On 10 July 2009 Mr Justice Mann ruled that certain terms and conditions included by estate agents Foxtons in their letting agreements with landlords are unfair. This decision is likely to have significant implications both for letting agents and landlords.
Proceedings were brought by the Office of Fair Trading (OFT) under the Unfair Terms in Consumer Contracts Regulations 1999. The OFT will now ask the Court to grant injunctions preventing the continued use of these unfair terms by Foxtons.
These included the use of terms obliging landlords:
• to pay further commission of 11% of annual rental where tenants stayed in occupation after the initial period of the tenancy ended, typically one year, despite Foxtons playing no part in persuading the tenants to stay, collecting rent or managing the property
• to pay the same commission on every anniversary of the tenancy period
• to pay such commission to Foxtons after they have sold the property
• to pay Foxtons commission of 2.5% where the property was sold to a tenant Foxtons had introduced, even if Foxtons had not marketed the property or negotiated the sale for the landlord.
It was held that the charging of repeat renewal commission by Foxtons for an infinite period of time represented a 'trap', or 'timebomb', The need for transparency was stressed when dealing with such important obligations; they must not be tucked away in the ‘small print’, where typical consumer landlords would be unlikely to read them, but flagged prominently not just in the letting agreement itself but also in any ‘glossy’ sales literature and advertising. The language must be 'plain and intelligible', as required by the 1999 Regulations.
With regard to the use of a term requiring landlords to pay a sales commission of 2.5% on the sale of a property to its tenant, the judge said that consumers would not merely be surprised but 'astonished' by the potentially large financial liability to Foxtons in relation to a transaction in which Foxtons played no material part.
The Regulations only apply to standard contract terms with ‘Consumers’. ‘Consumers’ are those who are not entering into the contracts concerned as part of their businesses. The Regulations exist to protect consumers against unfair standard terms in contracts. The OFT, and certain other qualifying bodies (such as local authority Trading Standards and national regulatory bodies) can take legal action to prevent the use of potentially unfair terms. A term is likely to be considered unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract, to the detriment of consumers.
The Regulations say that a consumer is not bound by a standard term in a contract with a trader if that term is unfair. The final decision as to whether a term is unfair lies with the Court - but this decision is bound to influence the terms and conditions of all 15,000 or so letting agents in the UK, and the options of their landlord clients. It is difficult to see how Foxtons and other letting agents can seek to distinguish between ‘consumers’ and other landlords when issuing letting agreements so it is not hard to predict significant changes in all such agreements.
As a result of this landmark decision all landlords, whether or not they are ‘consumers’, are bound to check their current and future agreements with letting agents and negotiate the removal of any clauses similar to those used by Foxtons. Indeed, landlords may wish to consider seeking repayment of any ‘unfair’ commissions paid previously.
For letting agents this decision must be a sharp wake-up call to review urgently with their legal advisers the terms of their letting agreements with landlords. The Judge in OFT v Foxtons did not say that all terms requiring landlords to pay renewal and other extra commissions would be unfair. However, some substantial changes are going to have to be made to the average agreement if agents are to have any chance of collecting these in the future.
Long leases of flats sometimes require tenants wishing to sell to seek the landlord’s consent to assign the lease, and to pay the landlord’s management and legal fees in connection with the consent application. Is that unfair on tenants? Not really, as it is a long established principle that landlords are entitled to recoup these expenses even if a lease does not give them an express right to do so.