Terms of Business
Following initial discussions with a prospective landlord, the agent sets out the terms in writing; the principal (more commonly called the landlord in the letting situation) accepts, they both sign, and the contract comes into existence. It is paramount that the agent does nothing that may constitute the commencement of their service until the landlord has signed the agreement and given the authorisation to proceed.
Unfortunately, the 'law of agency' is not one set of statutory regulations. The 'law' has developed as common law, statute, case law and so on over many centuries. This whole subject is full of difficulty and 'grey' areas. This means that any person who holds himself out as an agent for a principal would be taking huge risks if the terms of that agency are not clearly understood and legally compliant. Any agent who acts beyond that authority is running significant risks.
It follows, therefore, that an agent should aim to produce a 'watertight' agreement. The agreement must accurately reflect the terms agreed upon by the parties and be consistent with the customary practice of the business concerned (The RICS code of practice for lettings and management is a good starting point). Any standard business terms used should be regularly checked and updated. The problem in most busy agency offices is that a standard agreement may be outdated (staff may not be doing things that way anymore) or may not cover some particular aspect of a client's property or instructions.
The code of practice, which is mandatory under a Rent Smart Wales licence (see later), requires an agent to provide a prospective landlord who approaches them with the following details:
- fees and expenses
- the terms of business between the landlord and agent
- the duration of the agreement to manage the property on the landlord's behalf
- the extent of the agent's financial authority to authorise expenditures such as essential repairs/maintenance.
General Principles
The moment a landlord says "go ahead", in other words, when an agent offers to carry out services for a landlord and the landlord either expressly or by implication says "okay", the agreement is created. The agreement will continue until it is expressly cancelled by the parties or until the services have been concluded. This means that if the arrangement were for a tenant find, the agreement would end as soon as the tenancy has commenced. Where an agent is instructed to manage a property, the contract will run as long as the parties have agreed or until the end of the tenancy, unless cancelled earlier. Unless expressly stated, the agent has no authority to act after that, nor is the agent liable for any events occurring after that date (unless they arise from some earlier act or omission by the agent).
The parties' conduct may imply an agency agreement, and it may also be subsequently ratified after the event's performance. Ratification is not always straightforward, but it may be expressed or implied, i.e., the landlord accepting rent or taking no action to evict a tenant would be deemed to have ratified the arrangement.
An agency agreement may also be created by extending an existing relationship. It is not unusual for an agent to be engaged during the pre-let refurbishment of a property, in which case the agency agreement can start long before finding a tenant has commenced.
During the engagement/management period, the landlord will be liable for all of the agent's actions in the day-to-day management of the property. This could be rent collection, dealing with repairs and disputes. The extent of the agent's authority will depend upon what the parties have agreed, express instructions given by the landlord, the law or authority implied by the conduct of the parties, plus a duty of care.
Drafting/sourcing Terms of Business
Agents who belong to a professional body will be required to use terms of business that comply with that organisation's guidance. They make templates available and can also be purchased or drafted by a legal advisor.
Agent's Terms of Business are a critical legal document in a letting business. A well-drafted agreement assists both parties; the scope of the service provided will be apparent from the outset, and disputes can usually be resolved by reference to the contractual position of the parties. It is common for an agent to obtain copies of competitors' terms and use these as a base for drafting. Whilst this may be a good starting point, there is no guarantee that other agreements are correct in law or that those terms will accurately reflect the service provided.
It is essential that any agreement is in plain English, is fair and accurately reflects the agency's current practice or any particular matters agreed with an individual landlord. Variables such as fees are best shown as separate attachments.
The Consumer Rights Act 2015 may apply. Essentially, this legislation ensures the terms are fair and balanced. The legislation requires businesses to use less technical terms to make their interpretations simple. The contract should not seek to permit the agent to do something the law does not allow. Similarly, clauses that seek to waive the agent's liability may not be considered fair. Declarations which say that the client has read and understood the contract are regarded as unenforceable because if a client cannot understand a contract, stating that he does will add nothing to the agreement. The legislation requires the agent to give the client adequate time to read and reflect before signing and accepting the services offered and, in some cases, a 'cooling off' period.
Drafting the terms of business is an ongoing process. Agents should review the terms annually to ensure that the current day-to-day working practice is reflected.
Fees
Agents usually base management fees on a percentage of the rent collected, plus separate costs for setting up, agreement fees, inventory fees, etc. Clarity is needed regarding whether the management fee is payable on 'rents due' or 'rents collected'. The latter means that charges only apply if the tenant pays the rent, yet the agent will still provide a management service through non-payment. Also, ensure it clarifies when the fees are payable. Some agents will collect the payment monthly from the rent collected, and others will charge the full fee for the agreed tenancy upfront.
An agent should always consider the extra costs of day-to-day management. Who pays the cost of inspecting an empty property? Who pays for the administration and time sourcing and arranging the delivery of a new appliance?
Under the Consumer Rights Act 2015, agents' fees for their landlord and tenant clients must be displayed in a place likely to be seen in their office premises and on any website (if any). See later for more details.
The business terms require clarity on matters such as minimum charges and what fees will be payable on the cancellation of the agreement. Is the fee for a sole agency, and do charges apply if the landlord lets via another agency? The agent must protect his business against a landlord withdrawing early, but severely penalising such a landlord is unfair.
Variation
Once signed, the parties cannot make changes (including fees) to the business terms without consent. A provision to change the terms upon reasonable notice should be included, but that will allow the landlord to say no and withdraw instructions. It is not expedient to sign a new agreement every time fees are changed, and this can be done by a separate letter or notice, allowing the landlord to accept or decline (within a reasonable time limit). Building a fee structure enabling increased fees for a set criterion is possible. Where variations are agreed upon verbally or by practice, they should be recorded as a variation to the original terms and signed by all parties.
Termination
A landlord may revoke his agent's authority at any time, either verbally or in writing. Some agents seek to make termination difficult, but whether penalty-type clauses are enforceable is questionable. Given the 'close' relationship between an agent and a principal, it is better to end it sooner when the parties are unsatisfied with the arrangements or are not working well together. If the client can prove that the service is unsatisfactory, it is unlikely that a court would hold a landlord to the agreement.
The agent should require a reasonable notice period and can make a minimum fee payable to avoid early termination. Many agents will have a minimum price equivalent to six months of management. This will reduce the risk of a landlord cancelling his instructions immediately after the first tenant has taken possession.
The agent should reserve the right to terminate the contract without notice where the landlord is unwilling to comply with statutory obligations.
An agency agreement will terminate immediately upon the principal's death. The principal's estate is not bound by anything the agent does post-death of the client, even if the agent is not immediately aware of the client's death. This will also apply if the property is sold as the landlord cannot manage the property, nor can the agent be without instructions for the new owner.
Cancellation Of Consumer Contracts
Under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, in force from 13 June 2014, agents taking on consumer landlords must follow new rules.
Distance and off-premises have an automatic right to cancel within 14 days of agreeing to the contract. Also, within those 14 days, the agent cannot do any work for the landlord without the landlord's express consent. Most landlords will not want the agent to wait 14 days before arranging EPC and advertising, so express consent will likely become the norm. If any work is done within 14 days of cancellation without following this process, then no charges are payable by the consumer.
Firstly, consumer landlord contracts will fall into one of three basic categories.
- Distance contracts (concluded without a meeting),
- Off-premises contracts (basically those agreed upon from a home visit) and
- On-premises contracts (when the consumer comes to your premises and concludes the contract).
For letting agents, most contracts will probably be distance or off-premises contracts. While it is accepted that some landlords will not be consumers, it may prove tricky to identify the difference; therefore, granting the same right to all may simplify the business.
In all three contract situations, "prescribed information" (from the schedules at the back of the regulations) must be given to the consumer. There is a long list for distance and off-premises, and, again, to simplify things, this long list could be used for all consumers regardless of which type of contract they have. Failure to give this information could allow a consumer to cancel for twelve months and two weeks without paying anything!
Additionally, distance and off-premises contracts are legally required to include information about the consumer's right to cancel and a cancellation notice they can complete and return if they wish to exercise their right to cancel.
The regulations also prohibit "additional charges" without the consumer's express consent. This would apply to making a charge not agreed upon at the point of creating the contract, but could also be applied to increasing the amount charged. It is also unclear if a contract term allowing the agent to increase charges on a specific notice period would be considered express consent.
The regulations also require consumers to be able to contact the trader on a basic rate phone number to seek assistance in their contractual relationship.
Breach of these regulations carries unlimited fines.
Unfair Terms
Agents with consumer landlords must ensure all clauses within their business terms are fair, and unfair terms are governed by the Consumer Rights Act 2015.
A standard term is unfair if it creates a significant imbalance between the parties' rights and obligations to the consumer's detriment. It is contrary to the requirement of good faith. If a term is unfair, it will be void and not enforceable, but the rest of the contract will stand.