In Jones v Roundlistic Ltd [2018] EWCA Civ 2284; [2018] PLSCS 179, the Court of Appeal was asked to determine whether a user covenant prohibiting a lower maisonette from being “used for any purpose whatsoever other than a single private dwellinghouse in the occupation of the lessee and his family” was an unfair contractual term within the meaning of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).
The alleged breach
In 2013, Nathan Jones and Aideen Seymour purchased the leasehold interest of a lower maisonette flat in Barnes, west London, from Emma Scott. The user covenant was to apply to the upper maisonette if it was also sold on a long lease.
Roundlistic owned the freehold interest of the building. The upper maisonette was never sold and remained part of the freehold title. It had been periodically let on short-term tenancies as the user covenant did not apply.
Key points
- Regulation 4(2) of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) did not extend to terms that were continued in effect by a statutory mechanism, where the content of those terms had been agreed by the parties and not prescribed by mandatory statutory or regulatory provisions
- A term that was unfair before a lease extension would be equally unfair after and should not be immune to the operation of UTCCR
- A covenant against subletting to third-party non-family members was not contrary to good faith
In 2012, Scott made an application to Roundlistic for a lease extension under the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act). The new lease was expressed to be made on the same terms and subject to the same covenant conditions and stipulations as contained in the existing lease, save as to the term years and rent. The user covenant was, therefore, incorporated.
In 2015, Jones was posted abroad for work purposes. He applied to Roundlistic for consent to sublet the lower maisonette to non-family members on short-term lets. Roundlistic refused to grant consent.
Without Roundlistic’s consent, Jones and Seymour granted a 12-month fixed-term assured shorthold tenancy to a third-party non-family member. Roundlistic applied to the First-tier Tribunal (FTT) for a determination under section 168(4) of the Commonhold and Leasehold Reform Act 2002 that Jones and Seymour had breached the terms of their lease.
The statutory provisions
Section 42 of the 1993 Act allows a qualifying tenant to exercise their right to extend their lease by giving notice to their landlord. A landlord is obliged under section 56 of the 1993 Act to grant a tenant a new lease if the tenant has complied with the notice requirements. Save for the exceptions listed in section 57(1) of the 1993 Act, the new lease is granted on the same terms as the existing lease, subject to the right of the landlord and the tenant to modify or exclude terms under section 57(6) of the 1993 Act.
UTCCR applied to unfair terms in contracts concluded between a seller or supplier and a consumer. Regulation 4(2)(a) provided that UTCCR did not apply to contractual terms which reflected mandatory statutory or regulatory provisions. Pursuant to regulation 5(2), a contractual term that had not been individually negotiated would be regarded as unfair if, contrary to the requirements of good faith, it caused a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of the consumer.
The Consumer Rights Act 2015 superseded UTCCR, but due to its non-retrospective effect, it was not applicable in the present case.
The decision
The FTT found that the user covenant was an unfair term within the meaning of UTCCR and therefore not binding. Roundlistic successfully appealed to the Upper Tribunal (Lands Chamber) (the UT).
The UT found that regulation 4(2) of UTCCR specifically excluded the applicability of UTCCR to contractual terms which reflected mandatory statutory provisions. UTCCR therefore did not apply to the contractual terms under the new lease. Roundlistic had a statutory obligation to grant a new lease under the provisions of the 1993 Act. The terms of the new lease were prescribed by sections 56 and 57 of the 1993 Act, subject to limited modifications.
Additionally, the UT found that the user covenant did not cause an imbalance “in the parties’ rights and obligations under the lease” and was not contrary to the requirements of good faith. Jones and Seymour appealed all three findings.
The Court of Appeal disagreed with the UT on the applicability of regulation 4(2) of UTCCR. On a natural reading, the phrase applied only to contractual terms prescribed by statute, albeit not verbatim. In such circumstances, it could be legitimately assumed that the legislature had “given proper weight to consumer protection” when prescribing the terms to be included in contracts. It did not extend to cases, like the present, where the terms were agreed by the parties and those terms were continued in effect as a result of a statutory mechanism.
Section 57(1) of the 1993 Act did not prescribe substantive terms to be incorporated into the terms of a new lease; it only mandated that they should be the same as before. A term that was unfair before a lease extension would be unfair afterwards and should not be immune to the operation of UTCCR.
The fairness of a covenant had to be assessed at the time the contract was concluded. In the present case, it was at the time the lease was extended in 2012. The user covenant was a more onerous term for the lessee than the lessor because the upper maisonette had not been sold on a long lease and was therefore not subject to the user covenant. Contractually, this created a “significant imbalance” in the parties’ rights and obligations.
The user covenant was not, however, contrary to good faith. During an application for a lease extension, mechanisms were provided under the 1993 Act for a lessee to seek to renegotiate a term or ask for a tribunal to determine the reasonableness of its inclusion under section 57(6) of the 1993 Act. The appeal was dismissed.
Elizabeth Dwomoh is a barrister at Lamb Chambers