Lease subject to the Unfair (contracts) Terms Act?

[AnimalMagic]

Is a lease subject to the Unfair (contracts) Terms Act 1977?

Our management has set an interest charge on overdue levies at 10% which I believe to be excessive.

[Aequitas]

No. The Act does not apply to "any contract so far as it relates to the creation or transfer of an interest in land". See schedule 1 paragraph 1 (b).

[AnimalMagic]

Thanks for the response. I understand from another source that Newham Council –v- Khatun established the precedent that Tenancy Agreements are subject to the provisions of the Unfair Terms in Consumer Contracts Regulations 1999. That's near enough

I am still researching the implications, but if anyone has had an unfair penalty imposed under a lease, this may be an answer

[Aequitas]

The regs will not apply if the lease was individually negotiated; if it was aproved on your behalf by a solicitor I do not think it can be regarded as other than individually negoatiated. Even if you took a standard lease I still think you are going to be in difficulty since the regs do not apply to the level of remumeration a party receives.

If your lease is residential you may be better looking at landlord and tenant legislation. I can't point you in the right direction, but look here:

BBC - Action Network - How to challenge your freeholder

Residential Property Tribunal Service: Home

[AnimalMagic]

Thanks for the response. You seem to have some knowledge here, so I will explain the situation and what I am looking for:

The leases were not individually negotiated. The flats were built between 1984 and 1986 and the lease raised in 1984 for a period of 128 years. The flats were sold as leasehold and were not meant for renting, but residential. Indeed there was/is a restriction in the lease on renting them out. In 2002 we collectively bought the freehold, which is now owned by a company which we all hold shares in. The lease was increased to 999 years.

The reason I am investigating this is, the management is run by a small group who bully anyone who stands up to them. The majority of shareholders are elderley and it is next to impossible to get support to stand up to the bullys. They have introduced a penalty charge of 10% for failure to pay the service fees, which they apply selectively and without any notice. I believe this is unlawful and am attempting to find the correct statutes. The annula service charge is usually 2500-3000.

The Leasehold reform act 2002 Section schedule 11 part 2 states 'A variable administration charge is payable only to the extent that the amount of the charge is reasonable.', but does not define 'reasonable'.

It also goes on to state 'A demand for the payment of an administration charge must be accompanied by a summary of the rights and obligations of tenants of dwellings in relation to administration charges.' I would take this to mean that they have to give notice in a prescibed format before apply a penalty charge. It is not clear to me what format this notice should take, but I would assume it is similar to a CCA default notice and should allow the leaseholder to remedy the breach before the penalty applies.

The Unfair Terms basically state the penalty should only be the costs to the freeholder of the breach. The only cost I can see is lost interest - currently pennies (I have calculated this from the total levies and the annual interest shown in the accounts).

That is as far I have got so far. Any comments or pointers elsewhere?

[Aequitas]

I think that before you worry about what statutes apply you should look at the lease. If the lease does not allow a "penalty" (I have put the word in quotes as the law does not in fact allow penalties) then no penalty can be charged. Whilst many leases include a provision for the payment of interest on late payments (and such provisions are enforceable to the extent that the rate of interest is reasonable - say 4% above base) I have never seen a lease that allows a charge for late payment calculated in any other way and I should be surprised if your lease contains such a provision. A landlord or management company cannot unilaterally introduce new provisions into a lease.

[AnimalMagic]

Thanks for that.

I have investigated and cannot find any clause in the lease related to penalties. The Board minutes states that they are imposing the 10% charge on overdue accounts 'as detailed in the original rules and regulations'. This refers to a handbook that was issued to the old management company that had a lease over the property prior to the purchase of the freehold.

The lease has a clause under regulations which states 'at all times observe and perform all such variations or modifications of the forgoing regulations and all such further or other regulations as the lessors may from time to time in their absolute discretion think fit to make for the management and care of the buildings.' I can find no specific clause relating to penalties or interest on outstanding charges...

Any opinion on the legality of this? Seems to fit the definition of an unfair term in that it allows the lessors to change the lease in any way they see fit.

[Aequitas]

If the lease is fairly standard the "regulations" will be the sort of regulations that cover such matters as parking, hanging out your washing and playing musical instruments. I should be very surprised indeed if they cover anything to do with maintenance. Anything to do with the amount or collection of service charge cannot come under "regulations". The clause can no more be used to change the provisions about maintenance than it can increase your repairing obligations or change the rules relating to assignment or subletting.

[AnimalMagic]

Thanks yet again

The only clause I can see under 'service charge' is refering to the payment of the service charge and it ends with '...in case of default the same shall be recoverable from the lessee as rent in arrear'. No mention of penalties whatsoever...

[Aequitas]

I don't think you need to rely on any statutes. The lease says (or in fact doesn't say) it all.

Think of a suitable orifice and tell the management to insert their penalties in it.

[AnimalMagic]

Originally Posted by Aequitas

Think of a suitable orifice and tell the management to insert their penalties in it.

I would be glad to

I still have misgivings that they refer to the penalty as interest... and that there is some other statute that they can reply on. I've decided to write and ask them to explain...

Thanks again for your input...

[Aequitas]

There are some obligations and conditions that are implied into leases by statute, and indeed by the common law. However, there is no implied term requiring a tenant to pay interest (whether at a reasonable or penal rate) on late payments whether of rent, service charge or anything else. It is really is very simple: They cannot charge interest unless the lease contains a clear provision to that effect.

Don't ask then to explain - tell 'em!

[AnimalMagic]

I do believe you - I have been asking elsewhere as well... There will be some pleasure if they have to write back with a climb down...

[AnimalMagic]

Thanks for the responses. As far as I was able to ascertain, there is no provision in the lease for interest or any other penalty for late payment. In the end I decided to ask the management to justify their legal position. Their response is:

'The lease does not specifically mention interest charged on late payment of dues but under clause 3(ii) the Lessee is obliged to "pay all rates taxes duties assessments charges impositions and outgoings".

Late payment of dues results in a loss of income to the lessor who is entitled to claim such loss from the lessee. The charging of such interest is a normal and legal procedure.

Interest was charged on the late payment of dues by [old management co pre- purchase of freehold] and is being charged by [new freehold co]. Residents and Shareholders were notified of this regulation in the handbooks of those companies.
'

Anyone wish to comment on the legality of the management's position?

[Aequitas]

Originally Posted by AnimalMagic

'The lease does not specifically mention interest charged on late payment of dues but under clause 3(ii) the Lessee is obliged to "pay all rates taxes duties assessments charges impositions and outgoings".

I think they have difficulty arguing that that wording justifies charging interest. There may be an argument that if they had to borrow money to cover any deficit that it can be charged to the defaulters to the extent that it arises from contributions being made late.

Originally Posted by AnimalMagic

Late payment of dues results in a loss of income to the lessor who is entitled to claim such loss from the lessee. The charging of such interest is a normal and legal procedure.

Loss of interest on a credit balance is not an outgoing since it does not relate to the maintenance of the building or any tax payable in respect of it. Even if it was, they would only be able to claim what they had lost.

The charging of interest is only normal if the lease permits it.

Ask them what their authority is for the propostion that the general law permits interest to be charged, and, if there is such authority, where it is stated what the rate is. Also ask why, if the law allows it, leases are drafted to provide for it.

Originally Posted by AnimalMagic

Interest was charged on the late payment of dues by [old management co pre- purchase of freehold] and is being charged by [new freehold co]. Residents and Shareholders were notified of this regulation in the handbooks of those companies.

The fact that it has been charged before does not mean it can be charged now. As explained above, the charging of interest is not a matter that can come under regulations.

[AnimalMagic]

Thanks Aequitas

I have been unable to locate the statutes or regulations which specify how statutory interest is applied.

My understanding is that the Claimant cannot make a profit from any penalty, though I have been unable to find this referenced anywhere.

In our case, I have looked at the accounts and the only possible loss to the company for my failure to pay the service charge, is interest on deposits, which proportioned out is pennies. And it is unlikely that my contribution would have made it to the deposit account anyway. We have never had an O/D on the co account, so no costs there.

Anyone know under what circumstances can statutory interest be applied?

[Aequitas]

Statute certainly provides for interest to be paid in some circumstances; late payment of tax and commercial debts spring to mind and of course judgment debts. There is, however, no general principle that interest is payable on money owed. If there is a common law principle or statute that makes interest payable on money due under a lease it has escaped my notice.

I think the position is quite clear: interest is only payable under a lease if the lease specifically makes provision for it; the word "interest" has to appear.

Go back to the management company and say that you want them to cite authorites for their assertions, i.e. quote a statute or case which allows them to charge interest.