In this review, we look back at some of the cases that hit the headlines in the first six months of the year (January 2021 to June 2021) that are of relevance to the social housing sector.

City of London v Leaseholders of Great Arthur House [2021] EWCA Civ 431

The Court of Appeal was asked to consider the extent to which leaseholders were liable to contribute towards the costs of carrying out substantial works to the structure and exterior of the building.

Great Arthur House was a Grade 2 listed building containing 120 flats, originally granted under long leases pursuant to the right to buy. All leases contained a covenant requiring leaseholders to pay a reasonable part of the costs incurred by their landlord in carrying out specified repairs and insuring against risks involving specified repairs.

In particular, the term “specified repairs” was defined in the lease as repairs carried out in order (i) to keep in repair the structure and exterior of the premises and of the Building in which they are situated […] not amounting to making good of structural defects.

Great Arthur House suffered from water penetration for many years, stemming back to defects in the initial construction. In February 2016, the landlord started an extensive scheme of works to address these problems, which included replacing the existing curtain walling, works to the structural frame, new balcony doors and cladding and works to the roof. The works were completed in 2018 and the costs were approximately £8m, giving an estimated contribution of an eye watering £72,000 per leaseholder.

The landlord sought to recover the costs of the works from lessees, arguing that works do not cease to be repairs simply because they also cure a defect in the building that was there since construction and where that defect caused damage or deterioration to the structure and exterior of the building. In the Upper Tribunal, the leaseholders were successful in arguing that the lease provisions did not allow the landlord to recover costs of works that amounted to making good structural defects.

The Court of Appeal upheld the Upper Tribunal’s decision. The Court rejected arguments that there was a difference between undertaking repairs and making good structural defects, where the ‘repairs’ had the effect of correcting the structural defect at the same time. It was irrelevant that the works also remedied deterioration that had occurred to the building over the time that the defect had existed. Of course, it was a question for expert evidence whether the effect of the work was to make good a structural defect and accepted that, in this case, some of the works may have amounted to repairs.

This decision is particularly relevant to the sector as it reinforces the importance of understanding the specific wording of the service charge provisions in your lease. The fact that this case concerned the interpretation of a ‘Right to Buy’ lease, makes it likely that very similar clauses will be contained in other leases granted under the same legislation.

Chuan-Hui v K Group Holdings Inc [2021] EWCA Civ 403

This case concerned residential flats in a multi-purpose block in Mayfair, held under a tripartite lease, where the Maintenance Trustee (MT), not the landlord, was responsible for repairing and maintaining the premises. The premises had a long and troubled history of disrepair and service charge disputes, which led to numerous court and tribunal proceedings.

Following an application made by leaseholders to the Leasehold Valuation Tribunal in 2010, a manager was appointed to demand, collect and apply all the various funds made payable to the MT, including service charges, and to carry out the obligations of the MT. The management order ended in 2013, when control of the premises reverted to the MT, at which time some of the leaseholders were in significant arrears with their service charges. In August 2016, the former manager assigned to the MT the right of payment of arrears at the date of his appointment as manager.

The MT pursued the lessees for payment of the arrears, including arrears purported to be assigned to him by the former manager, and a claim was issued in October 2016, amounting to over £1m. The lessees defended the proceedings and argued that the MT had no entitled to arrears incurred and demanded before 2013 because the manager derived its powers from the management order and, once the order ended, there was nothing left for him to assign to the MT.

In the first instance, the First-Tier Tribunal held that the assignment was valid and that the MT was able to pursue the lessees for arrears. The lessees appealed to the Upper Tribunal, arguing also that the sums demanded were not service charges as defined by s.18 Landlord and Tenant Act 1985. The Upper Tribunal dismissed the appeal and the lessees further appealed to the Court of Appeal.

The Court of Appeal upheld the Upper Tribunal’s decision and dismissed the appeal. The Court was satisfied that a manager appointed under Part 2 Landlord and Tenant Act 1987 was not confined to carrying out the duties of the MT under the lease but who also performed the functions conferred onto him by the Tribunal. Thus, the manager remained accountable to the Tribunal even after the expiry of the management order.

The Court also found that the conditions of the management order were superimposed on the existing contractual framework of the lease, which did not affect the underlying rights and obligations. The lease made provisions for charges to be paid by the leaseholders incurred by or on behalf of the landlord. The lease also defined “the landlord” as any person who had the right to enforce payment of the charges. In this case, the manager had the right to enforce payment of the service charges. At the expiry of the management order, this right re-vested in the MT.

Trinity House of Deptford Strond v Prescott [2021] EWHC 283 (QB)

The Court was asked to consider whether the prohibition to enforce a possession order based on a s.21 Notice was discriminatory.

This case concerned an assured shorthold tenancy of residential premises in London, SE1. In 2019, the tenants fell into rent arrears. As a result, the landlord issued a notice under s.21 Housing Act 1988 as well as a notice seeking possession (NOSP) under Grounds 8,10 and 11 in Schedule 2 Housing Act 1988. The landlord started possession proceedings relying solely on the s.21 Notice and obtained a possession order in January 2020. As the tenants remained in the property, the landlord issued a warrant of possession in February 2020. In December 2020, the landlord transferred the case to the High Court for enforcement.

Due to the Coronavirus pandemic, the government introduced the Public Health (Coronavirus)(Protection from Eviction)(England) Regulations 2021) in January 2021 which prohibited the execution of possession warrants except in cases where, amongst a handful of other exceptions, the court was satisfied that the case involved substantial rent arrears and the warrant related to an order for possession made on Grounds 8, 10 and 11.

Although it accepted that the possession order was made pursuant to a s.21 Notice, the landlord nonetheless applied for permission to enforce the warrant. They sought for the exception to be read in a way that would enable eviction to be carried out on the basis that it would be disproportionate and discriminatory for a landlord who served a s.21 Notice to be prohibited from evicting tenants when a landlord who relied on a NOSP under Grounds 8,10 and 11 was able to do so. In his application, the landlord relied on s.3(1) Human Rights Act 1998.

The Court considered the difference in approach where a possession order is made under a NOSP on Grounds 8, 10 and 11 and a s.21 Notice. In the first case, there would be a judicial determination of the facts of those rent arrears, whereas in the second case, the landlord’s decision to serve and rely upon a s.21 Notice was simply based on their choice for whatever reason to deprive the tenant of their home, with no necessary or apparent connection to the rent arrears. The Court therefore held that the difference in treatment was directed towards a legitimate aim, that of striking a fair balance between landlords and the tenants. S.21 was a draconian measure and, in the circumstances of the pandemic, it was fair to restrict the rent exception to where the possession order was made on rent arrears grounds.

Faiz v Burnley BC [2021] EWCA Civ 55

The Court of Appeal was asked to consider issues relating to waiver of forfeiture.

The Respondent was the owner of a café, which they let to commercial tenants for a term expiring on 25 March 2020. In 2003, the lease became vested in the Appellant.

The lease provided that payment of insurance rent was payable within 7 days of demand. The lease also contained an absolute prohibition on sub-letting and a forfeiture clause in the event of a breach of covenant.

In September 2019, the landlord demanded payment for insurance rent for the period between 1 April 2019 and 25 March 2020 (the expiry due date of the lease). The sums demanded became due 7 days later, in early October 2019. The tenant failed to make payment. Around the same time, the tenant sub-let the premises in breach of the absolute covenant.

The landlord became aware of the unlawful subletting in mid October 2019 and served a s.146 Notice, forfeiting the lease. However, in November 2019, after service of the s.146 Notice, the landlord sent another demand for immediate payment of the insurance rent for the recalculated period of 1 April 2019 to 18 October 2019 (when they became aware that a subletting took place). The tenant did pay this demand and the landlord was deemed to have accepted the payment.

The landlord subsequently peacefully re-entered the premises.

The Court was asked to determine whether the re-entry was unlawful given that the tenant paid the insurance rent demand, which the landlord accepted, thus waiving the right to forfeit. The Court held that, where a breach consisted of an unlawful subletting, the tenant must show that (1) the landlord knew about the subletting taking place and (2) the sums demanded and accepted accrued after the date of the breach. The burden of proof would therefore be on the tenant to establish this based on the facts, which in this case, did not happen. The Court also held that the November invoice did not amount to a fresh demand for insurance rent as it asked for immediate payment of only part of the period already covered by the September invoice, which did not follow the lease mechanics for payability of insurance rent. Therefore, the November invoice did not amount to waiver of forfeiture.

Aviva Investors Ground Rent GP Ltd v Williams [2021] EWCA Civ 27

The Court of Appeal was asked to consider the extent to which a provision dealing with service charges in a residential lease is invalidated by s.27A(6) Landlord and Tenant Act 1985.

The case concerned long leases of flats in a mixed residential and commercial development in Portsmouth, which were originally held in common ownership. Each lease provided that the service charge comprised costs for three elements: insurance, building services and estate services. For each element, the lessees would contribute their share (for which the lease would fix a percentage) or “such part as the Landlord may otherwise reasonably determine”. The fixed percentage varied from flat to flat as it was calculated by reference to the square footage of each flat.

By the time proceedings were issued in the Tribunal, the development was no longer held in common ownership, which went to the crux to the dispute as the fixed percentage in the leases no longer allowed the landlord to fully recover their costs. This meant that the landlord took to charging service charges in different proportions, a practice challenged by a number of lessees.

Section 27A(1) Landlord and Tenant Act 1985 provides that applications can be made to the First-Tier Tribunal (FTT) for determination of various aspects relating to service charges, including “the amount which is payable” and “the manner in which it is payable”.

Section 27A(4) provides that no application can be made where the issues in dispute have been agreed/admitted by the tenant, have been referred to arbitration or have been the subject of a court or tribunal determination.

Section 27A(6) provides that any agreement seeking to exclude the jurisdiction of the FTT on questions that could be referred to it under s.27A(1) is invalid.

The landlord argued that the effect of s.27A(6) was to transfer the landlord’s power to specify another amount to the FTT.

The lessees’ argument was that it actually limited the landlord’s ability to recover no more than the fixed percentage mentioned in the lease, meaning that the reference to “such part as the Landlord may otherwise reasonably determine” was struck out from the lease.

The FTT agreed with the landlord’s argument, and the lessees appealed to the Upper Tribunal. The Upper Tribunal reversed the lower court’s decision and held that the effect of s.27A(6) was to remove the phrase “such part as the Landlord may otherwise reasonably determine” from the lease altogether, leaving the landlord to recover the specified fixed percentage. Understandably, the landlord appealed and the Court of Appeal held that the first instance was in fact correct. The effect of s.27A(6) was simply to remove the landlord from the decision making process and to transfer this to the FTT.

Price v Mattey [2021] UKUT 7 (LC)

The Upper Tribunal (UT) was asked to consider whether a service charge demand could still be valid even if it showed an incorrectly calculated proportion of the landlord’s total expenditure and if so, whether the Tribunal had jurisdiction to determine its reasonableness.

The case concerned Oak Close, a development in several blocks, comprising 31 flats. The Respondent was the freehold owner and the Appellant was a leaseholder living in a block of 8 flats. The lease required the tenant to contribute 1/8th of the costs incurred in providing services to the block in which her flat is located and 1/31st of the costs incurred in respect of the development.

Although all 31 flats were initially managed by the freeholder, some blocks were now managed by Right to Manage companies. For most of the period in dispute, the landlord was managing and incurring expenditure in respect of only 24 flats, which included the block where the tenant lived.

The landlord issued an application for determination of reasonableness and payability of service charges demanded from 2009 to 2017. The tenant sought permission to appeal the First-Tier Tribunal’s decision and permission was granted for the tenant to appeal only in respect of the validity of the service charge demands. The appeal was therefore only concerned with this aspect.

Although the demands said nothing about the way the service charges were calculated, it was clear from the budget calculations for year 2014 onwards that the landlord was charging the tenant 1/24th of the total expedite in respect of development costs and was accepted that this proportion was charged for all years in question. The tenant argued that the demands were invalid because they failed to comply with the provisions of the lease, in that it asked her to pay 1/24th of costs incurred for providing services to the development, instead of 1/31st as mentioned in the lease. This was the only argument raised by the tenant.

The tenant further argued that, as the demands were invalid, the Tribunal’s jurisdiction to determine a reasonable service charge under s.27A did not arise.

The landlord accepted that they could only recover 1/31st from the tenant in the absence of an application under s.35 Landlord and Tenant Act 1985 to vary the lease and argued that the demands were valid and that the FTT was correct to reduce the charge in each case to 1/31st when exercising their jurisdiction to determine a reasonable service charge. The UT agreed with the landlord and held that there was no formal invalidity on the face of the demands. It could only be seen from the budget calculations that the sums charged were too high, a fact which the landlord accepted. The UT held that the demands did in fact seek payment of sums unrecoverable under the lease, in that the sums charged were in excess of the proportion for which the tenant was liable, therefore the FTT was right to reduce the sums payable to only what was recoverable under the lease, namely a 1/31st proportion of development costs.