Out-Law News 4 min. read

Foxtons' contracts were unfair because key terms were hidden, rules High Court

The terms and conditions in a letting agency's contracts with landlords were unfair, the High Court has said. The agency, Foxtons, must now change the way it contracts with landlords.

The Office of Fair Trading (OFT) took the case in a dispute lasting years over the unfairness of the contract under which it agrees to find tenants for property owners.

Mr Justice Mann said that some of the terms would leave landlords feeling "ambushed" and that the terms were "potentially draconian". They must now be changed under the Unfair Terms in Consumer Contracts Regulations (UTCCRs).

Foxtons' contracts gave it the right to several kinds of commission for activities in which it had no role, as long as it had made the original introduction between landlord and tenant.

The contracts gave Foxtons a commission when a tenant renewed a lease even if Foxtons had not negotiated the renewal; when a property is sold and the agreement is renewed by the tenant and the new landlord; and even a sales commission if the property is sold to the tenant.

Mr Justice Mann said that the terms were all unfair under the UTCCRs, which are designed to protect consumers against unfair terms in contracts which they cannot negotiate, such as standard sales contracts. He said that the UTCCRs applied in this case because many landlords were effectively consumers with one or two properties to let, or even rooms or spaces within houses to let.

He emphasised that it was not renewal commissions per se that he was outlawing, just the terms Foxtons used to bind people to them. They were contained in the small print, he said, and consumers were unlikely to know what they were signing away.

"Not only is the renewal commission not 'at the forefront' of the publicity; it is nowhere even hinted at, much less referred to," he said. "The marketing material has its focus on the initial activities of identifying the tenant and getting him or her into the property."

"Imagine that the landlord is told, in terms, that he will pay 11% commission on all the rent due in respect of the first term, and an equivalent amount in rent on renewals for as long as the tenant remains in the property as tenant, whether or not Foxtons play any part in putting that renewal in place," he said. "The first element of the commission would not surprise him. However, I think the second element would, even if he is a circumspect client who reads the terms properly."

The Court said that Foxtons might be able to include renewal commissions in its contracts and still act fairly, but it would have to go about it in a different way.

"That might (and I stress 'might') be possible if there is something in the nature of a real negotiation or real bargain between the parties which involved this element. That would almost certainly involve a real degree of clear disclosure, if not active flagging, of the point," he said.

"Such conduct might put the client in the position of being sufficiently well informed that one could conclude that he had accepted this important element of the deal. But nothing like that happens in the cases which I have to consider. There was no suggestion that, as part of the negotiation, the renewal commission was drawn to the attention of the client," said the ruling.

The Court also found that the way that the demands were couched made them too hard to understand for them to be binding on consumers. "The term (or terms) relating to renewal commission are not drafted in plain and intelligible language," meaning that they cannot be enforced, it said.

Mr Justice Mann said that not only was the information about a landlord's future liabilities not clear enough in the contract, it was not even hinted at in promotional material.
"[The wording is] is sufficient to convey the idea and nature of a renewal commission, but in my view that is not enough for these purposes. It is in very small print with nothing to distinguish it from the 'initial' commission, and in my view not enough is done to draw it to the attention of the typical consumer who would not be expecting it," he said.

"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. It is certainly not spelled out to him, on the evidence that I have seen. There is no reference to it in Foxtons' glossy publicity, and no reference to it on the first two pages of the old form," he said.

The judge also ruled that the clause handing Foxtons 2.5% of any sale price agreed between the landlord and tenant was also unfair.

"This is a clause which imposes a potentially large financial liability on the landlord in relation to a transaction in which Foxtons have played no material part. The introduction of the tenant as a tenant hardly counts for those purposes. The liability arises before the landlord receives any sale money, and exists even if the contract for sale is not completed. There is an obvious imbalance … a potentially draconian provision like this would normally require more focus to begin to make it fair," he said.

The case had previously gone to the Court of Appeal on a question of the scope of the Regulations. That Court said that the Regulations could cover not only future contracts drawn up by Foxtons but existing ones as well.

OFT chief executive John Fingleton said that it was prepared to take action to protect consumers in the future.

"The OFT prefers to work with businesses to agree solutions where concerns are raised but we will not hesitate to take court action where this is not possible and especially where there is serious harm to consumers," he said. "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."

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