Property litigation weekly update – 13 August 2021

In this week's bulletin we report on a recent case involving the recoverability of notional costs from service charges and the proposed introduction of an arbitration process to deal with Covid-19 arrears. 

There is also a case about a right of way over a track leading to a churchyard. We have included links to other insights from across the firm and some positive news stories.

Government's Policy Paper proposes introduction of binding arbitration process for Covid-19 arrears

We previously reported on the Government's updated Code of Practice, which was first introduced in June 2020 to guide discussions during Covid-19. Although voluntary, the Code reinforces and promotes "best practice" amongst landlord and tenant relationships and aims to facilitate effective communication on Covid related arrears.

Building on this, on 4 August 2021, the Government issued a policy paper setting out its plans on how commercial rents debts should be dealt with in the future. The policy paper is available here.

These plans include a number of extensions to the current deadlines, including that:

  • the period in which no evictions can take place has been extended to 25 March 2022 (unless legislation is passed before then);
  • the restriction on the use of the Commercial Rent Arrears Recovery (CRAR) has been extended until 25 March 2022 (unless legislation is passed before then). Currently, CRAR can only be used by a landlord if more than 554 days' of rent arrears have accrued;
  • the period where restrictions have been introduced on serving winding up petitions based on statutory demands has been extended until 30 September 2021

The Government also proposes to introduce a binding arbitration process to deal with situations where agreement cannot be reached between landlords and tenants and arrears remain. The arbitrator, who is an independent third party, will consider the dispute and decide how the arrears should be dealt with. The parties will be bound by any arbitration decision, meaning that payment of the arrears must be made in accordance with the decision.

The proposed arbitration system will apply to all commercial rent arrears which have accrued due to Covid-19 closure restrictions in sectors which have been impacted by Non-Pharmaceutical Interventions (i.e. public health measures to prevent and/or control Covid-19). The policy paper suggests that this will enable landlords to:

  • evict tenants where arrears have been incurred before March 2020;
  • evict tenants where arrears have been incurred after the end of the ring-fenced period;
  • evict tenants for whom the legislation does not apply at any time;
  • charge interest on rent in accordance with the provisions of the lease;

The policy paper reiterates that the Government expects tenants to pay its arrears where it is able to do so, but that landlords should make concessions where possible. Although voluntary, the policy paper also indicates that any negotiations should take place in accordance with the Code of Practice.

Further details of the process, including how it can be commenced and the intricacies of how it will work in practice, will be released by the Government in due course.

The policy paper does however anticipate that the cost of the arbitration would be shared by both parties where negotiations have taken place in good faith and that arbitrators may have discretion to order otherwise if a party does not negotiate in accordance with the Code of Practice.

Francis v Sandoz [2021] UKUT 174 (LC) – What constitutes a "fair and equitable proportion of costs" when considering how service charge is divided between leaseholders?

Mr and Mrs Francis acquired a holiday park and leased the chalets on the site. In 2020, the owners sought a payment of £18,000 under service charge provisions in the chalet leases to cover the estimated costs of providing accommodation for the site manager and two wardens. The two wardens were the owners' sons and both occupied one of the 176 chalets on the park, which had been internally apportioned to create two separate areas of accommodation.

Services charges were equally distributed across 176 chalets.. The leaseholders failed to pay and the owners brought a claim in the First Tier Tribunal (FTT) for a determination of the reasonableness and payability of the estimated charges. The FTT concluded that the owners incurred only notional costs in providing the accommodation to the wardens, as they owned the chalet. The leases did not permit a deduction of notional cost as service charge. The FTT also determined that the wardens' apportioned chalet created 2 units and service charges should be distributed between 177 chalets. The owners appealed the decision.

The Upper Tier Tribunal (UTT) considered two issues on appeal. Firstly, as to whether the leases permitted the landlord to add any amount of rent it would otherwise have received from the service charge. The UTT decided that this sum was not a sum actually expended or incurred. It could therefore not be recovered as part of the service charge. However, costs actually incurred, such as payment of utilities and taxes associated with the chalet could be recovered.

Secondly, the UTT concluded that the FTT was wrong in treating the wardens' chalets as two units and total expenditure should be distributed between 176 units.

As an important aside, the UTT also considered Section 27A(6) of the LTA 1985 which renders void any lease term which might fetter the ability to seek a tribunal determination on service charge payability. As the "fair and equitable" test in the lease was to be determined at the sole discretion of the owner, it was void and the tribunal retained authority to determine the point.

It is worth noting that courts and tribunals will look at the heads of service charge expenditure closely. Landlords should not think that service charge provisions will be interpreted generously, because they will not be.

Hughes v Incumbent of the Benefice of Frampton-On-Severn, Arlingham, Saul, Fretherene & Framilode

A vicar succeeded in getting a right of way under the doctrine of "Lost Modern Grant" for the benefit of his churchyard, and in so doing the Upper Tribunal gave useful guidance about how much use is merely 'occasional use' in the context of someone asserting a right of way, and also about the requirement to put encumbered land owners on notice of the use.

The St James' Church Trustees in Gloucestershire owned a track and adjoining site next to the Churchyard. The Churchyard itself was owned by the vicar, as distinct from the church and its Trustees. The track gave access from the public road to both the churchyard and the adjoining site. In 2011 the church trustees registered the track and the adjoining land as a single title, before selling it all in 2012. In 2015, the land was sold again to Mr and Mrs Hughes, where they built their home.

The vicar stopped using the track in 2016, but in 2018, he applied to the Land Registry to register a right of way over the track for the benefit of the Churchyard. Mr and Mrs Hughes objected, arguing that the vicar had only used the track occasionally, and that this was not enough to establish a right of way. Mr and Mrs Hughes also submitted that even if only occasional use was enough to give rise to a right of way, that was not enough to put the landowner on notice that a continuous right to enjoy the track was being claimed.

The Upper Tribunal (UT) considered the three ways to claim a right of way in circumstances where it had not explicitly been granted. These were (i) that the track had been used since "time immemorial", which means since the year 1189 (not proved here), (ii) under the Prescription Act 1832 (not available here because the continuity of use ceased in 2016), and (iii) under the doctrine of "lost modern grant". This means that "where there has been upwards of twenty years' uninterrupted enjoyment of a right of way"…"the law will adopt a legal fiction that such a grant was made, in spite of any direct evidence that no such grant was in fact made". On these facts, the UT concluded that only the doctrine of lost modern grant was available to the vicar, but that this would succeed..

The UT went on to state that there needs to be enough use to put a person on notice that there is a right of way being claimed. What is "occasional use" is judged on that basis. Witness evidence described certain activities as a "matter of routine", including access and parking for clergy, attending Sunday services, access and parking for visitors attending services, weddings, christenings, funerals, community meetings and also family members tending graves. The UT decided that the use of the track by the vicar and visitors was enough to put Mr and Mrs Hughes and his predecessors in title that the 20 years use of the track was being accrued.

Mr and Mrs Hughes argued that when the title to the school site was registered in 2011 and then sold to Mr and Mrs West in 2012, no declarations were made on either occasion about any rights over the land. Therefore Mr and Mrs West could not have been on notice that the track was being used. This argument was dismissed by the UT, concluding that there was nothing to prevent the vicar from claiming use now, and the 20 year period required to benefit from the doctrine of lost modern grant was complete before the sale in 2012 in any event.

The case is useful in concluding that what is "occasional" depends on the context, that the fact that the vicar and the church trustees were different legal entities (even though the vicar was one of the trustees) enabled them to create rights against each other, and that the doctrine of "lost modern grant" can still operate to create rights even though the Prescription Act is no longer available.

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