Another case on the extent of the tenant protections under the Act emphasises the importance of understanding what can and cannot be recovered from tenants with a qualifying lease via a service charge
In summary, this case decided that irrespective of the service charge provisions in a lease no service charge is payable from 28 June 2022 where it relates to items covered in the Building Safety Act 2022 ("the Act") and this is the case even if a landlord has incurred the costs before 28 June 2022 if they remain unpaid at that date. If a tenant has already paid service charge as at 28 June 2022 referable to a period prior to that date then it cannot recover this.
What does Schedule 8 of the Building Safety Act 2022 provide?
The limits on what can be reclaimed as a service charge from tenants in a residential block holding qualifying leases covered by the Act has been further examined by the courts. A recent case highlights that the right of a landlord to recoup costs incurred before inception of the leaseholder protections cannot be presumed and that retrospective protection can be given to costs incurred before inception if they were not paid by the tenant at the inception date.
Schedule 8 of the Act came into force on 28 June 2022 and sets out details of certain costs which cannot be recovered from tenants who hold qualifying leases under the Act.
Schedule 8 effectively puts in place substantial protections for leaseholders, preventing them from being liable to pay service charges that would otherwise be payable and costly for them.
The provisions of Schedule 8 are complex and relate to costs linked to defects in buildings and sets out certain categories of costs that Parliament decided should not be claimable at all from leaseholders with qualifying leases (including cladding remediation costs and relevant legal and professional costs).
Facts of the case
The recent case of Adriatic Land 5 Ltd v Long Leaseholders at Hippersley Point gave the Court of Appeal a further opportunity to analyse the application of Schedule 8 to a claim by a landlord, Adriatic Land 5 Limited, to recover service charges in relation to certain costs incurred in respect of a mixed use block in London before 28 June 2022 - the date the protection provisions came into force.
The Act applied as the block was a “relevant building” i.e. “a self-contained building, or self-contained part of a building, in England that contains at least two dwellings and (a) is at least 11 metres high, or (b) has at least 5 storeys.”
The case related to costs incurred by the landlord in relation to dispensation for consultation requirements under the Landlord and Tenant Act 1985 ("LTA").
The block required emergency cladding work and under section 20 of the LTA a landlord is prevented from recovering a service charge of more than £250 per flat unless it has either complied with consultation requirements in LTA 1985 or obtained a dispensation from court that it doesn’t need to.
The landlord could not comply with consultation requirements despite best efforts and so it applied for a dispensation order. The landlord sought to recover the application costs through the service charge.
Following the commencement of Schedule 8 of the Act these costs were not recoverable from tenants holding "qualifying leases" as defined in the Act.
Issues to consider
The landlord argued that the Act did not apply because it was not in force when the costs were incurred and this part of the Act did not have retrospective effect.
The court needed to consider:
- Whether the dispensation costs fell within paragraph 9 of Schedule 8
- Did Schedule 9 have retrospective effect in relation to costs incurred before 28 June 2022
- Do any principles of law apply to negate any retrospective effect?
The first instance decision of the Upper Tribunal ruled that these costs fell under the definition of “legal or other professional services relating to the liability (or potential liability) of any person incurred as a result of a relevant defect" as set out in paragraph 9 of Schedule 8 in respect of which no service charge is payable under a "qualifying lease". Even though the legal costs were incurred before 28 June 2022, it was held they could not be recovered via the service charge.
It was stated that Paragraph 9 is not framed by reference to the incurring of the costs and so it is irrelevant when the costs of the relevant services were incurred.
Court of Appeal decision
By way of a majority decision, the Court of Appeal reaffirmed this and held that Schedule 8 operated with retrospective effect.
The presumption against legislation having retrospective effect and the presumption against interference with property rights needed to be considered by the Court of Appeal in order to come to this decision.
It needed to interpret the statute and decide whether Parliament had intended to take away a landlord’s existing rights to recover by way of service charge costs it had already incurred in enacting Schedule 8.
The court decided that the words “no service charge is payable” in para 9 in respect of the costs mentioned meant exactly that - that from the date of such provisions coming into force no such service charge is payable.
Service charges paid by tenants before 28 June 2022 are unaffected and cannot be retrospectively required to be repaid, but as from 28 June 2022 no further service charges relating to costs within paragraph 9 could be payable, whether the costs had been incurred or the service charge had fallen due before or after that date.
The Court of Appeal agreed with the Upper Tribunal that the costs of the dispensation application fell within the scope of paragraph 9 of Schedule 8 but did acknowledge the hardship caused to landlords. However, it determined that it was the intention of the Act to ensure leaseholders were protected from being charged for matters they could not afford.
Points to consider
- Any investor in/landlord of a building covered by the Act should ensure it carries out detailed due diligence to ensure it understands what works may be needed and what costs may not be recoverable from tenants with qualifying leases under the service charge
- Any investor/landlord should obtain detailed advice on what can be recovered under the service charge
- Landlords who have incurred but not received payment of costs covered by Schedule 8 whether or not invoiced should quantify what may not be payable under the Act
- Tenants should consider carefully any items included in service charges and consider what is properly payable under the Act
- What about where costs were incurred before 28 June 2022 and were invoiced before that date but not paid? The case held "any service charges paid before 22 June 2022 are unaffected by the legislation; but from that date no further service charges of the relevant type are payable, whether the underlying costs have been incurred, or service charges have been demanded or fallen due". This implies that an invoiced amount which has not been paid will fall within the legislation but is this regardless of the amount of the delay and any related payment default of the tenant?
