To be honest, I don't see anything wrong with ISP's charging a transfer out fee. I would guess that this particular hosting company was subsidising the cost of the domain, with potential hosting income. (£5 is pretty cheap). If you want to transfer out, then you are not really wanting the hosting, and so they are making a loss on each domain that's registered.
I register my domains through a company which charges 10 quid (still cheap but slightly more). They don't charge a transfer out fee, nor for pointing the domain at my hosts servers. I would guess this means they are making a slight profit on each domain, and therefore can afford to provide greater functionality.
To me, its a bit similar to mobile phones.... you wouldn't expect to get the latest handset for free and then be allowed to cancel your contract, and move to another network for free.
In your case though, undoubtedly, it would have been much better if any costs were clearly stated in the terms and conditions, to avoid your problem.
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