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Unfair contract terms

Application to residential tenancies

London Borough of Newham v Khatun
[2004] EWCA Civ 55

The Unfair Contract Terms Act 1977 does not apply to tenancy agreements and other agreements relating to land (Electricity Supply Nominees v IAH Group [1993] 3 All ER 372).

There has been some debate as to whether or not the Unfair Terms in Consumer Contract Regulations 1999, which relate to the seller of goods and supplier of services, apply to contracts relating to land. The OFT has been of the view that the regulations do apply and has been busy taking steps to ensure that various residential tenancy agreements comply with them (see below). This case confirms that the OFT is correct.

Homeless persons who rejected particular accommodation offered to them by the defendant housing authority brought the claim. There were a number of complaints but one of them was that the tenancy agreement in respect of the accommodation offered did not comply with the regulations. The OFT was made an interested party and took part in the proceedings. Specifically the court held that:
  • The 1999 Regulations and the Council Directive 93/13/EEC apply to contracts relating to land, including tenancy agreements. A broad, purposive method of interpretation was used in coming to this conclusion.
  • The regulations and the Directive apply to public authorities notwithstanding that the activities they are engaging in are carried out in discharge of a statutory obligation to provide housing although this factor might well be relevant when considering the question of fairness.
  • The defendant as landlord was a supplier
  • A tenant, who enters into the tenancy agreement for the purpose other than his trade, business or profession, is a consumer.

OFT Guidance

Guidance on Unfair Terms in Tenancy Agreements

The Office of Fair Trading has issued new guidance on how the Unfair Terms in Consumer Contracts Regulations apply to tenancy contracts, in order to help landlords provide clear and fair contract terms to their tenants. It is a revision of earlier guidance updated to reflect enforcement action taken by the OFT, court judgments and recent experience in dealing with tenancy contract complaints.

The guidance outlines why some standard contract terms used in tenancy agreements are considered to be potentially unfair and includes examples of terms considered to be unfair and possible ways of revising them. Examples of unfair terms include those that:
  • exclude or limit the landlord's liability, for example by transferring the landlord's legal obligations to the tenant
  • impose potentially excessive penalties on tenants for failure to meet the terms of the contract e.g. by charging excessive rates of interest on late payments of rent
  • enable the landlord to vary the terms of the contract, to impose new rules on the tenant or increase the rent at short notice.

Reform

Law Commission Report 292: Unfair Terms in Contracts

The Law Commission and the Scottish Law Commission have published a joint report and draft bill on unfair contract terms. The idea is to clarify and rationalise the law which is currently contained in two different but overlapping pieces of legislation: the Unfair Contract Terms Act 1977 and Unfair Terms in Consumer Contracts Regulations 1999. The draft bill seeks to rewrite the law into a single, clear statute and makes some amendments to improve consumer protection. In particular it will cover some negotiated clauses as well as standard clauses; and will give protection to small businesses (firms with nine or fewer staff) in certain circumstances.

There will be particular exemptions in relation to contract terms that relate to the creation, transfer, variation or termination of an interest in land in certain circumstances, i.e. (a) exclusion of business liability for negligence; (b) exclusion of liability for breach of a business contract where one deals on written standard terms of the other and (c) non-negotiated terms in small business contracts. In each of these cases the provisions of the proposed Act will not apply. (See Schedule 3, para 4).

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