Tenancy Agreements and the OFT - all's fair in love, war and tenancy agreements

In November 2001 the Office of Fair Trading (OFT) published its Guidance on unfair terms in tenancy agreements¹. This was the first issue of a guide of what the OFT believes (our emphasis) to be potentially unfair terms, based on a sample of agreements in use and on the OFT's experience of enforcing the Unfair Terms in Consumer Contracts Regulations².

Since that time, the OFT have been particularly active in its enforcement activities and it clearly has the letting industry in its sights.  The number of cases referred to the OFT is increasing. The most recent issue of the Unfair Contract Terms Bulletin³ has five examples of letting agents and others who have had to alter their agreements - including some big industry names such as Countrywide Residential Lettings.

At the end of the day only the courts can determine how the Regulations will apply and, therefore, which terms will be fair, but cases are likely to be rare and, for most landlords and letting agents, the arbiter will be the OFT.

Problem areas

Whilst the Guidance covers a wide range of potential areas of unfairness it is possible to identify some particular problem areas.  In this article, we shall try to review some of the more common of these problem areas, explain the approach that we have taken when reviewing our own tenancy agreements and, in some cases, supply possible improvements to the clauses that are acceptable to the OFT.

Shorter is better

It must also be said that the longer a tenancy agreement the greater the likelihood of terms contravening the Guidance. Terms that do so will be unenforceable in court. Some of these areas are relatively minor and can be dealt with by changes in the wording used but others are more significant and will alter the basic relationship between landlord and tenant, not always to the long term benefit of the latter.

Assignment and subletting

The OFT does not like absolute prohibitions on assignment or subletting. The Guidance states that the
"law ordinarily allows purchasers to sell on (or 'assign') to someone else what they have bought. Most tenants can also, in principle, let property that has been let to them (sub- or underletting) provided that they continue to observe the obligations under their own tenancy. Terms that restrict these rights may be considered unfair."

Whilst the OFT recognises that landlords have a legitimate interest in preventing their property passing into the hands of unsuitable tenants, they do not feel that this can justify a right to withhold consent to both assignment and subletting arbitrarily, at least in fixed term agreements. Expressly allowing a tenant to assign or sublet by consent that is not to be unreasonably withheld is considered a fairer balance by the OFT.

This will mean that landlords may still be able to carry out the normal referencing checks on prospective tenants by assignment or subletting. However it does mean that blanket prohibitions on assignment and subletting are likely to be unenforceable in the courts.

Care of the property and redecoration

Stringent terms on the care of a property will be unenforceable unless they are limited to the standard of the property at the start of the tenancy and allow for fair wear and tear during the course of the tenancy.
For example, a clause in the tenancy agreement published by LawPack Publishing required the items on the inventory and the interior of the property to be kept in good condition, without accounting for fair wear and tear.  The OFT required this clause to be revised so that fair wear and tear was excepted.

Given that a large number of disputes over deposits at the end of a tenancy are concerned with this issue, it is important for landlords and agents to realise that they will not be successful if they argue in court over breach of an unfair, and therefore, unenforceable, term in a tenancy agreement.

Similarly, prohibitions on redecoration are, according to the OFT, deemed unfair and where the consent of the landlord is required before any redecoration can take place, it should be made clear in the terms of the agreement that this consent will not be unreasonably withheld. This is also one of the areas where they believe that the consent need not be in writing; oral consent will be sufficient. But more of this later.

Pets

Absolute prohibitions on pets in tenancy agreements will be difficult to sustain after the OFT Guidance. The only clear exception would seem to be where there is an existing prohibition in the headlease of property.
In other cases, it would seem that, where the landlord reserves the right to give consent for pets to be kept at the property, then the term should specify that such consent would not be unreasonably withheld. This is another area where the OFT feels that oral consent should be sufficient.

Forfeiture clauses

One of the difficulties about the traditional wording of forfeiture clause is that they appear to give a landlord rights that in law no longer really exist. The following is part of a traditional forfeiture clause: -
"If any part of the rent is in arrears for seven days (whether formally demanded or not) the landlord may re-enter the premises and thereupon the tenancy created by this agreement will determine."

Forfeiture clauses are a necessary requirement under the Housing Act 1988⁴ to terminate fixed term tenancies. But they commonly appear to give the landlord's rights that they do not actually have. The right of re-entry, that is the right of the landlord to physically take possession of the property, no longer exists in a practical sense⁵.  The art would appear be to keep the forfeiture provision whilst making it clear that possession can only be granted by a court. Such a clause would be required by the OFT to:
"explain in further detail what the landlord is required to do in order to regain possession of the property"
" the need for a court order is highlighted" and
"the tenant is informed about where they can seek advice if the rent is overdue or they are in breach of their obligations."⁶

Declarations

The OFT dislike declarations or deeming clauses where the agreement includes a clause whereby the consumer confirms his or her understanding of the terms of the contract by signing the agreement.
The most recent Unfair Contract Terms Bulletin refers to a tenancy agreement containing such a clause.  The letting agent was required to delete the clause from the agreement.

A similar term in the same agreement required the consumer to declare that he or she had understood the terms of the agreement and had received a copy of the Tenant's Guide.  The clause was revised to inform the consumer that it is important that he or she read and understand the terms of the agreement and that any terms not understood should be discussed with a member of staff before the agreement is signed.

Charges

The OFT is concerned about unfair charges and penalties in tenancy agreements.
Unspecified charges or excessive penalties for late payment of rent (which do not fairly reflect the administration costs involved) will invite scrutiny and are likely to be unenforceable under the Regulations.

The OFT is particularly concerned about charges for the extension or renewal of tenancy agreements following some high profile cases and pressure from the Consumers' Association.  In the case of Countrywide Lettings, the tenancy agreement specified that the tenant would incur a charge of £52.87 for extending the tenancy agreement.  The OFT considered that the charge could be regarded as unreasonable "in view of the limited costs that were likely to be involved in arranging such an extension".  The supplier was made aware that the OFT would reopen the matter if complaints were received that indicated the term was operating unfairly.

Notices

The OFT does not like the provisions of section 196(4) of the Law of Property Act 1925. This section provides, inter alia, that a notice will be sufficiently served if sent by recorded or registered delivery post (if the letter is not returned undelivered) to the tenant at the property or the last known address of the tenant or left addressed to the tenant at the property. The OFT "considers that the common law rules regarding service of notices give the landlord ample protection". This is rather difficult to understand given that these rules were introduced 77 years ago simply because of the difficulties of relying on the common law rules where you have to prove actual rather than deemed service of notice. It is difficult to see why this is unfair, as the notice provisions would apply equally to both tenant and landlord.

Oral or written consents

The OFT seems to have a degree of confusion as to whether consents should be in writing or merely verbal (see redecoration and pets above).  In some situations they feel that oral consents are sufficient, in others they feel it should be in writing.  Our feeling is that such consents should be in writing as this protects both parties equally and, in the event of a dispute, the nature of the agreement is clear. This will not necessarily be the case with verbal agreements. The recent consultation paper from the Law Commission on Renting Homes⁷ would seem to support this view.

The Future

The move in Government seems to be towards greater degrees of intervention in the private rental industry and the application of OFT's Guidance on Unfair Contract Terms in Tenancy Agreements is only part of that process.
The new tenancy agreements envisaged by the Law Commission⁸ will, by their statutory authority, be deemed to be fair. Further standardisation seems to be on the way.

The effect of the recent OFT interventions has been dramatic and far-reaching.  On the positive side, the OFT has succeeded in clearing tenancy agreements of obscure legal jargon and closing up many of the more unfair contractual terms that tenants have been forced to endure (such as onerous penalty clauses and excessive renewal fees).  On the negative side, the OFT is forcing landlords to delete or amend standard terms that have sat comfortably and fairly in tenancy agreements for centuries.


References
1.  OFT Publication No. 356
2.  Statutory Instrument 1999 No. 2083
3.  Bulletin 20
4.  Housing Act 1988, s.7(6)
5.  See Protection from Eviction Act 1977 & Housing Act 1988
6.  Office of Fair Trading
7.  Law Commission consultation paper: Renting Homes (1) - Status and Security.
8.  Ibid - consultation paper above.