and become homeless.

    Reply

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