Sale of land — Leaseback — Possession — Sale and leaseback of residential property — Final payment of 30% of purchase price not payable to vendor in event of termination of tenancy by purchaser pursuant to rights under tenancy agreement — Termination for arrears of rent — Whether vendor entitled to final payment — Whether repayable as deposit not held by landlord on scheme authorised by Chapter 4 of Part 6 of Housing Act 2004 — Whether provision for retention of final payment unenforceable as penalty or unfair contract term
The respondent company ran a business that involved purchasing residential properties and leasing them back to their former owners. In October 2007, the appellant sold his house to the respondent on that basis and was granted an assured shorthold tenancy. Of the £125,000 purchase price, 70% was payable on completion of the sale and the final 30% was payable after 10 years, when the appellant was to give up possession. Under the terms of the sale contract, the final payment was not payable in the event of the respondent terminating the appellant’s tenancy pursuant to its rights under the tenancy agreement.
The appellant fell into rent arrears and the respondent issued possession proceedings on that ground. The appellant contended that even if possession were to be granted, the respondent was obliged to make the final payment under the sale contract because: (i) the final payment was a “deposit”, within the provisions for authorised tenancy deposit schemes in Chapter 4 of Part 6 of the Housing Act 2004, which had not been dealt with by the landlord in accordance with an authorised scheme; (ii) the contractual provision entitling the respondent to retain the final payment, in the event that it terminated the tenancy agreement, was a penalty or forfeiture and was thus unenforceable as failing to reflect a genuine pre-estimate of loss; and (iii) that provision had not been individually negotiated, was unfair and therefore not binding by reason of regulations 4, 5 and 8 of the Unfair Terms in Consumer Contracts Regulations 1999. Those points were all decided against the appellant at first instance. The appellant appealed.
Held: The appeal was dismissed. (1) Chapter 4 of Part 6 of the 2004 Act is intended to prevent abuses by landlords. It deals with the situation in which a tenant has paid money to the landlord and seeks its repayment: see sections 213 to 215. It is not intended to cover arrangements such as a sale and leaseback, whereby the vendor becomes a tenant instead of the freeholder. The wording of the statutory provisions is inapt to describe a situation where the tenant has paid nothing, but instead seeks payment as the purchase price for his or her property. (2) The provision relating to the retention of the final payment was not a penalty because it was not a sum that was payable on breach but rather on the exercise by the respondent of its right to terminate the tenancy agreement and to obtain a court order for possession. Although the principles that applied to the irrecoverability of penalties might apply, by analogy, to cases of relief from forfeiture, that did not help the appellant since he had no proprietary right to the amount of the final payment in the hands of the respondent such as to give rise to relief from forfeiture; he had merely lost a contingent right to the payment of a debt. (3) The relevant provision of the sale contract had not been individually negotiated within the meaning of regulation 5(1) of the 1999 Regulations. It is insufficient for that purpose to show that the consumer or his or her legal adviser has had an opportunity of considering the terms of the agreement; the consumer must have been able to influence the substance of the relevant term and the term must have been individually negotiated. However, the term was not unfair because it did not cause a significant imbalance in the parties’ rights and obligations under the contract contrary to the requirement of good faith. The relevant contractual term did not enable the respondent to retain the final payment for trivial breaches of the tenancy agreement because, under the Housing Act 1988, the court was not obliged to make a possession order save where a mandatory ground was made out.
The following cases are referred to in this report.
BICC plc v Burndy Corporation [1985] 1 Ch 232; [1985] 2 WLR 132; [1985] 1 All ER 417
Director General of Fair Trading v First National Bank plc [2001] UKHL 52; [2002] 1 AC 481; [2001] 3 WLR 1297; [2002] 1 All ER 97; [2002] 1 Lloyd’s Rep 489
Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 AC 694; [1983] 3 WLR 203; [1983] 2 All ER 763, HL
Shiloh Spinners Ltd v Harding [1973] AC 691; [1973] 2 WLR 28; [1973] 1 All ER 90; (1973) 25 P&CR 48, HL
Transag Haulage Ltd (IAR) v Leyland DAF Finance plc [1994] 2 BCLC 88, Ch
Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573; [1993] 2 WLR 702; [1993] 2 All ER 370; (1993) 66 P&CR 15; [1993] 1 EGLR 203
This was an appeal by the appellant, Michael Francis, from a decision of Mrs Recorder Stocken, sitting in Great Grimsby County Court, ruling on liability for the purchase price under an agreement for the sale and leaseback of residential property in the context of possession proceedings brought by the respondent, UK Housing Alliance (North West) Ltd.
Neil Wylie (instructed by John Barkers, of Grimsby) appeared for the appellant; John McGhee QC and Simon Read (instructed by LR Solicitors, of Wakefield) represented the respondent.
Giving judgment, Longmore LJ said:
[1] Mr Michael Francis used to own 23 Lavenham Road, Grimsby. On 3 October 2007, he sold his house for £125,000 to the respondent, whose business it is to buy up residential properties and then lease them back to their former owners. The sale price was payable as to 70% (£87,500) on completion and 30% (£37,500) on the expiry of 10 years and the giving up of possession by Mr Francis. If Mr Francis terminated his tenancy at any time during the first six years, the final part of the purchase price (the final payment) would not become payable; if he |page:82| terminated it thereafter, he would receive a percentage of the final payment on a sliding scale depending on the date of termination. If, however, the respondent terminated the tenancy pursuant to any right to do so under the tenancy agreement, para 4 of the schedule to the sale contract provided that Mr Francis would cease to have any right to receive the final payment.
[2] On the same date of 3 October 2007, Mr Francis entered an assured shorthold tenancy agreement (the AST), he being the tenant and the respondent being the landlord. The landlord’s right of termination was contained in clause 5.1, which provided:
5.1. Our right of termination
5.1.1 We are entitled to terminate this Tenancy Agreement and obtain a court order to evict you if:
5.1.1.1 any instalment of the rent is not received in full within 14 days of the date when we formally demand it after it has fallen due; or
5.1.1.2 You fail to comply with any of your obligations under this Tenancy Agreement; or
5.1.1.3 You become bankrupt or an interim receiver of your property is appointed; or
5.1.1.4 You (without making arrangements with us or our agent) leave the property vacant or unoccupied for more than 4 weeks
5.1.2 We are also entitled to terminate this Tenancy Agreement in the event that:
5.1.2.1 You (not being a Joint Tenant under this Tenancy Agreement) die; or
5.1.2.2 You (being the last survivor of two or more Joint Tenants under the Tenancy Agreement) die
in either case whilst this Tenancy Agreement is still continuing by us giving to your successors in title not less than 4 weeks prior notice in writing of our desire to so terminate this Tenancy Agreement such notice to expire no earlier than the expiration of the first 6 months of the Tenancy Period.
[3] Mr Francis fell behind with the rent and the respondent issued proceedings for possession. It is agreed that rent that is due has not been paid. It does not look as though it will be; there are therefore good reasons why possession should be ordered pursuant to ground 8 in Schedule 2 to the Housing Act 1988 (the 1988 Act).
[4] Mr Francis advances three reasons, however, for saying that, despite the fact that possession is to be granted, the respondent should nevertheless make the final payment. These are that:
(i) the final payment is a “deposit” within the provisions for authorised tenancy deposit schemes set out in Chapter 4 of Part 6 of the Housing Act 2004 (the 2004 Act), which are intended to make it easier than before for tenants to recover deposits;
(ii) the provision in para 4 of the schedule to the sale contract entitling the respondent to retain the final payment in the event of termination of the tenancy agreement by the landlord pursuant to a right to do so, constitutes a “penalty” or a “forfeiture” and is therefore unenforceable;
(iii) the provision is anyway an unfair term and is not binding pursuant to regulations 4, 5 and 8 of the Unfair Terms in Consumer Contracts Regulations 1999 (the 1999 Regulations)
[5] Mrs Recorder Stocken decided each of these points against Mr Francis, who now appeals to this court.
Deposit within the 2004 Act?
[6] If the final payment was a deposit within the 2004 Act, it is agreed that it was not dealt with by the landlord in accordance with any scheme authorised by the Act. The consequences would be not merely that the final payment would not be retainable by the landlord but also that a sum equal to three times the amount of that payment would be payable by the landlord to the tenant within 14 days.
[7] Chapter 4 of Part 6 of the 2004 Act was intended to deal, inter alia, with the notorious abuse of landlords requiring deposits from prospective tenants but not keeping the sums paid in any separate account or refusing to repay such sums at the end of the tenancy. On the face of it, the Act is not perhaps likely to cover arrangements such as the one with which this court is dealing, namely sales by an owner with a lease back to him whereby he becomes a tenant instead of the freehold owner.
[8] The Act applies to tenancy deposits, which are defined in the following way:
“tenancy deposit”, in relation to an assured shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his,
arising under or in connection with the tenancy.
[9] This definition, with its use of the phrase “money intended to be held”, might at first blush be enough to cover the final payment in the present case. However, it is necessary to read the Act as a whole, and when one does so one sees a pervading reference to money “paid” by the tenant to the landlord, “received” by the landlord and “repayable” by the landlord to the tenant. Thus, section 213(1) refers to a “tenancy deposit paid to a person”. Section 213(3) refers to a landlord that “receives a tenancy deposit”. Section 213(5) requires that information concerning the relevant authorised scheme should be given to a landlord “who has received such a tenancy deposit”. Section 213(6) says that the information is to be given within 14 days, beginning with the date “on which the deposit is received by the landlord”. Section 214(1) entitles the tenant to make an application to the county court “where a tenancy deposit has been paid”. If the landlord is in default of its obligations under any authorised scheme or otherwise, section 214(3) requires the court to order the person holding the deposit “to repay it to the applicant” or to order him “to pay the deposit” into a designated account. Section 215(1) prohibits the service of a section 21 notice, if “a tenancy deposit has been paid”. “Deposit” is defined in sections 213(8) and 215(4) as a “transfer of property”. All these references to “paid”, “received”, “repay” and “transfer of property” are simply inapt, in my judgment, to describe a situation in which a tenant pays nothing but is the person to whom money is paid, albeit that he is not to be paid some part of the money representing the purchase price of what was his property until some date in the future.
Penalty/forfeiture?
[10] Mr Neil Wylie, for the appellant, accepted that the final payment could not strictly be called a penalty because it was not a sum payable on breach but rather a sum payable on the exercise by the landlord of its right to terminate the tenancy agreement and obtain a court order for possession: see MacGregor on Damages (18th ed), in para 13-009. However, he submitted that the principles applicable to irrecoverability of penalties were equally applicable to cases of relief against forfeiture. If, for example, a sum payable for breach of contract was not a genuine pre-estimate of loss, it would not be recoverable as being a penalty; likewise, if money or other property was forfeited in circumstances where the amount so forfeited was similarly not a genuine pre-estimate of loss, relief should be granted.
[11] The difficulty with this argument is that there is a long line of authority to the effect that a claimant can obtain relief only if the defendant has purportedly forfeited property that the claimant owns or to which he has a right of possession. If all that happens is that the claimant is to forgo a right to make a contractual claim or is prevented from using property to which he had a mere contractual right, there is no claim to relief against forfeiture because the forfeitor is merely claiming or reclaiming his own property. So, although a tenant may be able to obtain relief against the forfeiture of his leasehold interest in property, a time charterer cannot obtain relief where a shipowner withdraws its ship from service under the charterparty because a time charterer has no property or possessory interest in the ship: see Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 AC 694, Shiloh Spinners Ltd v Harding [1973] AC 691 and BICC plc v Burndy Corporation [1985] 1 Ch 232.
[12] Mr Wylie relied on Workers Trust & Merchant Bank Ltd v Dojap Ltd [1993] AC 573* and Transag Haulage Ltd (IAR) v Leyland DAF Finance plc [1994] 2 BCLC 88 as exceptions to this principle of law because they applied to forfeiture of sums paid to or retained by |page:83| the “innocent” party to the contract. However, the first case related to a deposit paid by an intending purchaser to an intending vendor. Although deposits are not usually regarded as penal, the deposit in that particular case was: (a) 25% of the sale price; and (b) payable or retainable on breach of contract. The Privy Council applied the law on penalties, since the sum was payable on breach, and concluded that it was a penalty. It was not a case concerning relief against forfeiture.
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* Editor’s note: Also reported at [1993] 1 EGLR 203
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[13] Transag concerned a hire-purchase agreement in ordinary form of Leyland DAF vehicles. The agreement provided for payment by instalments, with an option to purchase the vehicle for £5 if the hirer had paid all sums due under the agreement. If a receiver were to be appointed over the claimant’s assets, the agreement would be determinable at the owner’s option and the owner would be entitled to retake the vehicles. A receiver was appointed and the owners determined the agreement. The owner retook the vehicle and it was held that that was not a penalty. Knox J did, however, decide that the claimant’s loss of the right to buy the vehicles for £5 was a forfeiture of a proprietary right since, by such payment, he would acquire the property in the vehicles.
[14] Mr Francis is not in the same position. He has merely lost a contingent right to the payment of a debt. That is not a proprietary right in the sense that he has any proprietary right to the amount of the final payment in the hands of the landlord. If the landlord became insolvent, the tenant would have only a right to prove in the landlord’s insolvency. That is not a right the loss of which can give rise to relief against forfeiture.
[15] There is therefore, in my judgment, no ability on the part of the court to grant relief against forfeiture in the present case.
[16] It is perhaps worth adding that even if there were jurisdiction to grant relief, it could be granted only on terms (as it was in Transag) that all sums currently due by way of rent be paid. There is no evidence that that is something that Mr Francis is in a position to do.
Unfair terms pursuant to the 1999 Regulations
[17] Mr John McGhee QC, for the landlord, accepted that the 1999 Regulations applied to the sale and leaseback arrangement between the landlord and Mr Francis since Mr Francis was a consumer within the meaning of the regulations. He further accepted that if para 4 of the schedule to the sale agreement constituted an unfair term within the meaning of the 1999 Regulations, it would be unenforceable and that, on giving up possession, Mr Francis would be entitled to the final payment. However, he contended that the term was a fair term.
[18] The critical regulation for the purposes of this case is regulation 5, which provides:
(1) A contractual term which has not been individually negotiated shall be regarded as unfair 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.
The recorder held that the landlord had discharged the burden, imposed on the landlord by regulation 5(4), of showing that para 4 of the schedule to the sale contract had been individually negotiated because Mr Francis had instructed solicitors “who had every opportunity of considering” the terms of the agreements with him and thus had the opportunity to influence the terms.
[19] In my judgment, the recorder was wrong about this. The fact that a consumer or his legal representative has had the opportunity of considering the terms of an agreement does not mean that any individual term has been individually negotiated. The supplier must prove that the relevant term was individually negotiated. The concept of ability to influence the substance of a term comes from regulation 5(2), which provides:
A term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term.
This therefore imposes an absolute prohibition on a finding of individual negotiation if there has not been an ability to influence the substance of a term. It does not follow from the existence of the ability to influence the substance of a term that the term has in fact been individually negotiated. That is still a matter for the supplier to prove and, in my judgment, the landlord did not prove that in this case.
[20] It is therefore necessary to consider the substance of regulation 5(1).
[21] The predecessor of this regulation was regulation 4 of the 1994 regulations (SI 1994/3159) (the 1994 Regulations), which had the same title as the 1999 Regulations (apart from the year). That regulation was considered by the House of Lords in Director General of Fair Trading v First National Bank plc [2001] UKHL 52; [2002] 1 AC 481 in the context of a clause in a loan agreement that provided that interest at a contractual rate would continue to be payable until any judgment obtained by the bank was discharged. The House of Lords decided that the regulation required that:
(i) the putative unfair term had to cause a significant imbalance in the parties’ rights and obligations; and
(ii) that imbalance had to be contrary to good faith.
The existence of an imbalance caused by the term was held not to be sufficient on its own despite an argument that the imbalance of itself demonstrated the absence of good faith. This emerges most clearly in [17] of the speech of Lord Bingham of Cornhill (with whom all the other law lords expressly agreed), in which he says:
A term falling within the scope of the Regulations is unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer in a manner or to the extent which is contrary to the requirement of good faith.
He then discusses, first (at p494D-E), the requirement of significant imbalance and, second (at p494F-G), the requirement of good faith. Lord Steyn also (in [36]) refers to the “twin requirements” of good faith and significant imbalance.
[22] The only difference of substance between the 1994 and the 1999 Regulations in respect of the content of 4(1) and 5(1) respectively is that in the 1994 Regulations the criteria for the assessment of good faith were laid down in Schedule 2 to those regulations, whereas there is no equivalent provision relating to the assessment of good faith in the 1999 Regulations. This does not, however, create any relevant distinguishing feature because Schedule 2 was an enactment of the 16th recital to the governing EU Directive 93/13/EEC, which is the same directive that governs the position today. Thus, not merely is the meaning of good faith the same under the 1994 and the 1999 Regulations, but the fact that it is an additional requirement to the requirement of imbalance must also be the same under the 1999 Regulations as under the 1994 Regulations.
[23] Both sets of regulations set out in a schedule an “indicative and non-exhaustive list of terms which may be regarded as unfair”. Mr Wylie relied on para 1(e) of this list:
[A term which has] the object or effect of
(e) requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation.
He then contended that the tenancy could be brought to an end and the right to the final payment be extinguished by a trivial breach of the tenancy such as the failure to have the windows cleaned (clause 4.5.2) or the use of a television without a television licence (clause 4.11.4). This, he submitted, created a significant imbalance and was contrary to good faith.
[24] Quite apart from the fact that para 1(e) identifies a term that requires a consumer “to pay” a high sum in compensation whereas para 4 of the schedule to the sale contract did not require Mr Francis “to pay” anything at all (but rather to submit to non-payment by the landlord), Mr Wylie’s construction of the tenancy agreement is incorrect. Termination (pursuant to clause 5) occurs only on the obtaining of a court order, since the landlord cannot exercise its right to forfeit: see sections 5(1), 7(1) and 45(4) of the 1988 Act. The court is obliged to make an order for possession only in the mandatory cases listed in the Schedule 2 to that Act. Failure to clean windows or using a television without a licence are not among those mandatory grounds, |page:84| and no circuit judge would dream of ordering possession on either of those grounds. Late payment of rent is of course a breach of the tenancy agreement, but again no circuit judge would order possession merely because the rent was a few days late save in the most exceptional circumstances. The mandatory ground relating to rent requires that two months must be outstanding before possession can be ordered.
[25] Mr Wylie’s primary argument must, therefore, fail. However, that does not absolve the court from considering whether para 4 of the schedule to the sale agreement causes or creates a significant imbalance in the parties’ rights and obligations to the detriment of Mr Francis in a manner or to an extent that is contrary to the requirements of good faith.
[26] In respect of imbalance, Lord Bingham said, in [17]:
The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty. The illustrative terms set out in Schedule 3 to the Regulations provide very good examples of terms which may be regarded as unfair; whether a given term is or is not to be so regarded depends on whether it causes a significant imbalance in the parties’ rights and obligations under the contract. This involves looking at the contract as a whole. But the imbalance must be to the detriment of the consumer; a significant imbalance to the detriment of the supplier, assumed to be the stronger party, is not a mischief which the Regulations seek to address.
[27] Looking at the contract as a whole, I am unable to conclude that the retention of the final payment, on the grant of a court order for possession, creates a significant imbalance. It is possible to conceive of circumstances where it might, especially if the original contract price was below the market price and the rental market (or perhaps the sale market) was buoyant at the time of the possession. But the matter has to be judged at the time when the contract is made and it would be equally possible to envisage a stagnant market in which the landlord would find it difficult to relet the property or even to resell it. In those circumstances, the retention of what is less than one third of the price does not cause any imbalance let alone a significant one.
[28] In respect of good faith, Lord Bingham said:
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. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Schedule 2 to the Regulations. Good faith in this context is not an artificial or technical concept; nor, since Lord Mansfield was its champion, is it a concept wholly unfamiliar to British lawyers. It looks to good standards of commercial morality and practice. Regulation 4(1) lays down a composite test, covering both the making and the substance of the contract, and must be applied bearing clearly in mind the objective which the Regulations are designed to promote.
[29] Again, I do not see that the agreement that the landlord can retain the final payment is contrary to the concept of good faith. It cannot be suggested that the term is not fully, clearly and legibly expressed or was not given appropriate prominence. No doubt, Mr Francis was short of money when he made the contract for the sale and leaseback of the property, but it cannot be said that he has been “taken advantage of” unfairly. The very nature of the transaction necessitated that he instructed a solicitor, which he did. There was (probably inadmissible) evidence that his solicitor made a careful report to him on the contracts that he was about to sign, drawing specific attention to the fact that if the court granted an order for possession in the event of his being in breach of the terms of the tenancy agreement, he would not receive the final payment. This evidence was probably inadmissible because the matter has to be judged at the time the contract was made without regard to privileged communications passing between a solicitor and its client. However, the fact is that Mr Francis necessarily had the protection of a solicitor at the time and he would have the protection of the court if and when a possession order was sought by the landlord. I cannot see here any failure to conform with “good standards of commercial morality and practice”.
Conclusion
[30] In those circumstances, I would uphold the decision of Mrs Recorder Stocken, to whose lucid judgment in this case I would pay tribute, and dismiss this appeal.
Smith LJ said:
[31] I agree.
Lord Neuberger, MR said:
[32] I also agree.
Appeal dismissed.
