Tribunal considers the extent of leaseholder protections

The Upper Tribunal (Lands Chamber) (the "UT") has recently handed down a judgment in Adriatic Land 5 Limited -v- The Long Leaseholders at Hippersley Point ("Hippersley Point") which considers the effect of paragraph 9 of Schedule 8 to the Building Safety Act 2022 (the "BSA") and provides some further useful clarity on its interpretation in the context of building safety cases.

Background

As we have reported over the course of the BSA becoming law, significant proportions of the protections afforded have come into force over extended periods of time. Moreover, a number of the new protections are completely new causes of action and as a result will be subject to interpretation by the Tribunals and Courts as to how they will work in practice.

In Hippersley Point, the UT was considering one of those such protections under Paragraph 9 of Schedule, which provides as follows:

It is important to note that this protection is afforded only to holders of qualifying leases (which in turn are defined in s.119 of the BSA). In summary terms, qualifying leaseholders are individual leaseholders of residential units who hold the leasehold as their primary residential home (i.e. corporate leaseholders with ownership of more than two leasehold dwellings are not classified as "qualifying leaseholders" and accordingly do not benefit from this protection under Paragraph 9 of Schedule 8).

Overview

In Hippersley Point, the Appellant (and original applicant) was the freehold owner of a mixed use building containing 32 residential flats let on long leases. The Respondents were the long leaseholders of the flats in the building.

The original application to the First Tier Tribunal (the "FTT") concerned an application for dispensation from consultation requirements in Section 20 of the Landlord and Tenant Act 1985. The application was made pursuant to Section 20ZA(1) of the 1985 Act due to the urgent need for remediation works to the external façade of the Building as well as interim fire safety measures.

The FTT granted the application, and further decided that an order should be made pursuant to Section 20C of the 1985 Act, preventing the Appellant from recovering any of its costs of the dispensation application from the Respondents by the service charge provisions in their leases.

The Appellant appealed the original decision in relation to the Section 20C Order, on the basis that the FTT had been wrong to make such an order.

In its revised decision (the "Revised Decision"), the FTT reversed the decision to make the Section 20C Order, and instead made it a condition of the grant of dispensation that the Appellant should not be entitled to recover its costs of the dispensation application (the "Costs") from the Respondents (the "Costs Condition").

The position following the Revised Decision therefore put the parties effectively in the same position, in the sense that the Appellant could not recover the Costs from the Respondents.

The Appellant sought a review of the Revised Decision in relation to the Costs Condition. Permission to appeal was granted to the UT. The grounds of appeal were confined to the Appellant's case that the FTT had been wrong to impose the Costs Condition.

In granting the appeal however, the Deputy President drew attention to a further issue of whether the Costs were, in any event, covered by Paragraph 9 of Schedule 8 to the BSA ("Paragraph 9"), such that no service charge was payable in respect of such costs by any leaseholder whose lease was a qualifying lease within the meaning of Section 119 of the BSA.

The UT's decision therefore centred on two questions:

1. Could the UT uphold the Cost Condition imposed by the FTT? ("Question 1")
2. Regardless of Question 1, is the recovery of the Costs affected by Paragraph 9? ("Question 2")

This article focuses primarily on the answer to Question 2, as it is likely to have an effect on understanding and interpreting "retrospectivity" within the realms of Schedule 8 of the BSA.

Question 1 – Could the UT uphold the Cost Condition imposed by the FTT?

On a point of jurisdiction, the UT is only entitled to alter a decision of the FTT if it considers that the making of such a decision was tainted by a procedural error or otherwise an incorrect application or interpretation of a point of law.

In this instance, the UT determined that, as the Cost Condition was made of the FTT's own volition, without either party having sought the Cost Condition nor having had the opportunity to make submissions on the same, that a procedural error had occurred and that the Costs Condition could not be upheld for that reason.

Notwithstanding the procedural error, the UT also considered whether the exercise by the FTT of its discretion in making the decision to impose the Costs Condition could be upheld.

The UT considered Daejan Investments Ltd v Benson^[1] on the question of the Tribunal's discretion to grant a dispensation order. It considered that the Tribunal has power to grant dispensation on such terms as it thinks fit, provided that such terms are appropriate in their nature and effect. The UT considered the reasons behind the dispensation application, and found that no prejudice was suffered by the Respondents as a result of the failure to consult as the remedial works needed to be carried out on an urgent basis.

Nevertheless, the UT disagreed with the FTT's reasoning that, because some of the Respondents made objections to recovery of costs from the Respondents when making general submissions, this applied to all of the leaseholders. The reasons for giving the Costs Condition in the Reviewed Decision were fundamentally flawed and could not be upheld as they "went outside the legitimate scope of their discretion and went wrong in the law".

In the UT's view, the decision of the FTT to impose the Costs Condition fell outside the legitimate scope of its discretion. Consequently, for both procedural and substantive reasons the UT determined that the Cost Condition was wrong in law and could not be upheld.

Question 2 – Is the recovery of the Costs affected by Paragraph 9?

For the purposes of its decision, the UT proceeded on the assumption that at least some of the Flats are held on qualifying leases, so that Paragraph 9, if it applies at all to the Costs, is capable of affecting the ability of the Appellant to recover the Costs by the Service Charge.

The Appellant's Case

The Appellant's case (i.e. that the protections under Paragraph 9 of Schedule 8 should not apply) was two-fold:

1. Retrospectivity

At the time of the original Dispensation Application, the BSA (and importantly, Schedule 8) had not yet come into force. It was submitted therefore that as the Costs (i.e. the freeholders costs of the Dispensation Application), were incurred prior to the provisions of Schedule 8 coming into force, the protections under Paragraph 9 could not apply (and as a result those costs were properly capable of being recovered from the Leaseholders through the Service Charge).

2. Paragraph 9 is not applicable to the legal costs incurred

The Appellant also submitted that, as a matter of statutory interpretation, the legal costs incurred in relation to applications for dispensation were not incurred "in respect of legal or other professional services relating to the liability or potential liability of any person incurred as a result of a relevant defect" (emphasis added). That is to say, the costs of a Dispensation Application are not concerned with the underlying liability of an original wrongdoer (say the Developer or Contractor), but rather were a standard cost that would typically be capable of forming part of a service charge.

In the event that the Tribunal was not persuaded by this analysis, the Appellant added an alternative argument which dovetailed with its "retrospectivity" submission. If it was found that, in principle, the costs of a Dispensation Application are capable of being caught by Paragraph 9, the actual costs in consideration in this case still could not be afforded the protection under Paragraph 9 as they had already been demanded/payable by the time Schedule 8 came into force.

The UT's Decision

The UT dealt with these arguments in reverse order as below.

Applicability of Paragraph 9 to legal costs for a dispensation application

The UT concluded that the "liability" referred to in Paragraph 9 could include any person.

In considering whether the reference to a liability or potential liability is limited to a liability arising under the 2022 Act only, the UT confirmed that courts and tribunals have the ability to look at Explanatory Notes as an aid to the construction of a statute.

The Explanatory Notes, when considered alongside the statutory wording, left the position on references to liability or potential liability open ended. However, the UT assumed that the Appellant's liability to carry out the works arose, or at least was capable of arising, both from the Appellant's leasehold obligations as well as from the provisions of the BSA. In making this assumption, the UT referred to the wording under s.123 of the BSA in relation to Remediation Orders, and noted that the definition of "relevant landlord" ties the liability of a landlord to be made the subject of a Remediation Order, to a landlord's contractual or statutory liability to remedy a relevant defect. As such, the UT determined that the "liability" to pay for the costs of Dispensation Application fell within the remit of Paragraph 9.

Having decided that the liability in the present case fell within the realms of Paragraph 9, the UT then turned to the identification of the legal or other professional services referred to in the same paragraph.

The key point was that the relevant services must be services "relating to" the liability or potential liability discussed above. The UT found it difficult to see how such a relationship can be said not to exist between the costs of a Dispensation Application made by a landlord, in relation to works required to remedy a relevant defect, and the liability of that landlord to remedy the relevant defect. The UT consequently stated that it was hard to see how this is not capable of extending to services provided in relation to a Dispensation Application, in circumstances where such application is made by reason of the landlord having a liability or a potential liability to remedy a relevant defect or relevant defects.

The UT therefore concluded that the Costs were capable of falling within the terms of Paragraph 9, subject to the retrospectivity argument raised by the Applicant.

Retrospectivity

As a reminder, Paragraph 9 came into force with effect from 28 June 2022.

The UT accepted the Applicant's argument that Paragraph 9 was not expressed to have effect prior to 28 June 2022. However, it was noted that the same is not true for the entirety of the BSA 2022 (see, for example, s.135 of the BSA which relates to the extension of limitation periods to bring Defective Premises Act claims). It also accepted it was bound to accept there is a general presumption that legislation is not intended to operate retrospectively.

Before coming to a decision on how Paragraph 9 takes effect, the UT considered various other legal materials for reference^[2]. In particular, it considered a legal article by Professor Susan Bright, Professor of Land Law and McGregor Fellow at Oxford University. While the UT noted the Appellant's submission that no weight should be given to the article, the UT referred to a highlighted reference to the BSA Explanatory Notes, namely paragraph 986. In summary, this paragraph appears to support the argument that Paragraph 9 is capable of applying to service charges demanded prior to 28 June 2022, and the consequential argument that what matters is when the relevant service charge comes to be paid.

The UT found it difficult to see why it matters when the costs of the relevant services were incurred, as the wording of Paragraph 9 is not framed by reference to the incurring of the costs, it relates to the liability or potential liability where there is a qualifying lease.

The UT ultimately rejected the Appellant's submissions on the question of how, in chronological terms, Paragraph 9 takes effect: "I do not think that it is possible to read into Paragraph 9 a provision that it does not apply to the costs of Qualifying Services incurred prior to 28th June 2022."

The UT also found that the alternative position on retrospectivity does not fit with the language of Paragraph 9. There is no exclusion of service charges in respect of the listed service in Paragraph 9 which became payable prior to 28 June 2022, and therefore the UT found it hard to see how any such provision could be read into Paragraph 9.

Conclusions on Paragraph 9 affecting the recovery of the costs

1. The costs of a dispensation application are, as a matter of language, capable of falling within the terms of Paragraph 9.
2. Paragraph 9 is capable of applying to the Costs, notwithstanding the date when Paragraph 9 was brought into force.
3. Accordingly, the ability of the Appellant to recover the Costs by the Service Charge is affected by Paragraph 9. The Costs are not recoverable, by the Service Charge, from those of the Respondents who hold qualifying leases within the meaning of Section 119, regardless of when the costs were incurred and/or became due for payment.

The effect of the decision was that the Reviewed Decision was re-made such that the Costs Condition was cut out, and instead, the costs are not recoverable by the Service Charge from those of the Respondents who hold qualifying leases within the meaning of Section 119, by virtue of Paragraph 9.

Final thoughts

This is an important decision as to how the mechanics of the BSA will be applied in practice, and is the highest authority to date on such matters.

Although this decision was concerned with a particularly narrow point (the Costs), it is likely to have a wider effect, particularly in respect of the so-called "retrospectivity" of the leaseholder protections afforded under Schedule 8 of the BSA.

To discuss any of the points raised in this article, contact Sue Ryan, Sarah Dyer, Sean Garbutt, or Brett Mason.

Footnotes

[1] [2013] UKSC 14; [2013] 1 WLR 854

[2] Adriatic Land 3 Limited v Residential Leaseholders of Waterside Apartments (MAN/30UG/LSC/2021/0044) supported the Appellant's position.

In Batish and others v Inspired Sutton Limited and others (LON/00BF/HYI/2022/0002), Section 124 of the BSA was given retrospective effect.

Waite and others v Kedai Limited (LON/00AY/HYI/2022/0005 & 0016). Whilst not directly applicable to the question, it provided the UT with some useful observations.