Exit fees – fair or not? The first legal skirmish
In danger of slipping under the radar recently was the High Court case of Burrell v Helical (Bramshott Place) Ltd.
The Two Claims
This concerns two linked claims by four tenants of a retirement village.
The first claim was that the “Exit fees” claimed by their landlords on assignment were unfair and therefore unenforceable under The Unfair Terms in Consumer Contracts Regulations (‘UTCCR’) 1999 (the First Claim).
The second claim was that the exit fees also amounted to the provision of credit under the Consumer Credit Act 1974 (the Second Claim) and, in the absence of a consumer credit licence, were also unenforceable.
So far so dull. But this is a fascinating case with many interesting aspects for operators, funds and all those on the edge of this pool, preparing to take the plunge. This article looks at some but by no means all of these.
The Court hearing – the Second Claim
The hearing related to the Second Claim only and was an application by the landlord for that claim to be struck out on the basis that the Claimants had no real prospect of success. That application was successful.
The reasoning behind the Court’s decision is interesting and there are some lessons to be drawn from it.
In their defence the landlords justified the exit fees as follows:
“Purchasers such as the Claimants can afford to buy properties on a luxury development, and enjoy the facilities the Defendant has created, without having to meet the costs of those facilities up front in the initial purchase price”.
We have heard that before of course and it carries a lot of weight. The Claimants here argued that the implication to be drawn from these words was an admission that the exit fees amounted to a deferred element of the purchase price.
A deferred purchase price, they contended, amounted to the provision of credit; the landlord was not licensed to provide credit and therefore the fees were unenforceable.
The logic is ingenious, but was not accepted by the Court. The reason lies in the fact that the arrangements here are unusual. The leases do not contain the usual pre-emption whereby the landlord can buy the property back at a discount to market value. Instead a leaseholder can sell to whomever it wishes, but the assignee is obliged to pay the landlord a fee to enable the assignment to take place.
The Court held that an obligation of this type could not be categorised as part of the purchase price or a payment for the lease. As a result there was no question of the landlord providing the Claimants with credit, and the Second Claim could have no prospect of success.
Consequences of Decision
The consequences of this decision are two-fold:
First, it leaves the way open for a similar claim in the more usual circumstances of a pre emption.
Secondly, it may impact upon the outcome of the First Claim, for the reasons referred to below.
The First Claim
The First Claim has been brought under the UTCCR. It is worth noting that this has now been replaced by the Consumer Rights Act of 2015. Although both are based on Article 4(2) of the Unfair Terms Directive of 1993 the 2015 Act goes further than the UTCCR in a number of particulars (it also runs to 157 pages in length against the 9 of the UTCCR). So we face the unsatisfactory result that the eventual outcome of the First Claim may be of limited use in providing future guidance, as subsequent cases are likely to be brought under different legislation.
What is Fairness?
Despite differences of terminology both the UTCCR and the 2015 Act impose into consumer contracts a requirement of fairness.
There are however exemptions to this requirement. In particular the Court may not assess for fairness terms relating to the price of the goods or services provided (the precise wording depends on the legislation).
The Law Commission in their recent report on exit fees concluded that the law was complex and uncertain, but that it was likely that exit fees are in fact part of the price and therefore the exemption should apply.
However the English Courts have ruled that even when the exemption applies that does not prevent the court considering the contract, but only “the appropriateness of the price”. That seems like a fine distinction, but it is very important. What it means in the context of exit fees is that while the court can not consider whether the amount of the fee is fair or not, it may consider whether the contract is unfair for other reasons.
In other circumstances, for example, consumers failed to appreciate when a charge would apply, or the unforeseen circumstances which might trigger a charge. In those cases the charges were found to be unfair, even though they fell within the price exemption and the Court could not consider the amount of the charges.
In this case however, there is a further complexity. As we have seen, the Second Claim was dismissed because the Court held that, on the particular facts, the exit fees were not part of the price.
If that reasoning is followed in the main hearing then the exemption will not apply and the court will be able to consider all aspects of fairness, including the amount of the fee.
This is all a long way from “Caveat Emptor”.
Is there a contract?
That takes us to another issue. While it is not relevant in the circumstances of this case it is likely to arise in the future and it is this. The UTCCR only apply to a contract between a trader and a consumer. Imagine a situation where a claim is lodged, not by the original tenant, but by an assignee. English Law tells us that in those circumstances there is no privity of contract between the assignee of the original tenant and the landlord, but only privity of estate. Does it follow therefore that, as there is no contractual relationship, there can be no contract and therefore the Regulations can not apply? How does that work out under European law?
The answer is that it does not. While there is no case absolutely on point, the principle has been considered. Lord Justice Laws’ comments are likely to have you heading for the Brexit:-
‘European law has to be read as a single corpus of law binding across the member states. In our domestic law these distinctions have a long history and a present utility. In the context of a Europe-wide scheme of consumer protection, they could be nothing but an embarrassing eccentricity.’
There are a number. Leaving aside the galling fact that the English legal system is reduced to an eccentric footnote to the European project we can conclude:
- The Second Claim (that the exit fees amounted to credit) is dead in the instant case but may reappear elsewhere.
- Given the particular facts in this case, it cannot be guaranteed that the price exemption will apply when it goes to trial, so the question of fairness may be considered.
- Even if the price exemption does apply the court may still consider whether the terms are fair; however it will not consider the amount of the fees and whether they are too high. It would look at other aspects of fairness: for example, whether the Claimants fully appreciated when the exit fees would apply or any unforeseen circumstances that might trigger a payment of those fees.
- Neither this case nor the full hearing may provide a definitive legal precedent on these issues given the particular facts and the change in the law from the UTCCR to the Consumer Rights Act.
- The First Claim will not be heard until after the Law Commission Report is published, in March or April this year. The indications are that the Commission will be supportive of exit fees that are fully transparent and properly regulated. It is to be hoped that is the case and that the Report will be actioned by Parliament; until then the outcome of the First Claim is likely to be of considerable significance.