Magnohard Ltd v Cadogan decides a block of flats is not a house

Previous authorities on the question of what is a house reasonably so called prompted a number of readers of my blog to get in touch to discuss whether the buildings in which they occupied could be described as “houses” in order that they could acquire the freehold under the Leasehold Reform Act 1967.  Mainly it is commercial tenants who after the decision in Day v Hosebay Ltd and Howard De Walden Estates Ltd v Lexgorge Ltd (which incidentally goes before the Supreme Court on 22 May 2012) want to see if they can acquire their building under this legislation.  Many are prohibited by the fact that they have leases protected by the Landlord and Tenant Act 1954 and are thus automatically excluded from enfranchising.

For a building to qualify under the 1967 Act it must be a house, this includes any building designed or adapted for living in and reasonably so called, notwithstanding that the building is not structurally detached, or was or is not solely designed or adapted for living in.  This is the sort of definition that lawyers love to litigate over!

In the Magnohard case, the property in question was described as consisting of a basement, ground and five upper floors. As built it consisted of six residential suites, one on each floor; one housekeeper’s flat, and three small shops. The housekeeper’s flat had been converted into another flat. All the flats are served by a communal entrance hall, although the former housekeeper’s flat had its own separate street entrance.  There were also alterations to the internal layout of the building which created an additional flat. The shops each had a separate entrance and the retail component of the building was just under 7 per cent of its total area.

The first instance judge thought that “When I ask myself what this building is, my immediate reaction is: “it’s a block of flats”. It’s a block of flats with three shop units, but – it’s a block of flats. It is not a house divided into flats. It is constructed and it is used as a block of flats. As I know (and I do) what the features of the building are, if I were to ask someone “what would you call that building” and they were to respond “a house” my eyebrows would naturally rise and I would think this odd. I would not call this building a house naturally, but only possibly if I were pressed into [doing] so by argument that it was surely “possible”. In those circumstances, it is, in my judgment, not reasonable to call this building a “house” at all, let alone in ordinary parlance.” The Court of Appeal was asked to rule if the judge had been wrong to conclude that the building was not a house and consequently that the tenant was not entitled to enfranchise.

The answer in this case was a simple one.  This building was a purpose built block of flats and was not a house reasonably so called so the first instance judge was correct!

The 18 Month Rule: When does the clock start running?

The 18 month rule can often be a headache for landlords and managing agents. Equally it is viewed by some residential tenants as a loophole for avoiding payment for services that they have enjoyed the benefit of but would rather not pay for.  In fact, the rule is there to encourage timely and proper accounting practices to be implemented by landlords in order to prevent tenants from receiving unpleasant and expensive service charge surprises for historic works and supplies.

The rule is contained in section 20B of the Landlord and Tenant Act 1985 which says:

“If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred”

One of the issues which arises out of this provision is when is a cost “incurred”.  This is obviously crucial to ascertaining when the 18 month clock starts ticking.  This was considering recently in the Court of Appeal in the case of OM Property Management Ltd v Burr. 

The facts of this case were that a gas bill for the heating of a swimming pool in a block of flats (wish we all had one of those).  The managment company, OMPM had been given erroneous information by the builder about who to pay the gas charges to for a period of 6 years.  When this was discovered, the bill was recalculated and a new invoice issued showing a £100,000 shortfall dating back to 2001.

One of the leaseholders, Mr Burr contended in the LVT that it was too late for OMPM to claim this £100,000 shortfall from him as the gas bill had been incurred more than 18 months beforehand, effectively at the time of supply and not at the time of the eventual bill.  The LVT agreed with him but the Court of Appeal did not, ruling that each and every case will turn on its own facts but in this case the liability for the gas was incurred upon presentation of the invoice for payment.  Crucially, this had happened within the 18 month period and Mr Burr would have to pay his share.

There are interesting implications for this principal, even though each case must be judged on its own facts.  For example, where a utility supply is invoiced on estimated use as opposed to actual use it can be many years before a reading is taken.  Where that results in a fresh demand for payment, the logic of this case is that the landlord can still recover as the invoice has been demanded in time, even if the supply itself pre-dates the 18 month period. 

The legislation is there to encourage landlords to act responsibly and the punishment for not doing so is that they cannot recover certain expenditure.  The Court of Appeal seems to have taken a sensible approach to this issue but I suspect it may not have been so sympathetic had the error in the charging sat with OMPM and not with the original builder.

Service Charges in London: How are they calculated, charged and administered by landlords and paid for by leaseholders?

The London Assembley has published a report asking the questions on everyone’s lips, in response to an apparently bulging mailbag of complaints from residential tenants about their service charges and disputes with their landlords.  My own view is that many of these complaints eminate from poor advice on the content and rights / obligations in the lease when a tenant is purchasing but that is a blog post for another day.

The report alleges that the London leasehold market is worth around half a billion pounds in terms of the annual service charges paid by tenants.  By any measure this is a large market and generates a siginficant and ever increasing amount of litigation from the estimated 500,000 residential tenants.  While the report accepts that new legislation is unlikely to be forthcoming in the near future, the main recommendations are as follows:

1. Make the private sector service charge consultation process much more like the public sector equivalent.

The reason for this is that the public sector bodies are obliged to plan over a much longer period of time and that can give tenants more certainty over the expenditure that they will have to fund.  Public sector service charges across London tend to be around £1,000 p/a less than the private sector. Even allowing for sinkings funds this is one area where the public sector appears to outperform the private sector.

2. Mandatory consideration of the financial impact of the works on the tenants (ie make this a relevant consideration for the purposes of establishing reasonableness of costs)

This is the old argument from Daejan v Benson!

3. Increase transparency in service charge procurement and accounting

This points the finger at the St Georges Wharf case which shone a light on a complex web of associated companies which won contracts to provide services to the building.  The LVT dug beneath this and awarded the residents a circa £1 million refund.

4. Free representation and more mediation

The proposal for resolving the “resource imblance” between landlord and tenant isn’t sensible.  The suggestion being that tenants avail themselves of law students and other pro bono services to take on landlords who can afford to instruct wiley experienced practitioners like me!  There is no substitute for proper advice and representation and only if the costs rules are relaxed and advrse costs become recoverable at LVT can this be properly addressed.  Further, the spectre of mandatory mediation is on the horizon which could work provided landlords don’t use the costs of such an additional procedural hurdle to make life more difficult for tenants.

5. Make Right to Manage easier in London

Getting the 50 + 1 % can be more difficult as London has a higher proportion of non-resident tenants or non qualifying premises and so it is generally harder for an RTM claim to gain traction.

The full report can be read here: http://bit.ly/IMAeVD

Tenancy Deposit Schemes: A New Dawn?

Regular readers will know that I have blogged about Tenancy Deposit Schemes a number of times before, in particular regarding the series of cases that came before the senior courts over the last couple of years which blunted the sanctions brought in under sections 213, 214 and 215 of the Housing Act 2004.  Such was the effect of those decisions on the the statutory scheme that the government had to go back to the drawing board and amend the legislation under the Localism Act 2011.

How did we get here?  This is the first and perhaps most important question to ask.  From 6 April 2007 the government introduced legislation designed to redress the balance between private rented sector tenants and their landlords in relation to the handling of the deposit at the end of the tenancy.  Up until that time, there was a perception that landlords were able to exploit their stronger bargaining position caused by the fact that they often held the deposit and could easily make deductions.  This placed an unfair burden on the tenant to pursue legal proceedings for the return of the deposit, which invariably for commercial reasons they did not pursue.  

The provisions of the Housing Act 2004 required all landlords to pay tenants deposits into one of the 3 government authorised schemes within 14 days of receipt and for the landlord to give the tenant details of where the deposit was held.  The schemes had dispute resolution procedures which meant that at the end of the tenancy both the landlord and the tenant could submit their evidence to the scheme operator to resolve it.  While this was not a perfect system, in that landlords and tenants still struggled with the evidential  burden of proving their cases, it was a move towards levelling the playing field (at a cost).

However, once introduced the judiciary soon interfered with these plans when considering the true meaning of the drafting.  The landmark case was the Tiensia/Honeysuckle case, which established that the appropriate time for assessing compliance with the registration requirements was the date at which the court fixed the final hearing.  In practice this meant that a landlord could neglect to follow the statutory procedures, leave the tenant to issue court proceedings and then protect the deposit and still evade the statutory fine.  In my view this was an example of the judiciary showing a dislike to the mechanics of the legislation, which had the potential to lead to a flood of claims, and finding a way to defeat it.  Unfortuantely, so many landlords were (and some still are) unaware of their obligations that the courts felt that the punishment did not fit the crime.

The position of the tenant was further compounded in the Gladehurst v Hashemi case, where the court decided that once a tenancy had come to an end, it no longer had the power to punish the landlord.  In effect, it meant tenants had to bring their claims and have them heard before the end of the tenancy.  In practice, it was only at the end of the tenancy that many became aware of the landlord’s non-compliance and so the whole thing became a bit of a mess.

The amendments proposed by section 184 of the Localism Act 2011 were designed to remedy these issues and restore the cutting edge of the original legislative intent.  In summary the changes are:

• The period for the landlord to comply with the initial requirements of the scheme and give prescribed information to the tenant has been increased from 14 to 30 days.
• If the landlord fails to comply, the tenant can apply to court even if the tenancy has ended.
• The penalty for failing to comply will be between one and three times the deposit rather than the fixed three times the deposit penalty that applied before.

However, while the amendments to the drafting cure many of the ills, there is one question that I think still remains.  Can a landlord protect itself from the punative fine by  registration of the deposit and service of information after the tenant has issued proceedings?  The reasoning which applied in the Tiensia case was that it could because:

1. that the present tense was used in s214 (2) (a) (and this tense is retained in the amended section); and

2. that the objective of the legislation was not to punish landlord but to encourage the protection of the deposits. 

Therefore, the legislation was not to be interpreted in a sense that implicitly encourages the ambushing of landlords by tenants who have grounds for believing that the landlords have not complied with their s 213 obligations. It was to be interpreted in a way that avoids litigation. 

Whether this view still prevails in light of the other amendments will no doubt require some further judicial scrutiny and therefore I expect that this is not the last we have heard of the TDS litigation.

Where have you been?

Well that is a question that many of my readers will have been asking over the last month as I have struggled to balance work committments, social media and blogging.  The latter has had to take a back seat.

At the beginning of March I was lucky enough to attend the MIPIM conference in Cannes with Brasier Freeth and network with a variety of property and other professionals from around the country.  I hope that I will form part of the SA Law delegation next year as now I have seen how it works I will know how to prepare.  

I have also taken on some interesting new residential disrepair instructions and found myself in court 3 times last week, after having rested my advocacy skills since before Christmas.

I am planning to get blogging again more frequently in the coming weeks, as there have been plenty of recent cases to write about!

Deposit warning for landlords

I have written numerous blogs in the past about the curious case law which has developed in relation to tenancy deposit schemes.  However, there are some practical headaches that a landlord case face in recovering the deposit from a scheme operator even where the tenant has vacated and judgment has been obtained for rent arrears or other damages.

You would have thought that a court order giving judgment against a tenant would be sufficient to convince the scheme operator to release the deposit to a landlord, as many landlords are experiencing this is not so.

There are 3 government authorised tenancy deposit scheme providers:

1. The Dispute Service (www.thedisputeservice.co.uk)

2. My Deposits (www.mydeposits.co.uk)

3. The Deposit Protection Service (www.dps.co.uk)

and each of them has their own rules and procedures about the recovery of the deposit at the end of the tenancy. 

The particular problem that I have noticed for some landlords concerns the DPS scheme and that having procured their judgment against the tenant they were not aware of the provision in the DPS terms and conditions that requires the court order to provide that the deposit can be used to satisfy the claim and that the scheme operator should be specifically mentioned.  This is a requirement of clause 29 (a) of the terms and conditions and failure to procure that statement in the court order will mean that the DPS will retain the deposit.

Clause 29 (b) suggests an alternative course of action for a landlord whose judgment does not contain the magic words, that is to obtain a third party debt order in relation to the deposit.  However, that means another court fee of £100 and a wait for the court to process the enforcement documentation.

It seems to me that the DPS in particular has set up its systems to protect the tenants deposit at all costs, when a more common sense approach based upon the evidence would make the system a good deal less bureaucratic.

Do I have to pay the landlord’s legal costs?

A vexed question for leaseholders contemplating issuing Leasehold Valuation Tribunal proceedings is whether or not their landlord will be able to charge them for the legal costs it will go on to incur in the proceedings.  Costs provisions in leases are often one of the major imbalances the relationship of landlord and tenant.  Nearly all leases that I see contain a provision that entitles the landlord to the payment of its costs in the event of the landlord having to enforce certain provisions of the lease against a tenant. 

Unsurprisingly, I have never seen a reciprocal covenant operating in the opposite direction allowing a tenant to recover its costs from the landlord under the terms of a lease.

This imbalance commercially operates aganst a tenant in most ordinary residential landlord and tenant disputes, especially in the LVT which is ostensibly a “cost free forum” in that awards of adverse costs are rare and limited to £500.

A tenant embarking on a claim for the assessment of service charges will often want to take legal advice or have proper representation at a hearing but the costs of obtaining such advice and representation can prove to be prohibative, especially as they are almost certainly unrecoverable.  A landlord on the other hand will march into a service chagre dispute armed with legal advice and expert evidence, initially funded from the service charge account.  While the procedural inertia that this creates against a tenant resolves a lot of disputes, the imbalance is obvious. 

What therefore can a tenant do to try and address this problem. Well, in the absence of a landlord’s costs covenant in their favour a tenant can make an application in the proceedings for an order under section 20C of the Landlord and Tenant Act 1985.

This provision empowers the Court or LVT to prevent a landlord from recovering its legal costs through the service charge.  This is a very important power as in many cases there will be no direct costs order in either party’s favour irrespective of the outcome but a landlord will often seek complete indemnity for costs through the service charge.

This provision helps to re-address the imbalance between landlord and tenant, particularly in less valuable disputes.  For example, it may cost the landlord £10,000 to contest a service charge determination to a full day LVT hearing, which may for arguments sake save each tenant say £500 each.  In a block of 20 flats, if the landlord could recover all of its costs back through the service charge, the costs of the proceedings would be eaten up the entire saving if the tenants were successful.  Therefore, this also provides an incentive on both sides to try and negotiate a settlement on a commercial basis, to avoid much hated “unrecoverable costs”.