Sale and leaseback of residential property – Final payment of 30% of purchase price not payable to appellant vendor in event of termination of tenancy by respondent purchaser pursuant to rights under tenancy agreement – Termination for arrears of rent – Whether appellant 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 – Appeal dismissed
The respondent company purchased residential properties and leased 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 would not be payable if, inter alia, the respondent terminated the appellant’s tenancy pursuant to its rights under the tenancy agreement, such as if the appellant failed to pay an instalment of rent within 14 days of it falling due.
The appellant fell into rent arrears and the respondent issued possession proceedings. The appellant contended that although there were grounds for possession, the respondent was still obliged to make the final payment under the sale contract. He contended that: (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 pursuant to its rights to do so constituted 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 and he appealed.
Held: The appeal was dismissed.
(1) Chapter 4 of Part 6 of the 2004 Act was intended to deal, inter alia, with abuses by landlords that required deposits from prospective tenants but failed to pay the sums into a separate account or refused to repay them at the end of the tenancy. It was not, on its face, intended to cover arrangements such as a sale and leaseback whereby the vendor became a tenant instead of the freeholder. Sections 213 to 215 expressly dealt with the situation where a tenant had paid money to the landlord and sought its repayment; the wording of the statutory provisions was inapt to describe a situation where the tenant paid nothing but was instead the person to whom money was to be paid as the purchase price for his or her property, albeit that part of that money would not become payable until some future date.
(2) The final payment could not be deemed 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 obtain a court order for possession. Although the principles applicable to the irrecoverability of penalties might be applied, by analogy, to cases of relief from forfeiture, that did not assist 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, but had merely lost a contingent right to the payment of a debt: Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] 1 EGLR 203 and Transag Haulage Ltd (IAR) v Leyland DAF Finance plc [1994] 2 BCLC 88 distinguished.
(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 was insufficient for that purpose to show that the consumer or his or her legal adviser had had an opportunity of considering the terms of the agreement; it was necessary that the consumer had had the ability to influence the substance of the relevant term and that the term had 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 since, under the Housing Act 1988, the court would not be obliged to make a possession order save in the case of the mandatory grounds, which, in the case of rent arrears, required at least two months’ rent outstanding. The retention of the final payment, on the grant of a court order for possession, did not create a significant imbalance. Although it was possible to conceive of circumstances where an imbalance could arise, for instance, if the original contract price was below the market price and the rental or sale market was buoyant at the time of the possession, the matter had to be judged at the time when the contract was made. 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 was less than one third of the purchase price did not cause any imbalance, let alone a significant one.
Neil Wylie (instructed by John Barkers, of Grimsby) appeared for the appellant; John McGhee QC and Simon Read (instructed by LR Solicitors, of Wakefield) appeared for the respondent.
Sally Dobson, barrister
