If you are fortunate enough to own residential investment property you may well have engaged a local estate agent to find you a tenant. In these circumstances it is important to carefully study the agent’s terms and conditions as there could be some unwelcome surprises.
You would expect to find a provision requiring you to pay a fee to the agent as an agreed percentage of the first year’s annual rent plus VAT (commonly such fees are between 8% and 10% so equating to about all of the first month’s rent) in exchange for the agent marketing the property, finding you a tenant and managing the completion of the tenancy agreement in a professional manner.
However, if you study the terms and conditions carefully you may well find unexpected onerous obligations such as the following:
- Renewal Commission Terms: These allow the agent to recover a further commission from the landlord where the tenant continues to rent the property from the landlord beyond the original term of the tenancy, and where the agent is not asked to provide any additional service in exchange. Such a fee would be payable if the landlord and tenant prepared their own renewal tenancy agreement or if the tenant simply remained in occupation holding over under the original tenancy agreement. If you have a tenant who stays for many years, then you could end up paying the same estate agent a huge aggregate fee.
- Sales Commission Terms: These terms allow the letting agent to charge a commission (usually of around 2% plus VAT of the sale price) where the property is ultimately sold by the landlord to the tenant, even though the letting agent has no involvement in brokering the sale and carries out no services in relation to it. Again, this could be significant sum of money where the house price is high.
- Third Party Renewal Commission Term: These terms allow the agent to recover a commission from the landlord, where they have sold their interest in the property to a third party (and so have no control over and derives no rent from it), in the event that the tenant continues to rent the property from the purchaser beyond the original term of the tenancy and the purchaser does not agree to pay the commission.
The best advice is to carry out a detailed review of the agent’s terms before signing up to them and to seek to strike out any provisions (including those of the types above) that you consider to be unfair and/or to increase the scope of the agent’s renumeration beyond what was originally understood by you. The letting agency market is a competitive one and if you take a strong stance then in many cases you would expect that the agent would be willing to concede to the deletion of these types of provisions in order to have a chance of earning the initial fee.
If you only become aware of the additional payment clauses after you have signed up to the contract, then all is not lost. In 2008 to 2010 the (now defunct) Office of Fair Trading challenged the above types of provisions contained in the standard letting agency contract of the London-based estate agency Foxtons as being in breach of The Unfair Terms in Consumer Contracts Regulations 1999. These Regulations apply to standard form contracts entered into between businesses and consumers and require that the terms of such contracts must be in plain and intelligible language and where they are not, the interpretation most favourable to the consumer will apply or the terms may be found to be unfair and not binding on the consumer.
The ultimate Court Order obtained by the OFT prohibited Foxtons from using sales commission and third-party renewal commission terms in letting contracts (as these terms were unfair and operated to the significant detriment of consumers) and required that where renewal commission terms are used, they must be transparent and clearly brought to the attention of consumers. The liability to pay the renewal commission, the circumstances in which it is payable, and the amount or rate of renewal commission must be clear and ‘actively flagged’ up to consumers. The renewal commission terms should also be written in plain and intelligible language, so that the consumer can understand the nature and extent of their liabilities.
The Order only specifically applied to the Foxtons letting agency contract but after it was made the OFT widely publicised the decision and wrote to various letting agency trade bodies to ask that they advise their members to take account of the findings and to modify their standard letting agency contracts accordingly.
Whether this has widely happened in practice is unclear and we have certainly seen recent examples of letting agency contracts containing sales commission and third-party renewal commission terms.
If you come across these then do refer the letting agent to the Court’s finding in the OFT -v- Foxtons case and request that they be disapplied as the law is on your side in this instance.
This article is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this article may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
