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There is still quite a bit of confusion regarding the recent decision in the case of the Office of Fair Trading (OFT) v. Foxtons (which I reported on here). One of the questions being asked is what exactly is the status now of clauses providing for commission on renewals?
I should make it clear here that we are talking about non management contracts, where the agent just finds the tenant, and the landlord then takes over the management of the property, but where the agent's agency agreement with the landlord provides for him to continue to receive commission whenever the tenancy is renewed. Also the regulations under which the case is brought, The Unfair Terms in Consumer Contracts Regulations 1999, are only enforceable in the context of an contract between a business and a consumer, made under the business's standard contract terms.
In his decision (which you can read in full here) the Judge, Mr Justice Mann, made it clear that he was not saying that clauses providing for commission on renewals were necessarily unfair in themselves. His ruling was just in respect of the specific clauses in the Foxtons agreements, before the court.
Or to use the Judge’s own words “I am not asked to decide, and do not decide, that renewal commissions (in the sense used in these proceedings) are always unfair.”
So can such clauses ever be fair, and if so what do agents need to do to make them fair? Well in my view, at the very least the renewal commission clauses must be given equal prominence with clauses setting out the initial commission charged, and the agents marketing literature must also make it clear that this type of commission will be charged and say how much. In other words, total transparency, so the landlord is fully aware of and understands the nature of the contract he is entering into.
It is also important that the way in which the average landlord/consumer is likely to view the contract is taken into account. To quote the Judge (para 84):
“the argument of Foxtons [is] that the renewal commission is justified because it is part of the payment for an income stream that has been introduced to the landlord .. There is no evidence that landlords generally (let alone consumer landlords) would view the commission in that way, and nothing in the way in which the matter is presented to them in publicity or otherwise which would bring the point home to the landlord. The landlords in question are not sophisticated economists, or even sophisticated businessmen, and would be unlikely independently to think in those sort of terms. They are likely to see themselves as paying 11% for getting a tenant into the property for the agreed first term. I doubt if many of them will think beyond that ...”
And again (para 91)
“I think it unlikely that the typical consumer who has got a tenant for (say) a year's tenancy, and paid 11% of the rent up-front, would expect a repeat bill in year 2 (and all years thereafter) unless that point is spelled out to him in some way. In the absence of that it becomes a trap, or a time bomb.”
The Judge then referred to Foxton’s glossy publicity and the first pages of the agency agreement as being suitable places for these points to have been made.
One of the main criticisms of the Foxtons clauses were that they were buried in the small print of the agreement. To quote the Judge again (para 92):
“I think that such a consumer will expect a lot of detail be dealt with in what is frequently labelled the "small print", but the whole point of that expression ... is that it contains things which are not of everyday concern to the consumer – it contains various clauses which are thought by the supplier to be necessary but which are not usually relied on ... The consumer would not expect important obligations of this nature with likely and significant impact to be tucked away in the "small print" only, with no prior flagging, notice or discussion. ... that is not a fair way to bring the point to the attention of the consumer, and is not adequate.”
However, is there any ground for saying that renewal commission is unfair per se? The Judge commented that Foxtons did very little work for their renewal commission (para 91):
“No particularly burdensome services are part of the package for years 2 and onwards (or at least nothing like the services involved in advertising the property and getting the tenant in in first place) and it would not readily occur to the landlord that the same sum would be payable in the future for years where that distinction remains true.”
If renewal commission is capable of being fair, could it then be argued that charging the same rate of commission for very much less work is unfair in itself? Although the Judge in this decision does not specifically address this point, this does not mean that it will not be considered at a later date, either in this case or another. From a common sense point of view, renewal commission for what appears to be hardly any work does seem to be unfair, although agents will no doubt continue to argue that it is only right that their firm should share in the good fortune of the landlord in having a long term paying tenant with no voids.
However at the moment we have a decision which avoids this point and seems to imply that such clauses will be fair if the are adequately flagged up in advance so the landlord is aware of them. Agents should be wary about relying on this unduly however. My advice would be that if such clauses are used they must be seen to be fair in an obvious way, i.e. to the ordinary person. If you want to charge renewal commission I would suggest charging a commission which is considerably less than the initial commission, to reflect the reduction in the work done by the agent at this stage. This would be less likley to be considered unfair.
I also think that agents should content themselves with looking to receive renewal commission (if it is claimed) only while the property is in the ownership of the landlord. This was not specifically discussed in the decision (as the renewal clause itself was found unfair). However it seems to me to be wholly unfair that a landlord should be expected to pay commission when the property has been sold on to a third party and is no longer under his control (and when he is no longer receiving any rent out of which to pay the commission), and I suspect that a court would also come to this view.
However this not the end of the Foxtons case. If the OFT and Foxtons are unable to agree on how the decision made is to be worked out in practice, the case may come before the court again. And although their initial comments seem to imply that they will not be appealing this decision to the Court of Appeal, this does not mean that Foxtons will not do so. An appeal court could come to a different view from Mr Justice Mann. The safest thing to do is to wait and see.
So my advice overall to agents is to try to make the clauses in their agency agreements as fair and transparent as possible, and not to put in too big an order for printed copies at their stationers. The fat lady has not yet sung!