In the four
years or so since it was brought into operation, the Estate Agents Act 1979 can
hardly be said to have captured the collective imagination of the profession.
True, the Office of Fair Trading’s warning in Burling Morrison, for
failing to give clients sufficiently detailed advance warning of expenses, led
to a brief flurry of activity by the professional bodies before it was
overturned by an appeal tribunal (See (1986) 277 EG 1147); true, also, that any
mention of section 21 (which requires an estate agent to disclose any personal
interest which he has in property he is buying or selling) provokes a string of
‘hypothetical’ examples and a lot of worried frowns. For the most part,
however, there can be no doubt that estate agents regard the Act with a fair
degree of complacency, based upon the idea that, provided they run their
businesses honestly, it has no effect upon them. Nothing could be further from
the truth!
Ironically,
perhaps, when some attention is paid to the Act, it is usually focused upon
those provisions which operate to ‘trigger’ the enforcement powers of the
Director General of Fair Trading. It is almost unheard of for an agent to seek
advice on the rules which govern his handling of ‘clients’ money’, and yet
these rules (contained in section 14 of the Act and The Estate Agents
(Accounts) Regulations 1981) are backed up by the sharpest teeth of all, in
that any breach exposes the agent to criminal prosecution. (A conviction then
acts as a trigger and may lead to further ‘punishment’ at the hands of the
OFT.)
In this and
succeeding issues we shall consider the ‘clients’ money’ provisions of the Act,
and the first important point to note is the very narrow definition of clients’
money for this purpose. Unlike the Members’ Accounts Rules promulgated by the
professional bodies, which apply to almost any money in an agent’s hands which
belongs to another person, section 12 of the Estate Agents Act applies only to deposits
relating to property in the United Kingdom which are received in the course of
estate agency work. These may be contract deposits or pre-contract
deposits, and they may relate not only to an actual contract of sale but
also to ‘connected contracts’ (such as those for fixtures and fittings).
However, that is as far as the definition goes and since, as we shall see, the
Act requires the complete separation of clients’ money from all other funds, it
follows that an agent who is a member of a professional body will have to
operate two separate systems of accounts, one for deposits and another for such
things as management income, insurance premiums and so on.
It is also
worth noting at the outset that the Act’s application does not depend in any
way upon the capacity in which an estate agent holds deposits (as agent, as
stakeholder, or whatever). Even if a deposit is received on the understanding
that it is to be handed on to the client (as where the agent is acting for a
builder on a residential development), it is ‘clients’ money’ and must
accordingly pass through the client account.
Section 13
of the Act provides that clients’ money is held by an estate agent on trust,
which naturally provokes the question: on trust for whom? The answer to this question (which also
determines who, if anyone, is entitled to interest earned by the money while in
the agent’s hands) depends upon the type of deposit and the capacity in which
it is held; the position, briefly, is as follows.
Where a pre-contract
deposit is paid, it will almost invariably be held by the agent on trust for
the depositor, who, after all, is entitled to demand its return at any time.
This will be the case even where the agent has signed a receipt for the money
‘as agent’ or ‘as stakeholder’, unless (and this would be very unusual indeed)
the client has actually authorised the agent to receive the money on his
behalf.
In the few
cases where an estate agent receives a contract deposit (not so few,
perhaps, if one includes auctions), what matter are the terms of the contract.
If this states that the money is received ‘as agent for the vendor’, then it is
held on trust for him. If, on the other hand, the contract describes the estate
agent as a ‘stakeholder’, then the ‘trust’ is temporarily without an identified
beneficiary; the agent holds the money for whichever of the parties ultimately
becomes entitled to it in accordance with the terms of the contract (ie when
the sale is either completed or falls through).
reconstruction and the 1954 Act
It is well
known that, by virtue of section 30(1)(f) of the Landlord and Tenant Act 1954,
a landlord can oppose the grant of a new tenancy where he can establish that he
‘intends to demolish or reconstruct the premises . . . or a substantial part of
those premises or to carry out substantial work of construction . . . and that
he could not reasonably do so without obtaining possession of the
holding.’ A landlord has many hurdles to
cross in order to bring himself within this provision: intention, that the work
constitutes demolition, reconstruction or substantial construction, and finally
that he cannot proceed without obtaining possession of the premises. It is on
the last requirement that this note concentrates.
It was held
by the House of Lords in Heath v Drown [1973] AC 498 that
‘possession’ in this context means legal possession. Consequently a
landlord cannot satisfy paragraph (f) where he has reserved to himself in the
lease powers of re-entry which enable him to carry out the work in question,
since he is thereby already entitled to the necessary possession. Even where he
does need legal possession, either because he has no power of re-entry which
covers the work or because the right of re-entry does not entitle him to carry
out all the items of work, he still runs into section 31A(1). This was
introduced in 1969 and allows the tenant to agree to the inclusion in the new
lease of terms giving to the landlord ‘access and other facilities for carrying
out the work intended’; in this event the landlord will succeed under paragraph
(f) only if he can show that despite ‘this access and other facilities’ the
work will still interfere ‘to a substantial extent or for a substantial time with
the use of the holding’.
The
operation of this new section has not proved easy and many of the difficulties
stem from the Court of Appeal decision in Redfern v Reeves (1978)
247 EG 991. Here, it was made clear that for the purposes of this section the ‘work
intended’ refers only to that work for which the landlord requires legal
possession. Thus if some of the proposed work can be carried out under a right
of re-entry but the rest cannot, it is only the latter which falls to be
considered under section 31A(1). This approach has now been endorsed by the
Court of Appeal in Cerex Jewels Ltd v Peachey Property Corporation
plc [1986] 2 EGLR 65 and, indeed, treated there as inevitable in the light
of Heath v Drown, although, as Slade LJ points out, ‘the process
of dividing the work which the landlord intends to do into the two relevant
categories will be an awkward and difficult one’.
Much more
controversially, it was held in Redfern v Reeves that, in
deciding the issue of substantial interference, the court is entitled to look
at only the physical effects of the work on the use of the holding and
not at its overall effect on the tenant’s business. Thus, the court held that
there was substantial interference despite the fact that while the work was
being carried out the tenant could protect her business by taking temporary
accommodation nearby. This aspect of the decision has clearly not been
welcomed. It was followed, with reluctance, in Price v Esso Petroleum
Co Ltd (1980) 255 EG 243, where Templeman LJ pointed out: ‘if section 31A .
. . is construed in [this] manner . . . the legislature may, in large part,
have given away, in the last portion of paragraph (a), that which they have
conferred on tenants by the first part’.
The Cerex
case makes interesting reading in that it demonstrates how the court has to
approach the application of section 31A. The facts are too complex for our
purposes, but suffice to say that the landlords of a shop wished to oppose the
grant of a new tenancy on the basis of paragraph (f). The court had to examine
the various proposals to see which could be carried out under various rights of
re-entry and which could not, since only the latter were relevant. Given that
the tenant was prepared to allow the landlord all necessary access the court
then had to decide whether or not those works would cause substantial
interference. Slade LJ was clearly unhappy with the Redfern approach but
was at least able to prevent further inroads into the efficacy of the section
by refusing to accept the landlord’s argument that the interference could be
substantial in either time or extent: although the section uses the word
‘or’, it was held to be employed conjunctively rather than disjunctively. Thus,
although the tenant would need to move out altogether for a period of two
weeks, this was not sufficient, in the court’s view, to lose him the protection
conferred by section 31A, which was thought by Slade LJ to have been intended
to cover just this situation.
