Forfeiture of Residential Long Leases

For sometime there has been debate as to whether a County Court default Judgment satisfied the requirements of Section 168 of the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) and section 81 of the Housing Act 1996 (“the 1996 Act”)

The section of the 2002 Act provides that a Landlord cannot serve a forfeiture notice in respect of a tenant’s breach of covenant until a Court or Tribunal has determined that the breach has occurred. The 2002 Act introduced a special procedure for the Leasehold Valuation Tribunal (“the LVT”)to determine breaches of covenant. The 1996 Act provided that there needed to be a final determination or agreement before forfeiture could take place.

Many landlords continued as part of their debt collecting processes to issue proceedings in the County Court and obtain default judgements which they then relied upon to seek forfeiture. If claims for service charges in the County Court are defended then often they will be transferred to the LVT for a determination. Until recently it was not clear as to whether a default judgement was a final determination with two results in cases, one saying it was a default judgement and the other the opposite.

In Church Commissioners v. Koyale Enterprises and Thaleshwar [2012] 21 EG 96 at first instance the District Judge determined that a default judgement was not a final determination and therefore section 81 of the 1996 Act was not satisfied. The landlord appealed.

The matter then came before HHJ Dight at Central London County Court. He ruled that where a default judgement had been entered the issues were to be treated as “determined” between the parties and that for the purposes of section 81 of the 1996 Act a default judgement was a determination.

In his view the leaseholders had been provided with an opportunity to mount a challenge to the charges if they had chosen to do so. Simply deciding that a default judgement was a “final determination “did not prevent the leaseholders form subsequently challenging (e.g. making an application to set aside the judgement). The judge was concerned that requiring an actual hearing in circumstances where no defence was filed would be unfair on landlords and increase pressure on the courts. For all of these reasons the judge decided that a default judgement was a final determination.

It seems that the judge was perhaps swayed by the practical difficulties that would arise if a default judgement was not a final determination. This may require landlords in service charge cases to require the Court to hold a hearing even when the leaseholders had not looked to defend. Clearly at a time when the Court Service is under enormous pressure this was not appealing particularly given the whole process of seeking a judgement does allow the defendant an opportunity to appeal.

What this case means is that in respect of service charge arrears recovery freeholders and landlords can rely upon County Court default judgements as the basis for forfeiture. For landlords this system is seen as relatively quick and user friendly for the majority of claims which are not defended. If a landlord thinks a matter may be defended they may still wish to consider whether to use the County Court or the LVT and both options are open. Hopefully we do now have some clarity on this difficult issue although the Courts still remain reluctant to forfeit a residential lease for what are often modest service charge arrears when considered against the value of the leasehold interest.

Filed under: England & Wales, legislation, long lease, service charges

I Haven’t Protected the Deposit? What can I do?

As regular readers of this blog will be aware the 6th April 2012 saw the amendments made to the Housing Act 2004 by the Localism Act 2011 come into force.

Prior to these changes various court decisions (in particular Tiensa v. Vision Enterprises Ltd [2010] EWCA Civ 1224 and Gladehurst Properties Ltd v. Hashemi [2011] EWCA Civ 604) rendered the provisions on enforcement of the deposit protection scheme, in the words of Lord Justice Sedley, “a dead letter”. These decisions meant that where a deposit had not been protected it was relatively easy for landlords and agents to avoid any of the penalties as included in section 214 of the Housing Act 2004. The changes were meant to correct the errors in the original drafting and give the Housing Act 2004 real teeth.

The changes mean that if a deposit is now not protected (and more below as to what this means) properly then the landlord and/or agent will be subject to a penalty amount if the tenant makes an application to the Court. The other serious consequence is that a landlord will not be able to serve a valid Notice under section 21 of the Housing Act 1988 (Section 215 Housing Act 2004). This Notice allows a tenancy to be ended without the landlord having to prove any fault on the part of the tenant and is a sure way for a landlord of obtaining possession.

To properly protect a deposit there must be strict compliance with the rules of one of the authorised schemes (section 213 Housing Act 2004). This now means that the deposit must be protected within 30 days of receipt (not necessarily the same as the start date of the tenancy), together with the giving of any and all prescribed information and any other requirements of the particular scheme (some require an advice leaflet to be given). If the deposit has not been fully registered within this scheme the general view currently is whilst you can register the deposit out of time this will not afford you protection.

So if the deposit is not properly registered what can happen? Firstly you will not be able to use a section 21 Notice to seek possession. The court forms for accelerated possession have been changed to ensure that details of the deposit and its registration are included. In our experience Courts are looking at this information and considering if deposits have been properly registered. The tenant may also make an application under section 214 of the Housing Act 2004 to seek a return of the deposit and also a penalty amount.

The Court has the power to order the return of the deposit in full to the tenant or that it is paid into an authorised scheme. Whilst prior to the changes the Court had to award a penalty amount of three times the deposit this has been amended so the Court can award an amount between one and three times the deposit amount. It is here that the Court retains some discretion as to the amount. It will be for the landlord or the agent to adduce evidence to try and mitigate this amount perhaps by showing that there was a technical breach, financial hardship etc. Clearly an award requiring the return of a deposit and also a penalty of three times the deposit (which of itself could be more than 4 months rent) will be crippling to many landlords and if such a claim is made as a counterclaim in rent arrears proceedings may wipe out any and all arrears meaning that possession is not granted.

With regards to section 21 notices if the authorised scheme has not been strictly complied with the landlord cannot serve a valid Notice. At this stage there are no particular cases relating to the changes and how in practice the Court will look at this situation. It is however believed that simply complying with the requirements out of time will not of itself allow you to then serve a valid section 21 Notice. Section 215 does provide that you can return the deposit in full to the tenant. It is believed that tenants will be advised not to accept the return of the deposit so in this way preventing a landlord from being able to serve a section 21 Notice. If the tenant brings a claim under section 214 Housing Act 2004 and this has been determined, withdrawn or settled this will allow the landlord to then be able to serve a section 21 Notice. If a section 21 Notice cannot be served this would then mean that a landlord could not rely upon this mandatory no fault ground to bring possession proceedings. A tenant would then find themselves in the position of almost being akin to an assured tenant only able to be made the subject of a possession order if one of the grounds to Schedule 2 of the Housing Act 1988 had been made out.

We are yet to see how the Courts interpret the amended Act and whether they give landlords “get outs” as they did previously. Most people will not want to be the no doubt expensive guinea pig to test this situation. The will of Parliament was to give the legislation teeth as part of the regulation of the private rented sector. It is vital that you do comply and if you become aware of a deposit which has slipped through the net take advice.

Filed under: England & Wales, deposits, Housing Act 1988, Housing Act 2004, legislation, tenancy agreements

Interaction Between Courts and LVTs

Over the past 12 months the Leasehold valuation Tribunal (“LVT”) has fallen under the responsibility of the Ministry of Justice. It is due to reform to become part of the Lower Tribunal (“Lands Chamber”) to reflect the various changes in jurisdiction of tribunals and organisation undertaken over the past few years. This will result in a new set of rules and procedures governing all cases before the LVT. It will however continue to be a specialist tribunal with members of the panel having appropriate specialist knowledge.
The LVT has over the past decade interacted increasingly with the Courts. In particular since the Commonhold and Leasehold Reform Act 2002 (“CLRA”) came into force the Courts have had a power to refer matters relating to service charge disputes to the LVT to determine. This jurisdiction has seen many claims which have been started in the County Court as a traditional debt claim being referred to the LVT to determine particular questions. Case law has provided that in such cases the LVT is however only allowed to deal with the particular question posed of it by the County Court. For this reason County Courts should ask specific questions of the LVT so that all parties are clear regarding the questions that the LVT are being asked to determine.
This procedure means that usually if a claim for a service charge debt is defended the Court as part of the allocation process will wish to consider if a referral is to be made to the LVT. The LVT has powers to consider points under which it already has jurisdiction such as the reasonableness of the service charge; and what often flows from this point is whether the lease itself allows recovery of all or part of the service charges being claimed. In practice it is evident that an LVT may determine all substantive matters; which when referred back to the Court the Court by the LVT allows the Court to simply giving final effect to such findings. The Court will of course continue to have costs jurisdiction in the usual way and it will be for the Court to determine any costs which may or may not be awarded for or against either party using the usual principles of court procedure.
The CLRA also provided jurisdiction to the LVT for the first time to determine if there was a breach of the terms of a residential lease. In essence this procedure was made the first step which a freeholder had to undertake if they wished to try to forfeit a lease. Once such a determination was made by the LVT then the matter could proceed for forfeiture in the usual way. Ultimately this could lead to an application to the Court for forfeiture. In considering a forfeiture claim the Court would no longer usually have to consider whether or not there was a breach of the lease as this aspect would have been predetermined. Obviously this can lead to many such claims taking up less time before the Court and being resolved prior to actual forfeiture proceedings. The determination of a breach procedure is viewed by many practitioners as being a fast and efficient way of dealing with allegations of breach, particularly given that in practice most can and will be remedied.
These changes have reflected the fact that it is generally accepted that the LVT is a specialist tribunal which can bring specialist knowledge and expertise to residential leasehold disputes. This was recently reiterated by the Court of Appeal in the case of Winstone v. Great Gate Management Company Limited 2012 unreported which was a case involving a leasehold dispute, injunctions and service charge matters where in an obiter statement the Court of Appeal suggested that the parties might seek to have the remaining items in dispute following the appeal referred to the LVT given its specialist jurisdiction.
What is clear is that everyone practising in this field must give careful consideration as to the correct forum to begin a claim as often a claim could be issued either in the Court or the LVT. There may be tactical advantages in using one avenue over the other, but ultimately the party making the decision could find themselves before the LVT come what may. The influence of the LVT and no doubt its successor are growing as may the jurisdiction over disputes which they cover.
If any help or assistance is required in this complex field PainSmith Solicitors are happy to advise.

Filed under: England & Wales