Fair share

The Court of Appeal decision in UK Housing Alliance (North West) Ltd v Francis [2010] EWCA Civ 117 has not only provided the first Court of Appeal decision on tenancy deposit protection under the Housing Act 2004 but has also provided useful comments on the Unfair Terms in Consumer Contract Regulations 1999.

In October 2007, F sold his house to UK Housing Alliance for £125,000 under an arrangement whereby he would lease it back for a term of ten years on an assured shorthold tenancy. The £125,000 was payable in two tranches: £87,500 on completion and the remainder of £37,500 at the end of the tenancy provided it ended naturally after ten years.

If the termination occurred sooner than six years, then no money would be paid and the sum would increase on a sliding scale for a termination between six and ten years.

Ultimately, F fell behind with the rent and was evicted under the mandatory ground 8 in schedule II to the Housing Act 1988. As a result the final payment was withheld in full.

UK Housing Alliance said this was to compensate them for lost rent, but F put forward three arguments as to why the final payment should be made in full notwithstanding the possession order made against him:

1. The final payment was a deposit within the meaning of chapter 4, part 6 of the Housing Act 2004 and was required to be protected with an authorised tenancy deposit protection scheme. It was accepted by UK that the final payment had not been protected.

2. The right to withhold the final payment was a contractual penalty and therefore unenforceable.

3. The clauses giving UK the right to withhold the final payment were unfair terms under the Unfair Terms in Consumer Contract Regulations 1999 and could not be relied on.

The definition of a deposit in chapter 4 refers to 'any money intended to be held'¦ as security for'¦ the performance of any obligation of the tenant' and therefore seemed to support the contention that the retention payment was a deposit. However, reading the chapter as a whole revealed a common thread running through it which envisaged the payment of deposit monies to the landlord and their later repayment to the tenant. This wording was, according to the court, 'simply inapt'¦ to describe a situation in which a tenant pays nothing but is the person to whom money is paid, albeit that he is not to be paid some part of the money representing the purchase price of what was his property until some date in the future'.

It was conceded that the withholding of the final payment was not a penalty in the conventional sense but a forfeiture. However, the argument was made that if a sum was forfeited where that sum was not a genuine pre-estimate of loss, relief should be granted. This argument failed on the basis of a line of authorities which state that relief can only be granted on the basis of forfeiture of property which a claimant owns or has right to.

Therefore, relief could not be granted on the basis of forfeiture of a payment which F had not yet become entitled to.

Unfair clauses

On the unfair terms point, it had been held at the previous hearing that as F had obtained legal advice and his legal advisers had been able to consider the terms of the contract in detail before it was signed, it was immune to consideration. The court considered that the recorder was wrong on this point, holding that the 'fact that a consumer or his legal representative has had the opportunity of considering the terms of an agreement does not mean that any individual term has been individually negotiated'. The taking of advice was not in itself enough as there must be an opportunity to influence the substance of the agreement, a fact that it is for the supplier to prove. However, this was of no assistance to F as the court considered thatthe retention clause was not unfair. This is an important point as there is a general assumption that the opportunity to take legal advice is sufficient to make a clause that would otherwise be unfair immune from consideration.

The court's decision is a little surprising in that the Financial Services Authority now regulates sale and rent back agreements of the type entered into by UK and F. It recently published document CP10/4 which contains the proposed final rules for the regulation of the sector. The new rules prohibit the use of retention provisions and would also have prevented UK from taking possession proceedings of F's home in a manner which precluded the court from exercising its discretion.

The FSA would clearly consider the agreement between UK and F unacceptable but this was not argued before the court and it is doubtful whether the opinions of the FSA would have altered the court's view of the fairness agreement. It is unfortunate that this point was not taken so that the court could give some guidance on the fairness of clauses that a statutorily authorised body is acting or has acted to prohibit going forward. However, some comfort can be taken from the fact that future agreements will not be permitted to include these clauses.