Property litigation weekly update – 29 July 2021


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Members of the team this week have reported on a recent Court of Appeal case concerning the validity of service charge demands, the new "How to Rent Guide" and amendments to the Ground Rent bill. All this alongside recent insight from our colleagues around the firm and a dose of positive news.

New "Easy Read" How to Rent Guide

The Ministry of Housing, Communities and Local Government have published an "easy read" version of the guide: "How to Rent: the checklist for renting in England" on 21 July 2021.

The "Easy Read" version has been designed to simplify the language contained in the previous, longer version of the How to Rent guide.

In accordance with the Assured Shorthold Tenancy Notices and Prescribed Requirements (England) Regulations 2015, landlords must provide the latest version of the How to Rent guide to tenants at the start of their tenancy. Failure to do so will render a section 21 notice invalid.

The Regulations stipulate prescribed information some of which is not contained in the Easy Read version. We therefore recommended that the "Easy Read" version be used to supplement the previous How to Rent Guide (December 2020) and not as a stand-alone guide.

Copies of the How to Rent Guide (December 2020) along with the "Easy Read" version can be found here.

Ground rent bill update

The Ground Rent bill is at the stage of its 3rd reading in the House of Lords and has received some welcome amendments and clarifications.

Among the amendments made are:

  • An exemption from the ground rent ban for leases that include multiple dwellings, meaning that residential development leases and sale and leaseback structures can continue to charge a ground rent;
  • A premium must be charged in a lease for it to be caught by the legislation, this means other lease-based structures, such as those with long leases at a market rent, could continue to charge a ground rent provided no premium is charged;
  • An exemption from the ban for 'large and complex buildings', which is to include buildings of 15 or more dwellings which contain or are connected to substantial communal facilities, this may enable new large estates (including retirement schemes) to maintain a ground rent; and
  • Service charges (and similar payments) are confirmed as not being categorised as a ground rent and therefore not caught by the ban.
    These are largely welcome amendments to some of the original provisions that could have unintentionally given rise to issues in a variety of contexts.

There are however some alterations which may give rise to concern which include:

  • A limit on replacement lease rents to 0.1% of capital value, which could in some cases defeat the objective of allowing replacement leases to maintain a rent;
  • The ability for additional legislation to make the ground rent ban retrospective to all residential leases, subject to a review post enactment of the bill; and
  • The proposed delay of the ban in respect of retirement housing to commence April 2023, has been removed.

The possibility of the ground rent ban becoming retrospective revives concerns for some investors about the collapse of existing ground rent investments (typically owned by pension funds and other institutional investors) which could also perhaps lead to the insolvency of some companies that own the freeholds of apartment blocks.

The bill's next stage is to be read in the House of Commons, with the bill subject to further review thereafter.

If you would like advice in regard to ground rents, leases or enfranchisement please contact our specialist William Bethune.
 
Court of Appeal considers the service charge 18 month rule - No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119

The case concerned an appeal by the head landlord of residential parts of a mixed use development. There were two issues on appeal: 1) the validity of a demand for payment in respect of the supply and charging of utilities, and 2) the recoverability of the landlord's costs of the litigation.

The terms of the leases did permit the landlord to recover the cost of providing electricity and other utilities and also to levy a service charge. Each flat was metered and a company was employed to gather the usage data and calculate appropriate charges. That company issued a statement "for information purposes only" itemising the charges and the statements included a "standing charge" which transpired to be its charge for reading the meters and calculating the sums.

The demands for payment were made pursuant to the terms of the lease which dealt with utility charges, however, the standing charges costs should instead have been demanded as service charge on the basis they were not a cost associated with the consumption of energy. The court held that the sums had been incorrectly demanded, and therefore there had been no contractually valid demand.

Section 20B(1) of the Landlord and Tenant Act 1985 provides that a demand for payment of service charge must be contractually valid and served under the service charge provisions of the lease within a prescribed 18 month period running from the date the relevant costs had been incurred. As there had been no valid demand within this time period, the "standing charge" costs were not recoverable. The court held that the later validation of the original demands did not have retrospective effect and the 18 month limit could not be circumvented. The court noted that the policy behind section 20B is that tenants should know where they stand in relation to potential service charge liability.

The second issue on appeal concerned the landlord's argument that its costs for proceedings were recoverable under the terms of the leases. Those terms did permit the recoverability of legal costs incurred under or in contemplation of any proceedings under section 146 or section 147 of the Law of Property Act 1925. However, it was agreed there was never any intention by the landlord to forfeit or take proceedings to forfeit the leases. The court held this was an essential prerequisite to be able to rely on this clause. As there were no other clauses of the lease that enabled the landlord to recover its costs of the litigation, the appeal on this ground was also dismissed.

The case serves as a warning to ensure that the proper contractual mechanisms contained in a lease are carefully followed when demanding service charges, to reduce the risk of technical issues with recoverability at a later date.


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