Why annual rents might be illegal in this country
Tuesday, October 02, 2007
The practice is common and widespread.
In this country, landlords demand and get payment of rent for both commercial and residential properties for a year at the signing of a lease or at the conclusion of negotiations where an oral agreement is entered into for the rental of property. There is widespread belief that this is either required by law or is permitted under existing statutes or common law doctrines. Nothing can be further from the truth. Most statutes in most jurisdictions outlaw the practice.
In others, the common law doctrine has undergone significant modification so as to make practice deemed illegal. Where it is not illegal, courts have struck down provisions in leases that provide for the annual payments because they offend basic equity principles. This article seeks to clarify the position of the law in this country by comparison to practices in other common law jurisdictions.
Under the old common law, rent is seen as a periodic payment for the possession of land. The foundation of this legal estate is based on the feudal doctrine of 'tenure'. Land is held at different levels on behalf of the freeholder who was the lord of the manor. When peasants were able to hold land, they did so by paying a rent to the landlord. This could take the form of cash payments but it could also be in the form of "fruits from the land". The landlord then had a dual advantage. He was the owner of the title to the land and also had a partial beneficial interest in the 'goods' that emanated from the land.
It is against this background that the English common law doctrine of rent was formulated. Under the traditional view, the landlord could stipulate all the terms under which a tenant would hold and occupy land in consideration for the payment of fee annually or at such times as was convenient to the landlord. There was little or no bargaining. Consequently, there was no understanding on the part of either the landlord or the tenant that a contract was being entered into. It was more like a licence.
This traditional view of the common law has long since been jettisoned in favour of a modern theory of contract that conceives of the relationship between the landlord and the tenant as a contractual one, nothing more, nothing less. The common law cannot now countenance a master/slave relationship as the foundation for the negotiation or conclusion of an agreement to hold property. The pace of change in the common law doctrine is slowest in England and Wales. In other jurisdictions (Australia, New Zealand, Canada, the U.S.A., Jamaica, Barbados, South Africa, Tanzania, Singapore, and many others) the pace has been faster. Judges in these jurisdictions have let it be known that this one-sided pattern of fixing rent was in general unacceptable. They would make exceptions, of course, for commercial leases where there is equality of arms between negotiating parties. However, judges have refused to endorse the practice for residential tenancies.
Perhaps the greatest change that has taken place is in the promulgation of statutes that expressly forbid the practice of landlords demanding annual rental payments in advance. These provisions are in statutes that are variously called Landlord and Tenants Acts, Rent Acts, Housing Acts, Settlement Acts or Property Acts. They do several things:
. They invalidate acceleration clauses (as annual rental payments are known) if these form part of leases for residential tenancies;
. They will permit the clauses in commercial leases only if the totality of the provisions in the lease do not appear to burden the tenant unduly. The statutes place the burden of proof on the landlord to show that this is in fact the case;
. The statutes create a legal interest for the tenant in the tenancy as opposed to only a beneficial interest. This means that if the tenant pays rent, he has possessory title to the land and not a mere interest in occupying or using space. He controls the rented land, not the owner;
. The statutes provide for a duty to mitigate by the landlord in the event of a default in the payment of rent by the tenant. In other words, the landlord has a legal obligation to look for other tenants after a current tenant has defaulted for non-payment of rent or has been evicted for other reasons.
These general propositions have enhanced the position of the tenant. However, some statutes permit the use of acceleration clauses but only under certain conditions. Most states in the United States have followed the tenor of the so-called Restatement of (Second) Property which recognises the use of acceleration clauses provided:
(a) The tenant retains the right to the leasehold and if the landlord terminates, the tenant must receive back all prepaid rent for the balance of the term, with interest;
(b) That in determining the amount of the prepaid rent, future rent is discounted to its present value;
(c) The acceleration clauses can only be used as a means to liquidate damages. Consequently, if a tenant defaults before the clauses trigger, sufficient time should be given to the tenant to cure (i.e. to pay the amounts owed). Only when this fails could the landlord enforce his rights under the acceleration clauses.
In reviewing the Rent Decree, 1996 in this country, I realised that there is nothing that gives the landlord the right to demand annual/accelerated payments. It seems that no one has ever challenged the practice in court and, as a result, local authorities, which are charged with enforcement, go along with whatever the practice has been in their locality.
Needless to say, the practice has hurt residential as well as commercial tenants. Many Gambians have great difficulty coming up with annual rental payments. They end up in debt to friends and family members in trying to come up with the amounts needed to pay their rents. Landlords say they ask for annual payments in order to reduce the time they have to spend in chasing delinquent tenants and to protect their properties from damage by tenants. This is a reasonable explanation. However, the remedy for this is for the landlord to ask for a month's (or sometimes two months) deposit, legally evict the tenant for non-payment of rent and recover any additional expenses that he would have undergone to get the property back on the market. He is not entitled to any accelerated payment.
Commercial enterprises, especially small businesses, have resorted to bank loans to pay for up-front rental costs. Small wonder many Gambian businesses fail after only a few months. Many enterprises are simply unable to maintain a healthy cash flow once steeped in debt at the start up of operations. Only foreigners who might work for big companies, governments or international organisations have the wherewithal to pay the up-front costs for residential accommodation and only a limited number of Gambian businesses are able to pay rent a year in advance. Landlords here continue to enjoy an advantage that is not available elsewhere.
My conviction on this matter was strengthened by a thorough review of the case law in other commonwealth jurisdictions. The judgments in those cases are too complex to be distilled in a newspaper column. Bearing in mind that each case in each jurisdiction will turn on its own facts, a few essential points can be established from the court reports.
1. Accelerated payments are to be seen only as liquidated damages (i.e. estimates of loss or damage agreed to in advance by parties to a contract) not as penalty. The clause that triggers their happening in leases would have to meet the test of what represents a "genuine pre-estimate of damages". The courts are reluctant, for historical reasons, to enforce provisions in leases that are draconian. Many courts have not found it easy to determine what a genuine estimate ought to be. In general, they would look at the amount demanded and decide whether the payment is a "sum irrespective of the damage sustained". If it is then it is a penalty, and the courts will deem such a clause illegal. The contract for the rental of property can then be treated as voidable.
2. The courts also look to the language of the lease to determine whether the parties really intended to give the landlord dual advantage in the execution of the lease. The landlord is able to recover possession and use of his property where as the tenant would have nothing. To remedy this, two things have been done. The first is that the courts determined that accelerated terms in leases were unconscionable and thereby unenforceable at both law and equity. Secondly, the courts have construed the clauses as having the effect of transferring the whole of the rented property to the tenant. Under this construction, the tenant can exclude the landlord from the property for the period of the tenancy and could consider the landlord a trespasser if he enters the property without permission. This alternative remedy is a powerful one and generally causes landlords to drop their demands for annual payments.
3. Courts have also construed annual payments as an advance by the tenant to the landlords without the formality of a loan agreement having been duly executed. Tenants do not have to make loans to their landlords. For that, landlords must go to a bank or a financial institution. If the tenant is flushed with cash and wishes to help the landlord out, then that is his business. The practice here is that landlords use the advance payments for other purposes such as investing in additional properties or in government treasury bills.
4. In some judgments, courts have seen annual payments as a means by which the landlord coerces the tenant to provide monies for him to prepay his statutory obligations such as taxes, rates, water and electricity, insurance, etc. When this is done, there is no benefit to the tenant in the form of reduced rent or other charges. The tenant is essentially used by the landlord to ease his cash flow problem and thereby enhance his income and the viability of his business. The courts have found this practice odious.
5. In advanced commonwealth jurisdictions, courts have deemed the annual payments either as monies held in escrow or as constructive trusts. These are technical issues beyond the scope of this article. In simple terms, what this means is that the landlord is deemed to be a fiduciary of funds that he holds in trust for the tenant. What this does is to place a very powerful obligation on the part of the landlord to keep the monies paid to him in advance in a separate account and to pay such interest that accrue to that account to the tenant. It is the tenant's money, not his. Failure to do so can be deemed as a breach of trust and can have severe consequences, including the risk of imprisonment for the landlord who fails to appreciate the legal burden that has been imposed on him (or he has imposed on himself) by being the sole trustee of a constructive trust.
6. Finally, the courts have ruled that accelerated clauses fetter the right of either party to a lease to terminate. Some leases provide for termination but the bulk of the ones that I have seen in this country do not. Tenants realise that once they have paid for the full amount for the period of the tenancy (one year), they are unable to leave until the period is up. The landlord might also want the tenant to leave earlier. The accelerated clause in the lease would seem to be the only glue that would be keeping the landlord/tenant relationship together. This is too rigid. Leases should have termination clauses and these should be as enforceable as any other term of the lease without the risk of a declaration of war between the landlord and the tenant. Below are suggestions for change:
(a) The National Assembly could debate this issue and consider repealing the section of the Rent Decree 1996 to make the practice of annual (accelerated) rental payments illegal.
(b) Alternatively, local authorities can enact subsidiary legislation that will do the same for properties within their jurisdiction. The Banjul City Council, the KMC and the Brikama Area Council can enact such legislation under their existing powers.
(c) The Minister of Lands can, by administrative fiat, order that the practice be stopped and with the advice of the Attorney General could issue guidelines accordingly that would now be followed by all who deal in rental land and property.
(d) Any affected citizen might want to consider filing suit in the High Court in order to have the court pronounce on the legality of accelerated clauses in his or her lease. This could be the test case that the country has been waiting for. Good luck!
The author is a lawyer and a contributing columnist to this newspaper.
Author: by St. George AdÈ Joiner