Category: Business

AVIVA INVESTORS GROUND RENT GP LTD AND ANOTHER (RESPONDENTS) – V – WILLIAMS AND OTHERS (APPELLANTS)

In a decision which will be of importance to residential landlords and tenants, the Supreme Court has ruled to preserve the contractual right within a lease, where provided, for the landlord to re-apportion service charges..

The Background

On 8 February 2023 the Supreme Court handed down judgment in the case of Aviva Investors Ground Rent Gp Ltd and another v Williams and others.

The case had been the subject of litigation over a number of years through various courts, from the First Tier Tribunal finally up to the Supreme Court.

The judgment given by the Supreme Court addressed the following issues:

1. To what extent is a term in a residential lease which allows the landlord to revise the tenant’s share of the service charges invalidated by section 27A(6) of the Landlord and Tenant Act 1985?
2. If the effect is that any discretion to re-apportion the service charge is transferred from the landlord to the First-tier Tribunal does section 27A(6) enable the tenant as well as the landlord to invoke the Tribunal’s jurisdiction?

The dispute concerned the apportionment of service charges payable by leaseholders of 38 individual flats in a building located in Southsea, Hampshire.  The leaseholders were obliged to pay service charges towards the cost to the landlord (Aviva Investors Ground Rent Gp Ltd) of maintaining the building and wider estate.  Within their long leases, there was a clause which provided for the payment of service charges by residential leaseholders as either a fixed percentage of the costs or “such part as the landlord may otherwise reasonably determine”.

The landlord had for many years been demanding service charge payments in proportions different to (and above) the fixed percentages provided in the leases, under the provision for re-apportionment of service charges.   The leaseholders issued proceedings against the landlord seeking to challenge that practice.

Section 27A(6) of the Landlord and Tenant Act 1985 gives the First-Tier Tribunal (Property Chamber) (the FTT) jurisdiction to make decisions about service charge payments, including whether they are payable and if so, in what amounts.  The leaseholders had argued that the effect of section 27A(6) was to render void the apportionment provision in the leases.

As stated above, the case had been litigated over a number of years, finally culminating in an appeal by the leaseholders to the Supreme Court.  Previously, the FTT had held that the relevant provision in the leases was not void and that the re-apportionments were reasonable.  Subsequently, the Upper Tribunal (Lands Chamber) ruled that the re-apportionment provision was void pursuant to s 27A(6).   The landlord had appealed and the Court of Appeal allowed the appeal, ruling that the re-apportionment provision was not wholly void and that the effect of s 27A(6) was to transfer the discretion to vary the service charge proportions from the landlord to the FTT.  The leaseholders appealed to the Supreme Court.

The central question in the appeal was whether section 27A(6) renders void a contractual provision in a lease which provides for a leaseholder to pay a fixed proportion of service charges or such other proportion as the landlord may determine.   The leaseholders had, in relation to this, maintained that the apportionments by the landlord were unreasonable.

The Supreme Court unanimously dismissed the appeal, finding that the revised apportionments of service charges by the landlord were valid.

The court held that section 27A(6) was plainly an anti-avoidance provision, designed to preserve the jurisdiction of the FTT in determining whether service charges were reasonable in amount.   It was not the effect of section 27A(6) to deprive a landlord of its managerial decision making.  In other words, it did not operate to prevent the landlord from exercising a contractual right to revise and re-apportion service charges, merely to maintain the jurisdiction of the FTT in determining the reasonableness of the amounts in question.   The Court found that a lease provision would however be void if it aimed to oust or limit the jurisdiction of the FTT in determining the reasonableness of a service charge, for instance a provision making the landlord’s decision binding.

The Court found that section 27A(6) was not intended to remove the ability to vary service charge apportionments.  In this regard it rejected the leaseholders’ approach, finding that the effect of this would be to remove altogether the power to vary service charges.  This would have the effect of having apportionment fixed for many decades over the full term of a lease, even where the apportionment might overwise be varied, for instance by the increase of additional contributing flats in a building.  That would be a commercially unattractive result clearly not intended by the parties.

The result will be welcome to landlords as it confirms  the contractual right where contained within a lease to re-apportion service charges and the ability of the landlord to make managerial decisions in this regard.  It is also an important reminder of the jurisdiction and ability of the FTT to assess the reasonableness and amount of service charges.   This will no doubt be of consequence to many residential landlords and tenants throughout the country.

This article is not intended and should not be relied upon for legal advice,  Should you wish to discuss your matter, please contact Joe Reeves of our Litigation Department on 0207 481 6383 or joe.reeves@wellerslawgroup.com.

We continue to receive a number of enquiries from contractors and sub-contractors unaware of their right to adjudicate under a construction contract for non-payment, despite the fact statutory adjudication was introduced 25 years ago.

Many clients have come to us after being advised by previous solicitors to commence County Court proceedings, which can be a lengthy and costly process, by which time the paying party may be insolvent.

Alternatively, clients have commenced insolvency proceedings and fall at the first hurdle if there is a genuine dispute. A client will be subject to a costs order if the debtor has been successful in setting aside a statutory demand, which is a precursor to liquidation of a company or the bankruptcy of an individual.

Adjudication

Adjudication is a way of resolving disputes in construction contracts. The right to adjudicate is governed by S.108 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”). The Act sets out certain procedural requirements which enable either party to a dispute, to refer the matter to an adjudicator, who is then required to reach a decision within 28 days of being served with the Referral Notice.

If a construction contract does not comply with these requirements, a statutory default scheme known as the Scheme for Construction Contracts will apply. If the construction contract contains adjudication provisions, but does not comply with the requirements of S.108, the Scheme will again apply.

The Referring Party of a dispute who appoints an adjudicator, has the added advantage that, its solicitors have spent weeks/months preparing for the adjudication, putting the other party (the Responding Party) on the back foot, with little time to prepare a Response.  This may result in payment being made before an adjudicator has reached his/her decision.

In the event that the losing party does not comply with the adjudicator’s decision, enforcement proceedings can be commenced in the Technology & Construction Court (“the TCC”) and you would normally apply for Summary Judgment. The TCC will enforce adjudication decisions without enquiring as to the correctness, subject to two exceptions.

The purpose of adjudication is to expedite cash flow during the construction contract and it is not uncommon to have multiple adjudications, throughout the duration of a project, but not adjudicated at the same time.

The payment terms of a construction contract are also regulated by Part II of the Act. So, before you decide to commence an adjudication, do you have a construction contract?

A construction contract

 A construction contract is defined by  the Act and are agreements for any of the following:

• carrying out of construction operations.
• providing one’s own labour, or the labour of others, for the carrying out of construction operations.
• arranging for the carrying out of construction operations by others e.g. under a sub-contract.
• It extends to architectural, design, advice on building, interior or exterior decoration, engineering, demolitions, surveying work and on the laying-out of landscape.
• Installation of mechanical, electrical and heating works. to include maintenance of the works.
• A collateral warranty as to the carrying out of construction work. Parkwood Leisure Ltd v Laing O’ Rourke Wales and West Ltd [2013] EWHC 2665 (TCC).Whether you can adjudicate will depend upon the timing and the wording of the warranty. Timing is paramount: Toppan Holdings Ltd & Anor v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC).
• Government contracts are construction contracts under the Act.

Exclusions

The following are excluded from being a construction contract:

• Agreements which primarily relate to the financing of works
• Development agreements containing provision for the disposal of an interest in land
• Contracts between employers and employees^.
• Supply only contracts: manufacture and delivery of building/engineering, unless the contract also provides for their installation on site
• Oil and gas exploration, mining and industries plants
• Contracts with residential occupiers that occupy or intend to occupy the property

All construction contracts, except those with a duration of less than 45 days, must contain a right to instalments, stage payments or other periodic payments.

The Act prohibits withholding or reduction of payments, except after proper notice and prohibits pay-when-paid clauses, except in circumstances of insolvency.  The Act provides a right to suspend performance for non-payment.

Payment under the Act

The Act has the following provisions regarding payment:

1. It requires a construction contract to provide for interim payments.
2. It requires the contract to provide a mechanism for determining what sums became due and when is the due date.
3. It requires the contract to provide a final date for payment which would be later than the due date
4. The contract must require the employer to serve a payment notice within five days of the due date
5. If an Employer wishes to resist paying a contractor’s final account, it is obliged to serve a pay less notice

Payment notices and pay less notices

A valid payment notice confirms the sum to be paid by way of an interim or final payment or any other payment provided for in the contract, unless a valid pay less notice is served. S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 at [37]–[42].

If an employer (owner/developer) fails to serve a valid pay less notice and fails to pay the amount claimed, the contractor will be able to recover the amount claimed by bringing an adjudication, without the adjudicator having to decide the substantive merits of the payment application.

These are known as ‘smash and grab’ adjudications. If you fail to serve a valid pay less notice and wish to obtain a reduction in the amount due or pursue a counterclaim or cross-claim, you will have to pay the full amount first and then pursue the reduction or other claim, by bringing proceedings or by set-off against a subsequent payment. This is known as a true value adjudication.

The notice requirements apply to all payments provided for by the contract: liquidated damages or repayment of overpaid instalments. It also applies to payments due following completion of the works or termination of a contract.

When deciding if a payment notice (or a pay less notice) is valid and complies with the relevant statutory and contractual requirements, it has to be construed objectively –  how a reasonable recipient would have understood the notice.

A payment notice (and a pay less notice) has to make plain that it is a payment notice (or a pay less notice). Each has to set out clearly the sum which is said to be due and/or to be deducted and the basis on which that sum is calculated. This can be zero. Beyond that, the question of whether or not it is a valid notice in accordance with the contract is a matter of fact.

Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) at [20]–[31] per Coulson J upheld by the Court of Appeal: see S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 at [46]–[59].

What happens if the payer does not serve a payment notice?

Section 110B deals with situations where there is a default in service of the payer’s payment notice.  There are two situations:

1. Where the contract requires the payer to give the payment notice, and a valid notice is not given, the payee may serve a payment notice instead.
2. Where a contract provides for the payee to make a payment application before the time for the payer’s payment notice, default in service of the payer’s payment notice, makes the application count as the payment notice. The application must be one which states the amount which the payee considers will become due and the basis on which it is calculated, and it must be given in accordance with the contract.^.

If you have been provided with a construction contract for execution by an employer, it is likely to be a JCT or NEC contract. They have a suite of standard form contracts for use in the construction industry in the UK to help deliver projects.

It sets out the responsibilities of all the parties within the process and their obligations to each other. The intention of these contracts was to give a balanced allocation of risk between the parties. These contracts are prepared by an employer’s construction solicitor, who will have appended to it, the employer’s schedule of contract amendments, with the objective of increasing the liability of the contractor under a contract and reducing the employer’s risk. It will often have amendments to the payment clauses contained in these contracts. For this reason, it is imperative that you obtain legal advice, so you are aware of all pitfalls, and if it is commercially viable for you to enter into the contact. Upon obtaining legal advice, you may be able to re-negotiate certain terms of the contract.

Whether you are an employer, main contractor or sub-contractor. and you require advice in relation to payment notices and pay less notices, under a construction contract, or wish to obtain our Guide to Adjudication, please contact Teresa Johnston on 0207 481 2422, 07584 229 373 or via email at Teresa.Johnston@wellerslawgroup.com