Tenancy Deposits on Sale and Rent Back on Appeal

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.

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 and tagged , , , .

4 Comments

  1. This suggest an obvious avoidance scheme for the avowedly evil landlord: Have the prospective tenant purchase something from the landlord (gold coin, peppercorn, etc), have the tenant sell the same good to the landlord, on terms that part of the consideration shall be payable at the end of the term.

    I’ll take a look at the judgment before I ask why the transaction did not fall foul of the prohibition on non-pecuniary deposits (or indeed why my above scheme might so fall foul).

  2. The judgment doesn’t mention s.213(7,8), so I assume that it wasn’t argued.

    Given that s.213(8) refers to “a transfer of property intended to be held (by the landlord or otherwise) as security” it would be a slight stretch to argue that the freehold (coin, peppercorn etc) is being transferred or held as security.

    To catch this sort of thing, the statute should have been drafted to catch any arrangement with the effect of making a payment to the tenant conditional on the performance of their obligations. Oh well.

  3. Hello Marcin,
    I did deal with s213(7),(8) and also(10) in my submissions, although you’re quite right to observe that they are not referred to in the judgment. By the way, having spent the last year involved in this case, I wholeheartedly agree that the statute could have been better drafted. I also think that David is right about the importance of the decision on the issue of individually negotiated terms (which is some consolation as that’s the only point on the Court of Appeal agreed with me!)
    Neil Wylie
    KCH Barristers
    Nottingham

Leave a Reply (We can't offer advice on individual issues)

This site uses Akismet to reduce spam. Learn how your comment data is processed.