Unfair contract terms
Extension of Leases; Covenants
Good Faith - Unfair Contract Terms
 EWCA Civ 2284
The Unfair Terms in Consumer Contracts Regulations 1999 reg 4(2), which disapplied the Regulations in respect of contractual terms that reflected "mandatory statutory or regulatory provisions" applied only to terms whose content was prescribed by the provision in question. It did not apply to terms in an extended lease which the parties had been obliged to include by the mechanism in the Leasehold Reform, Housing and Urban Development Act 1993 s57(1), but whose content they had agreed between themselves.
The property was the lower maisonette in a block of two. The original lease had been granted in 1978 for a term of 125 years. In 2012, the then lessee obtained an extension of the lease pursuant to the Leasehold Reform, Housing and Urban Development Act 1993. The 2012 lease was expressed to be made on the same terms and covenants as the original, and sch 1 para 4 of the 1978 lease contained a covenant by the lessee not to sub-let. Although there was a corresponding term in the lease of the upper maisonette, the intention being that both maisonettes would be owner-occupied, the upper maisonette had been let to a to a succession of short-term tenants. The instant lessees became the registered proprietors of the lease in 2013, and in 2015 they sub-let the lower maisonette. The lessor applied for a determination that, by doing so, they had breached the covenant in sch 1 para 4.
The lessees argued that it was unfair for them to be held to the covenant when the corresponding term relating to the upstairs maisonette had never been enforced. They argued that:
- Regulation 4(2)(a) was not triggered because the covenant did not arise from mandatory, statutory provisions;
- The covenant caused a significant imbalance; and
- There was a lack of good faith in that the lessor had failed to set up the contemplated scheme of owner-occupation for both maisonettes, and there was no mechanism by which the lessees of the lower maisonette could enforce the owner-occupation term in respect of the upper.
The First-tier Tribunal held that the covenant was an unfair term within the meaning of the reg 5(1) of the Regulations in that, contrary to the requirement of good faith, it caused a significant imbalance in the parties’ rights and obligations arising under the contract.
The UT reversed that decision. Firstly, it held that reg 4(2)(a), which provided that the Regulations would not apply to contractual terms which reflected mandatory statutory or regulatory provisions, was triggered because s56 and s57 of the Act had obliged the lessor to grant the 2012 extension on the same terms as the original. Secondly, it held that the 2012 lease did not cause any imbalance in the parties' rights and obligations because it arose from, and preserved the position established by, the 1978 lease, which fell outside the ambit of the Regulations. Finally, it held that the inclusion of the covenant in the 2012 lease was not contrary to the requirement of good faith because, when negotiating the lease extension, the lessee had not sought to have the covenant excluded under s.57(6).
Decision on appeal
The Court of Appeal in dismissing the Appeal was unanimous in its verdict but split in its reasoning.
The majority (Underhill and Singh LJJ) held that regulation 4(2)(a) only applied to terms whose actual content was prescribed by the legislation in question. It did not cover cases like the instant one, where terms whose content had been agreed by the parties were continued as a result of a statutory mechanism. Section 57(1) of the 1993 Act mandated that terms of any extension should be the same as those in the original lease, but it said nothing about the substance of those terms. If a term was unfair before the extension, it would be equally unfair after it, and it should not become immune from the operation of the Regulations simply because there had been an extension. The Court approved the observations in Chitty 32nd ed. Para 39-217A.
On the matter of causation, the Court of Appeal were unanimous in finding that the UT was wrong to find that the covenant could not cause a significant imbalance because it arose from the 1978 lease. The proceedings concerned the 2012 lease, not its predecessor, which no longer had legal force as between the parties.
The majority found that the inclusion of the covenant in the 2012 lease was not contrary to the requirement of good faith. It was a term of the original lease, entered into before the Regulations came into force. Even if the Regulations had been in force when that lease was first negotiated, it was hard to see how the covenant could have been regarded as unfair. The significant imbalance arose from the lessor's failure to grant a long-term tenancy of the upper maisonette, and that had not been foreseen in 1978.
In any event, the Regulations only bit because of the extension, and the process established by the 1993 Act gave the lessee the opportunity to seek to re-negotiate any terms which had become unfair, and to refer to a tribunal the question of whether any such terms should be included. Both parties would be operating, with the benefit of legal advice, under a statutory procedure designed to give reasonable protection to their interests. That was a long way from the situations with which the Regulations were primarily concerned, and the requirement of good faith required more than merely a finding of significant imbalance.