Unfair terms and implied conditions in tenancy agreements

The legislation governing unfair contract terms depends on whether the contract began before or on/after 1 October 2015. The Consumer Rights Act 2015 applies to agreements made on or after that date.

For contracts made before that date, the Unfair Terms in Consumer Contracts Regulations 1999 ('the Regulations') continue to apply thanks to savings provisions in secondary legislation.[1]

The Consumer Rights Act retains the key elements of the definition of an unfair term found in the Regulations and consolidates many aspects of the previous law.

Regardless of the date of the agreement, an unfair term is not binding on a consumer (including a tenant) unless it is exempt from the fairness requirement. This does not prevent a tenant from relying on an unfair term if they choose to do so, and the rest of the contract continues to have effect if possible. The law applies to local authorities and registered providers of social housing, as well as to private landlords.[2]

A term is unfair if it creates a substantial imbalance in the rights and obligations between a trader and a consumer, contrary to the requirements of good faith, to the detriment of the consumer. An unfair term in a tenancy agreement is one that creates such an imbalance between a landlord and a tenant, to the tenant's detriment.

The fairness of a term can only be assessed in the context of all the circumstances surrounding the agreement.[3] A form of words which is considered acceptable in one agreement is not necessarily fair in another. Only a court can rule on what is fair or unfair in a particular case.

The Unfair Terms in Consumer Contracts Regulations 1999 give the framework for assessing whether or not a tenancy term is fair. Certain terms are exempt from the fairness requirement.

All terms of a written tenancy agreement must be transparent - this means they must be in plain and intelligible language. Any written term should be interpreted in a way that is favourable to the tenant where its meaning is not clear.[4]

Terms listed in the Regulations as potentially unfair

The Regulations contains an indicative and non-exhaustive list of contractual terms which may be regarded as unfair. The listed terms refer to consumers and sellers/suppliers - in the context of tenancy agreements the consumer is the tenant and the supplier is the landlord. Included in the list are terms which:[5]

• oblige the consumer to fulfil their obligations under a contract where the supplier does not perform theirs

• enable the seller to unilaterally change the terms of the contract without a valid reason specified in the contract

• require the consumer to pay a disproportionately high sum in compensation if they fail to fulfil their obligations

• exclude or limit the consumer's rights to take legal action or exercise any other legal remedy in respect of the contract

Exempt terms

Core terms of the tenancy (those terms setting out the rent, the details of the property, and the length of the tenancy), do not have to be fair as long as they are transparent - this means that they need to be in plain and intelligible language.[6] They can, however, be challenged on aspects that do not relate to issues at the core of the contract. So, for example, the term setting the rent cannot be unfair simply because it sets a rent higher than other landlords charge, but it can be unfair because of the mode and timing of rent payment imposed.

The Regulations apply only to standard terms, not to terms that have been individually negotiated.[7] They also do not apply to a term in a tenancy agreement the content of which is prescribed by legislation.[8]

With effect from 1 October 2015, the Consumer Rights Act 2015 replaced the Unfair Terms in Consumer Contracts Regulations 1999 to provide a new legislative framework for unfair contract terms. The provisions of the Consumer Rights Act apply to all tenancies beginning on or after 1 October 2015. The provisions apply also when a tenancy that started before that date was renewed on or after it, including when it became a statutory periodic tenancy at the end of the original fixed-term period.[9]

Under the Consumer Rights Act, the definition of an unfair term remains the same as under the Unfair Terms in Consumer Contracts Regulations 1999.

Other provisions affecting tenancy agreements that continue to apply are that:[10]

• written terms must be transparent (in plain, intelligible language and legible)

• a term that may have more than one meaning must be interpreted in the way most favourable to the tenant

• the rest of a tenancy agreement can continue to have effect (where possible) despite the presence of an unfair term

Extension to the scope of unfair terms in the Consumer Rights Act 2015

Although the principle of assessing a term for fairness remains broadly the same as under the Unfair Terms in Consumer Contracts Regulations 1999, the Consumer Rights Act makes some changes, including the requirement that:[11]

• an individually negotiated as well as a standard term must be fair

• in order to be exempt from the need to be fair, a core term of a tenancy must not only be transparent, it must also be prominent (so that an average consumer would be aware of it)

• a court must consider the fairness of a contract term even if the parties to a case do not raise it as an issue

• the fairness requirement is extended to notices – any form of notification, including verbal announcements, that relate to the relationship between the landlord and tenant, or attempt to limit the liability of the landlord.

Schedule 2 to the Consumer Rights Act 2015 provides an indicative list (the grey list) of contract terms that may, in some circumstances, be considered unfair. They are in many respects similar to the indicative list provided in the Unfair Terms in Consumer Contracts Regulations 1999 that apply to pre-1 October 2015 contracts.

Examples of tenancy terms that are potentially unfair are those which:

• require the payment of rent even if the property becomes uninhabitable, for example destroyed by fire

• force the tenant to pay the landlord's costs in a court case which the landlord has lost and the tenant has won

• unreasonably restrict the tenant's right to assign

• attempt to limit the tenant's right to serve a notice to quit in accordance with the Protection from Eviction Act 1977

• give the landlord excessive rights of entry for an illegitimate reason

• require the tenant to give notice if they want to leave on the last day of a fixed-term tenancy, as it is the common law position[12] that tenants are able to leave on the last day of a fixed-term tenancy without giving notice. The validity of such a clause and whether it is unfair remains to be tested in the courts

• contradict other terms in the agreement - in one case a term purportedly giving a housing association the power to unilaterally alter tenancy agreements that contradicted a preceding clause stating that any unilateral changes must be agreed between the tenant and the landlord was held to be unfair.[13]

Guidance

The guidance most relevant for tenancy agreements made on or after 1 October 2015 is:[14]

• Unfair contract terms guidance (this guidance is available in short, expanded or long form, and in its long form contains Appendix A: historic examples of fair and unfair terms)

• Consumer protection law guidance for lettings professionals

Both the Unfair Terms in Consumer Contracts Regulations 1999 and the related government guidance were made to implement Council Directive 93/13/EEC on unfair terms in consumer contracts in UK law. The European Court of Justice (ECJ) provided a preliminary ruling on the true interpretation of the Directive in a case concerning unfair penalty clauses for unpaid rent which did not reflect the actual loss to the landlord. The ECJ established the following principles:[15]

• the Directive, and therefore the UK Regulations, apply to a residential tenancy agreement between a landlord acting in the course of a trade, business or profession and a residential tenant. This will include lettings by non professional landlords who use a professional letting agency and standard tenancy agreements

• the court has a duty to consider any contract clause which is disputed of its own motion, without the parties explicitly requesting it

• the court must disapply/annul any unfair term in a contract and cannot change the term to make it fair.

In a case where neither landlord nor tenant would have entered into a tenancy agreement had they not been informed by housing benefit that it would pay 90 per cent of the rent, it was discussed whether the agreement had an implied condition that the contract would end if the housing benefit was not payable. Such an implied condition would only occur if the effect of the new state of facts (for example the benefit not being paid) was such that performance of the agreement was impossible, or the agreement was different in kind from the agreement in the original state of facts. The Court of Appeal held that a condition should be implied into the contract that if the housing benefit was not payable then the contract should come to an end.[16]

The Consumer Rights Act 2015 applies where there is an agreement made between a consumer and trader. The Act and accompanying guidance do not refer to licence agreements, but if there is a consumer and trader relationship the Act will apply.

A consumer is defined as an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession. [17] Most licensees would be classed as consumers. Some licensees would not be consumers, for example service occupiers whose accommodation terms are dictated by their employment contract.

A trader is defined as a person acting for purposes relating to that person's trade, business, craft or profession. [18] It will depend on the circumstances in each case as to whether a landlord meets this definition. Most resident landlords letting out rooms in their own home would not be considered to be acting in the course of a trade or business.

Enforcement of a licensee's rights under the Consumer Rights Act 2015 might be difficult as most licensees have limited security of tenure and could risk eviction.