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Section
13 Notices and Is the deal closed? The use of the 'Subject
to Contract' formula by Dr David Smith of Pain Smith Solicitors*
PainSmith
Solicitors Legal Update
 30th
October 2007
Section
13 Notices
Most
agents and landlords will be familiar with the need to serve
a section 13 Notice to increase the rent in periodic Assured
and Assured Shorthold tenancies. However, they may not be
aware that it is perfectly possible to get round the provisions
of s13 with a little forward planning. A recent Court of Appeal
case has highlighted this point. .
It
is important to understand the purpose of the Section 13 procedure.
It is intended to allow landlords to have a means of increasing
rent during periodic tenancies. It was envisaged that this
would be important as the Housing Act 1988 specifically allows
for periodic tenancies to occur and continue for substantial
time periods. However, the process is specifically subject
to certain controls to prevent landlords getting rid of tenants
by massively increasing the rent. This control process is
the right for the tenant to refer the rent proposed by the
section 13 notice to a Rent Assessment Committee for them
to determine whether that rent is a fair market rent for the
property.
In
this, there arises a problem. The Rent Assessment Committee
("RAC") is not always entirely consistent. Indeed, they are
not under any requirement to be. Their decisions are also
difficult and expensive to appeal against and there is no
right of appeal at all in respect of decisions made by the
RAC in regard to the appropriate level of rent.
However,
the RAC does not have absolute jurisdiction. Subsection 5
of section 13 states: (5) Nothing in this section (or in section
14 below) affects the right of the landlord and the tenant
under an assured tenancy to vary by agreement any term of
the tenancy (including a term relating to rent). There is
therefore nothing that prevents a landlord and tenant making
some form of agreement about the rent. The most obvious way
of doing this is to renew the tenancy for a new fixed term
but it is not the only option. If it is anticipated that a
tenancy will become periodic then an appropriate clause can
be included to increase the rent periodically.
It
is important to realise that this is an either/or option,
there is no third way. So, for example it is unacceptable
for a landlord to increase the rent by writing letters to
the tenant. Without specific agreement between the parties
such an increase will be void. Equally, it is impossible for
a landlord and tenant to agree to involve the RAC when it
should not be. As Lord Neuberger said in Riverside Housing
Association v White "the jurisdiction of a rent assessment
committee is entirely statutory. As a matter of law, statutory
jurisdiction cannot, unless the statute so provides, be reduced
or enlarged by parties by consent." In other words the section
13 procedure must be used unless there is some other form
of agreement to alter the rent. If such an agreement exists
then the section 13 process cannot be used.
Turning
to rent increase clauses in more detail, it is sometimes thought
that these must act to increase the rent by a specific amount
such as set percentage or in line with the Retail Prices Index
(RPI). This is not the case. In the recent case of Contour
Homes Ltd v Rowen Lady Justice Arden said "to reach the conclusion
that the only sort of contingent rent review clause which
is included is one which provides for an increase of a specified
fixed amount upon the happening on the contingency involves
writing words into section 13(1)(b), and I would therefore
hold the judge was wrong to limit the clause to fixed amount
rent review clauses." In this case the clause simply set out
that the landlord would serve a notice increasing the rent
by an amount to be set out on that notice which
would not exceed the market rent at the time. Therefore there
is no reason why an agent cannot have a relatively
simple clause increasing the rent by a 'market' percentage
to be determined by the agent. Such a clause would have the
effect of setting aside the section 13 notice process and
avoiding the vagaries of the RAC.
Using
a 'market increase' also avoids the unsatisfactory effects
of the RPI. In fast moving areas the increase in RPI falls
well below that being achieved in the market. Central London
is a prime example of this issue as rents are increasing by
as much as 10% per annum in some areas while RPI has gone
up by a paltry 3-4%. In such cases using a clause with an
RPI increase is not really in the landlord's best interests.
In
summary, agents should consider incorporating some form of
rent increase clause into all Housing Act tenancies. This
will allow for an increase without having to deal with section
13 notices or the RAC. However, it is important that such
a clause is drawn up properly and allows for a large enough
increase to protect the landlord's interest as, if it is incorporated,
it must be followed and the section 13 process will not be
available as an alternative
PainSmith
Solicitors Legal Updates are provided for information only
and are not legal advice. If you do have a legal problem,
you should talk to a lawyer or adviser before making a decision
about what to do. You may wish to use the CLS/CDS Directory
(www.justask.org.uk/public/en/directory) to locate an adviser.
The information provided here is written for people resident
in, or affected by, the laws of England and Wales only. You
should note that date given in the update and be aware that
the information given may become inaccurate due to changes
in the law or its implementation.
________________________________
30th
October 2007
Is
the deal closed? The use of the 'Subject to Contract' formula
Many
agents will be familiar with the phrase "Subject to Contract"
or some similar formulation as a method of accidentally making
a representation to the tenant which was not intended. This
way any offer made is subject to its incorporation in the
final lease agreement. However, there some other consequences
of the use of this phrase which are not so favourable and
it may not always be the best course of action.
First
it is worth examining precisely what the Courts understand
the situation to be when the "Subject to Contract" formula
is used. The Courts construe the formula in accordance with
the conveyancers understanding of the phrase. This is that
a negotiation for a conveyance of land which is expressed
to be 'subject to contract' is not complete until there is
an exchange of contracts. There is an entire set of procedures
for such exchange which are set out and agreed between solicitors.
It is this position that allows for such situations as 'gazumping'
where the seller suddenly pulls out of a deal because they
have had a higher offer. In the case of Salomon v Akiens,
the Court of Appeal had to consider whether this formulation
should also be applied to a lease agreement. The Court was
clear that there was practically no circumstances in which
a negotiation for a lease should be seen as any different
from that for a sale and therefore the 'subject to contract'
formula should apply equally to both.
Practical
Consequences: What does this mean in practice? In the
case of Longman v Viscount Chelsea the Court made clear that
this means that the "relationship does not become binding
… until there is an exchange of lease and counterpart, before
which either party can withdraw". In other words, until both
the landlord and tenant have signed the agreement, the agreement
has been executed, and the signed agreement has been passed
to the other side then either party is free to withdraw.
Ending
the Formula: Of course, there are other ways in which
the 'subject to contract' formula can be dealt with. The parties
could agree that the formula should no longer apply which
is a common device in commercial or high-value leases where
the parties will enter into an agreement to make an agreement.
Alternatively, the parties can perform an action which sets
the formula to one side. The most obvious of these is provision
of the keys and the acceptance of rent and deposit payments.
The formula comes into force once either party expresses an
offer or acceptance of an offer as being 'subject to contract'
and will remain in force even if following correspondence
does not bear the same formulation until it is specifically
brought to an end as described above.
Recovery
of Expenses:
The use of the formula also has implications for the recovery
of costs and expenses. Where a party expends monies on the
basis of an agreement which is subject to the formula it will
be very hard to recover any monies expended on the basis of
that agreement. As the High Court made clear in Regalian Properties
v London Dockland Development Corpn each party must accept
that any monies spent are a calculated risk and there will
be no recompense if no contract results. This is not to say
that agents cannot take steps to ameliorate this risk and
a welldrawn up holding deposit agreement is a great help in
this regard. Despite the fact that costs cannot be recovered
in respect of actions taken under a belief that a contract
that is subject to the formula was to be entered into there
is no reason why a separate agreement taking a holding deposit
from an applicant cannot be enforced. Such an agreement would
typically cover the costs of referencing, preparing the agreement
and would therefore protect the landlord from incurring agents
costs with no prospect of recovering them. Such an agreement
has the added benefit of ensuring that the agent will be paid
for their time as well!
Other
Formulas:
There are other, more limited, formulas of a similar nature
which may also be of value. The most commonly seen of these
is probably 'subject to references' or some such phrase. This
will have an effect similar to the 'subject to contract' formula
but will be more limited and will effectively expire once
satisfactory references have been received or the parties
make clear that they have moved beyond that stage. By choosing
to ignore them and agreeing a finalised contract, for example.
The exact point at which these more limited formulas cease
to be effective is not as certain due to the lack of Court
decisions on the topic. In each case it will have to be decided
at what point it was intended that the formula should come
to an end and whether actions were taken to make it clear
that it should no longer be effective.
Practice
Points:
Agents should consider in every case what is best for their
client. In higher value properties where the landlord is unlikely
to wish to pull out of the deal unexpectedly it may be best
to avoid use of the 'subject to contract' formula to ensure
that the tenant is tied into the contract as early as possible.
In other circumstances, where the landlord is uncertain of
the tenant or may want to pull out of the deal it may be wise
to use the formula in order to preserve the landlord's position.
Alternatively, it might be best to start negotiations 'subject
to contract' but then agree at a later stage that the deal
is finalised and that the formula should no longer apply,
although this may be difficult where a deal is moving fast.
As always, agents should take great care in the representations
they make and how they are made to avoid invoking or rescinding
the formula unintentionally.
Points
to note:
- Once
the Subject to Contract formula has been invoked it will
stay in force until it is specifically rescinded or the
lease or tenancy has been signed and exchanged.
- Either
party can withdraw from the contract without penalty while
the formula is in force
- Agents
holding deposit agreements are not affected and therefore
recovery can be made from this for expenses such as referencing
etc.
- The
formula should not be used automatically in every case and
should be tailored to the specific requirements of each
letting.
- Make
sure you have a solid holding deposit agreement setting
out what charges the tenant is liable to pay.
PainSmith
Solicitors Legal Updates are provided for information only
and are not legal advice. If you do have a legal problem,
you should talk to a lawyer or adviser before making a decision
about what to do. You may wish to use the CLS/CDS Directory
(www.justask.org.uk/public/en/directory) to locate an adviser.
The information provided here is written for people resident
in, or affected by, the laws of England and Wales only. You
should note that date given in the update and be aware that
the information given may become inaccurate due to changes
in the law or its implementation.
________________________________
*See
also Duty of Landlords To Mitigate Loss It
is a widely accepted principle of contract law that a party
to a contract should Seek to mitigate losses brought about
by another party's failure to fulfil their contract adequately
(British Westinghouse Electric Coy v Underground Electric
Railways Coy [1912] C 673). It is usually assumed that this
principle a lies equally to landlords faced with a tenant
who wishes to surrender his tenancy during the contractual
term.For
full article Click
Here
________________________________
*See
alsoSafety Glass and Defective Premises Act - The
Information on a Court of Appeal decision (7th February 2007)
regarding the Defective Premises Act 1972 For full article
Click
Here
________________________________
*See
also Implementation of the Regulatory Reform (Fire Safety)
England & wales) Order 2005 Click
Here
________________________________
*See
also Understanding
Business Tenancies June 2007 Click
Here
________________________________
*See
also Going Smoke Free - England July
2007 Click
Here
________________________________
*
Articles
courtesy of PainSmith
Solicitors are a niche practice specialising in Landlord and
Tenant Law. Based in Medstead in Hampshire, they are ideally
situated to provide an efficient service to clients nationwide
as well as those based in Central London and the Home Counties.
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