Tenancy Agreements 33 days of tips – Day 16 – Unfair Terms (1)

About the Unfair Terms Regulations

The requirement to have legislation on unfair terms originally came from Europe as a directive which member countries were then required to incorporate into their own law.

They were originally set out in the UK in separate regulations in 1995 and then in 1999, but are now part of our law in the Consumer Rights Act 2015.

Although they are now part of a new act, they work in the same way and previous case law (not that there is very much) will apply.

The purpose of the rules is to protect consumers from aggressive terms and conditions created by lawyers acting for businesses.

Usually, the consumer will have no say in these terms and conditions, and will often sign them without even reading them. The unfair terms rules, which provide that terms must be ‘fair’, are an attempt to redress the balance so consumers are not unfairly taken advantage of.

So, in a contract, a standard term will fail the test of fairness:

“if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer”.

The House of Lords, in a case involving the regulations, have also commented that

“the requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties rights and obligations under the contract significantly in his favour”.

It has been confirmed (and there is now case law to support this) that the regulations apply to all tenancy agreements, save possibly private tenancy agreements (ie without using a letting agent) where a landlord lets out his own home on a non-commercial basis. However, this is not certain so it is best to assume that all tenancy agreements will be subject to the regulations.

All professionally drafted tenancy agreements are now drafted on this basis.

A guidance document (OFT356) was produced in 2005 by the Office of Fair Trading, who used to enforce these regulations.  This has now been adopted by the Competition and Markets Authority who have taken over this role and it can be downloaded from here.

Although it is now quite old, the OFT guidance is still the best we have and should be read by everyone involved in drafting tenancy agreements.

The Unfair Terms rules and tenancy agreements

So how do these rules apply to tenancy agreements? In essence:

• A clause will be considered unfair if it takes away a legal right a tenant would otherwise have had. For example all tenants are entitled to leave at the end of the fixed term without giving notice (this infuriates landlords, but it is, I am afraid, the law – see my blog post here) – so any tenancy agreement term requiring tenants to give, say, two months notice (and pay rent in lieu if they do not), will be void.

• If a clause is prohibiting something, you need to include special wording.  We look at this on Day 17.

• Where a clause is imposing any sort of penalty or charge on the tenant, it should provide for the charge to be (1) reasonable in amount and (2) reasonably incurred.

• Clauses which are considered ‘unfair’ will be void and unenforceable. So, for example, if you attempt to increase rent via a rent review clause which is void, the extra rent will not be payable, and (for example) you will not succeed in a claim for possession which is based on its non payment.

• Some clauses, known as ‘core terms’ will fall outside the regulations. These are things like the amount of the rent and the address of the property.

Other instances of unfairness

It is not just the subject matter of the clause which can be unfair.

If it is written in a complex and difficult style with a lot of legal jargon which ordinary people will not be able to understand, that also can be unfair. As can be printing contracts in a way which makes them difficult to read – for example very small font in a pale colour on a white background.

Ideally, all contracts which are with consumers should be written in a plain English style.

Enforcement of the Regulations

The rules used to be enforced by the Office of Fair Trading but this role has now been taken over by the Competition and Markets Authority.  Their powers and obligations are set out in Schedule 3 of the Consumer Rights Act 2015.

The rules provide for them to contact the relevant landlord or agent (if they learn of unfair clauses being used) and ask for an undertaking that the offending terms will be changed. If the company refuses to do this, they can go to the courts asking for a declaration confirming that the clauses are unfair and void and an injunction preventing the company from using them again.

The Office of Fair Trading were more active in this regard than the CMA.  Probably their best-known case in the private rented sector  (which was mainly about renewal clauses in letting agency agreements with landlords) being the Foxtons case.

Section 71 of the Consumer Rights Act also charges Judges in legal proceedings to consider the rules and whether a particular clause is fair – even if neither of the parties has raised this as part of their case.  However, section 71(3) goes on to say that this will not apply

unless the court considers that it has before it sufficient legal and factual material to enable it to consider the fairness of the term.

We will continue to look at how the regulations impact on tenancy agreements next week.