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Cite as: [2018] EWCA Civ 2284, [2019] HLR 17, [2019] WLR 4461, [2018] WLR(D) 681, [2019] 1 WLR 4461

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Neutral Citation Number: [2018] EWCA Civ 2284
Case No: C3/2016/4072

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (LANDS CHAMBER)
His Honour Judge Huskinson
[2016] UKUT 325 (LC)

Royal Courts of Justice
Strand, London, WC2A 2LL
19/10/2018

B e f o r e :

SIR ANDREW McFARLANE
(President of the Family Division)
LORD JUSTICE UNDERHILL
(Vice President of the Court of Appeal (Civil Division))
and
LORD JUSTICE SINGH

____________________

Between:
NATHAN R JONES

AIDEEN M SEYMOUR


Appellants

- and –


ROUNDLISTIC LIMITED
Respondent

____________________

Mr David Grant and Ms Elizabeth Grace (instructed through the Bar Pro Bono Unit) for the Appellants
Mr Henry Webb (instructed by Colman Coyle Ltd) for the Respondent
Hearing dates : 26th June 2018

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Sir Andrew McFarlane P:

  1. This appeal concerns the applicability of the Unfair Terms in Consumer Contracts Regulations 1999 ("UTCCR") in circumstances where the contract concerned is a domestic lease granted as an extension to an earlier lease under the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 ("LRHUDA 1993").
  2. The appeal, which is a second appeal, is from a decision of the Upper Tribunal (Lands Chamber) [HHJ Huskinson] handed down on 11 May 2016, and is brought by the lessees of 22 St Ann's Road, London SW 13. The property at 22 St Ann's Road is divided into two maisonettes; number 22 is the lower maisonette and number 22A occupies the upper floors. Paragraph 4 of the First Schedule ("paragraph 4") to the Appellants' lease is in the following terms:
  3. "4. Not to use the premises hereby demised or permit the same to be used for any purpose whatsoever other than a single private dwelling house in the occupation of the Lessee and his family."

    On 7 April 2015 the Appellants let their premises to a tenant for a period of 12 months and the tenant went into occupation. In consequence the lessor, Roundlistic Limited, made an application to the First-tier Tribunal ("FtT") for a determination under the Commonhold and Leasehold Reform Act 2002, s168(4) that the Appellants had breached the terms of their lease.

  4. The Appellants' case before the FtT included an assertion that paragraph 4 was an "unfair term" within the meaning of the UTCCR and that it consequently was not binding upon them. On that point the FtT concluded that paragraph 4 was, indeed, an "unfair term" and, by virtue of UTCCR, reg 8, was not binding on the Appellants. Roundlistic Ltd successfully appealed to the Upper Tribunal on the UTCCR issue with the result that the UT judge (HHJ Huskinson) held that paragraph 4 was not rendered invalid by the UTCCR with the consequence, in the light of other determinations made by the FtT and UT which are not relevant to this appeal, that, in accordance with the Commonhold and Leasehold Reform Act 2002, S168(4), a breach of paragraph 4 of the lease was occasioned by the grant of the shorthold tenancy of the lower maisonette in April 2015. It is against that determination that the Appellants now appeal to this court, permission for a 2nd appeal having been granted.
  5. Factual Background

  6. The factual background is summarised as follows in the UT judgment (neutral citation [2016] UKUT 325 (LC)) where the 'appellant' is Roundlistic (Respondent to this appeal) and the 'respondents' are the current Appellants:
  7. "11. The property of which the lower maisonette forms part is a building known as 22-22A St Ann's Road, London SW13 and comprises two maisonettes known as 22 and 22A.
    12. By a lease dated 8 September 1978 Invincible Properties Limited as lessor demised to Michael Benjamin Yahuda as lessee the lower maisonette for a term of 125 years at the rents and upon the terms and
    conditions therein contained. The first recital to the lease made clear the nature of the building and how it contained the two maisonettes. The second recital was in the following terms:

    "(2) The Lessor has previously granted a lease of or intends hereafter to grant a lease similar in length and term to this lease of the premises in the Mansion other than the…"

    Premises hereby demised and has in such lease imposed or intends in such lease to impose the restrictions set forth in the First Schedule hereto and covenants and stipulations similar to those contained in Clauses 2 3 4 and 5 hereof to the intent that the Lessee for the time being of any parts of the Mansion may be able to enforce the observance of the said covenants and stipulations by the lessee of the reminder thereof."
    13. Clause 2 of the lease provided as follows: "2. The Lessee hereby covenants with the Lessor and with and for the benefit of the owner and lessee from time to time during the currency of the term hereby granted of the upper maisonette that the Lessee and persons deriving title under him will at all times hereafter duly perform and observe all and singular the restrictive and other covenants and stipulations mentioned in the First Schedule hereto." Accordingly the lessee thereby gave the covenant in paragraph 4 of the First Schedule being the covenant referred to in paragraph 3 above.
    14. By clause 6(b) the lessor covenanted with the lessee as follows: "6(b) that the Lessor will require the persons to whom it shall hereafter transfer or grant a lease of the other premises comprised in the Mansion to covenant to observe the restrictions set forth in the First Schedule hereto and to enter into covenants and stipulations similar to those contained in Clauses 3 4 and 5 hereof and until the Lessor so transfers or grants such a lease as aforesaid the Lessor will nevertheless contribute the requisite amounts over and above those contributed by the Lessee hereunder towards the costs and expenses involved under Clause [4] hereof."
    15. The second schedule made provision for the rights and privileges granted to the lessee and these included in paragraph 5 "the benefit of the restrictions contained in the lease of the remainder of the Mansion granted or to be granted."
    16. It appears clear that by 26 August 1980 no long lease had yet been granted of the upper maisonette. By a deed dated 26 August 1980 between the same parties as the parties to the 1978 lease it was recited that the deed was supplemental to the lease and that the parties were desirous of adding to the terms of the lease in the manner there appearing. Clause 1 of the deed provided as follows: "The Lessor covenants with the Lessee and his successors in title (a) that any future lease of the Upper Maisonette granted for a term certain exceeding twenty one years will be in similar form as the Lease and contain inter alia covenants on the part of the Lessee to perform and observe covenants and stipulations similar to those contained in Clauses 2, 3 4 & 5 of the Lease and (b) that until the Upper Maisonette is let on a lease as aforesaid the Lessor will repair maintain uphold and keep the Upper Maisonette so as to afford all necessary support shelter protection and access to the Lower Maisonette and that (if so required by the Lessee) the Lessor will so far as is possible enforce against the occupier of the Upper Maisonette the restrictions and stipulations similar to those contained in the First Schedule to the Lease entered into by the occupier of the Upper [sic] Maisonette on 6 the Lessee indemnifying the Lessor against all costs and expenses in respect of such enforcement (including in the case of any litigious proceedings the costs and expenses incurred as between a Solicitor and his client) and first providing such security in respect of costs and expenses as the Lessor may reasonably require".
    17. There appears to be little or no evidence as to what was the state of occupation of the upper maisonette from August 1980 until the grant of the extension lease in June 2012. However the FtT proceeded on a basis, which was not suggested by either party to be inaccurate (and which I adopt) that no long lease was granted of the upper maisonette at any stage and that the occupation of the upper maisonette was either by way of an officer of the lessor for the time being occupying for his/her own benefit or by the lessor granting tenancies including assured shorthold tenancies to occupational tenants.
    18. In due course in 2012 the then lessee, namely Ms Scott, served the relevant notice under section 42 of the 1993 Act requiring the grant of a lease extension. The appellant was by this date the owner of the freehold of the building and accepted that Ms Scott was entitled to the grant of an extension. In the result the new lease was granted on 27 June 2012 for a term from 8 September 1978 expiring on 8 September 2188 (in lieu of the term set out in the existing 1978 lease) and at a rent of a peppercorn. The new lease did not make reference to the 1980 deed. The new lease was expressed to be made upon the same terms and subject to the same covenants conditions and stipulations in all respects as those contained in the existing lease save as to the rent and the term of years granted and save as modified therein. The new lease stated that it was to take effect as if such terms covenants etc were repeated in the new lease in full but with such modifications as were made in the new lease. The new lease in clause 6 provided: "No long lease created immediately or derivatively by way of sub-demise under the term hereby granted shall confer on the sub-tenant as against the Landlord any right under Chapter II of Part 1 of the Act to acquire a new lease."
    19. The new lease was registered at the Land Registry. In due course the respondents took an assignment of the new lease and became the registered proprietors thereof. It may be noted that the official copy of the register of title of the new lease included in paragraph 3 of Part A: Property Register the following text: "(20.07.2012) The Lease prohibits or restricts alienation."
    20. The respondents became registered with title to the lease on 2 October 2013. They purchased from Ms Scott. During their negotiations for the purchase the following matters occurred: (1) The respondents, by their solicitors, made inquiries of the vendor (Ms Scott) upon various topics. The respondents were informed that the first floor flat (i.e. the upper maisonette) was freehold and was let shorthold. The vendor was asked whether any of the occupiers of the lower maisonette were tenants or lodgers, with a supplementary request, if the answer was yes, to give details and supply a copy 7 of any tenancy agreement. The answer given was "no". The name of the occupier was given as Mr Gregory Allder and he was stated to be a "friend". (2) The respondents, through their solicitors, asked questions of the appellant which included at paragraph 5.2 a question as to whether all of the flats were let on leases similar to that specified. The answer given was that the first floor flat was freehold and was let on a shorthold tenancy. A further question asked of the appellant was for confirmation whether or not there had been any variation of the leases (either formal or informal). The only answer given was that there had been granted a licence to carry out works.
    21. The circumstances in which the respondents bought the lease of the lower maisonette were in evidence before the F-tT and were recorded by the F-tT in paragraph 19 of its decision as follows: "The respondents are a former British Army Officer and a teacher, respectively. For a number of years they lived abroad but, about 5 years ago, they moved to the Barnes area of south west London. They began renting close to the subject premises, with the intention of putting down some roots after an extremely transient period of deployments abroad. In mid-2013 they began negotiations to purchase the Premises from the then owners, Emma Scott and Mark Fooks. Copies of the original and extended leases were provided to the respondents and, by leasehold information form dated 13 April 2013, the sellers confirmed that they had not complained or had cause to complain to or about the landlord, the management company or any neighbour. The sellers confirmed that they did not live in the premises themselves, but that it was occupied by a Mr Gregory Allder, who was described as a "friend" on the form, and expressly not a tenant or lodger". The sale went through on 30 August 2013 and the change of proprietor was registered at HM Land Registry on 2 October 2013. As Mr Jones' grandparents and several generations before them had been residents and local business owners within the Barnes area, the respondents felt confident that they would continue to be long-term residents of the local area themselves and full participants in that community.
    22. The respondents moved into the lower maisonette and occupied it as their residence. Mr Jones took up employment at a major global and European bank. In February 2015 his employer posted him to Milan for a two year temporary assignment beginning around 1 April 2015.
    23. As soon as the respondents learned of their posting to Italy they tried to contact the appellant to confirm the appellant's attitude regarding subletting the lower maisonette. The respondents found it difficult to obtain a response by numerous telephone calls. When Mr Jones eventually got through to the appellant's managing agents he was informed aggressively that he would "lose my flat" if permission to sublet was not granted and that this would only be given on the basis of a "substantial cash payment" as there was an alleged "absolute prohibition" in the lease. The F-tT recorded what happened next in paragraphs 27 and 28 of its decision in the following terms: 8 "27. The respondents offered the applicant lessor a premium for a lease variation, which the applicant refused. After "several flat refusals" the respondents then made a final offer of £15,000 to vary the lease "which was refused out of hand with no justification given." Mr Jones made somewhere in the region of 67 telephone calls to the managing agents, leaving numerous messages, none of which were returned. Then, with only a few weeks to go before their departure, the managing agents told the respondents that the applicant would accept "something around double this amount for a temporary permission to sublet during the time I was overseas." "28. The respondents' evidence on these verbal negotiations was contained in the written statement signed by Mr Jones in the respondents' bundle and in Mr Jones' oral evidence to the tribunal. Although Ms Dixon on behalf of the applicant sought to deny that the applicant had made a demand for £30,000 for temporary consent to sub-let, the matter was not addressed by the applicant in the Reply to the respondents' statement and the applicant's director, Mr Barry Marsh, did not attend the hearing to be asked about this, despite having filed a witness statement in support of the application. The tribunal therefore accepts Mr Jones' evidence as to these negotiations."
    24. By a letter dated March 2015 the respondents wrote to the appellant formally notifying the appellant of their intention to sublet the lower maisonette after 1 April 2015. The letter stated that upon advice the respondents had established there were no clauses in the current lease which preclude subletting of the property and that the wording of paragraph 4 contains the same wording as in an earlier Tribunal case LON/00AM/LBC/20070025. The respondents also drew attention to the longstanding common law right to sublet the demised premises or part thereof.
    25. The appellant's managing agents replied by email on 20 March 2015 stating: "The freeholder has advised that should you proceed with letting the property they would go for an order of possession and will notify your mortgage providers of the same." The appellant's managing agents sent a further email dated 31 March 2015 noting that the lower maisonette was being marketed for rent and stating that the appellant had had the opportunity of legal advice following the respondents' correspondence. The letter stated: "We cannot stress enough that we feel you have been misadvised with regards to the caselaw on the clause in your lease. We would strongly advise that you consult with your solicitors before embarking on any letting of the property other than as described under the terms of your lease."
    26. On 2 April 2015 the respondents replied stating they had taken legal advice; that there was no clause in the current lease specifically precluding subletting; that at common law a tenant has a right to sublet; and that there was an explicit precedent of the tribunal finding in favour of the lessee in a case where the lessee was subject to a covenant similar to paragraph 4. The respondents stated that based upon these considerations they had decided to sublet the property as was their right without any specific consent from the appellant and without any variation of the lease. 9.
    27. On 7 April 2015 the respondents granted an assured shorthold tenancy to Mr Robert Jackson for 12 months at a rent of £2,200 per month.
    28. By a letter dated 8 April 2015 (which arrived on the day following the subletting) the appellant wrote further drawing attention to the decision of the Upper Tribunal in Aaron William M Burchell v Raj Properties Limited [2013] UKUT 0443 (LC) which came to the opposite conclusion upon the effect of paragraph 4 as compared with the decision of the F-tT upon which the respondents were relying.
    29. The position accordingly had been reached where the appellant was contending that paragraph 4 prohibited the respondents from subletting the lower maisonette to a third party who would occupy it, whereas the respondents were contending that they were entitled, consistently with the terms of their lease, to grant such a subletting. The respondents had, despite the appellant's opposition, granted such a subletting. In consequence the appellant made an application to the F-tT for a determination under section 168(4) that the respondents had breached the terms of their lease."

    The Legal Context

  8. LRHUDA 1993, Part 1, Chapter 2 concerns the right of a tenant to acquire a new lease. A qualifying tenant may claim to exercise the right by giving notice to the landlord under s 42. Subject to various provisions as to the validity of the notice and other matters, s 56 of the Act establishes an obligation on the landlord to grant a new lease. Section 56(1) provides:
  9. "(1) Where a qualifying tenant of a flat has under this Chapter a right to acquire a new lease of the flat and gives notice of his claim in accordance with section 42, then except as provided by this Chapter the landlord shall be bound to grant to the tenant, and the tenant shall be bound to accept —
    (a) in substitution for the existing lease, and
    (b) on payment of the premium payable under Schedule 13 in respect of the grant,
    a new lease of the flat at a peppercorn rent for a term expiring 90 years after the term date of the existing lease."
  10. It is of note that the wording in s 56(1) is clear in providing that, where the correct notice procedure has been followed, the landlord is 'bound to grant' and the tenant is 'bound to accept' a new lease.
  11. The default position with respect to the terms of the new lease is established by s 57(1):
  12. "(1) Subject to the provisions of this Chapter (and in particular to the provisions as to rent and duration contained in section 56(1)), the new lease to be granted to a tenant under section 56 shall be a lease on the same terms as those of the existing lease, as they apply on the relevant date, but with such modifications as may be required or appropriate to take account —
    (a) of the omission from the new lease of property included in the existing lease but not comprised in the flat;
    (b) of alterations made to the property demised since the grant of the existing lease; or
    (c) in a case where the existing lease derives (in accordance with section 7(6) as it applies in accordance with section 39(3)) from more than one separate leases, of their combined effect and of the differences (if any) in their terms."
  13. The requirement in s 57(1) that the new lease shall, save for stated exceptions, be 'on the same terms as the existing lease' is subject to the ability of the landlord and tenant to agree to the contrary which is provided for in s 57(6):
  14. "(6) Subsections (1) to (5) shall have effect subject to any agreement between the landlord and tenant as to the terms of the new lease or any agreement collateral thereto; and either of them may require that for the purposes of the new lease any term of the existing lease shall be excluded or modified in so far as —
    (a) it is necessary to do so in order to remedy a defect in the existing lease; or
    (b) it would be unreasonable in the circumstances to include, or include without modification, the term in question in view of changes occurring since the date of commencement of the existing lease which affect the suitability on the relevant date of the provisions of that lease."
  15. The UTCCR 1999 implemented EC Directive 93/13 on "Unfair Terms in Consumer Contracts" for the purposes of our domestic law. Recital 13 and Art 1(2) of the EC Directive are of relevance:
  16. Recital 13:

    "Whereas the statutory or regulatory provisions of the Member States which directly or indirectly determine the terms of consumer contracts are presumed not to contain unfair terms; whereas, therefore, it does not appear to be necessary to subject the terms which reflect mandatory statutory or regulatory provisions and the principles or provisions of international conventions to which the Member States or the Community are party; whereas in that respect the wording "mandatory statutory or regulatory provisions" in Article 1 (2) also covers rules which, according to the law, shall apply between the contracting parties provided that no other arrangements have been established."

    Article 1(2):

    "the contractual terms which reflect mandatory statutory or regulatory provisions and the provisions or principles of international conventions to which the Member States or the Community are party, particularly in the transport area, shall not be subject to the provisions of this Directive."
  17. It is accepted that the roles of supplier and consumer under the UTCCR 1999 apply to the roles of landlord and tenant under the LRHUDA 1993 (see London Borough of Newham v Khatun [2004] EWCA Civ 55).
  18. Regulation 4 of the UTCCR 1999 prescribes the terms to which the regulations apply:
  19. "4. (1) These Regulations apply in relation to unfair terms in contracts concluded between a seller or a supplier and a consumer.
    (2) These Regulations do not apply to contractual terms which reflect –
    (a) mandatory statutory or regulatory provisions (including such provisions under the law of any Member State or in Community legislation having effect in the United Kingdom without further enactment);
    (b) the provisions or principles of international conventions to which the Member States or the Community are party."
  20. The yardstick by which terms of a contract may be held to be 'unfair' is established by reg 5 and, in particular, reg 5(1) in these terms:
  21. "5. (1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer."

    The Upper Tribunal Decision

  22. The UT Judge held that the UTCCR could apply to the terms of a lease. He considered that the new lease granted in 2012 constituted a "contract" and that it was entered into between the landlord and the then lessee. Notwithstanding these preliminary findings in favour of the Appellants, the UT Judge's ultimate finding that the key paragraph, paragraph 4 to the First Schedule of the lease, was not invalidated by the UTCCR was based upon three factors:
  23. a) UTCCR, reg 4(2) relating to mandatory or statutory provisions;
    b) a finding that lease did not "cause" any imbalance;
    c) the inclusion of paragraph 4 was not contrary to the requirement of good faith.
  24. Taking each of these three points in turn, the judge explained his reasoning with respect to reg 4(2) at paragraph 101:
  25. "101. However regulation 4(2) provides that the regulations do not apply to contractual terms which reflect mandatory statutory provisions. The appellant was statutorily obliged to grant the new lease. The terms upon which the appellant was obliged to grant this new lease were provided for in sections 56 and 57. There was scope for some alteration in the terms of the new lease as compared to the existing lease, but the starting point was that the new lease was to be on the same terms as those in the existing lease subject to certain limited modifications. In these circumstances I conclude that regulation 4(2) is applicable and that the UTCCR do not apply to the contractual terms of the new lease."
  26. With respect to the second point, which relies on UTCCR, reg 5(1), the judge said this at paragraph 103:
  27. "103. In the present case the lessee chose to require the grant of a new lease in circumstances where the existing lease, containing paragraph 4, was a lease which would continue to regulate the rights between the appellant on the lessee until 2098. This lease being granted in 1978 was not a lease to which the UTCCR applied. Accordingly the position immediately after the grant of the new lease was (supposing that paragraph 4 operated to bind the lessee) exactly the same position as the lessee was in prior to such grant and would have continued to be in for a further period exceeding 80 years. In such circumstances I do not consider that the relevant contractual term (i.e. paragraph 4 as repeated in the new lease of 2012) can be said to be a clause which "causes" a significant imbalance etc. If there was a significant imbalance it already existed."
  28. The judge dealt with the 3rd point at paragraph 104:
  29. "104. Further, bearing in mind the circumstances in which the new lease was granted, namely pursuant to an obligation under the 1993 Act, I do not consider that it can be said that paragraph 4 (as repeated in the new lease in 2012) was a term which was 'contrary to the requirement of good faith'."
  30. Finally the judge drew his conclusions together at paragraph 105:
  31. "105. Accordingly, even if paragraph 4 does produce a result in which there is a significant imbalance in the parties' rights and obligations under the lease to the detriment of the consumer (as to which I make no finding), I conclude that paragraph 4 remains valid and is not rendered invalid by the UTCCR because in summary:
    (1) The UTCCR do not apply having regard to regulation 4(2)(a);
    (2) the lessee was already subject to paragraph 4 prior to the 2012 new lease and therefore the term in the new lease did not "cause" any significant imbalance; and
    (3) in any event the inclusion of paragraph 4, in the context of a renewal under the 1993 Act, was not contrary to the requirement of good faith. Upon this point I note that both appellant and lessee would have been professionally represented during the procedures for the grant of the new lease and that the lessee would have had solicitor's advice upon the terms of the new lease and upon the consequences of entering upon the renewal procedures under the 1993 Act."

    The arguments on appeal

  32. The Appellants, who initially acted in person, were greatly assisted by being represented on this appeal by Mr David Grant and Ms Elizabeth Grace of counsel instructed through the Bar Pro Bono Unit.
  33. At the core of the Appellants' case is the assertion that it is fundamentally unfair for them to be held to the terms of paragraph 4 and their lease when the corresponding terms in the lease relating to the upstairs accommodation have never been adhered to or enforced. They point to the apparent intention of the original lease, which was that a mirror scheme would be implemented for the upstairs flat with mutual rights of enforcement available to the lessees of the downstairs accommodation. That this has never been implemented is no fault of the Appellants or their predecessors in title and, they claim, it is basically unfair that they should now be held to the restrictive wording of paragraph 4 in their lease when the same is not the case for the upstairs maisonette.
  34. Two basic grounds of appeal are relied upon. The first asserts that the UT erred in holding that the UTCCR did not apply to the 2012 lease by reason of reg 4(2). The second ground challenges the UT finding on unfairness. At the oral hearing, Mr Grant accepted that it was necessary for him to overcome all three of the conclusions set out by the UT at paragraph 105.
  35. Looking at the grounds in more detail, the first ground asserts that the UT misunderstood reg 4(2) in concluding that paragraph 4 of the lease arose due to mandatory or statutory provisions. It is submitted that that finding cuts across the high level of protection established by UTCCR, misunderstands the rationale of reg 4(2) while extending its scope, and confuses the mechanism by which the lease was extended in 2012 with the source of the provisions of the 2012 lease. In contrast to specific terms in consumer contracts which may be inserted as a direct result of a statutory requirement, it is argued that the terms of the original 1978 lease neither reflected any mandatory statutory provision, nor arose from any legislative consideration or imposition.
  36. Reference is made to Chitty on Contracts – 32nd Edn at paragraph 39-217A where the following commentary appears with respect to the Upper Tribunal decision in the present case:
  37. "It is submitted, however, that this decision extends the scope of application of reg 4(2) beyond the likely interpretation of the Court of Justice of the EU of Art 1(2) of the 1993 Directive which reg 4(2) implements: Art 1(2) is to be strictly construed and there is a difference between contract terms required by legislation itself (where "it may legitimately be supposed that the national legislature struck a balance between all the rights and obligations of the parties to certain contracts") and contract terms which reflect an earlier contract between the parties whose content has not been the object of any legislative consideration or imposition."
  38. At the core of the submission is the assertion that, whilst the mechanism by which the 2012 lease and its terms came to be in force arose from the operation of the right to extend under the LRHUDA, the source of the term was the original 1978 lease which did not have any statutory origin.
  39. With respect to the second ground relating to unfairness, the Appellants submit that there are three relevant elements, namely:
  40. a) whether there was a significant imbalance in the parties' rights and obligations;
    b) if so, whether this was contrary to the requirement of good faith; and
    c) whether such imbalance was caused by the 2012 lease.

    The Appellants' case is that, so far as (a) is concerned, the FtT found that paragraph 4 imposed more onerous terms on the lessee than those applied to the lessor, the imbalance went so far as to be a derogation from grant by the lessor from paragraph 5, and that there was no reciprocal mechanism for the lessee of the lower maisonette to enforce paragraph 4 or its equivalent against the lessor directly. These factors contributed to a finding that there was a significant imbalance in the parties' rights and obligations. This finding was not seriously appealed before the UT and the finding must therefore stand.

  41. So far as (b) is concerned, the situation described above was contrary to the requirement of good faith because the lessor had failed to complete its side of the original bargain by failing to set up a scheme of occupation in the building.
  42. In relation to causation ((c) above), it is submitted that, if significant imbalance and a lack of good faith are established, it is no part of the statutory regime that terms in contracts within the scope of UTCCR are nonetheless enforceable. Further, the UT's reasoning places a strained meaning on "causes" and undermines the mischief which the UTCCR seek to address. Finally, this finding is submitted to be inconsistent with the fact that the question of unfairness is to be determined at the date at which the agreement was entered into, namely 2012.
  43. In his oral submissions Mr Grant challenged the jurisdiction of the UT in making its third conclusion, which relies upon an assumption of professional representation, when this is not a point of law and was not therefore open to the UT as a fresh point on appeal.
  44. In response, Mr. Henry Webb, who represented the respondent company (as he also did in the UT), submitted that it was clear that paragraph 4 in the Appellants' lease was within reg 4(2) once account was taken of the terms of the EU Directive, in particular Recital 13 and Art 1(2). Mr. Webb's submission is that, whilst the Appellants' case on appeal can be supported by the first two clauses in Recital 13 (which relate to circumstances where the substance of the contract clause arises directly from legislation), the final clause of Recital 13 is heavily against the Appellants in providing that the phrase "mandatory statutory or regulatory provisions" also covers rules which, according to the law, will apply between the contracting parties provided no other arrangements have been established. The Respondent's case is that the extension of the lease under LRHUDA is precisely the circumstance covered by the third clause of Recital 13.
  45. Looking more widely, Mr. Webb identified the purpose of this legislation as redressing abuse of unequal bargaining power. In the context of the present case, the bargaining power differs from that in a conventional consumer contract. It is, he submitted, the tenant who makes the first move. The tenant can choose the timing and the tenant can raise new terms that may be the subject of individual negotiation. In those circumstances, it is a process which manifestly protects the interests of the "consumer".
  46. Mr. Webb sought to support the UT conclusion on causation for the reason identified by the judge, namely, that the lessee would have been caught by the terms of paragraph 4 for the next 86 years whether or not the lease had been extended in 2012. The cause of the alleged unfairness therefore arises, it is submitted, from the original lease, which falls outside the UTCCR, and not from the new contract formed in 2012.
  47. Discussion

  48. This is a second appeal from a specialist tribunal presided over by an experienced specialist judge to which due respect must be afforded, albeit that the point at large arises from legislation which may not be part of the regular diet of the Lands Chamber. On the other hand, in lay terms it is easy to understand, and have sympathy for, the basic feeling of unfairness that lies at the heart of the Appellants' case and which was recognized in the decision of the FtT. These matters must, however, be determined according to the law.
  49. The central point in the appeal arises from reg 4(2). In drawing his conclusions HHJ Huskinson relied upon the following factors:
  50. i) the lessor was statutorily obliged to grant the new lease;

    ii) the terms upon which the lessor was obliged to grant the new lease were provided for in sections 56 and 57 of the 2002 Act;

    iii) although there was scope for some alteration, the starting point was that the new lease was to be on the same terms as those in the existing lease.

  51. Although Mr Grant deployed submissions to the contrary, in my view it is simply not possible to find a flaw in the judge's reasoning, albeit that it is shortly stated. Further, the following additional factors support the judge's conclusion:
  52. a) in terms of unfairness to the consumer, it is of note that the entire process under the 2002 Act is driven by the lessee (as consumer) who, in this case, chose to ask for an extension of the lease without seeking a variation of paragraph 4 notwithstanding knowledge of the manner in which the accommodation of the upstairs maisonette had been managed and notwithstanding the lessor's failure to implement the scheme of mutual enforcement described in the original leases;

    b) although, the primary focus of reg 4(2) may be upon specific terms in consumer contracts for which the source of the text is directly drawn from legislation, as the final clause in recital 13 demonstrates, the EC Directive, and therefore the domestic legislation, are to be construed more widely as including rules which, according to the law, must apply between contracting parties provided no other arrangements have been established. The circumstances of the present case would seem to fall within that which is envisaged by that sub-clause;

    c) the structure and mechanism of the 2002 Act impose a mandatory requirement on the lessor to extend the lease on the same terms as the existing lease if the tenant has complied with the detailed notice procedure.

  53. In all the circumstances, I consider that the decision of the UT on the reg 4(2) was sound. Given Mr Grant's correct acceptance that the Appellants must succeed on each of the three points held against them in the UT, my conclusion, unfortunately for the Appellants, marks the end of the appeal if My Lords agree. Out of respect for the quality of the arguments raised, I will however turn briefly to the remaining issues.
  54. In terms of "causation", the issue is narrow. The Appellants assert that it is the term in the 2012 lease which is the source of unfairness. The Respondent's case is that the relevant term arises from the original lease, which falls outside the ambit of the UTCCR. In this regard, I consider that the decision of the UT, which favoured the case of the lessors, was in error. It is the current term in the 2012 lease which is the subject of this litigation. The lessors assert that the Appellants are in breach of that term, rather than the term in the original lease which no longer has legal force as between the parties. The focus of the legislation is upon terms, and it is, therefore, the term in the 2012 lease which prevents sub-letting and which is the cause of the significant imbalance that was found to exist by the FtT.
  55. The third and final issue, relating to the UT finding that the inclusion of paragraph 4 was not contrary to the requirement of good faith, is also one on which, if it were relevant to do so, I would find in favour of the Appellants on the narrow basis that it was not strictly a point raised on the appeal before the UT and the reasoning of the UT judge relied upon matters which were strictly outside those relating to points of law.
  56. In conclusion, if my Lords agree, on the basis that I have held that the UT judge was correct in his decision on reg 4(2) and that therefore the UTCCR do not apply to paragraph 4 in the 1st Schedule to the 2012 lease, this appeal must be dismissed.
  57. Lord Justice Underhill:

  58. I agree with the President's conclusion that this appeal should be dismissed, but I have reached that conclusion by a different route. Thanks to his exposition of the background and the issues I can state my reasons quite shortly. As he observes, Mr Grant for the Appellants accepted that he had to succeed as regards all three of the points identified in para. 105 of the UT's Decision. I take them in turn.
  59. (1) Does Regulation 4 (2) (e) Apply ?

  60. The question is whether the phrase "contractual terms which reflect mandatory statutory or regulatory provisions" in article 1 (2) of the Directive, and thus also in regulation 4 (2) (e), applies only to terms whose actual content is prescribed (albeit not necessarily word-for-word) by the legislation or regulations in question or whether it also covers cases like the present where, for idiosyncratic reasons, terms whose content was agreed by the parties are continued in effect as a result of a statutory mechanism.
  61. In my view the phrase does indeed cover only cases where the content of the terms is prescribed. That seems to me the more natural reading simply as a matter of language. However, I accept that the words might be capable of a wider construction, and what is in my view decisive is the policy underlying article 1 (2). The reason why it is appropriate to exclude from the scope of the Directive terms reflecting "mandatory statutory or regulatory provisions" is that the legislator/regulator must be taken to have given proper weight to consumer protection when prescribing a term to be included in the contract: see para. 28 of the judgment of the CJEU in RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen EV [2013] EUECJ C-92/11, [2013] 3 CMLR 10. But that obviously does not apply in a case like the present. Section 57 (1) of the 1993 Act says nothing about the substance of the terms to be incorporated in the new lease: all that it mandates is that they should be the same as before. If a term was unfair prior to the extension it will be equally unfair following it; and it does not make sense that it should become immune from the operation of the Act because of the fact – which is in the logical sense a mere accident – that the lease has been extended in the meantime. That is essentially the point made in the passage from Chitty quoted by the President at para. 22 of his judgment, and I agree with it.
  62. The reasoning of the UT Judge at para. 101 of his judgment amounts to no more than saying that because section 57 (1) required the incorporation of the previous terms regulation 4 (2) (e) bites. That does not engage with the point that the statute does not prescribe the content of those terms; and I think the same is true of the third of the three supporting points made by the President at para. 33 of his judgment. As to his other two points:
  63. (a) I take the point that the Appellants' predecessor in title, Ms Scott, chose to invoke the terms of the 1993 Act, which involved reproducing the terms of the original lease in circumstances where (as it is now said) they had become unfair, without seeking to deploy section 57 (6) to get them changed. But, while that might go to the question of fairness, I do not see how it can affect the question of construction.

    (b) I agree with the President that if, contrary to my view, paragraph 4 of the First Schedule to the lease should be regarded as "reflecting" the mandatory provisions of section 57 (1), and accordingly falls within article 1 (2) of the Directive, the fact that section 57 (6) allowed the parties to agree something different would not make any difference, because of the effect of the final words of recital 13. But those words do not have any bearing on the primary question of whether a provision which does not prescribe the content of the term in question is caught by the Directive in the first place.

    (2) "Causation"

  64. As regards the causation point, I agree with the President's reasoning and conclusion at para. 35 of his judgment. What regulation 5 (1) is concerned with is the effect of the provision in question, rather than how, as a matter of history, it came to be included – though, again, considerations as to the latter may be relevant to fairness.
  65. (3) Fairness

  66. The FTT's reasons for its finding that paragraph 4 was unfair are at paras. 84-97 of its Decision. After directing itself on the applicable law it said, at paras. 93-96:
  67. "93. The unfairness of the term is to be assessed at the time of conclusion of the contract, that is to say, in the present case, at the time of the 2012 grant of an extended lease. At that stage, nearly 35 years had gone by since the lessor expressed its intention to grant a lease of the upper maisonette, and the lessor had taken no steps to set up the scheme of owner-occupation intended by the original parties, as evidenced by the drafting of the lease of the lower maisonette. Furthermore, the upper maisonette had been used for the short-term rental tenants during some or all of this period, including immediately before the respondent became successors in title to the lessee named in the 2012 lease extension.
    94. The lease therefore contained a provision in Paragraph 4, which imposed more onerous terms on the lessee (as consumer) than applied to the lessor (as supplier). In the tribunal's view, the imbalance went so far as a derogation of grant by the lessor from paragraph 5 of the Second Schedule of the lease, by which the lessee was granted 'the benefit of the restrictions contained in the Lease of the remainder of the Mansion granted or to be granted'. Furthermore, there was no reciprocal mechanism for the lessee of the lower maisonette to enforce Paragraph 4 or its equivalent against the lessor directly, for so long as there was no long lease of the upper maisonette. The most that the lessor covenanted to do was to enforce the like restrictions against the 'occupier' of the upper maisonette, which was a right devoid of any practical meaning for so long as the upper maisonette remained part of the freehold, owned by a limited company, and was let out to short-term rental tenants.
    95. The conclusion is that Paragraph 4 causes a significant imbalance in the parties' rights and obligations, to the detriment of the consumer (the lessee). This is contrary to the requirement of good faith, because the lessor: had failed for nearly 35 years (now nearly 40 years) to complete its side of the bargain to set up the scheme of owner-occupation in the building; had derogated from the grant of the lease of the lower maisonette; and had flagrantly disregarded its own need to comply with Paragraph 4 or its equivalent, for the better use and management of the building, as a whole, and for the benefit of the lessees of the lower maisonette, in particular.
    96. By refusing to comply with Paragraph 4 itself, but insisting that the lessee of the lower maisonette do so, the lessor was not merely seeking 'to have its cake and eat it', but was seeking to perpetuate, in bad faith, an unequal and unfair arrangement."
  68. The basis on which the UT reached a contrary conclusion appears at paras. 104 and 105 (3) of its Decision, quoted by the President at paras. 16 and 17 of his judgment. It will be seen that the Judge does not contradict the FTT's finding that paragraph 4, judged as at the time of the grant of the new lease in 2012, gave rise to a significant imbalance between the rights of the lessor and the lessee. Where he differs is on the issue of good faith. The reasoning is decidedly succinct, but Mr Webb submitted, I think correctly, that what the Judge relied on was the facts (1) that the 2012 lease was granted as a mandatory requirement under the 1993 Act; (2) that both lessor and lessee (namely Roundlistic and Ms Scott) were represented by solicitors on the transaction; and (3) that Ms Scott could have sought to have the terms of the lease amended under section 57 (6) but chose not to do so.
  69. In his oral submissions Mr Grant contended that the finding of the FTT represented an assessment or evaluation of a factual character which gave rise to no issue of law and could only be challenged on the basis that it was perverse and that that was not how Roundlistic had put its case in the UT or how the UT had purported to decide it. The President would accept that submission if on his reasoning the point arose: see para. 36 of his judgment. (Mr Grant also initially submitted that there was in any event no evidence that Ms Scott had had legal advice, which was an important element in the UT's reasoning; but in the course of his oral submissions he accepted that it was clear from the documents before the FTT that she had – as one would in any event have expected.)
  70. I am not persuaded that the UT decided the appeal on a basis which was not open to it. Para. 32 of Roundlistic's Statement of Case in the UT pleaded:
  71. "Given that section 57 of the 1993 Act sets out detailed provisions as to when it is possible for a party to insist on alternative terms being included in the new lease, it is submitted that it cannot be contrary to the requirement of good faith for the landlord to enter into a new lease which complies with its obligations under section 57."

    That seems to me to be essentially the argument which the UT accepted. In my view it goes beyond a merely factual challenge to the FTT's evaluation. The contention is that the requirements of the 1993 Act procedure are such that terms resulting from it cannot be regarded as "contrary to the requirement of bad faith". That could be characterised as a contention that the FTT's approach was wrong in principle or that its decision was perverse. Either way, if the contention is good, the FTT's conclusion would be wrong in law.

  72. As for the substance of the issue, we were taken to the leading cases which consider article 3 (1) of the Directive and regulation 5 (1) of the 1993 Regulations, and in particular the requirement of good faith. These are: Director General of Fair Trading v First National Bank plc [2001] UKHL 52[2002] 1 AC 481; Aziz v Caixa d'Estalvis de Catalunya [2013] EUECJ C-415/11, [2013] 3 CMLR 89; and Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67, [2016] AC 1172. The circumstances in which the issues in those cases arose were very different from those of the present case, and even the helpful statements of general principle which they contain are to some extent formulated with those circumstances in mind. Nevertheless, I should quote part of para. 105 of the judgment of Lord Neuberger and Lord Sumption in Makdessi (p. 1228), with which the majority agreed. They said:
  73. "105.  … The Regulations give effect to Council Directive 93/13/EEC on unfair terms in consumer contracts, and these rather opaque provisions are lifted word for word from articles 3 and 4 of the Directive. The effect of the Regulations was considered by the House of Lords in Director General of Fair Trading v First National Bank plc [[2001] UKHL 52] [2002] 1 AC 481. But it is sufficient now to refer to Aziz v Caixa d'Estalvis de Catalunya, Tarragona i Manresa (Case C-415/11) [2013] 3 CMLR 89, which is the leading case on the topic in the Court of Justice of the European Union. Aziz was a reference from a Spanish court seeking guidance on the criteria for determining the fairness of three provisions in a loan agreement. They provided for (i) the acceleration of the repayment schedule in the event of the borrower's default, (ii) the charging of default interest, and (iii) the unilateral certification by the lender of the amount due for the purpose of legal proceedings. The judgment of the Court of Justice is authority for the following propositions:
    (1)    The test of 'significant imbalance' and 'good faith' in article 3 of the Directive (regulation 5(1) of the 1999 Regulations) 'merely defines in a general way the factors that render unfair a contractual term that has not been individually negotiated' (para 67). A significant element of judgment is left to the national court, to exercise in the light of the circumstances of each case.
    (2)    The question whether there is a 'significant imbalance in the parties' rights' depends mainly on whether the consumer is being deprived of an advantage which he would enjoy under national law in the absence of the contractual provision (paras 68, 75). In other words, this element of the test is concerned with provisions derogating from the legal position of the consumer under national law.
    (3)    However, a provision derogating from the legal position of the consumer under national law will not necessarily be treated as unfair. The imbalance must arise 'contrary to the requirements of good faith'. That will depend on 'whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations' (para 69).
    (4)    …"

    I should also quote from para. 17 of the speech of Lord Bingham in the First National Bank case, where he said (p. 494):

    "The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer's necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Schedule 2 to the Regulations. Good faith in this context is not an artificial or technical concept; nor, since Lord Mansfield was its champion, is it a concept wholly unfamiliar to British lawyers. It looks to good standards of commercial morality and practice. Regulation 4(1) lays down a composite test, covering both the making and the substance of the contract, and must be applied bearing clearly in mind the objective which the Regulations are designed to promote."
  74. Applying those principles, I agree with the UT that it was not open to the FTT to find that the inclusion of paragraph 4 of the First Schedule of the 2012 lease was contrary to the requirement of good faith. It was (of course) a term of the original lease. Even if the 1999 Regulations had been in force when that lease was first negotiated, it is hard to see how the term in question could have been regarded as unfair, because the significant imbalance which the FTT found was only as a result of subsequent developments – namely the failure of the lessor to grant a long-term tenancy of the other maisonette – which were then unforeseen. But even if I am wrong about that the fact remains that the term was not caught by the Regulations because it was entered into prior to their coming into force. It is only because of the mandatory renewal of the lease, at the instance of the lessee, that the Regulations now bite. It may be arguable that that is in itself a factor which militates against a finding of unfairness; but, whether that is so or not, the important point is that the processes of the 1993 Act gave the lessee the opportunity not only to seek to re-negotiate any terms which had become unfair as a result of developments since they were first agreed but to have the question whether such a term should be included determined by a tribunal – see section 57 (6) (b). The lessee would almost inevitably in such a case be – and in any event in this case was – represented by solicitors. This is a very long way from the kind of case with which the Regulations are primarily concerned. Both parties were operating, with the benefit of legal advice, under the terms of a procedure designed by statute to give reasonable protection to the interests of both, and if the lessee chose not to operate those procedures in relation to paragraph 4 Roundlistic was in my view – to borrow the language of the CJEU in Aziz, albeit in rather particular circumstancesentitled reasonably to assume that the consumer would have agreed to such a term in individual contract negotiations. (I note in passing that the FTT had found that the operation of the 1993 Act procedures did not constitute "individual negotiation" because of the operation of regulation 5 (2) and (3); and there was no challenge to that finding before us.)
  75. That is essentially the reasoning of the UT, and I think it was right. The FTT did not in fact address this aspect at all. As appears from para. 95 of its Decision its finding of bad faith was based entirely on the perpetuation of the significant imbalance which it had already found. But it is quite clear from the case-law that the requirement of good faith imports an additional element which does not simply mirror the finding of significant imbalance. Mr Grant relied on an observation by Lord Steyn in the First National Bank case deprecating any "purely or even predominantly … procedural interpretation of the requirement of good faith" (see para. 36 of his judgment (p. 500)). But the reasons why I do not believe that paragraph 4 was unfair in the present case are in my judgment substantial and not predominantly procedural.
  76. Lord Justice Singh:

  77. I agree with both my Lords that this appeal should be dismissed. Insofar as their reasoning in reaching that conclusion differs I respectfully agree with the judgment of Underhill LJ.


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