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Landlords up and down the land will be jumping with glee at the Office of Fair Trading (OFT)’s victory over Foxtons regarding their unfair contract terms. To read the background to this, see my previous posts here and here. The OFT was challenging the clauses under the Unfair Terms in Consumer Contracts Regulations 1999 (The Regulations).
The court hearing took place over three days at the end of April/early May 2009 and the judgement was published today. It has already at the time of writing been reported fairly widely, including of course the OFT press release. These are my comments after reading the report (which you can see online here).
There are basically three types of clause which were looked at:
1. A clause providing for Foxtons to receive commission if the tenancy is renewed or extended
2. A clause providing for Foxtons to continue to receive this commission from the landlord even if he has sold the property, and
3. A clause providing for Foxtons to receive commission if the property is sold to the tenant
Foxtons claimed, in essence, that these clauses were fair as they were their just reward for finding a long term tenant, which provided the landlord with an income stream and no voids.
The first thing which struck me on reading the report was the eye poppingly high price charged by Foxtons for providing a tenancy agreement, of £320. Bearing in mind that you can get a perfectly good agreement in the High Street for under a fiver, and that unlimited access to my agreements are available online for £80 pa (together with all my other annual member benefits), this strikes me as exorbitant!
Returning to the case, the Judge confirmed that although the Regulations only apply to consumers (i.e. not to professional landlords whose main income is from landlording), as this agency agreement is used for both business and consumer landlords, it is subject to them. Examples of consumer landlords are those who are letting their home where they are posted abroad for their job, or who have invested in a couple of properties in lieu of a pension. A substantial proportion of landlords only have one or two properties and therefore will normally come within the ‘consumer’ category.
1. Commission on renewal.
The Judge spent most of his time looking at this point.. He found that Foxton’s clauses were unfair, and made the following comments:
• He made it clear that he was not saying that renewal commission would always be unfair. It would depend on the circumstances of the case and how clearly the renewal commission clause was presented to the consumer.
• The Regulations specify that they do not apply to clauses which are part of the ‘core bargain’ of the parties. However the Judge held that this is not the case here, as the average consumer would not consider the renewal clauses to be part of their core agreement with Foxtons (which was primarily for getting a tenant for a specified fixed term)
• Even if the clauses were ‘core terms’ they would still need to be plain and intelligible and be subject to the fairness test.
• The clauses concerned are not plain and intelligible as the language used would not be clear to the average consumer (even though businessmen and lawyers reading the contract closely would pick up on the points)
• 11% of the rent over an extended period of time is a significant sum and a very significant part of the rent, and the typical consumer would not realise that this was part of the agreement, particularly as it is nowhere mentioned in the sales literature provided by Foxtons about their service
• Compared to the initial work finding the tenant, where quite a lot is done by the agents, very little work is done by them for renewals, other than the provision of a tenancy agreement, which is charged for separately anyway
• Unless it is clearly spelled out at the time the agreement is made so the landlord is fully aware that it will be charged, a renewals clause becomes a trap, or a time bomb (these are the words used by the Judge)
• Although a typical consumer is familiar with the concept of commission, normal commission arrangements (such as with an Estate Agent) do not include commission extending long term into the future, as here
• A 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
• Most normal consumers would be surprised at such a clause, and if they were represented by lawyers, it is something that their lawyer would very likely request be removed (a further indication of unfairness)
• Although the Judge accepted that the lack of a void is good for landlords, he held that the important thing is that the landlord would not, (in this case), normally be aware, from this agreement and the pre contract information provided by Foxtons, that he would be paying ongoing commission on renewals in this way
I think that these are the main points made by the Judge, although anyone particularly interested should go and read the decision for him or herself.
2. Commission when the property is sold.
The Judge merely said here that having found that the renewals commission clause in itself was unfair, it would be even more unfair if the landlord was having to pay it after the property was sold on.
3. Commission on sale to the tenant.
The Judge also found that this would be unfair and therefore in breach of the regulations. The main reason for this was the such a situation was not being considered or contemplated by the consumer landlord at the time he entered the contract, and in most cases he would be astonished by its inclusion. He was instructing Foxtons to find a tenant, not to sell the property.
The Judge also made the point that the clause would impose a potentially large financial liability on the landlord in circumstances where Foxtons had not actually done anything. If such a clause were to be imposed on him, a normal landlord would consider that he had been ambushed. It was clearly unfair.
Although it is arguable that this type of clause would also be allowable if it was properly explained to the landlord, and he understood and accepted it, before signing the agency agreement.
The case report ends by saying that there will be a further hearing to consider how this decision will be implemented in practice, unless the parties (i.e. Foxtons and the OFT) are able to reach an agreement first. Of course there is also the possibility that the case will be referred to the Court of Appeal so this is not necessarily the end of the story. However to summarise
- Unless they are very clearly flagged up to the landlord at the time he signs the agency agreement, and given equal prominence to the fees for the initial letting, clauses providing for commission on renewals will normally be unfair and therefore void under the regulations.
- Clauses relating to commission for sales in a contract for agency services for lettings are likewise almost invariably going to be void, unless they are made very clear indeed to landlords at the time they sign the agreement and given prominence in the agreement
The OFT also say in their press release "The OFT expects the letting industry to comply with this ruling, and will take the necessary steps to ensure this where appropriate.". You are warned!