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Foxtons fallout

publication date: Mar 31, 2010
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FoxtonsLANDLORDS ASKED FOR commissions by letting agents in respect of transactions or events that were never contemplated when the agents were engaged, should think twice before paying up. Foxtons have recently been prevented by the court from imposing certain commissions in its letting agreements with “consumer landlords” following proceedings by The Office of Fair Trading (OFT) under the Unfair Terms in Consumer Contracts Regulations 1999 (the UTCC Regulations).

CONSUMER LANDLORDS

The UTCC Regulations only protect “consumer landlords”.
That is landlords who are:

  • individuals, not companies; and
  • letting their properties for purposes outside their trade, business or profession.

For example, individuals who let out their property while they are abroad or to fund their pension are consumer landlords. However if the landlord is a business, such as a company or a professional or commercial landlord, then it will not be a consumer landlord.

UTCC REGULATIONS

The UTCC Regulations impose the following requirements in contracts between businesses and consumers.

  • All terms which have not been individually negotiated must be in plain and intelligible language.
  • All “non-core” terms which have not been individually negotiated must be fair. They will not be fair if, contrary to the requirement of good faith, they cause a significant imbalance in the parties’ rights and obligations to the detriment of the consumer.

If the terms deal with the main subject matter of the contract or the quality/price ratio of the goods or services supplied (the ‘core’ of the bargain) then as long as they are in plain and intelligible language, there cannot be any assessment of their unfairness but the core terms may be taken into account in assessing fairness of other terms.

An unfair term in a consumer contract is not binding on the consumer but the contract will otherwise continue to exist if it can do so without the unfair term. A term found to be unfair generally, cannot be enforced against any consumers, unless in specific circumstances it operates fairly.

WHAT DID THE OFT CONSIDER UNFAIR?

In July 2009 the OFT challenged three terms in Foxtons contract under the UTCC Regulations:

  • Renewal commission which was to be paid on renewals, continuations and extensions of a tenancy - even where the person renewing the lease was not the tenant that Foxtons originally introduced.
  • Third party renewal commission which covered the situation where the landlord sold the property with the tenant still in it. If the new landlord let the tenant stay in the property at the end of the initial lease, the old landlord would still have to pay Foxtons’ commission - for as long as the tenant remained in occupation.
  • Sales commission which provided that commission shall be paid to Foxtons in the event of a sale of the property by a landlord to the tenant.

Rosemary HerbertCORE TERMS?

The judge first had to decide whether these terms were “core” contractual terms and concluded that they were not. Landlords instructing Foxtons would consider finding a tenant to be the focus of the contract, not renewal of the tenancy and certainly not the sale of the property. Foxtons’ sales literature and practices concentrated on the initial introduction of the tenant. Landlords would be surprised to be told that they would have to pay additional sums when Foxtons do no more work, or the renewal is negotiated by another agent or the landlord himself.

WHY UNFAIR?

The judge said Foxtons terms were unfair because:

  • Renewal commission represented a significant proportion of the rental income (11 per cent), which would increase with rents over time and for which Foxtons provided no or no commensurate services in return. The obligation was not flagged up or even mentioned in the glossy brochures, it just appeared in the small print of the contract and was therefore a trap or time bomb.
  • Third party renewal commission was unfair for more or less the same reasons.
  • Sales commission was unfair because it is a large liability, where Foxtons do no work whatsoever. The landlord does not have selling the property in his mind when he instructs Foxtons to find him a tenant. A demand for sales commission would come as a shock as the term was not flagged at all.

THE ORDER

On 23 December 2009 the court made an Order about the terms of Foxtons contracts in the light of this judgment. Foxtons were given until 29 January 2010 to appeal but have not done so.

The Order:

  • Declared all of Foxtons’ terms which the OFT challenged were unfair and not binding on a consumer
  • Prohibited Foxtons from relying on or enforcing these terms in contracts entered into before the date of the Order.
  • Prohibited Foxtons from using or inserting into their contracts after the date of the Order any of these terms or terms having the same effect as the terms challenged.
  • Made clear however that where Foxtons is providing the “Comprehensive Management Service”, they are allowed to charge renewal commission. This applies when Foxtons provide under a prior agreement of the landlord a property management service for which they charge additional commission over and above that payable for the introduction of the tenant.

The judge did not say that agents can never charge renewal commission. If they do so, this obligation must be actively flagged and liability to pay the commission, the circumstances in which it is payable and the amount or rate of commission made clear.

The OFT will continue to monitor the terms Foxtons uses in its letting agents contracts with consumers in order to assess whether the obligation to pay renewal commission has been sufficiently highlighted.

What this means

  • Foxtons cannot enforce against a consumer landlord an agreement before the Order containing sales commission or third party renewal commission terms. If the agreement contains a renewal commission term and Foxtons do not provide the Comprehensive Management Service, then they will be unable to rely on or enforce that term (or a term which has like effect) unless they first obtain permission from the OFT or the Court.
  • If Foxtons provide a ‘Comprehensive Management Service’ then for as long as they remain instructed to do so they can recover renewal commission. If they cease to provide this service, they will not be able to charge it.
  • This Order does not require Foxtons to repay money that consumers have already paid them. However landlords may consider obtaining legal advice on whether they would succeed in obtaining repayment.
  • Other letting agents should not seek to recover sales commission and third party renewal commission in letting contracts with consumers. Renewal commission terms should be transparent, clearly set out and given appropriate prominence both in the contract and any accompanying promotional literature and sales practices used by the agent. If this is not done the OFT consider that the agent ought not to be able to rely on the term.
  • If agents use terms similar to those ruled unfair the OFT will consider enforcement action. They intend to crack down on agents who do not comply with the law.

Rosemary Herbert is a Solicitor at Howard Kennedy www.howardkennedy.com