Estate Rentcharges – what do you mean?

Last year all the interest was on Leasehold Houses. Developers were selling new houses as 999 year leaseholds rather than freeholds in the normal way. This meant that the buyer would pay a lump sum, or ‘premium’ as if they were buying a freehold, but also pay a small ground rent to the freeholder (initially the developer) for the duration of the lease, and a service charge to cover the cost of the provision of services, such as maintaining the roads and cutting the grass on the estate.

Leasehold Houses

Most buyers thought nothing of it. They had been tenants of flats for years and this is the way that all flats operate, so why would this be a problem? And besides, it would be explained to them that the service charge would only operate until the local council adopted the roads and the verges, and they could always buy the freehold at an indicative price of a few thousand pounds. The developers might even have gone on to explain that unless they sold the houses leasehold they wouldn’t be able to recover the service charge from all the residents, as once the first buyers sold to a new owner the new owner would not be liable to pay it because in freeholds

the burden of a positive covenant (like paying for repairing the roads) doesn’t run with the land and bind the owner for the time being,

whereas in leaseholds it does. This sounds sensible, even if the reason for it sounds rather esoteric – a Maxim of Equity that lawyers learn about in the first year of their law degree.

Now if the developers had been fair and reasonable (not their natural inclination) this wouldn’t have been a problem. And if local councils hadn’t been subject to enormous financial pressures, so they didn’t want to take over housing estates in the way that they had always done, the problems would have been reasonably short-lived. But developers worked out pretty quickly that as well as sorting out the problem of recovering the cost of maintenance they could make extra money by selling on the freeholds after they had finished the development. As the prices depended on a multiple of the ground rent the developers weren’t content with ground rents of £10 a year, but built in rapidly increasing rents, say £250, perhaps doubling every 5 or 10 years.

The new owners of the freeholds then noticed that they could make even more money by increasing the maintenance charges, getting associates to cut the grass, or manage the estate, and that they could levy charges for alterations to the properties, like changing the colour of the doors or windows, altering the kitchen, or even keeping a pet. Service charges ran to hundreds of pounds a year. And the cost of buying the freehold went through the roof – people were quoted £50,000 or more.

Clearly this couldn’t last, and the first reaction was from mortgagees, who refused to provide morgages on these properties. So nobody would buy them, and the first buyers were stuck with properties that were essentially worthless.

It was a scandal, and the government had to act. After a lot of huffing and puffing in 2017 and 2018 the Housing Secretary eventually announced on 27th June 2019 that the sale of leasehold new-built houses was to be banned, and, what is more immediate, the help-to-buy monies were not to be made available for them. There has been no legislation yet (November 2019), as far as I can see, presumably because Brexit and the General Eelction had been getting in the way, but the writing is clearly on the wall, and developers have had to think again.

Because the underlying problem hasn’t gone away. If you have a lot of estate roads, some car parking areas, grass with swings, street lighting and so forth, somebody is going to have to pay to look after it. And there will be a cost that won’t be recoverable easily from the second and subsequent owners of the freehold houses.

Estate Rentcharges

So they went back to their lawyers, who dug out an old device, beloved of the Victorians – rentcharges.

These used to be pretty common. Most Victorian houses in Manchester and the North-West were originally sold this way. The original developers would pay a sum cash-down of a bit less than the market value and would then pay a small annual sum for ever – a perpetual rentcharge. This way the landowner would get both a price for the land and a continuing income, as if he had rented it. The payment was secured in much the same way as rent would be – if payment wasn’t made then the land could be repossessed. In Victorian times this was not a real issue, as all the houses would actually be occupied by tenants anyway, so the payments were made by the landlords, who weren’t too worried if payments were occasionally missed and somebody lost their home from time to time.

Times have changed, and they are all owner-occupiers now. Rentcharges were felt to be out of date, as well as giving rise to the sorts of problems set out below, and so the Rentcharges Act 1977 prohibited the creation of most new ones, allowed existing rentcharges to be redeemed (usually for 16 times the annual payment, which was generally less than £12.50 a year), and brought all such rentcharges to an end after 60 years, ie in 2037.

However, some rentcharges survived. The sort that we are interested in is the estate rentcharge. This is defined in s2(4) and s2(5) of the Act:

(4) For the purposes of this section “estate rentcharge” means (subject to subsection (5) below) a rentcharge created for the purpose—

(a) of making covenants to be performed by the owner of the land affected by the rentcharge enforceable by the rent owner against the owner for the time being of the land; or

(b) of meeting, or contributing towards, the cost of the performance by the rent owner of covenants for the provision of services, the carrying out of maintenance or repairs, the effecting of insurance or the making of any payment by him for the benefit of the land affected by the rentcharge or for the benefit of that and other land.

(5) A rentcharge of more than a nominal amount shall not be treated as an estate rentcharge for the purposes of this section unless it represents a payment for the performance by the rent owner of any such covenant as is mentioned in subsection (4)(b) above which is reasonable in relation to that covenant.

Unpicking this for a bit, it means that you can have

  • a nominal payment, which allows the charge-owner to enforce positive covenants against the land-owner; or
  • a payment for the cost of providing services, maintenance etc for the benefit of the land or of the land and other land.

In other words, you can use an estate rentcharge to recover the cost of maintaining private roads, common areas for carparking, cutting the grass and repairing the swings – just what the developers needed. As good as a lease, in many ways. So what has gone wrong?

The Problems with Estate Rentcharges

Well, like a lot of things, if you don’t change and adapt with the times, install the upgrades, and fix things that go wrong you end up with a Victorian quill when what you need is a modern laptop.

Rentcharges had been ignored by everybody for so long that they just hadn’t been updated in the way that leasehold law had. If you have a long lease then before your landlord can bring it to an end because of failure to pay service charges they have to:

  • serve a formal demand, complete with prescribed information;
  • get approval for the charge claimed from the First Tier Tribunal or the County Court;
  • serve a notice under s146 Law of Property Act and allow you time to pay;
  • bring possession proceedings in the County Court which can allow relief if you pay up, sometimes even after you have been evicted.

All these safeguards have been brought in during the 20th and 21st century, as the balance of power between landlords and tenants has changed. But nothing much has happened with the enforcement of rentcharges. This is set out in s121 Law of Property Act 1925. You can read the section via the link but the relevant parts are:

(3) If at any time the annual sum or any part thereof is unpaid for forty days next after the time appointed for any payment in respect thereof, then, although no legal demand has been made for payment thereof, the person entitled to receive the annual sum may enter into possession of and hold the land charged or any part thereof, and take the income thereof, until … the annual sum and all arrears thereof due at the time of his entry, or afterwards becoming due during his continuance in possession, and all costs and expenses occasioned by nonpayment of the annual sum, are fully paid; ….

(4)In the like case the person entitled to the annual sum, whether taking possession or not, may also by deed demise the land charged, or any part thereof, to a trustee for a term of years, … on trust, … to raise and pay the annual sum and all arrears thereof due or to become due, and all costs and expenses occasioned …

….

(5) This section applies only if and as far as a contrary intention is not expressed in the instrument under which the annual sum arises, and has effect subject to the terms of that instrument and to the provisions therein contained.

…..

This is draconian. It allows the owner of the rentcharge to:

  • take possession or
  • grant a lease

of the land if any payment or part, is 40 days in arrears, whether demanded or not.

Furthermore, following the case of Roberts v Lawton [2016] UKUT 395 any lease that is granted can be registered against the title in priority to the landowner’s and will continue even after all arrears and costs (which can be as high as the rentcharge owner likes) have been paid in full. The only way the landowner can get their land back is if they can pay whatever the owner of the rentcharge asks for a surrender of the lease.

In that case, the arrears were between £6 and £15. The rentcharge owner had made no demand and refused to prove that they owned the rentcharge without payment of a £60 administration fee. They granted 99 year leases of the land to their directors, as trustees, and sought to register them at HM Land Registry. This was held to be valid and enforcable.

There are stories of all sorts of charges being made, from grossly excessive maintenance expenses to escalating payments growing at more than RPI. As bad as, indeed worse than, leasehold houses. Especially after the CA held in Smith v Canwell [2012] EWCA Civ 237 that the court has a very limited role under s2(5) of the Rentcharges Act 1977 in assessing the reasonableness of any charges raised.

Not only does this cause considerable heartache to the homeowners, but it is of course wholly unacceptable to mortgagees in the modern context. Any property with a rentcharge is virtually unsaleable, unless the holder agrees to exclude these remedies from the rentcharge, and rely on a simple money claim  to recover what ought to be small sums of money, or at the least give the mortgagees say 2 months’ notice of intention to enforce.

But until the community woke up to the danger (and there are numerous articles on many solicitors’ websites) they became very popular. HM Land Registry figures, (quoted by the Conveyancing Association) show that 178,769 rentcharges have been registered since 2015, and 29,968 have been registered in 2019 so far, with no doubt more in the pipeline. This weekend there were reports on the BBC Website of house sales falling through once a rentcharge was discovered by the buyer’s mortgagees, and a piece on Money Box on Radio 4 on 23.11.19.

The Solution?

Well, you could introduce the safeguards found in leases to rentcharges, or go back to leases but with more restrictions. Or even resurrect commonholds, which were introduced by the Commonhold and Leasehold Reform Act 2002 but have been almost entirely ignored by the legal and business community ever since.

Some developers use restrictions on freehold titles, meaning that properties cannot be sold without the new purchaser entering into a direct covenant with the management company to pay for the cost of maintenance etc. This can work but needs rigorous administration by all the conveyancers involves, because one break in the chain releases all the future owners from the liability.

Another posibility is to rely on the doctrine in Halsall v Brizell [1957] Ch 169 that in order to take the benefit of a covenant you have to bear the burden. This has been qualified in Rhone v Stephens [1994] UKHL 3 to emphasise that you have to have a choice in the matter. In Halsall you could decide not to make use of the right of way and so not have to contribute towards its repair. In Rhone the owner of a roof couldn’t decide not to make use of the right of support to the building partly below his house, so was not liable. And it can give rise to a lot of argument about how much of the estate you have to use before you are liable, especially if one house has,  say, its own parking and so doen’t need to use the car-park.

Councils could be given more money and given obligations to take over the common parts of developments. This would reduce the problem but not really solve it. And if developers make money on selling off the rights they might not be prepared to co-operate and offer up the land, or keep a small portion of a site unfinished so as to avoid a compulsory purchase trigger. It will need careful legisltion if it is to be effective.

Or a decisive government could take the bull by the horns and abolish the doctrine that the burden of positive covenants don’t run with the land. But this is perhaps asking a bit much.

One way or another however a solution needs to be found.

Just a Bit of Free Advice

Quite a long time ago (when I was really Coventry Man) I wrote a piece Mind What You Say on the dangers of solicitors giving free advice. It was based on the case of Padden v Bevan Ashford, and involved advice being given to a wife in relation to the giving of a charge over the matrimonial home to secure her husband’s liabilities. The advice took 15 minute or so, it was basically correct (“don’t sign it”) and there was no charge made, but the solicitors were still liable, or at any rate potentially liable as this was an appeal before the final trial of the action.

In that case the Court of Appeal made clear that if a solicitor (or other professional) accepts instructions to do something then they have to do it properly, and the fact that there is no fee does not remove their liability if they get things wrong.

The point that I made was that it is vital for the solicitor to keep a good note of the advice given, in case a disgruntled client comes back complaining up to 6 years later, and you need to be able to prove what happened perhaps 8 years later, when the solicitor has seen hundreds of other clients and can’t remember this one.

Well, there has been another case of this sort  – Jenkins v JCP Solicitors Ltd, and a useful note on it from the procedural giant Gordon Exall – so I am coming back to the subject.

The brief relevant facts (and there are lots of issues, such as suing the wrong entity that I won’t deal with here) are that Mr J, The Chairman and a major shareholder of Swansea City AFC, went to JCP for initial, free, advice on his divorce in April 2011. He was told that because of his level of indebtedness he was unlikely to achieve a clean break settlement, and he should delay matters. Subsequently Swansea City achieved promotion to the Premier League, the value of their shares soared, and in 2016 his wife petitioned for divorce and achieved a settlement of £2.25m. He  claimed that if he had been advised to start divorce proceedings in 2011 he could have avoided this result, and the solicitors should have realised that his financial position was likely to improve and advised accordingly.

Again, this is a preliminary decision on an application to strike the claim out, so all is still to play for. However from what I can see in the report it was not even argued that the solicitors were not liable because the work was free. So they have at the very least been involved in hundreds of hours of non-chargable work in preparing their defence, even if it succeeds in the end. And (if J had not mistakenly sued the new JCP Ltd instead of the JCP LLP that gave the advice) they would have had to fight (in 2019/20) on the basis of the attendance note, such as it was, of a free interview given in 2011.

The advice to take away with this is clear:

  • all advice had to be professional. It can be short, and preliminary, but this has to be made clear at the time, and the client advised to come back for more detailed advice before initial comments are relied upon;
  • take a good note (preferably typed and copied to the client) of any advice given, and keep it in your filing system so that it can be found 6 years later if necesary, after the solicitor involved has left;
  • this is especially important if the client indicates that they aren’t going to take your advice;
  • try not to give off-the-cuff advice, especially out of the office. If you do, follow it up with an email or short letter summarising what you said and emphasising its initial nature;
  • be especially careful on the telephone;
  • and in articles on the internet (this is journalism, not advice – see the box opposite);

Some people won’t advise informally at all. This is however difficult in practice, and most lawyers are prepared to have an initial chat with potential clients for 10-15 minutes. But it is vital not to give hard advice when you don’t know many of the details, and often better to insist on a formal meeting, or at least an exchange of emails, for anything that is important, or likely to become so.

Doctors are famous for trying to avoid advising on ailments at parties, with good reason. Lawyers need to take care too. Clients often don’t appreciate how complicated some questions are, and how qualified any advice has to be, and don’t really listen if you tell them of the limitations of what you can say. So if you are telling them something that matters, you need to do it properly, and preferably for a fee. At the very least, this will make it clear to both of you that you are putting your name on the line, as well as helping pay the rent..

What Do You Mean?

Quite a long time ago now I wrote a piece on the importance of lawyers, and other professionals, using intelligable language when communicating with their clients, and indeed lay people in general. My piece was called We’re all Really Interpreters and I was reminded of it by a radio discussion by Michael Rosen in the Word of Mouth series, which was on Radio 4 on 22.1.19 and will be available on their Sounds app for the next year or so.

He was talking to the family barrister Lucy Reed who blogs as Pink Tape and to an academic, Dr Laura Wright, and they agreed that the law uses a lot of unusual language that many people find hard to understand properly. This is one of Lucy’s hobby horses, as she is a leading light in The Transparency Project, which is campaigning to make things clearer, especially in the Family Courts.

Lucy has written a piece on this subject, called, somewhat more forcefully than mine, Why Do Lawyers Talk Legalese? and there is a link to it here. She explains some of the code that might puzzle the unwary layman. It’s well worth reading, and indeed following.

But it’s also important to remember that the Law, like Medicine, or Rocket Science, is a complicated technical subject, and it is impossible to eliminate all technical language, and silly to try to do so. In order to express things with the clarity that we need, lawyers have to be able to use some technical language from time to time, or we can’t do our job properly. What is wrong, and to be avoided, is using it too often, and to the wrong people.

When you get down to it, confusing language usually indicates confused thought. If you understand something properly then you should be able to explain it, at various levels of complexity, to anybody. If you can’t then you may well not know what you are talking about. If you know what I mean.

 

Recent Developments in Housing – a Round-up

As one year turns to the next it is tempting to write a piece with some of the stories that haven’t made it into the main blog during the year, and this is one of those pieces.

Homes (Fitness for Human Habitation) Act 2018 

This would have made the main blog anyway, except it was enacted on 20th December 2018 and so was too late for the year. It is a short and comparatively simple piece of legislation which more or less does what it says on the tin.

Very briefly, it imposes an obligation on the landlord of a residential lease of less than 7 yearsof a dwelling in England that the dwelling is fit for human habitation when the lease is granted, and will remain fit for human habitation throughout the length of the lease. It works alongside the obligations in s11 Landlord & Tenant Act 1985 which require landlords of short residential leases:

(a) to keep in repair the structure and exterior of the dwelling-house (including drains, gutters and external pipes),

(b) to keep in repair and proper working order the installations in the dwelling-house for the supply of water, gas and electricity and for sanitation (including basins, sinks, baths and sanitary conveniences, but not other fixtures, fittings and appliances for making use of the supply of water, gas or electricity), and

(c) to keep in repair and proper working order the installations in the dwelling-house for space heating and heating water.

The new Act expands the obligation so as to include things which are not matters of repair as such as natural lighting and internal arrangement. The factors which a court has to take into account in deciding whether the property is fit for human occupation are set out in s10:

In determining for the purposes of this Act whether a house is unfit for human habitation, regard shall be had to its condition in respect of the following matters—

repair,

stability,

freedom from damp,

internal arrangement,

natural lighting,

ventilation,

water supply,

drainage and sanitary conveniences,

facilities for preparation and cooking of food and for the disposal of waste water;

in relation to a dwelling in England, any prescribed hazard;

and the house shall be regarded as unfit for human habitation if, and only if, it is so far defective in one or more of those matters that it is not reasonably suitable for occupation in that condition.

There are the usual exceptions for unfitness caused by the tenant’s breach of obligations, or to carry out works that are prohibited by legislation (eg planning and listed-building laws) or for which he needs consent from a third party (eg a neighbour) and despite reasonable endeavours has not been able to get it.

The remedy is in the County Court, and because of s17 of the 1985 Act the court has wide powers to order specific performance as well as awarding damages.

The Act applies to all new tenancies granted on or after the commencement date – 20th March 2019, including the periodic tenancies that arise at the end of a fixed-term, and to all periodic tenancies from 20th March 2020.

This is only a short note. The Act was heavi;y supported by Giles Peaker, and there is a much more detailed note on his blog Nearly Legal.

McDonald v McDonald – application in the ECHR

I covered this case when it was in the Supreme Court here. The losing party had applied to the ECHR, arguing that there was a right to review the proportionality of any possession claim if it was based on mandatory grounds – in this case s21 Housing Act 1988.

The ECHR rejected the application as inadmissible, basically on the same grounds that the SC had used. The Convention is not directly enforceable in a dispute between two inividuals, and so a contractual or statutory claim such as this one is not subject to claims for proportionality. It would be different if a public body was involved (such as the Pinnock case). But the national courts were entitled to apply national legislation, such as s21, which drew a line between the competing rights of two individuals, and the ECHR would not interfere.

There is, as ever, a much more detailed note on Nearly Legal.

Consultation for a new Housing Court

The Government has launched a consultation on whether a new Housing Court should be formed and all submissions need to be in by 22nd January 2019 – further details here.

Superficially there would appear to be a lot to be said for a court full of specialists who could deal with possession claims in residential cases, disputes over deposits, harrassment and eviction claims, injunctions seeking access to residential properties and so on.

However, the leading suggestion is that this should be based on the First Tier Tribunal (Property Chamber), and although these tribunals have a lot of expertise big problems arise because they do not award costs in most cases, have no provision for Legal Aid, and cannot grant injunctions. This would seriously restrict the ability of many tenants to enforce their rights. Landlords generally attend the FTT with lawyers, and unless tenants can have Legal Aid, or have the possibility of No-Win No-Fee assistance from solicitors (which requires the payment of costs by the loser) then the system is going to be very unfair.

And although the FTT has some spare capacity at present, they really will not be able to cope with the current 120,000 possession cases a year, let alone other housing matters.

This clearly isn’t straightforward. There are articles pointing both ways by Nearly Legal, and by David Smith of the RLA, and a more recent one from Nearly Legal, so you need to think about it and then have your say by 22nd January 2019.

And a Happy New year to you all.

The Secret Barrister – Stories of the Law and How it’s Broken

Now I don’t usually do book reviews here. It’s not that sort of blog. But this isn’t the usual sort of book. As the title (above) says it tells you how the law is broken – not as in speeding or murder, but as in a system failing to work properly or, in some cases, at all.

Written by the well-known (and strictly anonymous) criminal barrister and blogger really  known on Twitter as @BarristerSecret (and whose blog is to be found here) it came out in March and has shot to the top places of the bestseller lists and stayed there for weeks.  And although I haven’t done any criminal law since shortly after coming to Coventry (in the days when I really was Coventry Man) I bought and read it. Many of you will have also done this, and the rest of you ought to buy and read it too, because it is important, and talks about things that matter.

He (or she) gives a view of the state of the criminal justice system in England & Wales today, as seen from the coal face. And it isn’t a pretty sight. The basic problem is gross underfunding for many years, with the result that there aren’t enough courts, or judges & staff, or people and resources in the CPS prosecution service, or the police, to provide an even half-decent system. And the payments to the independant lawyers concerned – the solicitors and barristers – are appallingly low, with the result that fewer and fewer lawyers will do the work, and those that are left don’t have the time and resources to investigate cases, or prepare for and attend the trials. And things will get worse as the cuts to the system continue to bite, and those that are left give up the struggle.

Now many of you may feel that you are just not going to come across the criminal justice system, so it really isn’t your problem. You aren’t criminals. But the book shows

  • how it is very easy to get caught up in some incident and then get picked as the perpetrator from, say, a dubious CCTV film, or by a dazed victim;
  • or to be accused of some historic abuse allegation, which the police feel they have to take all the way for political reasons;
  • and how many victims fail to get justice because an otherwise strong case against the perpetrator falls over because of administrative incompetence and overwork.

And it is, anyway, a poor society which allows those accused of crimes, and liable to long periods of imprisonment, or other penalties, to be convicted of things that they didn’t do, and against which they are unable to defend themselves.

There is lots more – and they put it far better than I ever can here.

The book is amusing, challenging, hard-hitting, perceptive, and a must for anybody interested in Britain today. Go out and get one!

Note The book The Secret Barrister – Stories of the Law and How it’s Broken – is published by Macmillan in hardback and is available via Amazon, or at the shops.

 

The Risks of Do-it-Yourself – Barton v Wright Hassall

There are a lot of Litigants in Person (people acting for themselves) about these days. With the virtual abolition of civil Legal Aid and much more rigorous selection by No Win No Fee providers, a large number of people are more or less forced to act for themselves in many circumstances when this is far from ideal.

Predictably, they tend to make something of a mess of things from time to time, usually caused by lack of the technical knowledge needed for litigation, with a sketchy knowledge for the Civil Procedure Rules that govern the process, and little experience of how courts operate, and what they need to be told and how to do it. This has lead to calls in some circles for LiPs to be excused from complying with the CPR, provided they are not so far adrift that they cause serious prejudice to their opponents, or real inconvenience to the courts. In fact some people have been saying that the CPR should be interpreted this way already. Others say that the way forward is either to simplify the CPR for everybody, or to provide a simplified system that LiPs have to follow, leaving the detailed rules to those proceeding with professional representation.

Now, those on the front line in litigation will know that a combination of these views have been applied in practice by the District Judges who have to deal with the bulk of the LiPs from day to day. If you are appearing against a LiP then you will know that there is rarely much point in taking technical points about procedure against them – short service of documents, failure to include all the correspondence, vague allegations in the Statements of Case, or in the evidence in support. Most DJs will just raise their eyebrows and extend the time or whatever, and you won’t get anywhere unless they are miles out of line. You do better to fight things on the merits, when the fact that their case has not been properly argued or supported by evidence will count against them in the end. I have written about this before, here.

Now last week the Supreme Court gave judgment on a case which some commentators said would enshrine the new flexibility for LiPs in law. Others were more sceptical. So read on.

Barton v Wright Hassall [2018] UKSC 12 was a professional negligence claim by Mr Barton against his former solicitors, a well known local firm in Leamington Spa. Mr Barton had fallen out with the solicitors acting on his divorce and engaged Wright Hassall to sue them for negligence. Then he fell out with WH and wanted to sue them as well. He either couldn’t find a third firm to help him, or possibly thought that he could do better himself – either way, he issued the claim himself and in the summer of 2013 the time came for him to serve it.

Wright Hassall had instructed solicitors to act for them – Berrymans Lace Mawer – and they confirmed that they were authorised to accept service of proceedings for their clients, so all Mr Barton had to do was to stick the papers in the post, or deliver them by hand to their offices. However Mr Barton decided that, as he had left things to the last day for service, he would serve them by email, and sent the appropriate paperwork off to BLM on 24th June 2013. His email itself was fine, and he appears to have enclosed the right documents with it. However, he had missed a vital point, and so service was held to be invalid. This is that in order to validly serve by email the recipient has to confirm that they are prepared to accept service in that way. Just giving an email address in ordinary correepondence won’t do, they have to say they will accept service by email. PD 6A to r 6 CPR is specific:

Service by fax or other electronic means

4.1  Subject to the provisions of rule 6.23(5) and (6), where a document is to be served by fax or other electronic means –

(1) the party who is to be served or the solicitor acting for that party must previously have indicated in writing to the party serving –

(a) that the party to be served or the solicitor is willing to accept service by fax or other electronic means; and

(b) the fax number, e-mail address or other electronic identification to which it must be sent; and

(2) the following are to be taken as sufficient written indications for the purposes of paragraph 4.1(1) –

(a) a fax number set out on the writing paper of the solicitor acting for the party to be served;

(b) an e-mail address set out on the writing paper of the solicitor acting for the party to be served but only where it is stated that the e-mail address may be used for service; or

(c) a fax number, e-mail address or electronic identification set out on a statement of case or a response to a claim filed with the court.

4.2  Where a party intends to serve a document by electronic means (other than by fax) that party must first ask the party who is to be served whether there are any limitations to the recipient’s agreement to accept service by such means (for example, the format in which documents are to be sent and the maximum size of attachments that may be received).

It all looks a bit dated now, although it was probably entirely relevant when it was introduced a number of years ago. BLM had given their email address, but hadn’t confirmed that they would accept formal service there, Mr Barton made no enquiries, and so he was all set up for failure. His email arrived, was acknowledged, but was not responded to until 4th July, by which time not only had the 4 months for service expires, but so had the limitation period of 6 years for his claim itself, so he couldn’t re-issue and serve properly. A lesson not to leave things so late.

The various courts all held that this was not good service. What is more, Mr Barton’s application for an order under r6.15 CPR, which allows the court to validate service in some circumstances, was refused. The rule provides:

Service of the claim form by an alternative method or at an alternative place

6.15

(1) Where it appears to the court that there is a good reason to authorise service by a method or at a place not otherwise permitted by this Part, the court may make an order permitting service by an alternative method or at an alternative place.

(2) On an application under this rule, the court may order that steps already taken to bring the claim form to the attention of the defendant by an alternative method or at an alternative place is good service….

Unfortunately for Mr Barton, the District Judge, the Circuit Judge on appeal, the Court of Appeal and the Supreme Court all refused to approve service under para 6.15(2), although the SC was split 3:2 against him. Lord Sumption, giving the majority judgment said that:

  • The fact that the email actually brought the claim to BLM’s attantion was not enough. If it was, then any form of service would suffice, which was not the case.
  • Service of proceedings is important as it is the start of the timing for a lot of what follows, and stops limitation running.
  • Service by email could be a problem in case it took place without the solicitors being aware of it – for example by arriving at an address whose holder was away. Hence there are rules which ought to be followed.
  • There is no special treatment for LiPs in obeying the CPR. “Unless the rules are particularly inaccessible or obscure, it is reasonable to expect an LiP to familiarise himslef with the rules which apply to any step which he is about to take.”
  • These rules are neither inaccessible nor obscure. They are published on the internet and referred to in the instructions sent out by the court when they issued the claim. They are clear to read and if Mr Barton had read them (which he hadn’t) he would have easily understood what they said.
  • It is incorrect to say that BLM were “playing technical claims” with Mr Barton. They had not said that they would accept service by email. They were under no duty to advise him, contrary to their own clients’ interests, that he should re-serve or re-issue before limitation expired.
  • There was no reason to rescue the claim using r6.15, which would cause Wright Hassall considerable prejudice.
  • The Human Rights argument  – that this was a breach of Mr Barton’s rights to a fair trial under Art 6 – got nowhere. Rules on service and limitation periods are widespread and fair.

He did however urge the Rules Committee to look at redrafting the relevant rules in the light of developments since they were first drafted.

Lord Briggs and Lady Hale dissented, and would have allowed the appeal and validated service, on the grounds that the steps taken were effective to bring the service to the Defendants’ attention. But they repeated that there was no special treatment for litigants in person, other than the fact that they generally broke the rules by ignorance rather than as part of the tactics of a professional litigator.

So that is that. No special rules for LiPs for now, but perhaps a little bit more flexibility (depending on who is judging your case).

And finally it is perhaps ironic that if Mr Barton had put the documents in the post on that last day they would still be in time even if the Royal Mail took a week to deliver them. Because the rules on the time for service of a claim form, contained in r7.5 CPR provide:

(1) Where the claim form is served within the jurisdiction, the claimant must complete the step required by the following table in relation to the particular method of service chosen, before 12.00 midnight on the calendar day four months after the date of issue of the claim form.

And the step for service by post (or DX) is just the posting of the document, not its delivery.

More details in the usual places –  Civil Litigation Brief gives practical advice as well.

Does Carillion Ring any Bells?

I’m not going to cover the details of this topical case, because they are fast-moving, not entirely clear yet, and covered in more detail by specialists elsewhere. What matters more is that a distressingly small proportion of comentators, let alone ordinary business-owners, know very much about what happens when a business becomes insolvent, and, more to the point, goes bust.

I am going to look at a few hard truths.

The Background

The brief outline, for the sake of people reading this piece in years to come (if any) is that Carillion was the product of a merger between a number of well-known companies in the construction and facilities-management sector – part of Tarmac Construction, Mowlem, Alfred McAlpine, and part of John Laing, plus some businesses in Canada and elsewhere. It divided its activities between facilities management (eg maintenance of prisons, and railways), large constuction projects (eg hospitals and part of HS2) and mining and mineral extraction abroad. It was the second largest construction company in the UK.

After a number of apparently good years it issued a profits warning in July 2017 recording a downturn in its construction division of some £845m. The share price crashed from 192p to 45p by the end of August, resulting in the loss of 5 directors and frantic searches for refinancing or a buyer. These were scuppered at the end of September when it was revealed that the business had lost £1.15bn in the 6 months to 30th June 2017. Two further profit warnings were issued, and eventually all the options ran out and the company was placed into compulsory liquidation on 15th January 2018. The business owed some £900m, plus a £580m deficit in its pension fund.

Somewhat controvertially the Government, who had a high proportion of Carillion’s business, continued to award it contracts throughout this period, including the amazing award of a substantial share in the HS2 scheme a few days after the first profits warning.

The Outcome

The business apparently had assets worth just £29m when it closed. These would all be charged to its bankers, and although the head office in Wolverhampton may be worth something, the claims for payment on the various construction contracts are likely to be worth very little because of the counterclaims the employers are likely to raise arising out of the additional costs caused by the failure and various “defects in construction” which will come to light over the next few days or weeks.

The facilities management in the state sector – the prisons and the schools – will continue, initially funded by payments to the liquidators to cover the cost, and no doubt in due course the staff will be taken in-house by the clients, or the contracts will be re-let to other contractors, and the staff will, to the most part, be able to follow the work. There will be very little change, although the future cost will be higher because the cause of the failure was taking on contracts at unrealistically low prices in the first place.

The construction in the state sector – building the hospitals for instance – will also continue, after a bit of a hiccup. The hospital will need to be completed and the contract will have to be awarded to another contractor. This may take a bit of time, and will cost more (obviously) but there is every chance that the staff will be taken on by the new contractor, who will suddenly need just the number of workers who are working on the project when it failed, and although there will be some shaking out, and the replacement of key managers, things will continue. And hopefully some lessons will have been learned so that next time the contractor manages to finish the project intact.

The private sector work will be more difficult. Some facilities maintenance work will be taken in-house, with or without the workers, and the construction projects will continue, but after what could be a significant pause. There are likely to be more losses of employment, as new contractors bring in their own teams.

HS2 and the A14 road improvement projects are special cases: they are joint ventures between a number of contractors and they have guaranteed to take over the projects in the event of a failure such as this. Subject to their own financial stability, the survivors are likely to take over the existing staff and continue as before.

But there will be casualties – employees not taken over, pensioners and sub-contractors

The Victims

Although there has been a lot of fuss about them in the media, the employees have various sources of compensation. If they lose their jobs they will get statutary redundancy payments from the government, plus up to 8 weeks’ wages at up to £489/wk, and holiday pay, sick pay and notice pay. It may not be everything but it will be most of it, and few employees will be owed more than a few weeks at this point. And there is a good liklihood that they will be taken on again by whoever takes over the project.

Pensioners also have some protection from the Pension Protection Fund. Those receiving pensions will continue to do so at the same rates, although the rate of increase for future years will be restricted. Those who are below the scheme’s retirement age will get 90% of the pension that they would otherwise get, and subject to a cap (of some £38,500 odd for 2017). Again future rates of increase will be restricted.

It is sub-contractors, suppliers, and their employees, who will take most of the hit. Any company in Carillion’s position will have become very slow in paying their bills and the amounts that are owed will be considerable. I have heard talk that some were operating on payment terms of 120 days, or even 6 months, and for a small business this level of exposure is likely to be fatal. Even if they are taken on by the new contractors they won’t be paid for the work that they have done up until 15th January, and few businesses can afford a hole of this magnitude in their cashflow. They are unlikely to have insurance cover, and factoring won’t save them because the factor will just deduct payments from future invoices until they have been reimbursed.

If you are say an electrical contractor, if you fail then not only do your employees lose their jobs, but your suppliers, your landlords, your contractors and even (God forbid) your lawyers and accountants will miss out. To say nothing of any guarantees put up by directors or shareholders. It will be very grim.

And finally, there are the banks. There is something in the region of £900m owed to RBS, Santander, Barclays and HSBC and a few others. They will get very little of this back, and, although they won’t get much sympathy, that is money that they can’t lend to the rest of us, that can’t be invested in the economy, and we will all suffer as a result. Plus RBS still belongs to the government, and we will lose that way as well.

What can we learn?

Any manner of things:

  • Bigger is not necessarily better.
  • There is no point in bidding for a contract that has such a slim margin that the slightest problem makes it run at a loss.
  • Big construction projects used to lose money for the government because of cost and time over-runs. That is why they were put out to tender. They can still lose money for a private contractor too.
  • It isn’t always best to take the lowest bid – will the bidder still be around when the project is completing?
  • Just because the government continues to employ a company doesn’t mean that it is financially secure – so make your own enquiries.
  • Being a sub-contractor or supplier in these circumstances is risky, and this needs to be factored into your price, or indeed your decision on whether to do the work at all.

I won’t even begin on the activities of the Carillion directors, the payment of dividends when the pension funds were in deficit, the vast salaries and bonuses, and the apparant failure to see the writing on the wall. Or indeed on the government’s involvement in things. These are matters for another day.

And I am not covering the question of whether governments ought to out-source activities in this way. Again, something for another day

It is a sad time for a lot of hard-working people. We all need to learn a few hard truths.