Bankway Properties Ltd v Dunsford & Anor

Factual and Procedural Background

This is an appeal against an order dated 18 August 2000 from a County Court Judge who granted possession of a residential flat to the claimant landlord, Company A, and awarded judgment for outstanding rent arrears totaling £12,261.25. The tenancy agreement was originally granted by Company B to the appellants as an assured tenancy under the Housing Act 1988, commencing 15 February 1994 for one year at an initial rent of £4,680 per annum, payable monthly. The agreement contained a rent review clause (clause 8(b)), which provided for rent increases on specified review dates, including a final rent fixed at £25,000 per annum from the last review date, 11 February 1996.

The appellants were in receipt of housing benefit at the time the tenancy was granted, and the landlord knew the rent would be paid by housing benefit. The Judge found that the £25,000 rent was substantially above market rent and that the appellants did not properly read or understand the rent provisions. The landlord later became Company A. The appellants accepted a letter from an associated company of the landlord in 1997 which varied the agreement by deferring the review date indefinitely, allowing the landlord to specify a new review date with notice, and setting the rent at £25,000 per annum on such new review date, with the appellants able to terminate the tenancy on 14 days' notice after receiving such notice.

The landlord sought possession and recovery of arrears based on the increased rent, which the appellants challenged on various legal grounds, leading to the appeal.

Legal Issues Presented

1. Whether clause 8(b)(iii) of the tenancy agreement, fixing the rent at £25,000 per annum from the last review date, was validly incorporated and enforceable as a term of the assured tenancy.
2. Whether clause 8(b)(iii) constituted an unlawful contracting out or evasion of the mandatory security of tenure provisions of the Housing Act 1988.
3. Whether the clause was a sham, pretence, or device intended to circumvent statutory protections afforded to tenants under the Act.
4. Whether the appellants were bound by the clause despite not having read or fully understood it, and whether the landlord sufficiently brought the onerous term to their attention.
5. The proper construction of the tenancy agreement in light of the statutory framework and the parties’ intentions.

Arguments of the Parties

Appellants' Arguments

• Clause 8(b)(iii) was a pretence or device to evade the Rent Acts and the security of tenure provisions of the Housing Act 1988, as it fixed an unrealistically high rent that no tenant could realistically pay.
• The clause was not genuinely intended to create a real legal obligation but to enable the landlord to recover possession on grounds not permitted by the Act.
• The appellants were not properly informed of the onerous rent increase clause and did not read or understand it, rendering it unenforceable under principles from Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd.
• The landlord’s letter prior to the tenancy did not enclose the agreement and failed to fairly and reasonably bring the rent increase to the appellants' attention.
• The clause amounted to an unlawful attempt to contract out of the statutory scheme of assured tenancies.

Respondent's Arguments

• The tenancy was a genuine assured tenancy under the Housing Act 1988, and clause 8(b)(iii) was a valid contractual rent review clause permissible under the Act.
• There was no sham or pretence as required to invalidate the clause; the parties intended to create a binding assured tenancy with a rent review mechanism.
• The appellants were bound by the signed agreement, and the landlord sufficiently drew attention to the rent review clause prior to signing.
• The clause did not amount to an unlawful contracting out of the Act because parties have freedom to agree rents up to the statutory limit, and the Act does not prevent agreed rent reviews.
• The device employed by the landlord was permissible and not contrary to the statutory scheme; any change to prevent such devices was a matter for Parliament.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully examined the contractual terms of the tenancy agreement and the statutory framework of the Housing Act 1988, particularly the mandatory security of tenure provisions and the statutory machinery for rent review. It acknowledged that parties are generally free to agree on rents and rent review clauses, and that the Act does not prevent contractual rent increases so long as the tenancy remains within statutory limits.

However, the court found that clause 8(b)(iii), fixing the rent at £25,000 per annum from the last review date (less than two years after the tenancy began), was a device or pretence designed to enable the landlord to obtain possession contrary to the statutory scheme. The rent was set at a level well above market rent and above what any tenant could realistically pay, with no genuine expectation that it would be paid. The landlord’s conduct, including delay in enforcing the clause and the offer to defer the review date, supported the conclusion that the clause was not a genuine rent provision but a means to circumvent the security of tenure protections.

The court rejected the landlord’s submission that the clause was permissible as a contractual term, holding that the clause was inconsistent with the main purpose of the assured tenancy agreement, which was to provide long-term security to the tenant. The court applied established principles that contractual terms inconsistent with the main object of the contract or statutory scheme may be rejected.

The court also found that the appellants were bound by the signed agreement and that the landlord had drawn sufficient attention to the rent review clause, so the clause was incorporated. However, incorporation did not render the clause enforceable if it was contrary to the statutory scheme.

In contrast to the original trial judge, the court held that the device embodied in clause 8(b)(iii) was not permissible and amounted to an unlawful attempt to contract out of or evade the mandatory security of tenure provisions of the Housing Act 1988. The court emphasized that the statutory protection could not be circumvented by contractual devices masquerading as rent provisions.

The court considered relevant authorities on sham contracts, pretence, and consistency with statutory purpose, concluding that while the clause was not a sham in the strict sense (no common intention to deceive), it was a pretence or device inconsistent with the statutory scheme.

Holding and Implications

The court ALLOWED THE APPEAL, setting aside the possession order and the judgment for rent arrears based on the increased rent under clause 8(b)(iii).

The direct effect of this decision is that the landlord cannot rely on clause 8(b)(iii) to recover possession or arrears, as it is unenforceable for being an improper device to evade statutory protections. The tenancy retains its character as an assured tenancy with the security of tenure protections intact.

The court did not establish new precedent beyond the application of existing principles to the facts, but it clarified that contractual provisions that operate as devices to circumvent mandatory statutory tenancy protections will not be upheld, even if incorporated and signed by the tenant.