| 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
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