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Office of Fair Trading Guidance on Unfair Terms in Tenancy Agreements
(November 2001 & September 2005)
Applicability:
This is the first issue of a guide, to what the Office of Fair Trading (OFT) believes to be, potentially unfair terms in assured and assured shorthold tenancy agreements. It is based on a sample of agreements in use and on the OFT’s experience of enforcing the Unfair Terms in Consumer Contracts Regulations 1999 (SI 2083) [see Letting Factsheet 10]. These regulations implement the European Communities Council Directive 93/13/EEC. The guidance is aimed at those in England and Wales who use, or supply standard tenancy agreements and at housing advisers.
The guidance represents the OFT’s considered views and the basis on which it is likely to take enforcement action. The Letting Centre does not accept the OFT’s interpretation in some parts of this guidance. The OFT, however, recognises that is ultimately for the courts to decide whether any term is unfair. The guidance deals with standard terms that are drawn up in advance, and not those that are individually negotiated with the tenant.
The guidance is designed to help landlords, letting agents and suppliers of standard or model terms to meet the requirements of the Regulations. It will also be useful for housing advisers. The OFT expects those who use or supply standard pre-formulated tenancy agreements to review their terms and conditions in the light of the guidance and amend or remove any unfair terms from these contracts. Enforcement action will be taken either by the OFT, or by the local authority trading standards service.
The Test of Fairness:
The Regulations apply a test of fairness to most standard terms in tenancy agreements. It does not apply to ‘core’ terms, which set the price or describe the main subject matter of the agreement, provided that they are in plain and intelligible language. A standard term fails 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” (Regulation 5(1)). The courts have held that: -
“The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps.”
The OFT has identified contractual imbalance as the main cause of unfairness. This is created wherever a term gives powers to the landlord that he would not otherwise have, of protects him in a way that puts the tenant at a disadvantage. The Regulations require the use of plain and intelligible language. Contracts must be intelligible to ordinary tenants without legal advice. This means using normal words in their usual sense in short sentences, and avoiding legal jargon, statutory references, elaborate definitions and extensive cross referencing.
Analysis of Unfair Terms in Schedule 2:
There are 17 groups of terms that the OFT consider may be unfair in this Schedule, some have more relevance to tenancy agreements than others. All groups are referred to below, but those most relevant to the lettings industry have further notes.
- Exclusion of liability for death or personal injury
- Exclusion of liability
(a) For state of the property or furnishings
(b) For exclusion of liability for poor service
(c) For call out charges to complete a landlord’s repairing obligations
(d) For unreasonably short reporting times for repairs
(e) For excluding a tenant’s right to set-off
(f) For excessive delay in carrying out repairs, terms like ‘force majeure’ should not be used &
(g) Excessive rights of entry by the landlord should not be provided
- Binding consumers while allowing the supplier to provide no service
- Retention of prepayments on consumer cancellation
A term which rules out the refund of a substantial prepayment is likely to be unfair. Where cancellation is the fault of the tenant, the landlord is entitled to hold back from a prepayment either the net costs or the net loss of profit.
A term to pay unreasonable interest on arrears of rent, unless there are special circumstances, is likely to be unfair.
A term in a fixed term tenancy which requires a tenant who leaves early, without the landlord’s agreement, to pay rent for the remainder of the period in full is likely to be unfair.
A term may be unfair if it allows the landlord’s surveyor sole discretion to set the amount to be deducted from the rental deposit to cover damage caused by the tenant.
Whilst a term requiring a tenant to pay all the landlord’s legal costs regardless of the outcome may be unlawful, a term may not be open to objection if it says that tenants who break the terms of the tenancy can expect to have to meet any reasonable legal costs properly incurred as a result.
A term stating or implying that the tenant could be evicted at the landlord’s discretion would be would be seriously misleading and open to challenge on that basis.
- Supplier’s right to cancel without refund
A term is likely to be unfair if it makes a substantial prepayment non refundable on a serious breach by the tenant, regardless of whether the landlord has suffered any loss. However it could be fair for the landlord to keep as much of the prepayment as is reasonably required to cover his legitimate expenses.
- Supplier’s right to cancel without notice
- Excessive notice periods for consumer cancellation
An unreasonably long notice period for termination of an assured periodic tenancy agreement can lead to tenants paying for accommodation they no longer want or need.
- Binding consumers to hidden terms
It is a basic requirement of contractual fairness that tenants should always have an opportunity to read and understand terms before becoming bound by them. Tenants need to be effectively alerted to important terms.
- Supplier’s right to vary terms generally
- Right to change what is supplied
A term that allowed the landlord discretion to alter the building or remove or change furniture, during the currency agreement is likely to be unfair.
Rent variation clauses are more likely to be fair as follows:
Where the amount and timing of any increases are specified;
Terms which permit increases are linked to a relevant published price index are likely to be acceptable;
Also likely to be regarded as fair are rent review clauses which allow for an increase in rent to be determined in the light of objective factors by a person who is independent of the landlord.
- Supplier’s right of final decision
- Entire agreement and formality clauses
Good faith requires that the parties be bound by their unwritten statements and those of their representatives. A term excluding liability for such statements could give considerable scope for misleading tenants regarding their rights and may as a result be considered unfair.
A tenancy agreement may contain a statement warning that it is a binding document. Such a warning needs to be sufficiently highlighted in some way in order to draw it to the tenant’s attention.
A term that makes renewal of a tenancy conditional on compliance with excessive costs or formality may be open to objection.
- Binding consumers where the supplier default
- Supplier’s right to assign without consent
- Restricting the consumer’s remedies
Analysis of other terms considered potentially unfair:
There are 8 of this group of potentially unfair terms.
- Allowing the landlord to impose unfair financial burdens
Vague charges are likely to be unfair. A requirement to pay for cleaning at the end of the tenancy may be unfair if it is vague about the basis on which the money will be demanded or the extent of the cleaning involved.
- Transferring inappropriate risks to tenants
A risk lies more appropriately with the landlord if it is within his control, or if it is a risk of which the tenant cannot be expected to be aware, or the landlord can insure against it more cheaply than the tenant.
Terms under which the landlord must be ‘indemnified’ for costs, which could arise through no fault of the tenant, are open to objection.
- Unfair enforcement powers
The law recognises that landlords may expressly reserve the right to forfeit in the tenancy agreement. However, terms that appear to reserve a right of forfeiture or re-entry for any breach of covenant (however minor) are apt to mislead the uninformed tenant. The fact that such terms have long been extensively used does not make them fair.
- Excluding the tenant’s right to assign or sublet
Terms that restrict a tenant’s right to assign or sub-let may be considered unfair. The OFT considers that in fixed term tenancies an absolute ban on both assignments and subletting may be considered unfair. Expressly allowing a tenant to assign or sublet by consent that is not to be unreasonably withheld is considered a fairer balance. A prohibition on subletting may be acceptable if a tenant who leaves the property early is free to assign.
The OFT is likely to object to any standard declaration that appears to indicate that the tenant has been dealt with fairly and properly, for example in the establishment of the tenancy agreement, and to declarations that the tenant has received or seen documents stating that the landlord has discharged specific health and safety responsibilities. General declarations of understanding by the tenant are to be avoided, but clear and prominent warnings that the tenant should read and understand the terms before signing them are more likely to be acceptable.
- Exclusions and reservations of special rights
Any term which could deprive tenants of normal protection under the law may be considered unfair. Tenants should net be required to contract out of the protection offered by legislation.
- Landlord’s discretion in relation to obligations
A term giving the landlord complete freedom to make arrangements to carry out repairs or maintenance allows the tenant’s needs to be disregarded, and can have the same effect as an exclusion of liability for causing loss and inconvenience. Any term may be unfair if it gives the landlord, or his agent, excessive power to decide whether the tenant should be penalised, or obliged to make reparation, or deprived of any benefit under the tenancy agreement.
- Unreasonable ancillary obligations and restrictions
Terms that put tenants at risk of incurring contractual penalties that are more severe than is necessary to protect the landlord’s real interest in safeguarding his property generally will be considered unfair. Terms restricting a tenant’s use of a property should be reasonable in relation to the type and location of the property. Other examples of unreasonable prohibitions include terms against keeping pets. Such a term has been considered unfair under comparable legislation in another EU state because it could prevent a tenant from keeping a goldfish. A term prohibiting the keeping of pets that could harm the property or be a nuisance to other residents would be unlikely to meet the same objection.
Analysis of terms breaching Regulation 7 concerning plain English and intelligible language:
This concerns the requirement to use plain and intelligible language. Whilst recognising that clarity in the agreements is desirable in itself, the regulations go further. Their purpose is to protect tenants from one-sided agreements where the tenant is not given an opportunity to examine all the terms. The regulations therefore, demand ‘transparency’ in the full sense. Terms must be intelligible to tenants as well as, and not only, lawyers. The OFT objects to legal jargon in all its forms so, for example the use of the term “indemnity” is frowned on. Ordinary words should be used as far as possible. Sentences should be short and the text should be divided into easily understood sub-headings covering recognisably similar issues. Whilst it is not required that the tenant understands every word used, they have to have a chance to learn, by the time that the contract is binding, about the terms that might otherwise disadvantage them. This can be achieved in a number of ways including, highlighting, explanatory material or brochures.
Action required
The OFT expects those who use or supply standard pre-formulated tenancy agreements to review their terms and conditions in the light of the guidance and amend or remove any unfair terms from these contracts. If a term in a tenancy agreement is found to be unfair it will not be enforceable against the tenant. Letting agents and landlords will need to be aware of this potentially serious problem. The Letting Centre provides a service to ensure that tenancy agreements comply with this guidance. For further information please contact the Letting Centre.
Sources for Further Information:
- The Stationery Office - Copies of the Regulations are available from TSO Orders, P.O. Box 29, Norwich NR3 1GN, 0870 600 5533 or free of charge from the OPSI website www.opsi.gov.uk
- Copies of this guidance (ref: OFT 356) are currently available free of charge from: E C Group, Swallowfield Way, Hayes, Middlesex UB3 1DQ. 0800 389 3158, e-mail oft@ecgroup.uk.com
- The Unfair Contract Terms Unit, Office of Fair Trading, Fleetbank House, 2-6 Salisbury Square London EC4Y 8JX. E-mail unfair.terms@oft.gov.uk
- The Letting Centre, website: www.letlink.co.uk
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