A Big Loss for Foxtons, a Big Win for Consumers - The Office of Fair Trading v Foxtons Limited

We bring you the latest in The Office of Fair Trading and Foxtons Limited saga dealing with the fairness of certain terms in Foxtons' letting agreements

Certain commission terms in Foxtons Limited's standard letting agreements were deemed to be unfair at the High Court. Mr Justice Mann gave judgment in the case which was based on an analysis of the Unfair Terms in Consumer Contract Regulations 1999 (the "UTCCR") and relevant case law. We take a look at this ruling in detail and what it means for those within and outside of the letting industry.

Quick recap of the case

Background

Late February last year, The Office of Fair Trading (the "OFT") issued High Court proceedings against Foxtons Limited ("Foxtons") regarding the validity of certain standard terms in Foxtons' letting agreements with landlords. The action was brought on the basis of Regulation 5(1) of the UTCCR (which defines unfair terms as those that have not been individually negotiated, cause significant imbalance in the parties' rights and obligations, and are contrary to the requirement of good faith) and in response to a large number of consumer complaints received by the OFT with regards to Foxtons' terms dealing with commission payments. In bringing the case, the OFT was seeking a declaration from the Court that the relevant terms were unfair with a view to then obtaining an injunction to prevent continued use of those terms by Foxtons.

In April of this year, the Court of Appeal sat to consider the scope of the injunctive relief being sought. At that hearing, the Court ruled in favour of the OFT, allowing it to apply for relief with respect to existing contractual arrangements as well as future ones, in the event it was to win its substantive case in the High Court. In other words, if the relevant terms were deemed unfair, the OFT would be permitted to apply to prevent not only Foxtons' use of the offending terms in its future contractual dealings but also its enforcing these terms in existing contracts. As far as we are aware, Foxtons have not appealed the Court of Appeal's decision on this point.

The hearing at the Court of Appeal did not deal with the substantive issues of the case (namely, whether or not the relevant terms were unfair), and this was dealt with at the High Court before Mr Justice Mann on 10 July 2009.

The offending terms

The terms which formed the subject of the dispute between the OFT and Foxtons purported to entitle Foxtons to:

• charge a renewal commission if a tenant introduced by Foxtons renewed or extended his tenancy, even where Foxtons had not negotiated the renewal or extension, had not otherwise played a part in persuading the tenant to stay, and no longer collect rent or manage the property on behalf of the landlord (the "renewal commission");

• recover a commission from a landlord where that landlord had transferred the property to another and the other landlord renews again, without any intervention from Foxtons (the "third party renewal commission"); and

• charge a sales commission where a landlord sold to a tenant introduced by Foxtons, even though Foxtons neither negotiated nor assisted in the sale (the "sales commission").

New standard terms

Shortly before the hearing at the High Court, Foxtons issued a new set of standard terms removing or amending some of the terms questioned by the OFT. Although Mr Justice Mann was still required to determine the fairness of the old terms (which form a part of existing contracts in place between Foxtons and relevant landlords), he was also asked to rule on the fairness of the new terms.

The new terms amended the way in which renewal commissions were dealt with and no longer included any provisions dealing with sales commissions nor third party renewal commissions. The impetus for the change to a set of new terms seems to have been as a result of discussions and negotiations between Foxtons and the OFT over a 2 year period in the lead up to the case which, as we will see below, ended up making matters worse for Foxtons.

The High Court

At the High Court, Mr Justice Mann considered the offending terms in detail, referring to relevant provisions of the UTCCR. In coming to his decision, he found the decision in The Director General of Fair Trading v First National Bank plc [2002] 1 AC 481 (the "First National Bank case") and the first instance and appeal decisions in Abbey National plc v The Office of Fair Trading [2009] EWCA Civ 116 (the "Bank Charges case") to be helpful in fleshing out the meaning and intention of the protections set out under the UTCCR. We look at his analysis of each of the offending terms in turn below.

The renewal commission

Mr Justice Mann spent some time discussing the renewal commissions set out in Foxtons' agreements, having to consider their use under both the old terms and the new terms.

• The old terms

Mr Justice Mann first considered whether the renewal commission arrangement was a term which could be subjected to a test of fairness. Under Regulation 6(2) of the UTCCR, it is only those terms which are not considered to form a part of the core bargain of an agreement that can be subjected to it. Relying on the Bank Charges case, he explained that in determining whether a term was a part of the core bargain, one had to consider not only whether Foxtons considered this so but if the typical consumer thought that, too. What was also important was whether the term was in "plain intelligible language" as required by Regulation 6(2). Again relying on the Bank Charges case (having to consider not only if "the typical consumer understand[s] the actual wording used in the contract…but also its effect"), Mr Justice Mann stated that certain terms of the renewal commission "were too vague to be classified as plain and intelligible" and "would puzzle even lawyers". On this basis, Mr Justice Mann found the terms could be tested for fairness and were not subject to any exclusions.

The relevant test when determining fairness under the UTCCR is whether "contrary to the requirement of good faith, [the term] causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer". Weighing up Foxtons' and the OFT's arguments on this, Mr Justice Mann concluded (referring to the First National Bank case) that the renewal commission was unfair for a number of reasons. First, "the commission amounts in question are significant, and operate adversely to the client the more time goes on. Commensurate services are not provided as time goes on…[and]…give…rise to the significant imbalance referred to in the legislation". Secondly, he did not feel that the term was adequately brought to the attention of the customer and that a consumer would be surprised by the effect of the clause in relation to renewals and "would not expect important obligations of this nature…to be tucked away in the "small print" only, with no prior flagging, notice or discussion".

Accordingly, he found the renewal commissions to be unfair for the purposes of the UTCCR.

• The new terms

Mr Justice Mann was unable to draw a different conclusion with the new terms which to his mind "make the position worse, that is to say the unfairness is clearer". His primary issue with the new terms was that Foxtons, in trying to incorporate the renewal commission as part of the initial commission structure and as such a part of the core bargain (which as we saw earlier would not be subject to a test of fairness under the UTCCR), means "severely camouflage[ing]" the renewal commission payable by the consumer. That is, "under the old terms there was a reference to renewal commissions which stood some chance of being a flag to the consumer. In the new terms even that flag is not there. The risk of ambush, or time-bombs, or any other similarly graphic surprise metaphor, is even greater and the term more clearly unfair".

The third party renewal commission

Mr Justice Mann was only required to consider the old terms of the third party renewal commission as these were not in the new terms. Having considered the renewal commission, he explains that, "If the renewal commissions for the typical consumer landlords are unfair in relation to his own renewals, then this clause "which deals with an incoming third party landlord paying the renewal commission on a property that was let by the previous landlord, "is a fortiori unfair".

The sales commission

Mr Justice Mann was again only required to rule on the use of this wording in Foxtons' old terms on this provision. In his view, the provisions created an "obvious imbalance", imposing a "potentially large financial liability on the landlord in relation to a transaction in which Foxtons have played no material part". He went further to say that a consumer landlord "would be astonished" by the effects of this clause. He found the sales commission to be "plainly unfair" for the purposes of the UTCCR.

Outcome

The High Court found in favour of the OFT by holding that all of the offending terms were unfair for the purposes of the UTCCR. On its website, the OFT's Chief Executive, John Fingleton, says, "This ruling sends out a clear and unambiguous message that businesses offering services need to ensure unexpected or surprising terms are not hidden away in small print. Contracts need to be written in clear and straightforward language with important provisions, particularly those which may disadvantage consumers as in this case, given prominence and actively brought to people's attention."

The relief to be granted is to be discussed at a further hearing if the parties themselves are unable to agree on it. The OFT's press release regarding the High Court case indicates that it will now seek injunctions preventing the continued use of the terms by Foxtons. It seems clear that Foxtons will abide by this with respect to its future contractual dealings (unless it appeals the decision) having already been amenable to amending its standard terms. Its now apparent loss of revenue streams under its existing contractual arrangements which still have the offending terms is something which will certainly keep those in charge of the financial side of its business awake for nights to come. Significantly, in correspondence presented to the Court, Foxtons suggested that it operated a business model that could not make a profit from the initial letting commission alone (although it failed to back this up with any evidence).

Is this the end of the renewal commission?

It is important to emphasise that what was being tested in this case was not the concept or validity of renewal commissions generally but rather the manner in which Foxtons chose to charge the commissions and present them to its customers in its contractual dealings. The unfairness finding in this case with respect to the renewal commission in particular will not mean that all such existing provisions or the concept of a renewal commission is unfair or void. In fact, in his view, Mr Justice Mann explains that had the renewal commission, for instance, been a term which on its facts was seen to show that the typical customer would know what he was paying for and how much he was paying, his decision could have been different. In the case before him, he did not think it likely that the consumer had such knowledge. Each case and contract will therefore need to be considered on its own facts, and this case does not spell the death of renewal commissions per se but of those presented in the manner in which was brought before the Court in this case.

What does this case mean for you?

Those in the letting agency business may be left feeling a little nervous about their arrangements, given the OFT's voiced intention to enforce compliance throughout the industry wherever similar terms to those of Foxtons are being used. In light of our comments above regarding the nature of the case and the fact that Mr Justice Mann was not ruling on the validity of relevant commission arrangements per se, the OFT may be more limited in what it can actually do. Nevertheless, the case could have implications for very many people within and outside the industry, and many will perhaps be looking at their standard terms more closely to ensure that relevant provisions (and especially commission arrangements) are clearly set out and are adequately brought to the attention of customers.

In his witness statement to the High Court, Foxtons' Chief Operations Officer, Mr Budden, had this prediction: "Although no-one can say for sure at this stage, I suspect that were renewal commission to be ruled unfair in the manner sought by the OFT, there would either be significant upward pressure on the level of commission fee in the market (and hence also on rents) and/or increased pressure on prospective tenants to enter into longer initial tenancies or not to renew shorter tenancies".