Peabody Trust v Reeve

This is a reserved Judgment in a test case relating to the ability of the Claimant unilaterally to alter the terms of its tenancies for approximately 10,000 tenants. The Defendant is a representative defendant and the Claimant has very properly agreed to pay his costs for taking part in this test case.

The Claimant is a registered social landlord and charity providing low cost residential accommodation. Although the Defendant’s Tenancy Agreement is different in some respects from the Claimant’s current standard form, the differences are not material for present purposes.

Clause 5 of the “General Terms” of the Claimant’s standard form of tenancy agreement reads as follows:-

(a) With the exception of any changes in Rent this Agreement may only be altered by the agreement in writing of both the Tenant and the Trust.

The two questions that arise in this test case are whether clause 5 on its true construction gives the Claimant the ability to effect unilateral variations in the terms of the Tenancy Agreement using the section 103 procedure incorporated by reference, and whether, if on the true interpretation of clause 5, the Claimant has such a right, the clause is “not binding” on the tenant by reason of Regulation 8 of the Unfair Terms in Consumer Contracts Regulations 1999 (“the Regulations”).

Putting it very concisely for present purposes, registered social landlords such as the Claimant were, prior to the Housing Act 1988, in a position analogous to local authorities in providing “secure” tenancies. From 15 January 1989, registered social landlords were to some extent treated more like private landlords and lost some of the statutory benefits that local authorities continued to enjoy.

One statutory benefit which local authorities continued to enjoy but which registered social landlords ceased to enjoy was the ability to vary tenancy agreements in accordance with the notice procedure laid down by s.103 of the Housing Act 1985. Under this procedure a local authority can (except in certain specified cases) give preliminary notice in the case of a secure tenancy which is a periodic tenancy of a proposed variation and is obliged to consider the tenant’s comments. After considering the comments, the local authority can give a notice varying the tenancy, but the tenant can in turn give notice to quit.

Mr Bastin, Counsel for the Claimant, candidly accepts in his written argument that the wording of the two sub-clauses of clause 5 appear to be “directly contradictory”.

However, Mr Bastin relies on the surrounding circumstances when the Tenancy Agreement was entered into. The Claimant is a registered social landlord and charity which has numerous properties and tenants. The Agreed Schedule of Facts includes the fact that the Claimant is a registered social landlord and that it has approximately 10,000 assured tenants who will be affected by the outcome of the proceeding.

Mr Bastin further asserts that the Claimant does not currently charge for services that it provides and as a result loses approximately £1 million per year as a result. This is not in evidence but I will assume it to be correct for present purposes.

As against that, clause 3 of the Claimant’s “General Terms” enables the Claimant to give the tenant one month’s notice in writing of an increase in rent and, while the tenant has a right to refer the notice to Rent Assessment Committee, that will result in a “market rent” being determined. I would assume that the market rent could reflect the value of services rendered, but I do not base my judgment on that. The question is complicated by regulation and guidance from the Housing Corporation and there may in practice be restraints on what rent is charged.

The important point is that the Claimant’s standard form Tenancy Agreement does not require the landlord to provide such services: as Mr Bastin on behalf of the Claimant himself pointed out, the Claimant would be entitled to cease to provide the services unless they were paid for. The Claimant can therefore require such services to be paid for without imposing a unilateral variation in the tenancy agreement.

On the other hand, it would undoubtedly be much more convenient for the Claimant to be able to set out an express and detailed means of calculating and recovering service charges in the tenancy agreement and that is one of the matters it would propose to do by variation, if it were entitled unilaterally to vary the standard form of tenancy agreement.

The strongest point that Mr Bastin appears to have is the contention that clause 5 must be interpreted to take into account the fact that, in a situation such as the present, a registered social landlord such as the Claimant, with such a large number of properties and tenants, has a “need” to have a unilateral method of varying tenancy agreements, otherwise its housing stock would become impossible to manage.

This submission is based on a passage in the judgment of Rix LJ in The Queen on the Application of Kilby v Basildon District Council [2007] EWCA Civ 479. That case related to a local authority which had the statutory power of unilateral variation in section 103 of the Housing Act 1985, which clause 5(b) of the Claimant’s standard form Tenancy Agreement seeks to incorporate by reference.

The actual question in that case was whether a local authority could lawfully by contract bind itself not to exercise its unilateral power of variation without the approval of tenants’ representatives. The Court of Appeal held that the local authority could not fetter its right in that way.

The reason, according to Rix LJ (with whose judgment Moses LJ agreed) was that the local authority had a statutory power of management under section 21 of the Housing Act 1985 which was exercisable “for the single purpose of regulating secure periodic tenancies” and that a contractual clause preventing it exercising its right of unilateral variation was “simply incompatible with the Council’s statutory right and power to vary their tenancies unilaterally” (paragraph 32). Buxton LJ gave a concurring judgment with analogous reasoning.

Whilst the above sets out the ratio decidendi or “holding” of the Court of Appeal which is binding on me, Mr Bastin relies on a dictum at paragraph 4 of Rix LJ's judgment which reads as follows:-

“The need for such a unilateral method of varying tenancies can be readily acknowledged. A local authority may have thousands of housing units. Circumstances, or changes of policy, may require it to be able to vary the terms of its tenancy. If such variation had to be sought severally and bilaterally, the local authority’s housing stock could become impossible to manage, in breach of its duty under section 21.”

I describe this passage as a “dictum” because it forms no part of the necessary reasoning of the Court of Appeal’s decision. It merely provides a rationale for the statutory provision being considered. Moreover, it forms no part of Buxton LJ’s reasoning, which gives a different (although not inconsistent) rationale for the relevant legislative provision.

Mr Bastin asserts that the Claimant’s housing stock, only about 2000 properties fewer than that of the Council in that case (see paragraph 8), would become “impossible to manage” without a unilateral power of variation.

In my judgment, the dictum of Rix LJ at paragraph 4 of his judgment needs to be considered with caution outside of its original context. The decision in the case was that the local authority could not lawfully fetter an important statutory discretion granted by Parliament in aid of its power and, according to Rix LJ, “duty” under statute, to manage its housing stock. In that context, the quoted passage from paragraph 4 is merely a rationalisation as to why the power of variation was given by statute to local authorities. There does not appear to have been any evidence in that case to show that without such a power the management of the Council’s housing stock would in fact become impossible to manage and Rix LJ simply states that without such a power the housing stock “could” become impossible to manage. Rix LJ, in my judgment, points out nothing more than that there would have been a risk to the fulfilment of a statutory power and duty had the local authority been able to fetter its statutory power.

In this connection, two further points can be made. Firstly, under the current statutory regime, registered social landlords have been excluded from having the statutory power of variation they used to have under section 103 of the Housing Act 1985. Accordingly, Parliament does not appear to have thought it any longer appropriate for registered social landlords, as opposed to local authorities, to have such a statutory power as part of their ability to manage their housing stock. If Rix LJ’s rationalisation is correct, this could make a registered social landlord’s housing stock impossible to manage, but that is a risk Parliament has chosen to take. Secondly, a private landlord may also have a large number of properties and yet has never, as far as I am aware, had a statutory power such as section 103.

Accordingly, I am not convinced that it is actually impossible to manage 10,000 or so properties without a unilateral method of varying the terms of the tenancies. On the other hand, I take into account as part of the surrounding circumstances the consideration advanced by Rix LJ in the case of a local authority and applicable here by analogy that a lack of a statutory power of unilateral variation could make the housing stock of a registered social landlord unmanageable. However, I also note that Parliament chose to take this precise risk in excluding registered social landlords from this statutory power.

In construing clause 5 therefore I take the approach that a right of unilateral variation would be very useful to the Claimant and would avoid a the risk of its housing stock becoming unmanageable, but also consider that this is a risk which the legislature has chosen to allow registered social landlords to run, presumably on the basis that they may well be able to manage without such as provision.

I return therefore to the candid but necessary acceptance by Mr Bastin on behalf of the Claimant that the two parts of clause 5 appear to be “contradictory”. He submits that the (b) part of the clause is clear and means what it says. Were it to stand on its own, that would undoubtedly be right.

Mr Bastin then accepts that the same argument can be “turned around”, by saying that the parties meant what they said in (a). That is also correct.

Mr Bastin then submits that (b) should prevail because the tenants signing up to the agreement “… were agreeing to it notwithstanding its potential impact upon them …”. I am afraid I cannot follow Mr Bastin into this further step.

In terms of a hypothetical tenant signing up to this agreement, sub-clause (a) is clear and easy to understand and comes first. With the exception of changes to Rent, the Tenancy Agreement can only be altered in writing with the agreement of both parties. On the other hand, sub-clause (b) would be meaningless to a tenant without seeing the provisions of section 103 of the Housing Act 1985, which Mr. Bastin concedes were not appended to the Tenancy Agreement. Even if I were to assume that the hypothetical tenant could or should have obtained a copy of and read section 103 of the Housing Act 1985, and that he fully understood it, he would then have been signing up to flatly contradictory and apparently irreconcilable provisions. In that situation, I cannot agree that a tenant must be taken to be agreeing to allow a unilateral variation by the Claimant.

Mr Bastin argues that the proposed change in relation to service charges would not prejudice tenants: “… why should those who receive services not pay for them?” However, the clause in question which Mr Bastin on behalf of the Claimant seeks to rely on is not limited to the question of paying for services actually rendered. It is an extremely wide right of unilateral variation. I would take considerable persuasion that any tenant would agree or should be taken objectively to agree to such a wide clause without a clear and unambiguous term to that effect.

The clearest answer to the conflicting sub-clauses of clause 5 seems to lie in Regulation 7 of the Regulations:-

The Court of Appealin Regina (Khatun and others) v Newham London Borough Council [2005] QB 37 held that the Regulations apply to contracts affecting land. Amongst the material relied upon was the Advocate General’s opinion in Freiburger Kommunalbauten GmbH Baugesellschaft & Co KG v Ulrike Hofstetter (Case C-237/02). At the time the Court of Appeal gave judgment, the judgment of the European Court of Justice was still awaited: see paragraph 72. That judgment is now available and in it the ECJ plainly assumes that directive 93/13/EEC of 5 April 1993 on unfair terms and consumer contracts, which the Regulations implement, applies to contracts in respect of land.

Accordingly, given that there is “doubt” as to the meaning of clause 5 as a whole, and, in the light of the contradictory terms of the sub-clauses, as to the meaning of the sub-clauses themselves, I am obliged in terms of Regulation 7(2) to adopt the interpretation most favourable to the consumer, in other words the tenant in this case. That interpretation must in my judgment be that there can be no variation of the Tenancy Agreement without the agreement in writing of both parties.

This rule in the Regulation appears to be analogous to the domestic English law principle of contra proferentem which is normally to the effect that in the case of ambiguity a document is construed against the party putting it forward. As Lord Mustill observed in the Privy Council decision in Tam Wing Chuen and another v Bank of Credit & Commerce Hong Kong Limited (in liq) [1996] 2 BCLC 69 at page 77, the cases show that the principle “… can have some weight, even today”.

The present case is not the usual case of ambiguity, where one expression may have two different meanings, but a very unusual one of two flatly contradictory provisions immediately next to each other. Nevertheless, it seems to me that if there is no compelling reason to choose one sub-clause over the other, the contra proferentem principle does enable the court to break the deadlock and apply the provision less favourable to the party putting the terms forward. This would mean that in cases not covered by the Regulations or its predecessor, the principles of English domestic law achieve the same result.

A different route to the same result contended for by Miss Bhaloo lies in the concept of “repugnancy”. The relevant principle of construction is that where an earlier provision cannot be reconciled with a later one, the earlier provision will prevail: per Lord Wrenbury in Forbes v Git [1922] 1 AC 256 (PC) at 259. In that case, a contract provided for work to be done in consideration of $3,000 to be paid in three instalments and later in the contract provided for a balancing payment in one direction or the other depending on whether the value of the materials and labour turned out to be more or less than $3,000. These provisions were held to be reconcilable on the basis that the operation of the first provision was qualified by the second (at p.260).

In the present case I consider that Miss Bhaloo is right in contending that 5(a) and 5(b) cannot be reconciled. Accordingly, if it were necessary to apply this approach, I would hold that clause 5(a) as the earlier provision must prevail over 5(b).

I have to add that this solution seems to me to be one of last resort only. It is not clear why the two sub-clauses in the present case come in the order in which they do. It may be that they could just as easily have appeared in the reverse order. That would have led to the opposite solution if this were the only applicable test. It is hardly satisfactory for the true agreement of the parties to be ascertained on grounds which may be arbitrary and I suspect it is only in rare cases that this approach will be applied.

As one stage of the argument I threw out the possibility as to whether it might be possible to try to reconcile the sub-clauses by viewing 5(a) as being a general provision and 5(b) as being specific, with the result that the specific provision might take priority over the more general provision. This approach would be in line with the maxim generalia specialibus non derogant.Mr. Bastin was content to adopt this approach.

However, Miss Bhaloo observed, correctly in my view, that in substance the two sub-clauses are dealing with exactly the same subject-matter and it cannot be fairly said that clause 5(b) merely qualifies 5(a) by reference to a particular situation or situations. In view of that, the general/specific dichotomy is not appropriate as a tool of interpretation in this case.

Given my conclusion that clause 5 does not give the Claimant a right of unilateral variation, it is not strictly necessary to decide issue 2, namely whether a right of unilateral variation in terms of clause 5(b) is to be held to be “not binding” on the tenant by reason of Regulation 8 of the Regulations on the grounds that it is an “unfair term”.

However, since the point has been fully argued, and in case I am wrong on the first issue, I will go on to consider whether or not clause 5(b) passes this test.

Before dealing with the detail, it may be helpful for me to mention that since, in the case of such Regulations, the European Directive will be a prime source for interpretation, it should always be provided in the Bundle of Authorities sent to the Court. Likewise, relevant decisions of the European Court of Justice, and where appropriate, opinions of the Advocate General, potentially decisive sources of interpretation, should also be provided, in addition to any binding or persuasive English case-law in point.

Regulation 5 applies where the following elements exist:-

There is no difficulty in the present case with the standard form Tenancy Agreement falling within the first criterion: it is not suggested that it has been individually negotiated in any case.

The notion of “contrary to the requirement of good faith” does not require dishonesty or anything or that sort: Director General of Fair Trading v First National Bank plc [2002] 1 AC 481 (HL), a decision which dealt with the predecessor Regulations. Lord Bingham, giving the leading speech in the House of Lords stated at paragraph 17:-

“The requirement of good faith in this context is one of fair and open dealing. Openness requires that the term 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 list in Schedule 2 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.”

There is no doubt that a unilateral right of variation in favour of a landlord causes a “significant imbalance” in the parties’ rights and obligations to the detriment of the tenant. The landlord can impose material changes but the tenant cannot. The tenant’s only right is to walk away from the tenancy by giving notice to quit under the procedure set out in section 103 of the Housing Act 1985. However, in the case of relatively low cost housing operated by a registered social landlord, this is unrealistic. The tenant will typically have a strong necessity, will be of relatively limited means, may well lack experience and familiarity with contractual terms and will have a very weak bargaining position.

Mr Bastin’s principal argument on behalf of the Claimant is that the present situation is covered precisely by a comparison of Schedule 2, which contains “Indicative and non-exhaustive list of terms which may be regarded as unfair”, which by subparagraph 1(j) mentions as a potentially unfair term, one which has the object or effect of “enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract”, balanced by Schedule 2, paragraph 2(b) which states:-

“Paragraph 1(j) is also without hindrance to terms under which a seller or supplier reserves the right to alter unilaterally the conditions of a contract of indeterminate duration, provided that he is required to inform the consumer with reasonable notice and that the consumer is free to dissolve the contract.”

The standard form tenancy in this case is a “contract of indeterminate duration” and Mr Bastin relies on the combination of these two provisions as showing an indication that clause 5(b) is fair.

However, with respect to his argument, the provisions that he points to do not provide any indication as to fairness in one direction or the other. It is clear from the provisions themselves and it is spelt out by the European Court of Justice in Freiburger v Hofstetter (Case C-237/02 – full citation above) in relation to the equivalent provisions in the Directive that:-

“The Annex to which Article 3(3) of the Directive refers only contains an indicative and non-exhaustive list of terms which may be regarded as unfair. A term appearing in the list need not necessarily be considered unfair and conversely a term which does not appear in the list may nonetheless be regarded as unfair … As to the question whether a particular term in a contract is, or is not, unfair, Article 4 of the Directive provides that the answer should be reached taking into account the nature of the goods or services from which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract. It should be pointed out in that respect that the consequences of the term under the law applicable to the contract must also be taken into account. This requires that consideration be given to the national law.” (paragraphs 20 and 21).

It follows from the judgment of the European Court of Justice that even if Mr Bastin is correct in locating the present provision both within Schedule 2, paragraph 1(j) as a typically unfair provision but yet one which is not to be regarded as typically unfair by reason of Schedule 2, paragraph 2(b), this takes the matter no further forward and is of no assistance to him.

Looking at “all the circumstances attending the conclusion of the contract”, as I am directed to do by the ECJ (para 21), I have no doubt, within the terms of Regulation 5(1), that the unilateral variation provision causes a significant imbalance in the party’s rights and obligations arising under the contract, to the detriment of the consumer. There is no doubt that the contractual term is not individually negotiated. The only remaining question therefore is whether the term is “contrary to the requirement of good faith”.

It seems to me that in the present case, setting out two entirely contradictory clauses and then claiming to rely on one of them, in particular when it is the more obscure clause, must in any event be contrary to any concept of “fair and open dealing” as mentioned by Lord Bingham in Director General of Fair Trading v First National Bank, referred to above. As Lord Bingham pointed out, “Openness requires that the term should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps.”

I do not suggest for a moment that the Claimant has deliberately tried to take advantage of any tenant, but it certainly seems to me that if their interpretation of clause 5 were correct, they would “unconsciously” be taking “advantage of a consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position …”, as again set out by Lord Bingham in the case cited.

Moreover, it seems to me that even if clause 5(b) stood by itself, it is such a sweeping and one-sided provision, that even if it had been clearly and unambiguously set out and explained, I doubt whether it could be held to be fair in terms of the criteria set out in the Regulations.

Although the Court is in no sense bound by the guidance provided by the Office of Fair Trading (OFT 356 “Guidance on unfair terms in tenancy agreements”), to which Miss Bhaloo drew my attention, that guidance does give landlords helpful commonsense indications of what is likely to be considered to be fair and should be carefully taken into account when drafting a variation clause in a tenancy agreement.

For example, the OFT must be right in saying (at para 3.89) that a term is likely to be objectionable if it “… gives the landlord a broad discretion that could be used to impose new restrictions, penalties or burdens unexpectedly on the tenant.” By contrast, a term allowing for variations is less likely to be thought unfair if “its effect is narrowed, so that it can be used to vary terms to reflect changes in the law, for example, rather than be used to change the balance of advantage under the contract…” (at para 3.92).

Mr. Bastin relies on the status of the Claimant as a registered social landlord and charity and its being regulated by the Housing Corporation to submit that it can be trusted only to impose reasonable and proper variations. While such status is a factor I can take into account as part of the relevant circumstances when the tenancy agreement was concluded, I do not think it is sufficient to make it fair for the Claimant as landlord to have almost carte blanche in the field of variations, apart from the areas of rent and statutory protection, so as to provide in effect that the terms of the tenancy agreement will be whatever the Claimant says they are to be from time to time.

Once again in this context, Mr Bastin relies heavily on the tenants’ ability, upon being given notice of a proposed variation, to walk away from the contract. For reasons I have already mentioned, I regard that right as being illusory in this type of case. The consumer does not have a real choice.

It is important also in relation to potential variations to appreciate that the unilateral variation clause in this case appears in the context of a detailed tenancy agreement which already makes considerable provision for future events. Thus there are already specific clauses dealing with nuisance, harassment, noise, animals, improvements, internal decoration, damage, disrepair, access, repair liabilities, gardens and patios, sub-letting and assignment, changes in residents, car parking and a number of other matters. I cannot accept that on the facts of this case the Claimant is left in an impossible position without a sweeping variation clause.

I will refer to one specific example, because it formed the subject matter of a certain amount of debate during the hearing. Miss Bhaloo for the Defendant mentioned the hypothetical case of an old lady who had lived for many years in her property with a cat and the Claimant decides on a variation barring cats. As Miss Bhaloo pointed out, such a unilateral change would force the old lady to either lose her companion or her home. Mr Bastin suggested that a tenant in this type of situation would be protected by the tenant’s express or implied right of peaceful occupation, which in fact in the Claimant’s standard form is expressly set out in paragraph B2 of the “General Terms” of the Conditions of Tenancy. I am not at all convinced by that suggestion and in any event it would not be fair to leave a tenant in that situation to the uncertainties of a legal dispute with her home at stake.

I also raised with Counsel the possibility that any new term imposed by unilateral variation would itself be subject to the test of fairness under the Regulations and whether that might make the unilateral variation term less unfair. Mr. Bastin was willing to adopt this argument but Miss Bhaloo forcefully and persuasively pointed out on behalf of the tenant that the Regulations are meant to protect consumers in an immediate sense rather than just give them a right to future litigation. I do not consider that the possibility of a future challenge to a future variation is sufficient, either by itself or together with the other factors considered here, to make the present sweeping variation clause fair.

On the subject of provisions relating to animals, paragraph C7 of the “General Terms” in the Claimant’s standard form Conditions of Tenancy already makes provisions in respect of dogs and cats and specifically allows a cat to be kept but requires it to be kept in proper care and control and not to become a nuisance to other residents. Accordingly, if one envisages a point at which the old lady comes to her property and agrees to fair and balanced terms in relation to the cat of the type set out in the tenancy agreement, one can easily see that a unilateral variation clause in the type of wide terms contended for by the Claimant could lead to hardship in the future.

I cannot myself think that it can be fair to give a registered social landlord, which does not operate in the same statutory context or with the same statutory powers and duties as a local authority, the ability to change almost any term of the contract to the prejudice of the tenant. It seems to me that any variation clause, to pass the test in the Regulations, would have to take full and proper account of the factors set out in the guidelines issued by the OFT, which provide a commonsense guide to the criteria set out in the Regulations.

I conclude therefore that:

the Claimant’s standard form of Tenancy Agreement does not provide for unilateral variation in terms of clause 5(b) but provides in terms of clause 5(a) that, with the exception of any changes in Rent, the Tenancy Agreement may only be altered by agreement in writing of both the Tenant and the Claimant;

if the Tenancy Agreement had successfully made a provision in terms of clause 5(b) allowing for unilateral variation by notice incorporating the provisions of section 103 of the Housing Act 1985, such a term would not be binding on a tenant pursuant to Regulation 8 of the Unfair Terms in Consumer Contracts Regulations 1999, on the grounds that within the terms of Regulation 5(1) it would be a contractual term which had not been individually negotiated and, contrary to the requirement of good faith, caused a significant imbalance in the party’s rights and obligations, arising under the contract, to the detriment of the Tenant as consumer;

to satisfy the requirements of the Regulations, any such unilateral variation clause will need at a minimum to take full and proper account of the commonsense guidelines set out by the Office of Fair Trading for tenancy agreements.