Retrospective protection from Service Charge Payments?

This post looks at an FTT case, Waterside Appartments (sic) MAN/30UG/LSC/2021/0044, that discusses a short question: do the leaseholder cost protections in the Building Safety Act 2022 (BSA) Schedule 8 restrict a leaseholder’s liability for service charges otherwise payable before the commencement of  Schedule 8? The answer given in this case is straightforward: no, they remain payable (subject to other challenges about lease construction, and whether the charges are reasonably incurred and the works are to a reasonable standard).  

The affected block

The report is very brief (6 pages), dealing only with this point as a preliminary issue in relation to a payability claim that was to be heard at a future date.  As yet the report is not available on the public sites although it was decided on 27 June 2023. An earlier FTT decision in relation to the same property, granting dispensation from the consultation requirements in the Landlord and Tenant Act 1985 s 20, provides some background. The block has 55 residential apartments (although said to be 56 in the earlier case), within a purpose-built, seven storey, mixed use development (probably the block shown here). Following an enforcement notice from the Fire and Rescue Service, works were required to install a fire detection system and remedial works to the automatic and manual opening vents were also required. Until the alarm system was installed, fire marshalls were employed. Service charge demands in relation to these works and the waking watch were issued in 2019 and 2020. The Applicant’s response in these proceedings states that the service charge demands have been paid. Separately, there are issues with the cladding system for which an application has been made to the Building Safety Fund. By the time of the FTT determination on cost protections, dealt with on paper rather than at a hearing, the leaseholders were not represented, although they had previously had legal representation.

The decision

The judge dealt with the point at issue briefly, stating:

‘the language of both section 122 are (sic) of Schedule 8 is in the present tense: “certain service charge amounts … are not payable” and “No service charge is payable …” etc. This is language which is apt only to affect liability for service charges which would otherwise become payable after the new provisions came into force, and nothing about it suggests that the payability of past (pre-commencement) service charges may be revisited by reference to the new provisions in Schedule 8.’ (para 13)

It was noted that past charges paid during the 5 year pre-commencement period may still be taken into account in relation to the capping provisions in Sch 8 paragraph 5 for post-commencement service charges. In addition, the judge noted that it may be possible to apply under the BSA s 124 for a remediation contribution order, and the wording of s 124(2) ‘is indicative of the general proposition that such an order may be made in respect of relevant pre-commencement service charges’ (as had been found in the Sutton Court Road decision, discussed here).

But what if the facts are different?

The Schedule 8 provisions came into force on 28 June 2022 (hereafter, ‘the commencement date’). In Waterside Apartments all of the key ‘moments’ were before the commencement date: the costs were incurred, service charge demands were issued, and the demands were paid. But there will be many variations on this where, for example, the costs are incurred (in whole or in part) before the commencement date but the demands are served after it. Even if the service charge demands for building remediation were served before the commencement date, it is likely that there will be some leaseholders who have not paid, particularly given the high cost of remediation. In these variations, is the effect of the BSA that the protected classes of leaseholders no longer have to pay?  The wording in the BSA could have been more specific about its application. Instead, it simply says that ‘no service charge is payable’ in the circumstances of the relevant paragraphs of Schedule 8.

One argument might be that what is critical is the timing of the service charge demand and/or the date that costs are incurred. Paragraph 10 (2) of Schedule 8 provides that ‘where a relevant paragraph [of  Sch 8] provides that no service charge is payable’ no costs incurred or to be incurred…are to ‘be regarded for the purposes of [sections 18 to 30 of the Landlord and Tenant Act 1985 and section 42 of the Landlord and Tenant Act 1987] as relevant costs to be taken into account in determining the amount of a service charge’. Under the 1985 statute, there must be consultation on ‘relevant costs’ above specified amounts, and they must be reasonably incurred, and the works done to a reasonable standard etc. Section 42 of the 1987 Act requires relevant service charges collected by landlords from their tenants (including leaseholders) to be held in one or more accounts, which are deemed to be held in trust.

It might be suggested that as there was no prohibition on the inclusion of remediation costs before the commencement date, a demand prepared and served before that remains valid and payable. Further, even demands prepared after that date but relating to costs incurred before then will remain payable. In my view, this would be a strained reading of paragraph 10(2) which appears to be seen as making clear that these costs cannot be included in the service charge demands. In so far as this might be argued to be ‘retrospective legislation’ this is what the government intended. A letter dated 27 June 2022, from the Secretary of State for Levelling Up, Housing and Communities, says that the BSA does apply retrospectively and that ‘qualifying leaseholders can thankfully dispose of’ invoices being sent for remediation work.

Parliament clearly intended that whether those leaseholders protected by Sch 8 are liable under the terms of the lease depends only on whether they have already paid. If they have, then they are free to seek a remediation contribution order, as in the Sutton Court Road decision.  If they have not paid, they no longer need to. The BSA Explanatory Notes state (emphasis being added):   

‘986 The protections apply equally irrespective of when any service charge demands were issued by landlords or managing agents. This means that, even if a valid service charge demand was issued prior to commencement, provided that the service charge had not already been paid by the leaseholder, the demand is no longer valid after commencement insofar as it does not comply with the provisions set out in the Schedule. In practice, this means that managing agents and landlords will need to rescind service charge demands issued prior to commencement where they relate to historical building safety defects. Where landlords are entitled to recover some costs from leaseholders according to the Schedule, they will need to issue new service charge demands which comply with the provisions set out in the Schedule.’

Likewise, at the Grand Committee stage of the Building Safety Bill in the House of Lords ,the Building Safety Minister, Lord Greenhalgh said:

‘The new schedule to be inserted before Schedule 9 [ie what is now sch 8], tabled on 14 February, also provides the Secretary of State with the power to make regulations providing for the recovery of sums due that have not been paid. These amendments ensure that leaseholders will no longer be susceptible to large costs’. (Hansard, 22 February 2022, Col 45GC)

Any court applying the BSA is able to rely on both the Explanatory Notes and the Hansard statement. The principles in relation to Hansard are set out in Pepper v Hart where Lord Browne-Wilkinson said that a ‘statement of the Minister or other promoter of the Bill’ can be used as an aid to ‘the construction of legislation which is ambiguous or obscure or the literal meaning of which leads to an absurdity.’ In Kostal UK Ltd v Dunkley Lady Arden and Lord Burrows state that a court can look to the Explanatory Notes in carrying out their interpretative role (at [73]).

The Waterside Apartments case was clearly at one end of the spectrum. Other scenarios involve some element of retrospectivity and although retrospective legislation is not unknown it is viewed with some caution, as discussed here in the context of potential A1P1 human rights challenges to the retrospective extension of limitation periods by the BSA s 135. No doubt there will be further decisions on this point.