21 July, 2009
Thousands of the 1.15 million buy-to-let landlords in Britain are potentially in line to reclaim considerable amounts of money from letting agents after a landmark ruling from the High Court on 10 July 2009.
It was held by Mr Justice Mann, who found in favour of the Office of Fair Trading (OFT) that all of the practices were unfair, that leasing agreements made by Foxtons, who operate predominantly in London, unfairly overcharged commission to landlords. The Judge described these arrangements as representing 'traps' and 'time bombs' for landlords.
The OFT commenced proceedings in the High Court against Foxtons in February 2008 in relation to both previous terms used in letting agreements and also to recently applied terms. The contracts charged landlords 11 per cent commission when a tenant continued to occupy the property for longer than the initial term of the lease (typically for one year) even if Foxtons plays no part in persuading the tenant to stay and did not collect the rent or manage the property, and an initial 2.5 per cent commission payment (a full estate agent's commission) if a tenant agreed to buy the property from the owner. The contracts also required landlords to pay commission to Foxtons even after the property had been sold.
Mr Justice Mann ruled that these terms were not fair because they disadvantaged customers and were not prominently disclosed to them. The Judge held that such important terms must be flagged prominently not just in the contract, but also in any sales literature and processes. He said a typical consumer would be unlikely to read standard terms with a great degree of attention and would not expect important obligations to be tucked away in the small print and not specifically brought to their attention. He also found that Foxtons had used language in its contracts which is not 'plain and intelligible'.
On the use of a term providing for sales commission to be payable on the sale of a property to a tenant, Mr Justice Mann said consumers would not merely be surprised but 'astonished' by the potentially large financial liability to Foxtons in relation to a transaction in which Foxtons played no material part.
The OFT will now ask the High Court to grant injunctions to prevent the continued use of these terms in agreements.
As a result of this court ruling, landlords across the country can now issue proceedings to recover overpaid charges for up to the past 14 years of existing agreements with lettings agents.
To put this in context, a landlord renting out a typical two-bedroom property costing around £15,000 per year may have paid a typical letting agent around £1,650 in annual commission. Over the maximum 14 year period which can be claimed for, this would entitle the landlord to reclaim approximately £23,100.
With Britain having around 1.15 million buy-to-let landlords and with many of the 15,000 other letting agents operating similar agreements to that of Foxtons, the High Court's ruling could give rise to total claims across the sector of £26 million.
Private landlords who are in existing letting agreements with agents who charge similar renewal commissions may have a strong prospect of recovering these amounts from the letting agent. It is important to note however, that the court ruled that the terms were not fair because they disadvantaged the customer and because they were not properly disclosed. This means therefore that it is still possible for letting agents to charge renewal commissions, provided that they are prominently laid out in the agreement.