Landlord and Tenant

Landlords considering whether to repair or replace equipment in a multi-let building may be interested in a recent case, particularly if they are tempted to replace traditional kit with energy-efficient systems.

The case in Triplark Limited v Whale [2024] EWHC 1440 concerned a purpose-built block of 194 flats, built in the 1930s.  The dispute between the landlord and the tenants related to the communal heating and hot water system serving all the flats in the building, which is operated by the landlord.  There has been previous litigation between the parties, and in this case the landlord had asked the Court to make a declaration to the effect that it is entitled to renew the system by replacing it with something that was not identical but which performed the same service.  The key difference between the two systems is that the new one involves the installation of heat exchanger units in each flat which heat the cold water supplied to each flat by taking heat from the hot water circulating in the building. The leaseholders do not want the heat exchanger units to be installed in their flats because they would add to their repairing covenant obligations.

Bearing in mind the Supreme Court's judgment in Arnold v Britton [2015] UK SC 36 regarding the need to identify the parties' intention at the outset by reference to what a reasonable person would have understood their contract to mean, the High Court declined to grant such a declaration.

Although the case turned on the drafting of these specific leases, this judgment is a reminder for landlords and managing agents that even though increasing a building's overall energy efficiency is of benefit to all parties, they need to work within the ambit of each party's repair obligations and the terms of the service charge provisions in the relevant leases.

The Leasehold and Freehold Reform Act 2024 ("LAFRA"), discussed here, received Royal Assent on 24 May 2024.  It was one of the last pieces of legislation to be enacted by the previous government and most of it is not yet in force. Many of the sections require regulations to be enacted, which will contain important information and details such as, for instance, prescribed form documents. In terms of its impact on service charges and estate charges, LAFRA will:

2.1 Increase regulation of service charges and other payments under a lease

Various protections contained in the Landlord and Tenant Act 1985 are currently only applicable if the tenant pays a variable service charge.  Part 4 of LAFRA will extend some of these rights to fixed service charges by amending the Landlord and Tenant Act 1985 so that it will now refer to both a "variable service charge" and a "service charge". 

Once this Part is implemented, if a landlord wishes to recover expenditure in the future under a variable service charge, they will be required to serve the tenant with a "future demand notice" (which is a written notice in a prescribed form regarding future service charge demands) within 18 months, to prevent the recovery of relevant costs being time-barred.

LAFRA will also mandate a form of service charge demand that a landlord must use, and for multi-let buildings with 3 or more flats the landlord must provide a written account statement in a prescribed form.  There will also be an obligation on landlords to provide annual certified reports regarding the service charge expenditure.  In addition, leaseholders will have the right to obtain certain information on request, the details of which will be specified in future regulations.

Landlords will only be able to recoup permitted insurance costs through the service charge system - regulations will set out in detail what constitutes a permitted insurance payment.  This section is aimed at preventing the landlord from benefitting charging tenants for the full price of insurance premia in respect of which they have benefitted from a commission, a practice on which the FCA reported last year and which is currently the subject of a class action by leaseholders.  Landlords will also be subject to a statutory duty to provide tenants with specified insurance information within a specified period.

LAFRA introduces a landlord duty to publish administration charge schedules, setting out the administration charges payable by tenants, the charge amount or how the amount will be determined.

Finally, LAFRA provides that a landlord's litigation costs in relevant proceedings are not relevant costs and cannot be recovered through variable service charge or administration charges, unless a court or tribunal orders otherwise.

2.2 Regulate estate management

Part 5 contains regulations that relate to estate management.  It is widely drafted to include estate management service charge obligations that are secured through rentcharges, leases, and any other obligations which bind the owner of the dwelling from time to time.  It will limit estate management charges to the extent that they reflect only the costs incurred by the estate manager reasonably and if the services or works provided are of a reasonable standard. New regulations may set an appropriate maximum amount payable, and/ or consultation requirements for estate manager to meet regarding proposed works.  Estate management charges are not payable if incurred more than 18 months before demanded unless a "future demand notice" has been provided to the owner.

This part of the Act also enables payees of estate management charges to apply to the tribunal for a determination of whether an estate management charge is payable, when, by who and to whom. 

An estate manager will be required to use a specified form to demand payment of estate management charges, and also to provide the owners with an annual report.  They will be entitled to request information from the estate manager about the charges.

2.3 Regulate administration charges

An administration charge is an amount payable by a homeowner in relation to applications for approval from a landowner (for instance a licence to carry out works); fees charged by managers for providing information or documents; charges made in relation to land sales; or default charges.

LAFRA will require estate managers to publish an administration charge schedule, setting out the administration charges the estate manager considers may be payable, and the amounts or details of how the amounts will be determined.  An administration charge will then only be payable if reasonable and the amount appeared in an administration charge schedule at least 28 days before demanded.  Codes of management practice will be extended to estate managers.

LAFRA will create mechanisms which will facilitate homeowners making formal complaints to an estate manager, culminating in a tribunal application to replace the manager.

There are also provisions setting out a right for a homeowner to request certain sales information (in a specified form) to the estate manager, and obligations on the manager to provide the information requested, notify the owner that it does not have that information and/or pass on the request to a relevant third party.

2.4 Require membership of redress schemes

Part 6 of LAFRA provides for later regulations to be enacted which may require an estate manager or landlord carrying out estate management to join a redress scheme.  That scheme must incorporate an independent complaints procedure, must be approved by the relevant enforcement authority and must satisfy the further conditions set out in LAFRA and in the regulations.

2.5 Regulate rentcharges

Part 7 of the Act amends the Law of Property Act 1925 ("LPA 1925") to add the concept of a "regulated rentcharge", which means an estate rentcharge.  Under the previous regime, section 121 of the LPA 1925 allows the rentcharge owner to take possession of a freehold house and lawfully exclude the owner from it if the rentcharge monies are unpaid for 40 days, without the homeowner ever having received a payment notice.  This causes great concern to lenders as it entirely disproportionate to the relatively small sums that are usually charged.

Under the new regime, which came into force on 24 July 2024, arrears due under regulated rentcharges will no longer be recoverable unless:

• the rent owner has served an arrears notice on the landowner, which complies with statutory requirements (including the amount in arrears and how this amount has been calculated);
  
  
• a copy of the instrument creating the regulated rentcharge and proof of the rentcharge owner's title is served with the notice (unless the correct documents have been supplied before); and
  
  
• 30 days have passed since the demand.

In Lehner v Lant Street Management [2024] UKUT 0135, a leaseholder appealed to the Upper Tribunal regarding a decision of the First-tier Tribunal that he was liable to contribute towards cladding and fire safety remediation works at his building.

Here the Upper Tribunal ruled that no service charge was payable under a "qualifying lease" for the removal or replacement of any part of a cladding system that forms the outer wall of an external wall system and is unsafe.

The Building Safety Act 2022 ("BSA") at Section 122 and Schedule 8 contains provisions aimed at protecting leaseholders under “qualifying leases” from liability to pay some or all of the service charges which would otherwise be due from them as their contribution towards costs connected with “relevant defects”.

Here the Upper Tribunal concluded that the service charge was not due from the leaseholder (Mr Lehner) for two reasons:

• on a technicality under Section 47 of the Landlord and Tenant Act 1987, because the demand failed to state the name and address of the landlord; and
• because the service charge demand was for “cladding remediation” and, as the owner of a "qualifying lease", the leaseholder had the benefit of the Schedule 8 (Paragraph 8) protection and was not liable to pay such a charge.
  
  

We hope you've found this collection of updates interesting. Please contact us if you'd like to discuss any of them.