And Another Thing….

I wrote a piece on the Pre-Action Protocol for Debt Claims yesterday – link here. I took the title at face value and assumed that it was about Debt Claims – by businesses against customers or possibly others for sums of money that were owed by individuals.

However, the definition of scope is surprisingly wide:

1.1 This Protocol applies to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including sole traders).

A number of people have pointed out to me that most claims for possession or forfeiture of leases include a claim for payment of  a debt – the rent or service charge arrears – and so the Protocol appears to apply to them.

Now the Protocol doesn’t apply when the debt is covered by another protocol (para 1.4) but the only possession claims that are covered by their own protocols are mortgage possession claims and possession claims by social landlords. The other claims  – for ASTs based on rent arrears (Grounds 8 or 10 or 11), for long residential leases based on arrears of rent or service charges, and even for business tenancies  where the tenant is a sole trader – are not, so the Protocol presumably applies. In all of these cases the Landlord invariably asks for a money judgment against the Tenant for the amount of the arrears, and this is clearly a “debt” in the normal meanong of the word.

I haven’t thought it all through, but I can’t think that this was entirely intended. The timescales in the Protocol don’t really fit in at all well to the normal commercial timescales in possession claims. Is the tenant really going to be given up to 90 days before possession proceedings can be brought against them, when the rent is normally payable monthly, or even weekly? Is the Landlord going to have to ask for possession but not a money judgment until a lot later, when the tenant has possibly moved out?

And what about the complicated procedure for claims for service charges, with all their applications to the FTT, or the rules on payment for maintenance, complete with the mechanism for consultation beforehand, payments of estimated sums on account, followed by balancing charges, and so on? This really doesn’t tie in with the Protocol procedure.

I just don’t know, because it was only drawn to my attention by James Attew of Brethertons today (here) and I had previously thought that as the Protocol has been around in draft form since late 2015 somebody would have thought of this by now.

Now it may be that there is going to be a new protocol covering all this, although I haven’t heard anything about it. Or the courts are going to say that “debt” doesn’t mean “debt” for these purposes, or something. I just hope that it isn’t another mess-up on the lines of the deposit protection fiasco, because that is rather what it looks like at present.

Any views would be most welcome.

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Paying for the Repairs – Sanity Prevails

Francis v Phillips [2014] EWCA Civ 1395

S 20 Landlord & Tenant Act 1985 provides a consultation procedure that landlords of residential properties let on long leases must follow before carrying out building works on the premises or they risk having the cost recoverable in the form of service charges capped at £250 per tenant. Unless the FTT (formerly the LVT) grants a dispensation. There are a number of other features as you might expect, and I have set out Noddy’s Guide to this in my piece on this case when it came up to the High Court in early 2013.

The short facts for today are that the case was set in a holiday site at St Merryn, Cornwall, which had been let out as more than 150 chalets, plus some other properties, all on long leases. The landlord had been carrying out a long and pretty expensive series of piecemeal improvements and repairs, without any consultation at all. However, as the £250 a head limit netted over £40,000, and as each of the projects came out at somewhat less than this, he argued that he didn’t need to, and the County Court Judge agreed, following the 1999 CA case of Martin v Maryland Estates, and  saying that

a commonsense approach to construction needs to be taken,and in view of the fact that it acts as a trigger for the protection afforded by consultation. If the threshold were too low and all minor or non permanent works covered, the result would be commercially unmanageable, to the detriment of both lessor and lessee.

Unfortunately the Chancellor Sir Andrew Morritt, in one of his last judgments before retiring, disagreed. He disagreed with Martin, said that a subsequent minor change in the legislation meant that he could distinguish it, and ruled that you shouldn’t divide the works up into separate projects and only consult if any one project exceeded the limit. You had to add up all the building works (and this includes “all works on a building or any other premises” – so it includes painting,  and the like) and if over the accounting year they come out at more than £250 a head the obligation kicks in. Even if some of the work is unexpected or very minor.

There was utter horror and disbelief among landlords of these properties at the sheer impracticability of this, tempered only by the fact that the Supreme Court decided shortly afterwards in the case of Daejan Investments v Benson that the FTT can grant dispensations before or after the event, and ought normally to do so unless the tenants can show that they have been badly prejudiced by the failure to consult beforehand. And even then the landlord may get permission if they compensate the tenants for any additional cost involved. I’ve covered this in my earlier piece too (here).

 The Court of Appeal

Fortunately the landlord appealed to the CA and came up before a strong court made up of the Master of the Rolls, Kitchin LJ and the new Chancellor, Sir Thomas Etherton. They vigorously supported the projects or “sets” approach adopted by the CCJ as against the “aggregation” approach of the Chancellor and pointed out that:

  • the changes in the legislation were very minor, and Martin still applied;
  • aggregation was not a sensible or practical approach, and cannot have been what parliament intended;

26…..Imagine a residential block of flats with 4 tenants: the annual regulatory limit is 4 x £250: £1000. Three lots of minor works on a building each costing £75 are carried out in the first half of the year. The landlord has spent £225 on service charge items. There has been no consultation. Unexpectedly, in September the outer door of the block breaks and a new door frame is required which would cost £800. A storm in November causes window damage that would cost £400 to repair. On the sets approach, the landlord would not need to consult on any of these items. They are all distinct sets of qualifying works none of which costs more than £1000. The landlord could respond immediately and repair the damage to the door and the window. The tenants are still protected because they have the after-the-event protection afforded by section 19 of the 1985 Act that the costs are only relevant costs to the extent that they are reasonably incurred and of a reasonable standard.

27. On the aggregating approach, the annual limit is exceeded by the broken door. The landlord is obliged to consult on it. This process takes time and costs money. If instead he replaces the door immediately, he has no right to recover the full amount without dispensation. Seeking dispensation has attendant legal and administrative costs as well as the risk of non-recovery and delay. But if he does not replace the door, the flats are unsafe and he is likely to have irate tenants.

And they pointed out that the real protection for tenants brought by the 1985 Act is that all service charges have to be reasonably incurred and of a reasonable amount, and if not can be disallowed by the FTT.

And the moral?

Possibly beware of judges who are retiring, as they may be thinking more about the law than the practical results of their judgments.

Anyway, we are now back to the situation as we all believed it was before this little explosion:

  • consult on projects which will cost more than £250 a head
  • there is no need to do so on smaller ones
  • if a project is too urgent to consult on then the FTT  may dispense with the need beforehand
  • or indeed afterwards, which may be a way out if a project ends up costing more than £250 a head when it wasn’t expected to do so (after Daejan)

But remember that the costs have to be reasonable if the landlord is going to defeat a challenge in the FTT.

 

Windermere Marina v Wild & Barton – Service Charges

Windermere Marina Village Ltd v Wild & Barton [2014] UKUT 163 (LC)

This is just a quick post to draw attention to this case in the Upper Tribunal. It is about apportioning a service charge among various residents of a lakeside development. Normally the actual apportionment (eg 1.73% each) would be set out in the lease, but as the developer intended to build more properties later the leases contained a clause saying that each tenant would pay a fair apportionment of the cost of services:

to be determined by the surveyor for the time being of the Lessor whose determination shall be final and binding

The surveyor carried out a formal apportionment, the tenants objected and the case found its way to the LVT (now the FTT) and then on appeal to Martin Rodger QC the Deputy President of the Upper Tribunal.

The questions were

  1. How can the “final and binding” determination in the lease fit in with the terms of s27A LTA 1985? and
  2. If applicable, what is the correct split?

Now lots of leases have provisions that charges have to be certified by agents, accountants and so on before being payable. The LVT/FTT have had no problem in overruling them when they want, but a “final and binding” determination is something different.

Superficially it ought to be easy as s27A gives lots of powers to the tribunals to decide how much service charges should be and who they are payable by. It goes on to say that

(6) An agreement by the tenant of a dwelling (other than a post-dispute arbitration agreement) is void in so far as it purports to provide for a determination—

(a) in a particular manner, or

(b) on particular evidence,

of any question which may be the subject of an application

However, one of the matters which cannot be brought before the tribunal is any matter which

(4) a) has been agreed or admitted by the tenant,

It was clear law that a tenant couldn’t raise the actual apportionment set out in the lease (eg 1.73%) so was this similar? Some previous decisions seemed to think so. And many tribunal decisions don’t need to alter apportionments, just the figures themselves, in fact apportionment disputes are very rare (up until now) so is this caught by s27A(6) at all?

The decision this time was clear. The Surveyor’s decision was wholly void, and was treated as not having been made. The matter had to be decided afresh by the tribunal. The LVT had done this, and the Upper Tribunal dismissed the landlord’s appeal.

There is an excellent (and far more detailed) summary of the decision in the Law and Lease blog and another in Nearly Legal , so I’ll just stop here. But this is a decision that will see a lot of action in the future, I’m sure.

Keep up at the Back – more changes in leasehold forms

One of the things I like about Landlord and Tenant law is that it’s never dull. Or rather, if it is dull then it won’t be for long, because somebody is going to change it. Often immediately, and sometimes with retrospective effect.

This is what happened with the recent case on the protection of tenants’ deposits – Superstrike v Rodrigues [2013]EWCA Civ  669 –  [my piece from 20.6.13]. The law, as it had been understood since 2007 was changed in the stroke of a key and with retrospective effect back to 2007, leaving thousands of landlords open to claims for penalties from their former tenants for failing to re-notify them that their deposits had been protected when the initial fixed term tenancy expired and the periodic tenancies began. Unless of course the Supreme Court decides that it hasn’t changed at all, or the CA decides that on reflection the decision didn’t mean quite what it looks like it means as at today. We shall see.

Well the law has been changed again, although not quite to quickly – we were warned on 29.4.13 and the change takes place from 1.7.13 onwards. However the consequences could still be messy as it has hardly been the subject of wall-to-wall publicity.

It concerns service charges and administrative charges for residential properties let on long leases. Demands for these have (by s153 of the Commonhold and Leasehold Reform Act 2002) to be accompanied by a summary of the tenant’s rights and obligations. If not then the monies demanded are not due and can be withheld. The summary is prescribed in some detail in the statutory instrument down to the size of the print (not less than 10 point). The summaries are slightly different for service charges and for administrative charges. And they set out in a number of places the powers that the Leasehold Valuation Tribunal has to decide on disputed service charges, approve works, determine breaches and so on. All good useful stuff, although in all fairness they could have a bit more detail here and there.

Well, you are a bright lot and have an interest in this sort of thing, so you probably know that the Leasehold Valuation Tribunal, together with a number of other land-related bodies such as the Agricultural Lands Tribunal and the Adjudicator of HM Land Registry are being amalgamated into the new First-tier Tribunal (Property Chamber) with effect from 1.7.13. Only for England (not Wales) in relation to the LVT and the ALT, although the Adjudicator is being abolished entirely, and won’t be able to continue in exile in the valleys.

There has been quite a lot of publicity given to the new rules which will apply to the FTT(PC)  – the snappily-titled Tribunal Procedure (First-tier Tribunal (Property Chamber)) Rules 2013/1169 – which will be much more like the CPR that apply in the civil courts, and the Tribunal will get power to strike cases out, award more costs in appropriate cases,  and give more effective directions, with teeth. However most commentators (apart from Brady Solicitors of Nottingham) seem to have overlooked the fact that as the LVT goes it would be pretty pointless to keep their name in the summaries served with the demands. So Schedule 6 of the Transfer of Tribunal Functions Order 2013/1036 takes the opportunity of altering the prescribed notice to give the new name, and make a few other small changes.

So, if you are a landlord, or advising a landlord, do make sure you serve the new form of summary with any service/administrative charge demands on or after Monday 1st July 2013, or the charges just aren’t due, which could be embarrassing, and potentially expensive. The actual changes are set out in the SI 2013/1036 and there are forms of the revised notice on Bradys‘ website at http://www.bradysolicitors.com.

You have been warned!

How do we Pay for the Repairs? – Two Recent Decision

Like with buses, there are often large gaps when there are no interesting developments in an area and then two come along at the same time. In this case the particular area is the recovery of service charges by landlords , and the two cases are Phillips v Francis [2012] EWHC 3650(Ch), a decision of the Chancellor in the High Court in December 2012, and, much more recently, Daejan Investments Limited v Benson and others [2013] UKSC 14, a decision of the Supreme Court on 6th March 2013.

They are both of considerable interest, although operating in essentially opposite directions. However, before I get into things properly we need to set out the broad outlines of the problem that they tackle in their own ways.

The Law

Under s 20 Landlord & Tenant Act 1985 landlords of residential premises that levy a service charge are required to consult with tenants before contacting for qualifying works, or a qualifying long-term agreement. If they don’t do this then they can only recover £250 per tenant (or £100 per tenant if it is a QLTA). Unless the Leasehold Valuation Tribunal (LVT) gave dispensation, either before or after the event. The requirements for public sector housing are slightly different and I won’t cover them specifically in this article, so as to keep it a sensible length. And although the obligation is to consult and not necessary to agree with the tenants, in practice the landlord has to be prepared to justify his decision before the LVT if the tenants ask them to find that the service charge, including the cost of the works, is unreasonable, under s27A of the 1985 Act. So the provisions have real teeth.

Now the consultation procedure is quite a lengthy one as set out in the Act and prescribed regulations, lasting at least 2 months and requiring the landlord to give 30 days’ notice of the proposed works and to invite observations and nominations for invitation to estimate. Then once the estimates are in the landlord has to give another 30 days to allow for observations on the estimates, and finally they must give notice that the contract has been awarded and justify the choice if it isn’t the lowest estimate, or a contractor nominated by the tenants. The procedure for works under a QLTA is slightly different, and only involves one consultation, once the QLTA has been entered into at the outset. In either case there is a lot of scope for getting things wrong, and if there are many tenants the cost of all the consultation, tendering and so on can be considerable.

However, things are even worse if there are only a few tenants, because it means that even small maintenance projects get caught in the net. If there are 2 tenants anything over £500 has to be subject to the procedure , and you can’t get much done for that, especially in London. There is no way for tenants to waive their rights or to abbreviate the generous time-limits. So it becomes important to know what counts as a project: if repairing 2 doors is going to cost £750 can you split this into two projects of £375 each and save time and effort all round? What about minor works such as repairing a downpipe, changing light bulbs, and so on that add up to more than £250 a head over a year but individually cost a lot less than that?  And it also matters to know whether the LVT will dispense with the requirement, either if you go there first, or if you do the work first and then have to go and seek permission afterwards, possibly because you have messed up the procedure in some minor way.

It is important to note that although we normally call them “building works” the Act describes them as “works on a building or other premises” ie anything that is not purely the provision of services. So touching up the paintwork is covered as well as replacing the roof.

In practice landlords consulted on major projects , or faced the consequences, but didn’t if the cost worked out at less than the £250/head figure, and the tenants, and the LVT went along with this, more or less – the individual LVT members are well known for providing a wide range of views to the same facts. But you could very rarely get the LVT to agree to dispense with the procedure beforehand, unless the project was large and urgent, and virtually never get them to dispense with it afterwards. It was a far from ideal situation but al least we knew where we were, and could advise accordingly.

The Problem

Well, things have changed. Phillips v Francis was an appeal to the High Court from Truro County Court about the service charges payable on a holiday estate near Padstow. The landlords embarked on what appears to have been a rather disorganised scheme to improve the facilities, where one thing lead to another without any overall plan. But as it was a large site, with over 150 houses on it, the £250/head limit came out at about £41,000. And the county court judge had decided that no individual part of the scheme cost more than that in any year, so it wasn’t caught by the limit.

The Chancellor wasn’t having any of this. He looked at the CA decision Martin v Maryland (1999) which the landlord relied on and which indicated that you looked at the individual projects to see if they needed consultation, and said that he wasn’t bound by this because of changes in the scheme brought in by the Commonhold and Leasehold Reform Act 2002. You  no longer had to look at the overall cost of the project but had to look at the annual cost to each tenant. There is no “triviality threshold”:

Accordingly, I see nothing in the present legislation which requires the identification of one or more sets of qualifying works. If the works are qualifying works it will be for the landlord to assess whether they will be on such a scale as to necessitate complying with the consultation requirements or face the consequence that he may not recoup the cost from the tenants’ contributions. As the contributions are payable on an annual basis then the limit is applied to the proportion of the qualifying works carried out in that year. Under this legislation there is no ‘triviality threshold’ in relation to qualifying works; all the qualifying works must be entered into the calculation unless the landlord is prepared to carry any excess cost himself.

Commentators are unsure what exactly this means, but the most natural meaning is that if there is qualifying work in a year that adds up to more than £250/head then the procedure has to be complied with, even if each individual project is under £50. The decision by a High Court Judge is binding on the LVTs and on County Courts, but not other High Court Judges, and so until the CA clarifies things it stands, albeit subject to the possibility of alternative interpretation by other judges. But the parties have apparently confirmed that they are not going to appeal, so the matter is not going to be clarified soon.

ARMA and other landlord organisations are horrified. It means that not only are landlords probably going to have to consult at the beginning of every year if they want to do virtually anything, but also that tenants may now be able to claim back all excess service charges that they have made over the last 6 years, by going to the LVT under s27A(2) of the 1985 Act.

Commentators are puzzled, and some of them are looking forward to a raft of decisions in the LVT and the UT(LC) when the detailed implications are thrashed out. Many just say that the decision is wrong. The best summary is, as ever, in the Nearly Legal blog. The answer may be come in the form of legislation, or an amended regulation defining the limit for qualifying works, although given the present government’s track record this cannot be relied on with any certainty. Or a greater use of QLTAs to cover smaller maintenance, which would reduce the consultation but not remove it entirely.

I’m not sure whether you can say that the decision is wrong, as the previous interpretations certainly did some violence with the wording, and were open to abuse. But it cannot be disputed that the judgement did not consider the extremely wide implications of what was being said, or spell out the consequences in enough detail. And for a decision that expressly disagreed with the CA decision in Martin v Maryland

save in its reference to the need to use common sense

this is at the least disappointing.

The Answer

None of the above. For yet again the Supreme Court ride to the rescue. I am immensely impressed with the way that the SC looks at a problem, works out the sensible answer, and then gives it to us, by a combination of energetic distinguishing of inconvenient authorities, or if need be just overruling them. I have commented previously on their efforts in Day v Hosebay (on enfranchisement) and in Berrisford v Mexfield (on leases without terms), when they rescued the law from the inconvenient and downright idiotic position that a long succession of entirely logical but cumulatively daft decisions have left it in, by going back to basics.

In Daejan v Benson the court, lead by Lord Neuberger, looked at the provision in s20ZA of the 1985 Act allowing the LVT to dispense with the need to consult on qualifying works, as set out above. The provision itself is a simple one:

Where an application is made to a leasehold valuation tribunal for a determination to dispense with all or any of the consultation requirements in relation to any qualifying works or qualifying long term agreement, the tribunal may make the determination if satisfied that it is reasonable to dispense with the requirements.

It would appear to give the LVT a wide discretion if it is satisfied that it is reasonable, and normally you would expect such a power to be exercised fairly frequently. However, a succession of cases had built up guidance that meant that it was virtually impossible to get dispensation beforehand, unless the matter was extremely urgent, and impossible to do so in practice after the event. The CA in Daejan itself had said that consultation in itself was what the Act was trying to achieve and so if consultation had not been carried out in full (in this case the decision to award the contract was made shortly before the consultation ended, rather than afterwards as it should have been) then the tenants had suffered prejudice, and the landlords could therefore not show there was none. The financial consequences (£280,000 here) were not even relevant.

Lord Neuberger made pretty short shrift of that. He said that

Given that the purpose of the Requirements is to ensure that the tenants are protected from (i) paying for inappropriate works or (ii) paying more than would be appropriate, it seems to me that the issue on which the LVT should focus when entertaining an application by a landlord under section 20ZA(1) must be the extent, if any, to which the tenants were prejudiced in either respect by the failure of the landlord to comply with the Requirements

And so if the quality, extent and cost of the works haven’t been affected by the failure to properly consult then dispensation ought to be granted in virtually all cases. If there is some prejudice, such as additional cost, this can normally be compensated for by imposing conditions, such as payment of compensation, or more usually restricting the amount the landlord can recover. In Daejan itself the landlord proposed a reduction of £50,000 in the amount that they were seeking, to cover any potential losses. And if need be the landlord could pay the tenants’ reasonable legal and surveyors’ costs in investigating the matter, and being represented at the tribunal.

There was no benefit in itself in having a consultation. It was just a mechanism for achieving the end of only having to pay an appropriate amount for appropriate works. And virtually all applications for dispensation should succeed, subject to the grant of compensation in cases where the works have cost more than they should because of the failure to consult properly.

Which, given Phillips v Francis, is just as well, because there are going to be an awful lot more applications in future.

Some commentators say this is a bad decision, that openness and transparency are good in themselves, and the result means that s20 adds very little to the existing power under s19 to disallow inappropriate costs. But I disagree. Law is the servant of man, not his master, and our laws must work in practice. This law was no longer working in any useful way, and has now been brought back to life. The management of blocks of flats on long leases is difficult enough without making the escape clause impossible to use. Tenants often don’t want to pay for repairs, and landlords often charge more than they ought. You have to have an effective mechanism for resolving these matters, and thanks to the Supreme Court the useful tool that is s20ZA(1) has now been dusted off and restored to the front line.