Many landlords nowadays are looking to transfer their properties to a limited company in order to avoid some of the new tax rules.
There is quite a bit of advice out there on the tax issues (including in our online tax course) but this post is looking at an aspect of this you may not have thought of.
It’s about consumer law
What is consumer law?
Consumer law is legislation which has been passed to protect consumers from being treated unfairly by businesses.
Unfair terms
For example, legal contract documents made between a business and a consumer are now subject to the unfair terms rules. I wrote about this in my 33 days of tips series as they apply to tenancy agreements.
However one of the most important cases was the OFT v. Foxtons case in 2010 which involved letting agent contracts with landlords. Foxtons lost this case as the Judge held that their clause requiring ongoing commission where Foxtons did no work was unfair.
Cancellation rights
Another consumer law which benefits landlords is the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 which give consumers a 14 day period during which they can cancel the contract and recover any fees paid.
This will apply where landlords retain a letting agent (typically by signing an agency agreement) after at least one meeting off the agents business premises (eg after viewing the property).
If the agent does not notify the landlord of his cancellation rights then the landlord can cancel at any time for up to a year – and recover all fees paid.
It is also arguable that a landlord will be able to cancel if the agent has induced him into the agency agreement by unfair practices under The Consumer Protection (Amendment) Regulations 2014.
For example, if the agent’s service has been misrepresented.
But is a landlord a consumer?
This answer depends on the context.
- Insofar as contracts with tenants are concerned, landlords will almost always be treated as a business /supplier. However
- Insofar as contracts with letting agents are concerned, they will often be treated as a consumer – and so will be protected by the consumer legislation.
In particular, landlords who have another job, so managing property is not their main business, will almost certainly be treated as a consumer – even if they have quite a large portfolio.
There is no rule, for example, which says that landlords will not be treated as a consumer if they have more than five properties. If their main occupation is something else – for example, if they are a doctor or an actor – then they will be treated as a consumer and will be entitled to take advantage of the consumer protection laws.
However, a landlord will NOT under any circumstances be treated as a consumer if his property is managed through a limited company. A limited company is always treated as a business.
Consumer protection – something to take into account
Consumer law is probably not the first thing you will think about when deciding whether or not to set up a company for your properties. However, it is something you should consider.
Many landlords have benefited from the consumer law rules – for example when agents seek to claim commission for long periods of time when they are doing no work. You will be able to challenge this if you own your property personally but not if you own them through a company. Not under the OFT v. Foxtons case anyway.
Find out more
If you want to find out a bit more about consumer law, you may want to watch David Smith’s talk to our 2017 Conference. This is available free of charge to members of my Landlord Law service. We also have articles and FAQ looking at consumer law issues.
Are there precedents about this?
The definition of ‘consumer’ in statute does not seem to make a difference between main business and other businesses, and a person may have several businesses.
I am not aware of any precedent, but that does not mean there isn’t any.
The purpose of this article is to raise awareness.
If you own properties personally you may be able to take advantage of the consumer regulations (which could be very much to your financial advantage). If you own your properties via a company – you won’t.
It’s up to each landlord what they decide to do – all I am saying is that this is something they should take into account.
Indeed, landlords should be aware. I think that this includes being aware than having a main occupation besides BTL isn’t guarantee of being treated as a consumer as far as I can tell.
For the Consumer Rights Act 2015 “consumer” is defined as “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession.”
One certainty: If the landlord is a company it does not have the protection of the Act even if it only owns one property.
One uncertainty: If the landlord is an individual what the circumstances are which will take him out of protection.
Indeed Lawcruncher.
It does not seem right to interpret the definition as implying that a person may only have a single trade or business as that would lead to awkward results.
If so and if we assume that letting is a business (apart perhaps in case of an accidental landlord) it is then reasonable that a person is not a consumer when acting in relation to his ‘rental business’ even if that person has only a single property.
A question is whether letting is necessarily a business. For example HMRC seems to often consider it an investment.
The tax code uses at least three definitions of business. Some laws included a definition, others just rely on the “normal” meaning. There is also a meaning that comes from european law. So far as HMRC is concerned letting is a business, is not a business. is an investment and is an investment business depending on which tax you are considering.
There is a discession of meaning of business in http://www.bailii.org/uk/cases/UKUT/TCC/2013/226.html though that might be more suitable for the post about the complexity of the law.