The Law Commission

 


PART XI

SERVICE AND ADMINISTRATION CHARGES

Residential tenancies

11.1     Recent legislation has attempted to restrict the circumstances in which, and to regulate the extent to which, landlords may forfeit residential tenancies for non-payment of service or administration charges.^[1] While that legislation is relatively complex, two basic methods have been adopted.

Restricting the exercise of forfeiture

11.2     Under current law, the effect of commencing forfeiture proceedings (or of peaceable re-entry) is to terminate the tenancy at once.^[2] This is viewed as too draconian a consequence where the landlord has done nothing more than allege that service or administration charges, which are frequently themselves the subject of dispute as to liability and/or quantification, are overdue. Accordingly, legislation^[3] provides that, unless and until the amount due has been admitted by the tenant, or determined by a court or arbitral tribunal, a landlord may not exercise a right of re-entry or forfeiture for non-payment of such a charge. A similar prohibition^[4] is applied where the amount unpaid is small and it has not been payable for very long - that is, it does not exceed "a prescribed sum", and it has not been payable for longer than "the prescribed period".
11.3     The principal effect of our recommendations in this Paper is that termination of the tenancy will not occur until the court makes an order for its termination and that order takes effect. Even where the landlord exercises his or her right to recover possession unilaterally,^[5] the tenancy will not terminate until the expiry of a period of one month following recovery of possession (and the failure of the tenant to make application to court for relief during that time). Before the landlord can take the matter to court, or seek to recover possession unilaterally, a pre-action notice, stipulating in what respects the tenant is in default, must have been served on the tenant. We think therefore that under the termination of tenancies scheme which we propose it will not be necessary to have provisions of this kind.

Restricting the contents of a pre-action notice

11.4     Instead, we propose to concentrate on the requirements of the pre-action notice. There is already a precedent for this method of regulation. Under section 168 of the Commonhold and Leasehold Reform Act 2002 the landlord may not serve a notice under section 146 of the Law of Property Act 1925 unless the breach of covenant or condition relied upon has been admitted by the tenant or has been finally determined by a court, a leasehold valuation tribunal or an arbitral tribunal.^[6]
11.5     We believe that the clearest way forward, in an area which is becoming extremely complex, is to make provision that a landlord may not claim in a pre-action notice that the tenant has failed to pay a service or administration charge unless the amount due has been admitted by the tenant or has been finally determined by a court or tribunal as above. In so far as the landlord does make such a claim, it should be struck out by the court, and if it is the only basis on which the pre-action notice is served, the notice itself will be treated as invalid.
11.6     The easiest way of facilitating this process will be to provide that failure to pay a service or administration charge shall not comprise tenant default unless the amount due has been admitted by the tenant or has been finally determined by the court or tribunal as the case may be. This protection should apply to all those whom the current legislation protects, that is those to whom premises have been let as a dwelling.

Commercial tenancies

11.7     The question arises whether this form of protection should also apply to other forms of tenancy, in particular commercial tenancies. We are not currently convinced that the need for protective regulation of service charges in commercial tenancies is such as to make it an absolute requirement that the amount due be admitted by the tenant or determined by the court as a pre-condition to service of a pre-action notice in a case where the landlord is intending to take termination order proceedings. In such circumstances, the court will be able to protect the tenant from spurious or exaggerated allegations of default by the landlord as in any other claim for tenancy termination.
11.8     We have considered whether restrictions should be imposed on the exercise of the right to recover possession unilaterally where the sole allegation of default is non-payment of a service charge. For example, it would be possible to provide that, consistent with our proposals concerning residential tenancies, the landlord should only be able to recover possession unilaterally where the tenant has admitted the amount outstanding or the court, or a tribunal, has finally determined the amount which is due. It would be necessary for the landlord to refer expressly to the admission, or determination, relied upon in the pre-action notice. While there is some attraction in consistency, however, we are concerned that this degree of intervention would be unacceptable to landlords.
11.9     Following the consultation exercise on Termination of Tenancies by Physical Re-entry, the Law Commission issued a press release which included the following statement:^[7]

The Commission's proposal for a "short notice" procedure for cases involving non-payment of rent might cause difficulties for tenants involved in disputes over service charges demanded by landlords.^[8] Service charge disputes are more likely to involve genuine disagreement about the amount payable than other cases in which the landlord alleges non-payment of rent. The Commission does not wish to see the threat of physical re-entry employed as a means of applying unfair pressure to tenants in this situation. Consequently, the Commission intends to recommend that there should be a notice and counter-notice procedure similar to that which will usually apply where the landlord threatens to act as a consequence of the tenant's failure to repair.^[9] If a counter-notice was served, the landlord would not be able to re-enter, but would have to commence termination order proceedings.

11.10     The provisional proposals concerning the statutory right to recover possession unilaterally (as we now term the "statutory right of re-entry") entitle the tenant who contests the landlord's right to terminate the tenancy to apply to the court for relief. Thereafter, the matter is treated as if the landlord had commenced termination order proceedings. As the tenant has the right to put the dispute before the court in any case (subject of course to cost penalties and so forth) we do not consider that there is any need for specific provision concerning service charges in commercial tenancies. In effect, the procedure we provisionally propose has the same consequence as the notice/counter-notice procedure contained in the Leasehold Property (Repairs) Act 1938.

summary of provisional proposals made in this part

residential tenancies

(1) Where premises are let as a dwelling, a failure to pay a service or administration charge shall not comprise tenant default unless the tenant has admitted that the amount is owing or the court, or tribunal, has made a final determination to that effect.

existing provisions

(2) Provisions to this effect can replace in their entirety the provisions restricting forfeiture for non-payment of service or administration charges contained in the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002.

Commercial tenancies

(3) No specific provision is required to regulate the enforceability of service charges in commercial tenancies.

Note 1    See Part II, paras 2.70- 2.73 above.    [Back]

Note 2    Canas Property Co v K.L Television Services [1970] 2 QB 433, see para 2.10 above.    [Back]

Note 3    Housing Act 1996, s 81, applying where premises are let as a dwelling.    [Back]

Note 4    Commonhold and Leasehold Reform Act 2002, s 167, applying to “long leases” (of dwellings): see para 2.73 above.    [Back]

Note 5    This right will not be available where the premises are currently occupied as a residence, owing to the operation of the Protection from Eviction Act 1977.    [Back]

Note 6    We should note that we do not propose any inroads on the effect of this provision as far as other breaches of covenant or condition are concerned.    [Back]

Note 7    Press Release dated 30 June 1999. Footnotes 8 and 9 below are reproduced from that Press Release.    [Back]

Note 8    This is because it is standard practice for leases to be drafted so as to include service charges within the definition of “rent”. Because of this, a service charge dispute will often amount to the non-payment of rent, thus triggering the short notice procedure.    [Back]

Note 9    In relation to the application of the Commission’s proposals for a scheme of termination orders to alleged breaches of repairing covenants, the existing notice and counter-notice procedures in the Leasehold Property (Repairs) Act 1938 and the Law of Property Act 1925, s 147 are to be replaced by a single scheme whereby, if the tenancy had three years or more to run, a landlord who wished to commence proceedings (or to re-enter) in reliance upon a breach of a repairing covenant, would be required to notify the tenant. If the tenant served a counter-notice within 28 days the landlord would be unable to re-enter or to commence termination order proceedings without the permission of the court.    [Back]