Tenancy Deposit Protection on Sale and Leaseback

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]

About D

D is a solicitor specialising in landlord and tenant matters with a London firm.
Posted in Assured Shorthold tenancy, Deposits, Housing law - All, Possession and tagged , , , , .

5 Comments

  1. This is mine. I provided the Piggott -v- Slaven case early last year.

    Just a small correction the hearing is listed for either 8th or 9th. I better make sure Counsel knows that otherwise he’ll be turning up on a Sunday.

    I personally was unhappy with the judgment on the Deposit. As if correct it could allow for the creation of instruments to avoid the legislation. We shall see what the Appeal Court says.

    These sale and rent back agreements (where there is retention) are highly challengeable. I am looking at another one at the moment, although a different method was used for the retained monies.

  2. Presumably you mean by an inflated rent/reverse premium arrangement or by a premium/normal rent/reverse premium arrangement? (Although the latter might be treated as a sham).

  3. I am not sure that I can accept that the retention could constitute a deposit, at least not in the manner it was put together in the particular agreement at issue in this case, although I am prepared to be corrected by the Court of Appeal. I think there are definitely issues with this and I am not sure that the Recorder was wholly right on the issue of it being a contractual penalty. The answer really is proper regulation by the FSA although I must confess to being less than entirely hopeful.

  4. Having been mean about the FSA yesterday I have actually read their draft rules for sale and leaseback last night and have to eat some humble pie. The new rules prevent the creation of contracts that provide any penalty for the tenant terminating early which would put paid to the retention. The use of ground 8 for possession actions is also prohibited which leaves any eviction in the discretion of the Courts.
    F was unfortunate in that his contract was created before the need for regulation was seen and carried through but the FSA would certainly consider the terms of his agreement to be unfair which might be persuasive in the Court of Appeal.

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