England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM GREAT GRIMSBY COUNTY COURT
MRS RECORDER STOCKEN
8PB83253

		Royal Courts of Justice Strand, London, WC2A 2LL
		24/02/2010

Lord Justice Longmore:

1. Mr Michael Francis used to own 23 Lavenham Road, Grimsby. On 3^rd October 2007 he sold his house for £125,000 to the claimants 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 as to 30% (£37,500) on 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 6 years, the final part of the purchase price ("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, the claimants terminated the tenancy pursuant to any right to do so under the tenancy agreement, paragraph 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^rd October 2007, Mr Francis entered an Assured Shorthold Tenancy Agreement ("the AST") he being the tenant and the claimants 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 claimants issued proceedings for possession. It is agreed that rent which is due has not been paid. It does not look as if it will be; there are therefore good reasons why possession should be ordered pursuant to Ground 8 in the second schedule of the Housing Act 1988.
4. Mr Francis advances 3 reasons, however, for saying that, despite the fact that possession is to be granted, the claimants should nevertheless make the Final Payment. These are

i) that 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) that the provision in para 4 of the Schedule to the sale contract, entitling the claimants 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) that the provision is anyway an unfair term and is not binding pursuant to Regulations 4, 5 and 8 of the Unfair Terms in Consumer Contract 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 –

the performance of any obligations of the tenant, or

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. But 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 who "receives a tenancy deposit". Section 213(5) requires that information about 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 his 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 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 (18^th ed) para 13-009. But 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 only get relief if the defendant has purportedly forfeited property which the claimant owns or to which he has a right of possession. If all that happens is that the claimant is to forego 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 since the forfeitor is merely claiming or re-claiming his own property. So, while 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 his ship from service under the charterparty because a time charterer has no property or possessory interest in the ship, see Scandinavian Trading Tanker Co A.B. v Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 A.C. 694, Shiloh Spinners Ltd v Harding [1973] A.C. 691 and BICC Plc v Burndy Corporation [1985] Ch. 233.
12. Mr Wylie relied on Workers Trust Bank Ltd v Dojap Ltd [1993] A.C. 573 and Transag Haulage Ltd v Leyland DAF [1994] 2 BCLC 88 as exceptions to this principle of law because they applied to forfeiture of sums paid to or retained by the "innocent" party to the contract. But 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 about relief against forfeiture.
13. The Transag case 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 £5.00 if the hirer had paid all sums due under the agreement. If a receiver was appointed over the claimant's assets the agreement was determinable at the owner's option and the owner was 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 £5.00 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 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 only have 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, with worth adding that, even if there were jurisdiction to grant relief, it could only be granted on terms (as it was in the Transag case) that all sums currently due by way of rent be paid. There is no evidence that that is something which Mr Francis is in a position to do.

Unfair terms pursuant to the 1999 regulations

17. Mr McGhee QC for the landlord accepted that the 1999 regulations applied to the sale and lease-back 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 regulation, it would be unenforceable and that, on giving up possession, Mr Francis would be entitled to the Final Payment. But 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) 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 [2002] 1 AC 481 in the context of a clause in a loan agreement which 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

i) that the putative unfair term had to cause a significant imbalance in the parties rights and obligations; and

ii) that that imbalance had to be contrary to good faith.

The existence of an imbalance caused by the term was held not to be enough on its own despite an argument that the imbalance of itself demonstrated the absence of good faith. This emerges most clearly from paragraph 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 page 494D-E) the requirement of significant imbalance and secondly (at page 494 F-G) the requirement of good faith. Lord Steyn also (in paragraph 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 relation to 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 16^th recital to the governing EU Directive 93/13/EEC which is the same Directive which still governs the position to-day. 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 paragraph 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 paragraph 1(e) identifies a term which 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) only occurs on the obtaining of a court order, as the landlord cannot exercise its right to forfeit, see sections 5(1), 7(1) and 45(4) of the Housing Act 1988. The court is only obliged to make an order for possession in the mandatory cases listed in the second schedule to that Act. Failure to clean windows or using a television without a licence are not among those mandatory grounds 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. But 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 which is contrary to the requirements of good faith.
26. In relation to imbalance Lord Bingham said:-

"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 [2] 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 re-let the property or even to re-sell it. In those circumstances the retention of what is less than ?rd of the price does not cause any imbalance let alone a significant one.
28. In relation to 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 [3] 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 lease back 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 which 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 when the contract was made without regard to privileged communications passing between a solicitor and his client. But 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.

Lady Justice Smith:

31. I agree.

Master of the Rolls:

32. I also agree.