UK Housing Alliance (North West) Ltd v Francis (2010)
A provision in a sale and leaseback contract entitling the landlord buyer to retain 30 per cent of the purchase price if it terminated the tenancy pursuant to any right to do so under the tenancy agreement was not an unfair term under the Unfair Terms in Consumer Contracts Regulations 1999 reg.5.
The appellant (F) appealed against a decision that the respondent (U) was not required to pay him the sum of £37,500.
F had sold his house for £125,000 to U, whose business it was to buy residential properties and then lease them back to their former owners. The sum of £87,500 was payable on completion, while the balance of £37,500 (the final payment) was due on the expiry of 10 years and the giving up of possession by F. If F terminated his tenancy at any time during the first six years, the final payment would not become payable. If he terminated it thereafter, he would receive a percentage of the final payment on a sliding scale depending on the date of termination. If, however, U terminated the tenancy pursuant to any right to do so under the tenancy agreement, the sale contract provided that F would cease to have any right to receive the final payment. U terminated the tenancy for non-payment of rent. The issues were (i) whether the final payment was a "deposit" within the provisions for authorised tenancy deposit schemes set out in the Housing Act 2004 Pt 6, which were intended to make it easier than before for tenants to recover deposits; (ii) whether the provision in the sale contract entitling U to retain the final payment in the event of termination of the tenancy agreement by it constituted a "forfeiture" and was therefore unenforceable; (iii) whether that provision was an unfair term for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999 reg.5.
(1) The final payment was not a "tenancy deposit" within the meaning of the Act. The references in the Act to "paid", "received", "repay" and "transfer of property" were simply inapt to describe a situation in which a tenant paid nothing but was the person to whom money was paid, albeit that he was not to be paid some part of the money representing the purchase price of what was his property until some date in the future. (2) F had merely lost a contingent right to payment of a debt. That was not a proprietary right in the sense that he had any proprietary right to the amount of the final payment in the hands of U. If U became insolvent, F would only have a right to prove in the insolvency. That was not a right the loss of which could give rise to relief against forfeiture. The court therefore had no ability to grant relief against forfeiture in this case. (3) For the purposes of reg.5 of the Regulations, it was necessary to consider whether the impugned provision caused or created a significant imbalance in the parties' rights and obligations to F's detriment in a manner or to an extent which was contrary to the requirements of good faith. Having regard to the contract as a whole, it could not be said that the retention of the final payment, on the grant of a court order for possession, created a significant imbalance. It was 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 had to be judged at the time when the contract was 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 was less than a third of the price did not cause any imbalance, let alone a significant one. Further, the agreement that U could retain the final payment was not contrary to the concept of good faith. It could not be suggested that the term was not fully, clearly and legibly expressed or was not given appropriate prominence. No doubt F had been short of money when he made the contract for the sale and leaseback of the property, but it could not be said that he had been "taken advantage of" unfairly. The very nature of the transaction necessitated that he instructed a solicitor, which he did. He also had the protection of the court if and when a possession order was sought by U. In the circumstances, there had been no failure to conform with "good standards of commercial morality and practice", Director General of Fair Trading v First National Bank Plc  UKHL 52,  1 A.C. 481 applied.
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24 Feb 2010
Court of Appeal
Lord Neuberger of Abbotsbury MR, Longmore LJ, Smith LJ
LTL 24/2/2010 :  Bus LR 1034 :  3 All ER 519 :  HLR 28 :  2 EGLR 81 :  18 EG 100 :  9 EG 167
John McGhee QC