Unfair Contract Terms Regulations - how do they apply to tenancy agreements?

Since the original Unfair Terms in Consumer Contracts Regulations came into force, a few tenancy agreements have now come under the scrutiny of lawyers and the Office of Fair Trading (OFT), with certain deficiencies being revealed.  Anxious to clarify what has, to date, been a grey area, we contacted the OFT for further information on the Regulations and submitted our own tenancy agreements for scrutiny by the OFT lawyers.  As a result, it is now possible to give landlords and agents a certain amount of guidance in this area.

Background

The Unfair Terms in Consumer Contracts Regulations are important to any business which needs to rely on a contract or 'terms of business' in order to conduct business with its customers. 
In essence, the Regulations impose a test of fairness¹ on certain types of agreements (see 'Scope' below) and require all contract terms to be written in plain and intelligible language².  The OFT regards this as meaning that the terms have to be understood by an average consumer without recourse to a lawyer.

Statutory Instrument 1999/2083 published the Unfair Terms in Consumer Contracts Regulations 1999, which came into force on 1 October 1999.  The 1999 Regulations make two small but important amendments:

• the new Regulations extend to all contracts - they no longer limited to contracts for a 'good or service'.
• Trading Standards Offices and the Consumers Association have been given new powers to enforce.

Scope

The Regulations relate to any term in a contract or agreement made by a seller or supplier of goods or services and a consumer, where the seller or supplier is acting for purposes relating to his business and where the term has not been individually negotiated³.  A 'consumer' is defined as a natural person who is acting for purposes which are outside his trade, business, or profession⁴.  A term can be regarded as not having been 'individually negotiated' where it has been drafted in advance and the consumer has not been able to influence the substance of the term⁵ (e.g. pre-printed terms or standard agreements held on a word processor, or the like).

There had been some early debate as to whether residential tenancy agreements come within the scope of the Regulations but in a recent court case⁶ the court held that a local authority tenancy agreement was within the scope of the legislation⁷.  The removal of the original restriction to 'goods and services' removes any lingering doubt that the agents terms of business and tenancy agreements can be caught by the Regulations.

Test of fairness

As is obvious from the long title of the Regulations, the contract terms must not be "unfair" to the consumer.  Contract terms that deal with the main subject matter (i.e. the "core terms") of the contract or the price of the contract will be outside the scope of the Regulations provided they are written clearly (where they are not, they can be interpreted to the benefit of the consumer).  The Regulations also provide that ambiguous terms will be interpreted so as to favour the consumer⁸.

Other contract terms that, contrary to the requirement of good faith, cause a significant imbalance in the parties' rights and obligations to the detriment of the consumer will be legally unenforceable⁹.  The Regulations contain schedules which attempt to define 'good faith' and provide an illustrative list of examples of terms which may be regarded as unfair.

Thus for example, in the case of a tenancy agreement, it will not be possible for the consumer to ask the court to determine whether the rent agreed is fair - the rent payment is one of the core terms of the tenancy agreement and cannot be challenged under the Regulations.  However, for example, many residential tenancy agreements contain absolute prohibitions on making any alterations or additions to the property, or the keeping of any pets or animals.  As tenants will often wish to put up shelves or keep innocuous pets such as hamsters and goldfish, such sweeping restrictions appear to be unfair.  Some lawyers now take the view that it is preferable for the tenancy agreement to state that the consent of the landlord would normally be required in such instances and that such requests would be dealt with reasonably.

'Purposes relating to his trade, business or profession'

In the context of a tenancy agreement for residential lettings, a tenancy agreement with an individual (i.e. the consumer) may be subject to the Regulations where the landlord is considered to be acting for 'purposes relating to his trade, business or profession'.  
If the landlord is, however, just letting his own home as a temporary arrangement, for example whilst abroad, then the landlord would not be considered to be letting for purposes relating to his business and therefore not subject to the Regulations.
On the matter of tenancy agreements, the OFT, in its written advice to us has stated:
"We note that many small landlords may not be regarded as acting in the course of business, in which case their tenancy agreements will not be within the scope of the Regulations. "

The OFT has intimated that they are less concerned about the landlord who only lets one or two properties and does not use an agency (presumably because such landlords are not seen to be acting in a commercial capacity).  However, according to a recent OFT statement it is more likely that action could be taken against commercial landlords;
"Action will be taken against unfair terms used by commercial landlords if they pass the various tests within the Regulations and are likely to cause loss to significant numbers of consumers."

Agency agreements

An agent's agency agreement on the other hand will operate under the Regulations only where the client landlord is a individual consumer (i.e. not acting in the course of business).  Again, quoting from the OFT advice:
"Where landlords are operating in the course of business then the agency agreement will not be within the scope of the Regulations as this would be considered to be a business to business agreement."

Landlords under attack

Greenwich Council's Housing Aid Centre was one of the first organisations to try to use the new powers in anger against landlords.  Advisers in the Centre believed that many tenancy agreements used locally in Greenwich contained terms could be declared unfair under the Regulations.
Amongst the terms that tenants complained about was a provision, used by an agency responsible for many lettings in the borough, making a charge of £5 for every day rent was in arrears.  Some offending agreements and terms were referred to the OFT for comment.  Another term that was particularly unpopular and under fire is one which says that "the holding deposit paid by prospective tenants is not refundable in any circumstances".  It is considered that this terms would be unfair under Sch. 2 para 1(d) of the Regulations since the term permits the supplier to retain sums paid for services not yet supplied.

Which? agreements

The Consumers Association's own tenancy agreements (supplied within the "Which ? Guide to Renting and Letting) have also come under scrutiny of the lawyers.  Dermot McKibbin, in a recent article¹⁰ listed a number of clauses in the sample agreements which he deemed to be potentially unfair or unintelligible.

In the fixed term agreement, the break clause only allows the landlord to break the agreement; this clause is likely to be deemed unfair since the tenant is not given the same right to terminate the agreement (Sch 3 para 1(f) )
Also, the rent increase in the agreement allowed the landlord to increase the rent at any time following two weeks' written notice.  This, in theory, allows for 26 increases in a 12 month period and as the tenant is not allowed to give notice following such increases, this could be regarded as unfair (Sch 3, para 1(l)).

Words in the agreements such as 'void and voidable', 'transferee', 'right of re-entry', and 'without prejudice' were also criticised - the Regulations require all contract terms to be written in plain and intelligible language.

Unfair terms

The Regulations list 17 illustrations of potentially unfair terms (Reg 5(5) and Schedule 2. It is emphasised that the schedule is for illustration only and terms that are not described in the Schedule may still be unfair.  As can be seen from the extracts listed below, some clauses used by landlords may be deemed to be unfair under the Regulations.

A term enabling the seller or supplier to alter unilaterally the terms of the contract without a valid reason any characteristics of the product or service to be provided.¹¹
Example: A rent increase clause enabling the landlord to increase the rent at a rate which is greater than is justified by the contract may be unenforceable.

A term excluding or hindering the consumer's right to take legal action or exercise any other legal remedy.¹²
Example: A term prohibiting a tenant from exercising a right to set off his/her rent or service charge if the landlord is in breach of a covenant may be unenforceable.

A term authorising the supplier to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer.¹³
Example: A term permitting the landlord to break or end a fixed term agreement, where such a right is not given to the tenant.  Such a term may not be enforceable.

Irrevocably binding the consumer to terms with which s/he had no real opportunity of becoming acquainted before the conclusion of the contract.¹⁴
Example: tenants given insufficient notice that they have entered into a fixed-term tenancy may be able to terminate without being liable to pay rent for the remainder of the term.  Under the Regulations, it is important that tenants are given reasonable opportunity to read and understand the tenancy agreement before signing.

Deposits

The OFT is particularly concerned about clauses and terms relating to dilapidation deposits since they recognise this area is a frequent cause of contention between landlords and tenants.
The OFT consider it necessary that the tenancy agreement is clear on how the deposit is held (when held by an agent or other third party), whether interest is paid on it, in what circumstances and in what proportion the deposit is retained and when it will be returned.

Plain English

The requirement for contract terms to be written in plain intelligible language has presumably caused great delight to the supporters of the "Plain English" campaign.  However, lawyers, landlords and estate agents will struggle to find basic terms to replace those which have comfortable and well defined meanings in the professions.  It is not just a question of replacing "vendor" with "seller" and "right of re-entry" with "Landlord's right to repossess the Property".  Words like "ad valorem", which are part of the English language, will have to be replaced with "in proportion to value" and "moiety" with the word "half".

While this exercise is comparatively simple, there are a host of words and phrases which have been subject to judicial interpretation and are now required to be replaced with a whole string of basic words to cover the same ground.  The danger is obvious.  In attempting to particularise, one basic word may be omitted in error, or have a meaning ascribed contrary to the intention of one of the parties, enabling the contract or agreement to be circumvented, or struck down.

Declarations
Consumers are in practice unlikely to read any but the shortest and simplest contract thoroughly and, even if they do, cannot know for certain that they have understood it correctly.  Therefore, the OFT considers that it is not normally fair for them to be required to make a definite statement that they have or have not done so.
Instead, the OFT would like to see a clear and prominent warning that consumers should read and try to understand the terms of any contract or agreement before signing and to ask for an explanation of anything not understood.  Such a warning may usefully tell consumers to ask the supplier about any terms they do not understand or wish to agree before signing.¹⁵

"Indemnify"
One word that the OFT dislikes is "indemnify".  The word is considered legal jargon which tenants cannot be expected to understand.  It would prefer replacement with "responsible for reasonable net costs", or something similar.  While, at first glance this appears reasonable, the term has an exact and clearly understood meaning in law.  Lawyers are reluctant to depart from the long accepted meaning of "a penny for penny reimbursement of sums necessarily and unavoidably paid under the contract while it is (or was) in force".  In the legal sense it does not include any claim for loss of profits or sums of money paid foreseeably, but unavoidably, under the contract, e.g. fair wear and tear, which is never recoverable from the tenant¹⁶- whereas "reasonable net costs" could be interpreted by the layman as including some direct loss of profits, or payment reasonably made resulting from the tenant's conduct.

Explanatory notes
The Regulations appear to require that contracts must be intelligible to ordinary consumers without legal advice.  The OFT takes the view that consumer contracts should ideally be written using normal words in their normal sense and that legal jargon should be avoided wherever possible.  But the OFT acknowledges that there may be situations where legal jargon is unavoidable.  In these cases, the OFT recommends such technical terms are used with adequate explanation.  In practice, this means that suitable explanatory notes should be provided alongside the text if the use of technical terms in a contract is unavoidable.

Opportunity to examine contract terms
The OFT guidance states that:
'consumers should be given the opportunity to examine all written terms before entering into a contract.  Long and complex contracts present special problems and consumers need to be given more opportunity to read and understand them.'¹⁷
Thus, under the Regulations, care will need to be taken when signing tenancy agreements.  In the event of a dispute, it is possible that the court may be asked to take account of whether tenants were given reasonable time to study the details of a contract before deciding whether to sign it.  This means that presenting a tenant with a copy of a tenancy agreement minutes before he or she is due to take occupation of a property may no longer be acceptable practice.

Futhermore, the Regulations reinforce the trend for reasonably short and simple agreements.  Before drafting long and complex agreements, practitioners should ask themselves whether each and every term is really necessary.  Landlords granting assured shorthold tenancies already have considerable statutory powers to bring a tenancy to an end following nuisance and rent arrears.  Therefore, the obscure terms that pad out some agreements are often superfluous since they are unlikely to be invoked in practice.

"Reasonable"
The Office of Fair Trading does like "reasonable" to pepper any contract.  The words "costs of" should be qualified to read "reasonable costs of", such as the tenant paying a deposit for the performance of obligations and to pay and compensate the landlord for the "reasonable costs of any breach of those obligations".  As the courts will only generally recompense landlords, or their agents, for reasonable costs incurred, the qualification is reasonable.

An appendix to the Regulations lists 17 examples of terms which may be considered "unfair".  For example, termination clauses could be deemed "unfair" not only if the terms greatly prejudice the consumer (client), but if the client is not permitted to terminate the agreement as well as the agent. 
However, all is not lost if a term is held to be "unfair".  If the term can be struck out, the rest of the contract can be upheld.  The question always has to be asked as to whether the offending words can be excised without causing the whole agreement terminal injury. 

Enforcement
The OFT has an enforcement role under the Regulations to ensure the removal of unfair terms from contracts within the scope of the Regulations.  They have the power to seek an injunction from the courts to ensure the removal of an unfair term where voluntary persuasion has been unsuccessful.  The OFT have produced guidance notes on the Regulations, and also produce a regular bulletin for interested parties.

Under the new 1999 regulations, enforcement powers have been widened; Trading Standards offices and the Consumers Association have now also been given powers to enforce the Regulations.

Conclusion

The Regulations are important to any business which needs to rely on a contract or 'terms of business' in order to conduct business with its customers.  Landlords and agents acting on their behalf should look at their terms of business and letting agreements with a critical eye and allow someone not experienced in the nuances of property jargon to see if they fully understand the terms, especially penalty and cancellation clauses. 
If they do, the next question is are the terms fair ?  Does each party to the agreement have equal rights and remedies ? If not, would a "reasonable person" agree that the terms are fair?  If not, the court is likely to find them "unfair" and the sword of Damocles may fall to sever the "unfair" clause from the agreement.
If necessary, ask your friendly lawyer or local Trading Standards Officer for an opinion.  Thankfully, in the case of the Unfair Contract Terms Regulations the opinion of a layperson may be just as relevant as the opinion of a lawyer in deciding what constitutes 'plain intelligible language'.

References
1. The Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) Regs 5 and 6
2. UTCCR Reg 7
3. UTCCR Reg 5
4. UTCCR Reg 3(1)
5. UTCCR Reg 5(2)
6.  Camden Council v McBride [1988]
7.  See Student Notes LUJ April 1999
8.  UTCCR Reg 7(2)
9. UTCCR Reg 8(1)
10. Legal Action, Noc 1998, p30
11. UTCCR Sch 2, 1(k)
12.  UTCCR Sch 2, 1(q)
13. UTCCR Sch 2, 1(f)
14. UTCCR Sch 2, 1(i)
15. See OFT UTCCR Bulletin 4, p107-109 for examples
16. Whittington v Seale Hayne (1900) 82 LT 49
17. See OFT UTCCR Bulletin 4, p16