Painsmith Landlord and Tenant Blog

A practitioners landlord and tenant law blog from PainSmith Solicitors

Blog Changes

We have made some small changes to the blog.

First all new posts will be categorised to show which of the main UK jurisdictions (England & Wales, Scotland, Northern Ireland) they relate to. The England and Wales category has sub-categories for matters that are for England or for Wales alone. This should help clarify applicability of material for each area. We will try to go back through posts and add categories to past items as well.

Second, we have (experimentally) enabled a star rating system for each post to allow users to indicate how useful they found an item. This should assist us in targeting future content.

We hope these are useful changes. If you want more or less then please comment.

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Service Charges….or not

The Court of Appeal in Morshead Mansions Ltd v Di Marco distinguished between service charges payable under a long lease and the liability of a member of a company to pay that company under its Articles of Association.

The claimant company owned the freehold and undertook the management and administration of the block of 104 flats. All the flats were under long leases, with each lease containing provision for the payment of service charges. The leaseholders also owned a share in the company.

Under the company’s Articles of Association, the company was permitted to establish and maintain capital reserve, management funds and sinking funds to pay or contribute to fees costs and other expenses for such things as maintenance of the block and the provision of services. The Articles allowed the company to require the shareholders to contribute to such reserves or funds in a manner approved by the shareholders at a general meeting.

At the general meeting, the shareholders approved the establishment of a recovery fund for the purpose of raising some £400,000 to redecorate the exterior of the block and to finance the provision of services. It was resolved that each leaseholder would contribute £4,000.

The defendant was a leaseholder and a shareholder in the company and refused to contribute to the recovery fund. The company issued proceedings to recover the funds and the defendant contended that such funds were service charges as defined by s.18 of the Landlord and Tenant Act 1985, and that the company was not entitled to summarily decide to collect service charges which could be recovered under the terms of the lease.

The Court held that there was a distinction between the liability of a tenant to his landlord to pay a service charge, to which s.18 of the Landlord and Tenant Act 1985, applied, and the liability of a member of a company to pay similar sums under the Articles; the claim bought by the company related to the company’s right to recover money owed by the defendant as a member of the company and had no bearing on his position as a leaseholder, s.18 of the 1985 Act was irrelevant.

The key point to note here is that it is important for companies to be clear as to which of the two positions they are seeking to recover monies under and equally, leaseholders need to make sure they are not shareholders of the company if they plan to contest such payments.

The Government has recently consulted on default Articles for Right to Manage companies such as that in the Morshead case and we have previously posted on this issue.

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Tenant’s Notices to Quit, Holding Over and Double Rent

In these difficult times tenants are increasingly giving notice to end their tenancy and then seeking to withdraw that notice or staying for a few days beyond their original term. This practice is known as holding over. Where a tenant has given notice to quit, either under a break clause or in relation to a periodic tenancy, that notice is binding on the tenant even if it is defective and it can only be withdrawn or rescinded with the consent of the landlord.

Where a tenant gives notice to quit and then does not in fact vacate the premises, staying for a few extra days the provisions of section 18 of the Distress for Rent Act 1737 come into play. This section states that to discourage tenants causing “great inconveniences … by … refusing to deliver up the possession when the landlord hath agreed with another tenant for the same” the landlord may seek double the sum normally charged in rent.

This can only occur where the tenant has given a valid notice to quit which the landlord accepts as a valid notice and where the landlord is, therefore treating the tenant as a trespasser while they hold over. In other words it can only apply where the landlord would have a right to seek possession through the Courts but is unable to do so because the tenant will not be remaining in the property for long enough to make it a practical option. The landlord may not seek double rent for a full period of the tenancy (as this would be inconsistent with treating the tenant as a trespasser) and must charge it on a daily basis. It should also be noted that failure to return keys promptly is not sufficient to engage this principle.

A landlord can recover his double rent in the normal manner from the tenant’s deposit or through the Courts although landlords are warned that, in general, neither tenancy deposit protection adjudicators or judges are familiar with this legislation and so a claim may be hard to pursue in practice.

It should be noted that this stipulation does not apply to tenants who remain in a property for a few extra days at the end of the fixed term or who try to leave part way through a period of a periodic tenancy. In both of these cases the tenancy does not end and the landlord cannot treat these persons as trespassers. The tenancy simply continues for another period until the notice is properly given.

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TDP. New Case and a Summary

District Judge Burn at Bromley County Court has ordered a landlord to pay 3 times the deposit and to return of the initial deposit paid to his former tenants due to his failure to lodge the deposit with an authorised tenancy deposit.

In the recent case of Da Costa v Pinter the claimants were assured shorthold tenants whose tenancy had come to an end. The tenancy agreement required the rent of £1,950.00 a month and a payment initially of £4,200.00. A dispute arose with regards to the Deposit and the tenants issued court papers in order to recover the deposit amount. The court papers were then subsequently amended by the tenants for a further claim of £6,750.00 representing 3 times the initial deposit amount under the Housing Act (HA) 2004 section 214 (4). After proceedings were issued the deposit was then placed in an authorised tenancy deposit scheme.

The judge confirmed that she was happy that the £4,200.00 included a deposit of £2,250.00 and that the agent had described it as such. There was a clear breach of section 213 of the HA 2004 since the deposit was not paid into a scheme within 14 days of receipt. The judge was satisfied that the ‘initial requirements’ of a tenancy deposit scheme were not met and that the remedies of ss 213 and 214 therefore applied, that is the return of the deposit and an award of 3 times of the deposit. Undoubtedly, the judge was assisted in her decision by the fact that the tenancy had actually come to an end prior to the deposit being protected.

This case illustrates the ongoing problems both landlords and agents are having with the tenancy deposit schemes. The case law surrounding this area is mostly unreported however having viewed some judgements there does appear to be some uncertainty over whether the ‘initial requirement’ is to both lodge the deposit with a scheme within 14 days and to provide the prescribed information within the same period or whether lodging the deposit alone is enough. This uncertainty will no doubt continue until a court of record (High Court or above) is asked to rule on the point. Until such a time agents and landlords are warned that judges will decide each case as they see fit given that the decisions of the lower courts are not binding on other lower courts.

In order to assist with the uncertainty The Dispute service (TDS) has amended its rules and now confirm that its initial requirements are that the deposit be registered with the scheme within 14 days of receipt and that the prescribed information must be provided within the same 14 days. Consequently members that miss the 14 day deadline will automatically find themselves in breach of the initial requirements of the TDS and risk being ordered to pay 3 times the deposit.

In the case of Universal Estates v Tiensia MyDeposits have also been held to have similar ‘initial requirements’ to the TDS.

It is also vital that agents are particularly careful when landlords are registering the deposit themselves. Section 212 (9) (a) of the HA Act states:
References to a landlord or landlords in relation to any shorthold tenancy or tenancies include references to a person or persons acting on his or their behalf in relation to the tenancy or tenancies.
This is of course open to interpretation but from an initial reading it seems that where the landlord fails to lodge the deposit the tenant may have a claim against the agent for the landlord’s failure to register. County Courts appear to support this position and agents may, therefore, wish to consider including a indemnity in their terms of business protecting them from the landlords failure. It may be prudent for the agent to seek confirmation that the landlord has registered with a scheme prior to sending the deposit to him or in the case of the custodial scheme that is Deposit Protection Service (DPS), sending the deposit to them directly. However this does not deal with the issue of relying on the landlord to ensure that the prescribed information is also provided to the tenant within the 14 day deadline. For a more ‘belt and braces’ approach, agents may wish to consider insisting on registering the deposit themselves through their own scheme membership.

The purpose behind the HA 2004 is to secure deposits and to return them quickly to tenants in the event of no dispute or to refer the matter to adjudication where there is, without the need for court. Landlords that do not secure the deposit within 14 days of receipt and then attempt to deduct monies upon the expiry of the tenancy are seen to be flouting the sprit of the legislation and agents need to ensure that they are not seen in the same light.

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When is a Trial Not a Trial……

When it is a hearing of course! The recent case of Forcelux v Binnie in the Court of Appeal reviewed the status of initial hearings under part 55 of the Civil Procedure Rules, which govern possession actions. It seems that the first hearing before a Court is not a trial even though a possession order may be awarded and it may be the only hearing.

The key upshot of this is that it is far easier for a tenant to apply to set aside any possession order made at such a hearing where it has been made in his absence. This is because any attempt to set aside a decision made at trial can only be made by application under rule 39.3(3) and this requires that the party seeking for the order to be set aside must show:
1. He acted promptly;
2. He had good reason for his non-attendance; and
3. He has reasonable prospects of success at an re-trial.
This can be hard to do and therefore has the effect of preventing many re-hearings of matters where the defendant was not at the original trial. However, as the first hearing of a matter under CPR 55 is not a trial CPR 39.3(3) does not apply and the Court power to set aside the hearing is provided by CPR 3.1(2)(m). This does not require prompt action or the Defendant to show that they have reasonable prospects of success but merely requires a the Court to be persuaded that justice will not be done without a proper hearing.

In practice, this means that many more Defendants may have the opportunity to apply to the Court to set aside possession orders where they can show that the overriding objective of fairness will be best served by doing so. Agents and landlords should be aware that this may allow unscrupulous tenants to delay possession further and should also be aware that simply proceeding to a hearing without the presence of the tenant may not be the ideal situation that it may first appear to be.

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EPCs and the HHSRS

We have been surprised to be told of a few cases where Local Housing Authorities are serving improvement notices under the Housing Health and Safety Rating System on landlords because they have a very poor Energy Performance Certificate rating. Presumably this is on the basis if the ‘excess cold’ hazard profile in the HHSRS. However, an EPC is a measure of the cost of heating and lighting a property and says nothing about how warm or cold that property can be. Therefore it is hard to see on what basis action is being taken.

If anyone would care to give some more information we would be grateful!

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Accuracy of Information on Websites

Many people will be aware of the problems of obtaining accurate information on the internet. As a law firm we frequently receive communications from individuals telling us what the law on a particular matter is. Often this is based on poorly written commentary or, more amusingly, on the law in other parts of the world.

For agents this is a particularly important issue as property advertising on the internet continues to grow. The risks of misrepresentation and misdescription (which for estate agents is prosecutable under the Property Misdescriptions Act 1991) are growing and the modern phenomena for sites taking automatic data feeds from agents own software means that small (and otherwise inconsequential errors) can rapidly be magnified into major problems.

However there is some good news. A recent case in the Court of Appeal dealt with the liability of a company for incorrect information appearing on its website. In Patchett v SPATA the Court of Appeal held that the Defendant was not liable for a misleading representation on its website in relation to the quality of third party contractors. This was primarily because the website “urged independent enquiry”. The website made reference to other documents supplied by the Defendant and set out a series of enquiries that should be made before relying on the contractors mentioned on the site.

Agents would be well advised to take this on board by making clear on their websites that further details of properties are available and should be sought before reaching a decision on rental or purchase.

However, agents should also take care of the details appearing on their websites and on other internet portals and should make sure they have a proper procedure in place to review this information and check its accuracy on a daily basis. Not only will this help avoid mistakes but it will also provide a defence against any threatened prosecution under the Property Misdescriptions Act.

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Mortgage Repossession Protocol Changing Behaviour

It seems that the new mortgage repossession pre-action protocol (which we talked about here) is having an effect on mortgagee’s behaviour with a dramatic drop in repossession actions.

Whether the protocol has been responsible for this or whether mortgagees are less inclined to take possession due to the difficulty in recovering their investment by selling the property is a moot point. The key issue from the point of view of the landlord and tenant professional is the increased willingness of mortgagees to appoint receivers and reach sensible commercial arrangements.

From the tenant’s point of view this means that they may be able to remain in a property they have rented by paying rent to a receiver appointed by the mortgagee. However, it should be remembered that the receiver is frequently not accepting the landlord’s responsibilities (just the money!) and so it will still be necessary to look to the landlord to repair the property.

For buy-to-let landlords the new willingness of mortgagees to reach sensible commercial arrangements coupled with a reduction in interest rates may be sufficient to allow them to weather the downturn. However, it is notable that many mortgagees are refusing to remortgage with buy-to-let landlords so this may not be sufficient.

Whether this new attitude from mortgagees will continue when they can more easily sell property remains to be seen but the current change in attitude will benefit landlords who make an effort to negotiate with their mortgagee if things are difficult.

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TDS, Evidence, and Bias

We often hear allegations that tenancy deposit protection schemes are biased towards tenants. This, in part, conceals a fundamental misunderstanding of the nature of a deposit.

The tenant’s deposit belongs to the tenant and continues to do so until such time as the landlord becomes entitled to make reasonable deductions from it. Therefore the default position is that all the deposit should be returned to the tenant unless the landlord demonstrates that the deposit should be sent to them. This is not bias but the correct application of the law.

It is for landlords to show that the tenant’s deposit or parts of it should be passed to them by providing evidence of the tenant’s breaches of the tenancy agreement. This should be weighed on the balance of probabilities but the landlord will need to provide solid evidence that the loss or damage has occurred and that the valuation placed on it is realistic. Where this is not provided or the tenant provides evidence to the contrary then the money should be returned to the tenant.

In summary, the various schemes are no more biased than the Courts. They start from the proposition that the money belongs to the tenant and require the landlord to show that it should be given to them. Where insufficient evidence of that proposition is provided then the money will be returned to the tenant.

Accusations of bias toward tenant should perhaps be viewed as an admission that the landlord could not make a strong enough case. Looking at the statistics it can be seen that the schemes make awards almost equally to both parties. Given that they should be starting from the premise that the money is the tenant’s this shows that landlords do relatively well from scheme adjudications.

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Further Energy Performance Tweaks

The Energy Performance of Buildings (Certificates and Inspections) (England & Wales) (Amendment) Regulations 2009 came into force on 10 August 2009.

These make a small amendment to the EPC regulations to allow for disclosure of EPCs, recommendations and Display Energy Certificates on the sale of properties. Where an EPC is produced for a property which is for sale and the rating on the certificate is in bands F or G the keeper of the EPC register (ie. one of the licensed bodies who register and maintain records of inspectors) is permitted to disclose the certificate to the Energy Saving Trust Ltd, a body licensed by government to provide information and advice in relation to energy saving in the home.

The objective of the disclosure is to allow the trust to provide information to the owner of the property on things they can do to improve the efficiency of the property and grants that might be available to pay for the improvements.

In general this will have limited effects on the sector except to encourage improvement of less efficient properties. This may be of benefit as these properties are generally less desirable and harder to sell although, in truth, most agents will already be pointing vendors and landlords towards the trust and its free advisory services in any event.

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Notices to Quit

A recent Court of Appeal decision sheds light on issues relating to Notices to Quit by tenants. In Bradford Community Housing Ltd v Hussain & Kauser the Court of Appeal ruled on the validity of a Notice to Quit which contains a saving provision and on whether the acceptance of rent or holding back on enforcement can invalidate a Notice to Quit.

Mr Hussain and Ms Kauser held an assured tenancy from Bradford Community Housing Ltd and after allegations of domestic violence their relationship collapsed and Ms Kauser (at the urging of Bradford) served a notice to quit on Bradford. As the tenancy was periodic by this stage the notice was valid to terminate the tenancy without the involvement of Mr Hussain following the well-known decision in Hammersmith & Fulham LBC v Monk. On the back of this notice possession proceedings were taken.

Before the Court of Appeal two arguments were made. The first was that the date on the notice was wrong and that the standard saving provision made the notice ambiguous as the saving provision and the given date ultimately referred to different dates. The second argument was based around correspondence between Bradford and Ms Kauser whereby Bradford had suggested suggested that they would not enforce on the notice to quit immediately and would continue to accept rent monies on an ad hoc basis. It was argued that this arrangement had the effect of renewing the tenancy and thereby made the notice to quit ineffective without the consent of Mr Hussain.

The Court of Appeal dismissed both arguments out of hand.
The Court was in no doubt that the use of the saving provision did not create and doubt in the mind of a reasonable recipient of the notice. This is an interesting point as the same question has been raised (although not at such a level) in relation to section 21(4)(a) notices and the possibility of ambiguity if they contain both a date and a saving provision. It would seem that this argument is now dead.
The Court was also not prepared to accept that a statement by Bradford that they might not immediately enforce the notice to quit and would in the meantime accept rent in any way acted to create a new tenancy. The Court made reference to the case of Clarke v Grant and made clear that mere acceptance of rent after the expiry of a notice could only create a new tenancy if this was the settled intention of the parties.

While this is a small case it provides clarity over one or two points of interest.

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EPC Directive Changes

The European Commission, the primary legislative body of the EU, has put forward proposals to make changes to the Energy Performance of Buildings Directive (EPBD). CLG has published a consultation on the proposals to allow it to reflect the views of UK stakeholders back to the commission.

The proposals are in two categories. The first stage, which UK government supports seeks to clarify and simplify the directive. The other part seeks to expand and strengthen the directive. The UK government is largely opposed to this, in common with its general policy on Europe, and takes the view that many of the issues should remain with member states under the general principle of subsidiarity.

Looking at the key proposals they are as follows:

  • buildings occupied by public authorities or where the public visit regularly are to have a Display Energy Certificate on display where the building is larger than 250 sq m as oppose to the current size of 1000 sq m;
  • any commercial or domestic building which is renovated will also have to have its energy performance upgraded at the same time for which targets will be set;
  • there will be minimum requirements for technical building systems such as boilers in commercial property.

Naturally this will cause increased costs for many older properties.  However, given the impact of empty building rates on commercial property and the consequent knocking down of some of these properties the impact may well be small.  In residential properties properties being renovated will have to have their performance improved but this would probably be done in the majority of renovations anyway.

The consultation is open for responses until 2 October 2009.

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RTM Company Articles

The government is consulting on new default articles for Right To Manage (RTM) companies formed under the Commonhold and Leasehold Reform Act 2002.

It is debateable whether such changes are really necessary. All companies can choose to set up their own articles when they are created. However, many RTM companies are created on the fly by inexperienced individuals and so the creation of some form of pre-defined articles for these companies might be advantageous. It is also worth pointing out the low take-up of the powers offered by the Act and the arguable pointlessness of legislating where the advantage is so limited.

The model articles aim to provide a degree of balance between the rights of tenants and the needs of landlords who have a greater investment in the structure of the property and the common parts. How well that balance is struck probably depends on the side from which you approach the issue. It is difficult though to see how a pre-defined set of articles can properly take account of the large number of different RTM situations and whether there should be a greater emphasis on each RTM company choosing articles to fit its own situation.

The consultation is open until 16 August.

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Mortgage Possession and Tenants

We have previously discussed the problems experienced by tenants when a mortgagee seeks to repossess the property to exercise its power of sale. In a recent alteration to the Civil Procedure Rules some of the issues were addressed by forcing mortgagees to give more notice to occupiers of properties. We reported on this here.

However, providing more notice does nothing to protect tenants whose landlord has not bothered to seek the consent of their mortgagee to the letting. Where the landlord has sought consent the mortgagee is obliged to see out the term of the letting. Non-authorised tenants are not so protected and get short shrift from mortgagees and the Courts. Of course, tenants should always insist on seeing consent to their letting from the mortgagee but this will not help those who find themselves under threat of eviction today.

The government has now produced a consultation on further changes to the process of mortgage eviction in order to help protect unauthorised tenants.

Apparently the government are working with lenders to remind them that they are obliged to see out tenancies which they have consented to and to encourage them to accept unauthorised tenants where possible. We have not seen a great deal of evidence that this engagement is actually working with the worst offenders being Northern Rock and other lenders taken into government control!

The other intended improvement is to make notification to tenants of problems more effective by requiring the letter that is currently addressed to “The Occupiers’ to make specific mention of tenants on its face. This is to come into force in October 2009.

Turning back to unauthorised tenants the consultation intends to achieve a balance between reasonable notice to the tenant and the right of the mortgagee to sell the property with vacant possession. The aim is to allow the tenant two months notice to vacate.

There are a series of different proposals for how this might be achieved ranging from no change through to radical legislative amendment.

There are some real problems with this consultation. For on the government appears to have absolutely no idea how many tenants are affected. They estimate that there are approximately 360,000 properties with unauthorised tenancies but this figure is plus or minus 120,000 which shows the level of uncertainty.

In fact, it is not clear precisely how the government will deal with the situation as a change to assist unauthorised tenants would, in practice, have to be applied in all circumstances where mortgage possession is considered, adding considerably to the cost of mortgage repossession for lenders at a time when they can ill-afford it.

Probably the most practical option is to imporve notification and allow the tenants to attend Court to seek a stay of possession before the judge. Obviously this has the same disadvantage as the current system in that many tenants do not have the knowledge or the desire to attend a Court hearing. Therefore any change is going to have to make the process as painless as possible for those who are, after all, innocent parties. The best option is probably a form sent to the tenant by the lender which permits them to make written representation to the Court.

The consultation is open for responses until 14 October 2009.

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TDP and Prescribed Information

It has come to our attention that many agents are still not providing all the necessary prescribed information to tenants on the registration of deposits under the various tenancy deposit protection schemes. Section 213(5) of HA 2004 requires that the tenant is given such information as may be prescribed. Section 216(b) requires that this is given within 14 days of the receipt of the deposit. There is still a lot of debate as to whether there is any penalty for the giving this information late.

The information required to be handed over is set out by the Housing (Tenancy Deposits) (Prescribed Information) Order 2007. Provision of the tenancy agreement and the information certificate supplied by all of the schemes will satisfy most f the requirements of this Order. However paragraph 2(1)(b) requires the provision of

any information contained in a leaflet supplied by the scheme administrator to the landlord which explains the operation of the provisions contained in sections 212 to 215 of, and Schedule 10 to, the Act

Both the insured schemes (TDS & MyDeposits) provide such leaflets and they must be passed on to the tenant to comply with the terms of the Order. This provision is frequently being ignored but failure to fulfil it properly may lead to the usual penalties being applied.

You have been warned!

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Gas Safe Register Confusion

Gas Safe Register appear to be advising on their helpline that a landlord is obliged to obtain a new gas safety certificate every time a tenancy is entered into, notwithstanding any current gas safety certificate that is in place. This is not the position.

The Landlord (or the Agent if it forms part of the terms of business) is required to arrange the annual preparation of a gas safety certificate and ensure that throughout any tenancy a valid gas safety certificate is in place at all times.

An annual gas safety check must be carried out by a Gas Safe Registered engineer. A record of the safety check must be kept for 2 years. A copy of the certificate must be issued to each existing tenant within 28 days of the check being completed, and in any event before the commencement of a tenancy.

This is consistent with the advice as given on the Gas Safe Register website.

The relevant legislation can be read here.

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Planning and HMOs

Not sure how we missed this really but the Department of Communities and Local Government has launched a consultation on possible changes in planning systems to deal with HMOs.

This consultation is in response to an increase in HMOs in parts of the country and the tendency for these to be grouped together in small areas. This is sometimes referred to as “studentification”.

The current method of control of HMOs involves the licensing of larger properties. However, there is no power to refuse a licence on the basis that there are a large number of other HMOs in the same area. The problem is made worse by the fact that student naturally wish to cluster and the type of property suitable for conversion naturally tends to be built in blocks.

There is an aspect in which this is a bit ironic in that many of the issues with concentrations of HMOs are caused by the growth of educational institutions and the need to house the resulting large numbers of students. The government encouraged this but made no effort to ensure that the growing establishments provided suitable accommodation for there students. Therefore the private sector has tended to take up the slack. For the government and local authorities to complain about this now is a little unfair and is largely illustration of a failure to properly consider all the consequences of unchecked growth in higher education establishments.

In any event, the consultation ends on 7 August 2009.

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Rent Increase Clauses and Statutory Periodic Tenancies

In a periodic Assured or Assured Shorthold Tenancy the provisions of section 13 of the Housing Act 1988 are used to increase the rent. This is not a wholly satisfactory system as it is overly technical and ultimately allows appeals to the Rent Assessment Committee which can be somewhat capricious.

It has been thought that a clause in the agreement which set out a mechanism for increasing the rent, however abbreviated, would be sufficient to oust the provisions of section 13 and the clause would prevail.

In London District Properties Management Ltd v Goolamy [2009] EWHC 1367 (Admin) this view has been overturned. The High Court ruled that the prevailing view was inaccurate. Taking a literal view of section 5(3) of the Act the Court held that in a statutory periodic tenancy the provisions of section 13 would overrule any rent increase clause.

Bizarrely, the legislation appears to draw a distinction between tenancies which are intended to be periodic from the outset and those which start out as fixed term tenancies and become periodic by operation of section 5. The former can incorporate rent increase clauses, the latter will have theirs overruled by the section 13 process once the tenancy has become periodic. While the Court does not mention this point it would seem that the way around the problem is to simply agree a tenancy for a fixed term with a contractual provision that it will then continue as a periodic tenancy. Presumably if it is pre-agreed that this will occur then the provisions of section 5 will not be required to create a periodic tenancy and thus the section 13 provisions will not be given the primacy that section 5(3) provides.

Whether this will work or not remains to be seen.

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Landlords as Consumers

One of the biggest difficulties in dealing with unfair terms questions relates to the point that it only applies to consumers. The Unfair Terms in Consumer Contract Regulations 1999 (UTCCR) define a consumer as “any natural person who … is acting for purposes which are outside his trade, business or profession”. This definition is particularly problematic when we consider the position of a landlord. While it seems fairly clear that a casual landlord with one or two properties is largely within the definition of a consumer the position becomes less certain when dealing with landlords who own several properties, who may be highly sophisticated and experienced, and who derive a substantial percentage of his income from his activities.

In the past there has tended to be a view in the industry that a landlord with more than a certain number of properties should be viewed as being outside the ambit of a consumer. However, this immediately raises the question of precisely how many properties should mark the boundary. The Solicitors Ombudsman Scheme has indicated recently that it views the threshold to be four properties but it has not provided any clear understanding of how it arrives at that position.

The question of how to categorise the more sophisticated and knowledgeable client has, surprisingly, not exercised the Courts a great deal but the one apposite case indicates that a concentration on the number of properties may be missing the point.

In Standard Bank London Ltd v Apostolakis & Anor [2002] CLC 933 the Court was required to consider a contract relating to currency trading between a UK bank and a Greek couple. The Greek couple were highly educated professionals, being a civil engineer and a lawyer, and had been trading currency for many years. The income of this made up approximately one-fifth to one-quarter of their total income from all sources. During the course of a number of futures trades the couple built up a significant exposure which the bank eventually liquidated when the situation turned radically against them in 1998. For a number of reasons the Court was required to consider whether the Greek couple could be found to be consumers under the terms of the UTCCR.

The Court found that a contract for foreign currency trading was not part of the normal trade or profession of the Greek couple. The Court further found that despite the couples evident education and experience with currency trading they were still not acting in the course of a trade or profession by entering into the currency trading that they had. The Court found that they were rather “disposing of income which they had available.” They were “using their income in what they hoped would be a profitable manner” and were not “trading in foreign exchange in the sense that a bank or dealer can be said to trade.”

If we bring this view across to the world of the private landlord we paint a bleak picture. It would appear by analogy that a private landlord who simply invests his income in a degree of property speculation should still be viewed as a consumer as they are not speculating in the sense that a property developer does. To step outside the realms of a consumer the landlord would appear to need to be dealing by way of a company vehicle or be deriving the majority of his or her income from such transactions.

In short, it would be a dangerous tactic for any agent to rely on showing that an individual landlord was not a consumer as a means to defeat a claim under the UTCCR.

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OFT v Foxtons- Renewal Commissions and Mis-reporting

Following the decision in OFT v Foxtons on Friday there has already been a great deal of mis-reporting of the outcome.

One of the most noticeable points relates to the issue of renewal commission and the suggestion in much of the media that renewal commissions are unfair and that landlords will be able to recover commission already paid.  This is simply incorrect.  Unfortunately, as a result of these misunderstandings many agents have already been contacted by landlords demanding repayment of alleged unfair fees.

It is worth considering the judgement in detail at this point.  In paragraph 33 of his judgement Mr Justice Mann said the following:

I should first make clear what I am not deciding, and what I am not asked to decide. I am not asked to decide, and do not decide, that renewal commissions (in the sense used in these proceedings) are always unfair. I make that clear because some of the evidence and submissions of the OFT come close to asserting a case that they are always unfair, and some of the correspondence seemed to be based on such a proposition, though Mr Nicholas Green QC, for the OFT, eventually made it clear that that was not his case. Mr Michael Kent QC, for Foxtons, opened his submissions by saying that I would eventually have to, and should, rule on renewal commission generally, but he moved away from that. I shall not decide whether or not renewal commission is always unfair to consumer landlords.

Therefore, the judgement in no way states that renewal commission is unfair.  What was decided was that Foxtons renewal commission clauses were not worded in plain and intelligible language and were excessive in the level of commission charged and in their wider definition of renewals by associates of the tenant which would also attract a fee.

The other area of mis-reporting is in relation to the rights of parties to demand the return of sums already paid.  Contrary to the decisions made in the various cases involving bank charges there is nothing in this judgement which allows for monies already paid to be recovered.  This particular issue was one which Foxtons fought hard to avoid and at the current time the Court has not made any ruling in relation to it.

In short, no agent is in any way obliged by Friday’s decision to return monies to any party.

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Initial response to OFT v Foxtons

Following the ruling today in this matter, letting agent terms of business may well contain some significant flaws and unenforceable terms.  In particular any term which seeks to charge a commission fee where the landlord sells the property to the tenant will be deemed unfair.  In addition, where an agent seeks to charge commission on a renewal where the landlord has sold the property to another landlord such clauses will be deemed unfair.

What is not unfair is the charging of a renewal fee, even where the agent has not been involved in the negotiation of the renewal, provided that this charge is signposted to the landlord at the outset of the instruction and drawn to their attention.  The reporting of this matter is inaccurate in this aspect.

Nothing in today’s judgement requires agents to refund monies to landlords but it will prevent agents from using or relying on clauses that have been found to be unfair.

PainSmith have already amended our standard terms of business and are able to provide these for immediate use as a stop-gap measure until such time as agents can amend their standard terms.

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OFT v Foxtons Links

The OFT press release on today’s judgment can be found here

The judgement can be found in full here

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OFT v Foxtons – early hints

Its 9.30 and we’re waiting for the judge to give his decision which should start 10.00. It appears that both parties have had early copies of his judgment and hints have started to leak. First indications appear to show that the oft have succeeded on the matter of charging commission to landlords who sell their property to tenants or occupiers and this type of provision may well now be considered unfair.

The oft have further succeeded in relation to charging commission to landlords who have divested themselves of their interest in the property and where the new landlord renews a tenancy with the original tenants. It appears, however, that charging of renewal commission in other circumstances even where the agent has not been directly involved in the negotiations of the renewal is acceptable provided that the terms of the agreement are expressed in plain and intelligible language. It may well be that many clauses currently in use fall short on that requirement.

It seems that some early comments on the news media this morning may have been premature. More information as we get it.

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OFT v Foxtons

The judgement in this matter is being rendered at 10am tomorrow in the High Court. PainSmith solicitors are contracted to one of the main organisations representing lettings agents to provide a brief electronic response and a full consideration. The brief response should be available late tomorrow.

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Changes in Home Ownership Attitudes

The Today programme tells me that the Chartered Institute of Housing has published a new study which suggests that young people, in particular, are turning away from house ownership after being scared off by the economic downturn and the concomitant drop in house prices.

This leads to the immediate question about where these people are living. Presumably this will lead to an increase in renting. Inevitably much of this increase will be felt in the private sector. However, the private sector is not really geared towards the longer-term renter which is something that will be desirable to those seeking to stay in the sector. Indeed, the legislation tends to discourage longer term arrangements.

Contractual provisions can provide the long-term security that tenants will seek but few landlords are prepared to grant such long-term rights. In addition mortgage companies, freeholders, and insurers all tend to refuse consent for such long-term lettings. In addition there is no protection for tenants whose landlords fail to maintain their mortgage payments which inevitably erodes the security offered. Finally, the creaking Civil Court system is too slow to deal with possession claims and this pouts landlords off lettings where they cannot get rid of tenants easily.

The Law Commission proposed changes to the legislation which would help here. The creation of two tenancy types giving short-term and long-term rights would allow landlords and tenants to make a clear choice as to the nature of tenancy they were in the market for. However, without other legilative and structural changes the Law Commissions proposals will fall on barren ground.

The current government as well as its challengers are all keen to talk about housing and to make sweeping statements. However, much of this proposed action seems to get lost in a maze of reviews. Until these are backed by real legislative intent and proper incentives things are unlikely to change.

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The Life and Death of Tenancy Deposit Scheme

This week has seen a degree of excitement in the world of Tenancy Deposit Protection. We know….the excitement is just too much to bear.

A new tenancy deposit scheme appeared to have set itself up earlier this month calling itself MyTenancyDeposit. Its website described itself as a custodial scheme. This was a surprise to the three government approved schemes and indeed to the Department of Communities and Local Government as no such scheme had in fact been authorised. Much paper was expended behind the scenes and the telephone wires turned red hot!

All has now been revealed. Looking at the website today it appears that MyTenancyDeposit had already registered with the MyDeposits scheme and was, in effect, acting as a deposit taking agent protecting its holdings with the MyDeposits scheme. They are now apparently taking legal advice as to whether they can continue to operate.

While it appears that there was no intent to evade the provisions of the Housing Act 2004 the website was, at best, deceptive about the actual method of operation of the system. Given that the system was essentially free and actually paid £10 to agents who registered deposits with it, it is hard to see how it was actually going to make any money as its earnings on the deposits would be limited to that obtainable as interest on a ring-fenced account.

Anyway, the system may reappear depending on legal advice given. However, MyTenancyDeposit may find it hard to persuade MyDeposits, or any other provider, to work with them.

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Sale and Rent Back Regulation

The Financial Services Authority has released more details of its plans to regulate the sale and rent back sector. In the downturn this sector has grown substantially and unscrupulous lenders have excited the interest of the Office of Fair Trading and HM Treasury due to a lack of good information being given to consumers.  This is an interim regime and will ultimately be replaced by a full regime which is expected to come into operation on 30 June 2010.

Unauthorised firms operating in the sale and lease back sector will now need to seek authorisation from the FSA.  The scheme is expected to come into operation on 1 July 2009 and firms will have until 1 August 2009 to seek authorisation.  Already authorised firms will need to apply for a variation of permission to allow them to continue to operate.

Firms wishing to apply for authorisation should look at this page on the FSA website which contains information to assist with an application including the type of information that will need to accompany the application. The FSA states that the page will soon also contain draft application forms.

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Electrical Safety in Dwellings- A Reminder

The Gas Safety (Installations and Use) regulations 1998 require landlords to ensure that the gas appliances in their property are safe.  These regulations were supported and policed by the Council for Registered Gas Installers (CORGI) and now the Gas Safe Register.

There are similar statutory requirement for landlords to maintain electrical systems under their control in a safe condition, the legislation is less explicit and there is no electrical equivalent of the Gas Safe Register.

There are 2 main Acts of Parliament that place a statutory duty on Landlords to ensure that the electrical equipment in their properties is safe.

1. The Consumer Protection Act 1987

2. The Health and Safety at Work etc. Act 1974

The Consumer Protection Act affects all persons who let property in the course of their business because it defines them as “suppliers”, i.e. they are supplying goods to the tenant. There are several items of secondary legislation under the umbrella of the Consumer Protection Act that are directly relevant to the supply of electrical goods, including:

1. The Low Voltage Electrical Equipment Regulations 1989

2. The Electrical Equipment (Safety) Regulations 1994

3. The General Product Safety Regulations 1994

4. The Plugs and Sockets etc. (Safety) Regulations 1994

A failure to comply with the Electrical Equipment (Safety) Regulations 1994 and the The Consumer Protection Act 1987 is a criminal offence and may result in:

  • A fine of £5,000 per item not complying
  • Six month’s imprisonment
  • Possible manslaughter charges in the event of deaths
  • The Tenant may also sue you for civil damages
  • Your property insurance may be invalidated

The Consumer Protection Act provides a defence of “due diligence” if it can be shown that the landlord or agent took all reasonable steps to avoid committing an offence – you will need documentary evidence of this.

The regulations are enforced by the Health & Safety Executive.

Although there is no statutory requirement to have annual safety checks on electrical equipment (PAT testing) it is advisable to have periodic checks done by a qualified electrician.

Electrical appliances and fittings within the property need to be SAFE and in good working order, but the legislation does not require the landlord to obtain a electrical safety certificate. However, if any electrical fittings or appliances within the property cause harm to a tenant the landlord/agent could be held liable.

Therefore in order to minimise the risk of something going wrong with the electrics landlords and agents are advised to make visual inspections and have periodic checks carried out by a qualified electrician. The landlord could also keep supplied appliances to a minimum, ensure that operating instructions and safety warning notices are supplied with the appliances and make sure that tenants know the location of and have access to the main consumer unit, fuses and isolator switch.

In January 2005 legislation under Part P of the Building Regulations made it a requirement that for certain types of electrical work in dwellings, plus garages, sheds, greenhouses and outbuildings to comply with relevant standards. It is therefore necessary to ensure that a competent electrician must carry out the work. For DIY electrical work you must belong to one of the Government’s approved Competent Person Self-Certification schemes or submit a building notice to the local authority before doing the work. Any Landlord, regardless of whether they see themselves as running a business or not, should look to comply with these regulations to ensure that all electrical equipment supplied is safe.

It should also be remembered that Houses of Multiple Occupation have their own electrical testing requirements.  The Management of Houses in Multiple Occupation (England) Regulations 2006 require that HMOs should have their fixed wiring tested every five years.  This applies equally to licensed and unlicensed HMOs.

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LACORS on Cancellation of Contracts

On my weekly NFOPP email I was directed to this article on their website which mentions LACORS guidance on the Cancellation of Contracts Made in a Consumer’s Home or Place of Work Etc Regulations 2008.
Unsurprisingly LACORS takes the view that the Regulations apply to Estate (and presumably also Lettings) Agents.
What is more interesting is one of the scenarios in the guidance which we have reproduced here:

2.3.3 – During an estate agent’s visit to the consumer’s home, if the consumer has been able to review the information required by the Estate Agents Act 1979 and the Estate Agents ( Provision of Information) Regulations 1991 and then agrees to the quotation provided by the estate agent and says “Yes” to contracting with the estate agent for his services. The estate agent says “I’ll go back to the office and finalise the contract and send it through” – the Regulations are likely to apply as the contract is made following the offer made by the consumer. The estate agent needs to be careful to give the written notice of the right to cancel at the point the offer is made by the consumer.

This is an interesting view. LACORS is essentially saying that if a verbal agreement is made for business to commence then the notice must be handed over at that stage and cannot wait until the written contract is signed.
This is, of course, quite logical as a verbal agreement concluded on agreed terms is enforceable immediately and does not need to be reduced to writing. However, agents should take care and consider at what stage they are at with a landlord if they are talking to him face-to-face in his own home or place of work. If they are taking away from the meeting that they can immediately start marketing a property and can get th terms signed along the way then they should have handed over a cancellation notice and could potentially be liable to prosecution.

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OFT v Foxtons- A Clarification

It is not normally the practice of this blog to comment on matters that are still before the Courts but we are becoming frustrated by the large amount of incorrect information about this matter that is floating around.

Currently the OFT has suggested that certain aspects of Foxtons terms of business may be unfair.  They have particularly focused on the practice of seeking a fee on the sale of a property by a landlord to a tenant where the tenant was introduced by Foxtons and on the practice of seeking a fee where a tenancy which was carried out on a let only basis is renewed for a further period without any involvement by Foxtons.

The OFT has not said that all agents fees or even all renewal fees are unfair. They are particularly focused on those issues where the agent has not done any work to secure the renewal.  They have also suggested that charging the same fee on a renenwal as on an initial rental may also be unfair as the amount of work done in the two situations is different.

At the current time (21 May 2009) none of these fees are unfair and they will not be so until the High Court rules on the point (probably mid to late June 2009).  Even then there is a high chance of appeals to the Court of Appeal and possibly further.

In terms of outcomes there is a large range of possibilities.  The Court could decide that the specific clauses used by Foxtons are unfair or that any similar clause used by Foxtons is unfair or that clauses of this type are generically unfair and can also choose whether to impose this view only going forwards or retroactively.

Finally it should be noted that the OFT case is based on a general challenge and is therefore focused on the idea of a ‘typical consumer’.  This leaves open the option in any other case for an agent to show that their landlord was not a ‘typical consumer’ and that they should not be protected by the decision.

In any event there is still a long way to go.

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