Property litigation weekly update – 29 July 2022
This week's update looks at the recent appeal to the Upper Tribunal on rent repayment orders and we review a case which may provide guidance on whether a tenant could terminate a lease under the force majeure clauses due to Covid-19 restrictions
Simpson House 3 Ltd v Osserman & others
In a recent Upper Tribunal (UT) appeal from the First Tier Tribunal (Property Chamber) (the FTT) the UT considered the level of the award made in a rent repayment order.
The landlord, Simpson House 3 Ltd, appealed the decision of the FTT made pursuant to section 40 of the Housing and Planning Act 2016 (the 2016 Act) which allows for a rent repayment order to be made if it is established, beyond reasonable doubt, that the landlord has committed a relevant offence, which in this case was the fact that the landlord had control or management of an unlicensed HMO (house in multiple occupation) contrary to section 72 (1) of the Housing Act 2004 (the 2004 Act). The landlord's defence of 'reasonable excuse', because its managing agents had failed to inform it that the property was subject to a recently introduced additional licensing scheme (which they were contractually obliged to do), was dismissed by the FTT.
It then fell to the FTT to decide the amount of the rent repayment order and it ordered the landlord to repay 65% of the rent it had received from the tenants in the year to 31 August 2021. When the FTT considered the amount of the rent repayment order the starting point they had applied was the whole amount of the rent paid for a 12 month period. Pursuant to section 74 (5) and (6) of the 2004 Act, the FTT had been guided by the fact that the amount of the order should be "such amount that the tribunal considers reasonable in the circumstances."
The landlord appealed and the tenants cross appealed on the basis that the FTT had failed to take relevant matters into consideration in determining the amount of the rent repayment order.
The UT found that the FTT had misdirected itself when considering the amount of the rent repayment order, with the relevant provisions being set out in section 44 of the 2016 Act. In particular, section 44 (2) provides that the amount of the order “must relate to rent paid“ during the relevant period. From this amount, any payment of universal credit should be deducted. Furthermore the conduct of the landlord and the tenant, the financial circumstances of the landlord and whether the landlord has at any time been convicted of an offence to which the relevant chapter of the 2016 Act applies are also determining factors.
There were various relevant matters that the FTT had not had regard to. The FTT made no reference in its decision to the alleged harassment against the tenants (which suggested that either the FTT did not consider these to be relevant or did not accept it had occurred). Nor was there any mention of the section 21 notices that had been served and the landlord's motive for serving them. Furthermore, there was no reference to the landlord's failure to provide gas safety or energy performance certificates until it became necessary to terminate the tenancy.
In light of this, the UT decided to remake the decision itself.
The UT held that the purpose of the rent repayment order regime is to secure compliance with the law on housing standards, and one element of this was to ensure that HMOs are safe and free from serious defects.
It was apparent from the decision that the FTT had only taken account of ‘good conduct’ issues, which it considered justified a deduction of 35% from the total amount of rent claimed. No account had been taken of ‘bad conduct’ in the weighing of factors relevant to the amount of the order.
A landlord responding to legitimate requests from its tenants concerning repairs and the condition of a property by terminating the tenants' rights of occupation would deter others from raising these issues. If such behaviour were allowed, the UT said it may discourage other tenants from requesting that repairs be carried out and it could even encourage other landlords to avoid their obligations. For this reason, the behaviour was taken into account by the UT.
The landlord was also criticised for misrepresenting what the consequences of non-compliance with the section 21 notice would be for the tenants.
For these reasons, the rent repayment order was increased to just under 80% of the rent.
Force majeure and Covid-19 restrictions
In the case of NKD Maritime Limited v Bart Maritime (No. 2) Inc  the court grappled with whether a force majeure clause could be activated by the imposition of Covid restrictions.
The facts of the case involve the sale of a vessel for the purposes of the claimant/buyer, NKD, scrapping the vessel at their recycling yard in Alang, India.
The clause in question allowed the termination of the contract if either the seller was unable to transfer the title, or the buyer was unable to accept transfer of the vessel due to (amongst other circumstances) "restraint of governments".
NKD claimed it was unable to accept transfer of the vessel as a result of the lockdown restrictions in place in India at the time of the sale and sought to terminate the contract on that basis. However, the Court held that whilst it was accepted the sale was hindered or delayed by the Covid restrictions, hindrance or delay is not the same as there being an 'inability' for the buyer to accept the transfer of the vessel. The judge held that 'inability' due to government restraint depended on whether the probable period of that restraint was such as to "materially undermine the commercial adventure" which the judge noted would involve similar considerations as to whether a contract was frustrated.
Whilst the subject matter differs, the principles arising from the decision as to the interpretation of the force majeure clause in the contract have a wider impact, as most commercial leases will contain this type of clause. The courts have previously held that government closure restrictions due to Covid will not frustrate a lease and this case suggests the same would be true of force majeure restrictions. Therefore, it seems unlikely that a tenant would be able to terminate a lease under the force majeure clause due to restrictions related to a pandemic.
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