Costs Conditions on Dispensation, and the (Non)Payability of pre-2022 Act costs: Part 2 – ‘Retrospectivity’

UPDATE: Permission has been granted for this decision to be heard in the Court of Appeal, probably in 2024. There are 2 grounds of appeal: 1) Relating to whether the scope of para 9 extends to costs of pursuing a s20ZA dispensation application; 2) Relating to whether costs incurred and or payable prior to the BSA22 came into force are rendered no longer recoverable by Sch 8 provisions i.e. extent to which the leaseholder protections have retrospective effect.

In Adriatic Land 5 Ltd v Long Leaseholders at Hippersley Point the Upper Tribunal held that the Building Safety Act 2022 (BSA) can prevent the recovery from qualifying leaseholders of certain legal and professional costs incurred, demanded, and payable prior to the commencement of Schedule 8. This is a significant ruling on a point that has troubled many as it is sometimes portrayed as giving the legislation retrospective effect.

The landlord had applied for dispensation from the consultation requirements in section 20 of the Landlord and Tenant Act 1985 in respect of fire safety interim measures and remediation works. The FTT granted the application in its Original Decision on 20th December 2021. This included a section 20C order but as the leaseholders had not asked for it a Reviewed Decision was issued on 30 June 2022. This latter decision replaced the section 20C order with a condition stating that the applicants were ‘prohibited from seeking their costs of this application from the leaseholders at Hippersley Point’. The Upper Tribunal held that this costs condition should not have been imposed; this is discussed in Part 1. The dates of the decisions are significant in relation to the issues discussed in this post. The application and original decision were made before the BSA received Royal Assent, and the Reviewed Decision was made after the commencement of Schedule 8. Thus, the landlords’ application costs were incurred before commencement, but the Reviewed Decision was post-commencement.

In granting permission to appeal, the Deputy Chamber President said that the appeal raised a further question: were these costs covered by paragraph 9 of Schedule 8 to the BSA ‘so 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? This issue was seen as being raised in the appeal as it was part of the question as to whether the costs condition imposed on the grant of dispensation was a proper exercise of the FTT’s discretion.

Schedule 8 prevents a landlord from recovering remediation and other fire safety costs from (certain) leaseholders in certain situations. Paragraph 9 is focussed on charges in connection with  legal or professional services and provides:

9(1) No service charge is payable under a qualifying lease 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.

Sub-paragraph 2 defines services to include obtaining legal advice, any proceedings before a court or tribunal, arbitration, or mediation.

Statutory construction

The first question was whether the wording of paragraph 9 covers the landlord’s costs incurred in bringing a dispensation application. The Upper Tribunal held that it does as the phrasing is very wide.

A further question is whether the reference to liability is only to liability stemming from the BSA itself or whether it would also apply to other sources of liability, such as contractual provisions under the lease. On the facts of this case the Upper Tribunal did not find it necessary to reach a final decision on this point. Presumably this is because the Chamber President considered that both sources of liability are engaged here, as he assumes the applicant’s liability ‘to carry out the Works arises or is capable of arising both from the Appellant’s contractual obligations under the leases of the Flats and from the provisions of the 2022 Act’ [S.108, see also S.113]. The source of such liability is not further explained. In the future, the clearest statutory duty will be that placed on the landlord where it is the ‘accountable person’ but this will only arise under section 84 when it is brought into force. Nonetheless, given that the wording in para 9(1) is open ended (as the Chamber President notes) it is most likely that it will apply to any liability that flows from a relevant defect rather than being narrowly confined to BSA liability.

As paragraph 9 was held to apply to the costs in connection with a dispensation application, it was necessary to decide if this was true in relation to costs incurred before it was in force.

Retrospectivity

The Upper Tribunal accepted that there is a general presumption that legislation is not intended to operate retrospectively, based on concepts of fairness and legal certainty. It remarked that the wording of paragraph 9 itself is clear but recognised that it was necessary to consider more specifically whether it applies when some component of the services predate the commencement of Schedule 8 (28 June 2022).

Counsel for the landlord had argued that if the costs were incurred before the commencement date then the recoverability of costs was unaffected by paragraph 9. The Upper Tribunal disagreed, drawing support from  FTT decisions and ‘academic commentary’ (ie this author’s blogpost). Waterside Apartments (unpublished) supports the argument that Sch 8 does not affect liability for service charges payable before the commencement date. However, in Waterside Apartments the service charges had actually been paid and I note here that Parliament clearly intended that any service charge not already paid at commencement was no longer payable, even if the demand was issued before commencement; in Adriatic Land the Upper Tribunal also takes this view. Batish v Inspired Sutton Ltd was also mentioned (discussed here). Here a remediation contribution order had been made to qualifying leaseholders for repayment of service charges already paid in respect of relevant defects. Although the dates are somewhat unclear from Batish report, it appears (as the Chamber President says in Adriatic Land) that the sums were incurred and paid (at least in part) prior to 28 June 2022. As he notes, if ‘Section 124 can have the retrospective effect which it appears to have been given by the FTT in Sutton, this might be said to support the argument that Paragraph 9 can have a similarly retrospective effect.’

In approaching this issue, the Upper Tribunal said that as a matter of statutory construction the legislation was to be given its ordinary linguistic meaning. From the wording of para 9, it was difficult to see why it matters when the costs were incurred. Although counsel had argued that it would be unfair to the landlord if it covered costs incurred prior to the commencement date the Upper Tribunal remarked that this is ‘simply a reflection of life in the new world of the 2022 Act’.  

Counsel had also sought to draw a distinction where the service charge demand had been made and/or was payable before the commencement date, again arguing that paragraph 9 did not prevent recovery in this situation. This interpretation would have the advantage of avoiding the otherwise anomalous situation of the prompt payer who settles the demand prior to commencement having no protection and the ‘late payer’ who has made no payment at the date of commencement being protected. Again, however, the wording of paragraph 9 was clear: it simply states that ‘no service charge is payable’, with no exclusion for charges that became payable before the commencement date.

The outcome of the Upper Tribunal decision is very important. It means that there is no scope to argue that a distinction should be made between whether costs have been incurred before or after commencement; or whether demands have been issued and become payable before or after commencement. The BSA itself is clear that as from the date of commencement any sums unpaid are not payable. This is consistent with the intention of the government as revealed in the BSA Explanatory Notes. The consequence for some landlords is that millions of pounds spent on remediation with the expectation that leaseholders would pay is now not recoverable.

It should be remembered (see Part 1) that the Upper Tribunal also considered it a procedural flaw for the FTT not to have considered the impact of para 9 when granting dispensation. This will be important in future FTT decisions, presumably as part of the requirement to consider the ‘nature and effect’ of any terms imposed on the grant of dispensation (Daejan Properties Investment Ltd v Benson [54]).

Finally, the impact of this case highlights the differential treatment of qualifying and non-qualifying leaseholders under the BSA. Provided that the landlord has acted responsibly in applying for dispensation, the FTT is likely to grant dispensation without any conditions being attached preventing the landlord from recovering its own costs (see Part 1). Only qualifying leaseholders will be protected from the costs of the dispensation application by para 9; non-qualifying leaseholders will have to pay if this is what their leases provide.