Section 13 rent increases

Salvation Army Housing Association v Philip Kelleway [2024] UKUT 53 (LC)

Judge Elizabeth Cooke considered the First-tier Tribunal's (FtT) reasoning to strike out a rent review application in the Upper Tribunal (Lands Chamber).

Considering the wording of the tenancy agreement, the FtT had concluded that the Section 13 notice*  was defective on the basis it did not provide for the new rent to take effect on the first day of a new tenancy period. It also stated that in order to increase the rent the landlord would need to serve a new Section 13 notice in the prescribed form.

The FtT refused the landlord's request for an appeal and stated that the application was an abuse of power. The landlord argued that the FtT's reasoning was wrong in law. The landlord was not appealing the decision to strike out, but its reasons for making that decision – i.e. that the tenancy was a statutory tenancy and rent could only be increased under the provisions of section 13.

The Upper Tribunal found that the FtT had misdirected itself and consequently the application for permission to appeal went ahead.

The Upper Tribunal found that that the tenancy was an assured periodic tenancy with provision for the rent to be increased. In light of S.13 (1)(b) Housing Act 1988, section 13 had no relevance to this tenancy. The FtT was correct to strike out the reference, but for the wrong reason. The Upper Tribunal concluded that the landlord was free to follow the contractual provisions for the increase of rent.

A copy of the judgment is here.

What this means for you

Section 13 Housing Act 1988 applies to a statutory assured periodic tenancy and any other assured periodic tenancy other than one which contains a contractual rent review provision binding on the tenant. Where section 13 applies, rent increase notices must be in the prescribed form and the Tribunal has jurisdiction to determine the rent under section 14.

Tenancy agreements will often refer to sections 13/14 and some will simply insert wording from section 13, which becomes ripe for arguments over jurisdiction in the FtT.

The Renters Rights Bill might address the issue as current proposals are that rent increases can only be annual and via the section 13 procedure (although it remains to be seen whether Registered Providers will be exempt).

Currently, the FtT does not have jurisdiction to determine whether a section notice is valid, although the Tribunal will review validity in considering whether it has jurisdiction. The Renters Rights Bill also seeks to confer jurisdiction on validity on the FtT which would also address that problem.

Service charges  

The London Borough of Tower Hamlets v Lessees of Brewster House and Malting House [2024] UKUT 193 (LC)

The block of flats was built using a Large Panel System*  (‘LPS’); the issue with this construction method was that the walls bore the weight of the building. For context, in the 1968 Ronan Point Inquiry, it was recommended for work to safeguard buildings constructed using this method from the risk of collapse in case of abnormal loading.

In the report it was found that the reinforcement of the building was insufficient to cope with normal loading and after further investigation the landlord carried out works to ensure the buildings safety for its occupiers. The landlord was seeking to recover part of the costs through the service charge. The First-tier Tribunal (FtT) was to determine the lessees’ application as to whether those service charges were payable under the terms of the lease pursuant to Section 27A of the Landlord and Tenant Act 1985 (LTA 1985) and whether the costs were going to be reasonably incurred under Section 19 of the LTA 1985.

The Upper Tribunal upheld the FtT’s decision that the landlord was not entitled to recover the cost of work needed to remedy structural defects caused by the LPS, as part of their service charge, from lessees. The Judge considered that neither a covenant to repair nor to maintain is a covenant to remedy structural defects or to make safe a building that was not safe when originally built.

Further detail on this is available in our insight here. A copy of the judgment is here.

What this means for you

The new government has vowed to take ‘decisive action’ to improve building safety. There is a continuing battle for leaseholders stuck in defective buildings and Labour’s election manifesto promised to protect leaseholders from costs and taking steps to accelerate the pace of remediation across the country.

Lease interpretation on repair clauses is crucial to determining whether the cost of works is recoverable through the service charge. An application to the FtT under section 27A LTA 1985 to determine whether the costs are recoverable under the lease can be a useful tool to landlords before embarking on costly litigation to recover costs from leaseholders in the County Court.

Shared Ownership and Section 166 Commonhold and Leasehold Reform Act 2002 

Sovereign Network Homes v East

This appeal case raised the interesting issue of whether a landlord under a shared ownership lease is required to serve notice under Section 166 Commonhold and Leasehold Reform Act 2002 (2002 Act) before rent, which is contractually due from shared owners who have not staircased*  up to 100% can lawfully be recovered. The case also raised important questions of wider implication for possession proceedings concerning shared ownership leases.

The landlord obtained an outright Possession Order, however, due to an error on the court file, the leaseholder was only made aware of the Order when she received a notice of eviction. The Deputy District Judge discharged the warrant for possession and so the landlord appealed this decision.

Following the case of Avon Ground Rents Limited v Canary Gateway (Block A) RTM Company Ltd, Her Honour Judge Bloom concluded that a shared ownership lease where the tenant has not staircased to 100% interest, but which was granted for a term of more than 21 years, is a long lease for the purpose of s.76 of the 2002 Act. Therefore, when s.166 of the 2002 Act defines a long lease by reference to s.76 of the 2002 Act, it should be interpreted in the manner the Court of Appeal said.

What this means for you

This case provides useful clarification of a point that has until now been “counsel of perfection”; i.e that a s.166 notice should be served prior to serving a Notices of Seeking Possession (NoSP) in respect of arrears of rent due under a shared ownership lease.

It may however be of fairly time-limited application because if the Renters Rights Bill comes into force, it will no longer be possible to treat a shared ownership lease as a form of assured tenancy, meaning that it will be necessary to comply with the requirements of section 166.

Enfranchisement

Guv Harborough and Saltley House RTM Co Ltd v Adriatic Land 3 Ltd [2024] UKUT 109 (LC)

Section 27(1)(a) of the Commonhold and Leasehold Reform Act 2002 (2022 Act) requires that to apply for the right to manage*  (RTM) the premises concerned must consist of a self-contained building or part of a building.

The RTM company served a claim notice, asserting its right to acquire the right to manage three blocks of flats that were joined by an underground carpark. The claim notice stated that the 2002 Act applied to the premises because “they consist of a self-contained building or part of a building with or without appurtenant property.”

The respondents’ counter-notice disputed the claim notice on three grounds:

1. The acquisition of the right to manage was prohibited as the premises are not a self-contained building/part of a building and therefore did not satisfy s.72(1)(a) of the 2002 Act.
2. The RTM company was not an RTM company in relation to the three blocks as another RTM company (from a previously failed RTM application) remained in existence with the object of acquiring the right to manage one of the blocks and in those circumstances section 73(4) of the 2002 Act prohibits any alternative claim.
3. The RTM company had failed to give notice inviting participation in the company to one qualifying tenant of a flat in one of the blocks, contrary to section 78(1) of the 2002 Act.

Section 72(2) of the 2002 Act provides that a building is self-contained if it is “structurally detached”. The RTM argued that one block was vertically divided above ground from the other two blocks and each block had its own separate entrance. However, with the car park, the three blocks comprised a single building which was structurally detached and so self-contained within the meaning of sections 72(1)(a) and (2).

The Upper Tribunal decided that it was unable to make a determination of its own, due to inadequate evidence and poorly developed argument by the RTM company and so their application for determination to acquire the right to manage was dismissed as unproven and the qualifying tenants were told to consider the issues properly before any further notices or applications are served.

A copy of the judgment is here.

What this means for you

The case provides a useful analysis of the law relating to the right to manage and, in particular, how it applies where buildings that are ostensibly structurally detached above ground are physically joined underground. It is also a helpful reminder of the need to put full evidence of the claim before the Tribunal including, in a case such as this, expert evidence as to the structural make-up of the buildings.

Legislation

Leasehold and Freehold Reform Act 2024

Following on from our June 2024 edition of Quarter Day, four sections of the Leasehold and Freehold Reform Act 2024 (the Act) came into force on 24 July 2024. These sections relate to estate rent charges and amendments to the Building Safety Act 2022 (BSA 2022):

• Section 113: regulation of remedies for arrears of rent charges
• Section 117: recovery of legal costs etc. through service charge
• Section 118: repeal of section 125 of the BSA 2022 and remediation of building defects
• Section 119: higher-risk and relevant buildings - notifications in connection with insolvency

The rest of the Act is not yet in force and requires secondary legislation before that happens. Whether the Labour government does that remains to be seen, but it is unlikely to be a legislative priority.

Renters Rights Bill

The new Labour government has laid the Renters Rights Bill before Parliament, which closely follows (but has some key differences to) the Renters Reform Bill that the last Conservative government ultimately chose not to pursue.

Whilst the bulk of the Bill relates to tenanted properties, one key proposal is that no lease of over seven years can be an assured tenancy. This means that it will no longer be possible to argue that a long lease is an assured shorthold tenancy (something that was a major concern for mortgage lenders) and it will make it clear that shared ownership leases of less than 100% ownership are not assured tenancies. This part will come into effect two months after the Bill receives royal assent.

The implications for our social housing clients are significant because it will no longer be possible to serve a Notice of Seeking Possession when dealing with a breach of a shared ownership lease; instead, the landlord will be forced to rely on the forfeiture provisions that are typically used with “full” leases.

Landlords will also need to ensure that the rent under a shared ownership lease is properly demanded meaning that, for example, a s.166 notice will be required – something that the courts have recently picked up on and suggested is required: see case of Sovereign Network Homes v. East above.

How Capsticks can help

Capsticks aims to be the firm of choice for our housing clients, offering a full service from leasehold and asset management advice to banking and finance, governance and planning. We are experts on all aspects of compliance with these new legal requirements and can advise on the broader changing landscape of the housing sector.

If you have any queries around what's discussed in this article, and the impact on you, please speak to Steven Wood or Emily Jordan to find out more about how Capsticks can help.