A ‘Clear and Unambiguous Message’ sent to Letting Agents

In a recent High Court case Office of Fair Trading v Foxtons Ltd [2009] EWHC 1681 (Ch) it was accepted that certain terms and conditions used by Foxtons Ltd in its letting agreements with landlords were manifestly unfair to consumers under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs).

Foxtons’ standard contract terms in their letting agreements provided for a commission payment for the introduction of a tenant. However the wording stipulated that such a commission would continue to be paid even if the tenants renewed their existing tenancy or where the tenants themselves arranged new tenants. Commission would be also payable where the tenants later purchased the property from a landlord of where the landlord assigned the tenants’ rights to a 3rd party.

Various landlords complained to the Office of Fair Trading (OFT) in 2008 over these letting agreements and Foxtons were forced to amend the wording slightly. However the situation remained unsatisfactory and unclear; the OFT took action and applied for declaratory relief. During the proceedings the Court of Appeal confirmed the OFT’s long-held view that it can take enforcement action under the UTCCRs to protect consumers in relation to both existing and future contracts.

Mann J accepted that all the terms brought before the court by the Office of Fair Trading were contrary to the requirement of good faith, and caused a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumers (in this case the landlords). Such onerous contract terms were not automatically unfair but as they were not part of the core bargain between the parties they were insufficiently ‘plain and intelligible’ as required by reg.6(2) and 7 of the UTCCRs. Few consumers were likely to read such terms, which appeared to be deliberately concealed within the rest of the contract wording.

Foxtons argued that the renewal commission was justified because it was part of the payment for an income stream that had been introduced to the landlord. Mann J rejected this submission, stating that “the landlords in question are not sophisticated economists, or even sophisticated businessmen, and would be unlikely independently to think in those sort of terms”. He held that such important contract terms must be flagged prominently not just in the contract, but also in any sales literature and processes (consider Denning’s ‘red hand test’ from lnterfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433).

An additional submission made by Foxtons was that the renewal commission was legally severable and that a blue pencil test could allow the clause to fall away from the rest of the contract. This was also refused by Mann J, who instead viewed that they were not “divided up in that war”. The OFT will now go on to ask the High Court to go on to grant injunctions under reg.12(4) of the UTCCRs preventing the continued use of the terms by Foxtons.

This ruling reiterates the principle that all terms which are likely to impact on a consumer financially should be communicated to that consumer before the contract is entered into. In light of the nature of the case and the fact that Mr Justice Mann was not ruling on the validity of relevant commission arrangements generally, the OFT may be more limited in what it can actually do. Nevertheless, the case could have implications for practitioners within the industry, and may perhaps be a catalyst for reform by the letting agents.

In his witness statement, Foxtons’ Chief Operations Officer, Mr Budden, had this prediction:

“Although no-one can say for sure at this stage, I suspect that were renewal commission to be ruled unfair in the manner sought by the OFT, there would either be significant upward pressure on the level of commission fee in the market (and hence also on rents) and/or increased pressure on prospective tenants to enter into longer initial tenancies or not to renew shorter tenancies”.

Regardless of this, OFT Chief Executive, John Fingleton, championed the case as a victory for the hapless consumer in the lettings market:

“This ruling sends out a clear and unambiguous message that businesses offering services need to ensure unexpected or surprising terms are not hidden away in small print. Contracts need to be written in clear and straightforward language with important provisions, particularly those which may disadvantage consumers as in this case, given prominence and actively brought to people’s attention.”

Wendy Parker