Landlord and tenant – Forfeiture – Housing Act 1996 – Possession – Landlords bringing claim for unpaid service charges – Tenant filing no acknowledgment of service or defence – Default judgment entered for landlords – Whether landlords entitled to possession on ground of forfeiture of lease – Whether such claim precluded by section 81 of 1996 Act – Whether default judgment a “final determination” that service charge payable within meaning of section 81
The claimants were the landlords and the first defendant was the tenant under a lease of a flat for a 99-year term from 1986; the second defendant guaranteed the first defendant’s obligations under that lease. The first defendant failed to pay service charges falling due between December 2009 and December 2010, resulting in arrears of £6,509 and triggering the landlord’s right of re-entry under the terms of the lease. In February 2011, the claimants brought proceedings under CPR 7 to recover the unpaid sums. Neither defendant filed an acknowledgment of service or a defence and, in March 2011, default judgment was entered for the claimants.
The claimants subsequently brought proceedings for possession on the ground that the lease had been forfeited. The defendants contended that the claimants were not entitled to possession on that ground since there had been no “final determination” that the amount of the service charge was payable, within section 81 of the Housing Act 1996, as amended. An issue arose as to whether a default judgment was a final determination for that purpose. The district judge held that it was not and dismissed the claim accordingly. The claimant appealed.
Held: The claim was allowed. A default judgment is a “final determination” for the purposes of section 81 of the 1996 Act, as amended. Section 81 provides a tenant with an opportunity to challenge service charges before possession proceedings are brought on the grounds of non-payment. The wording of the section does not, either expressly or by necessary implication, remove or detract from the right of a landlord to seek a default judgment, in accordance with the usual rules of procedure, where the tenant fails to engage with the process that section 81 has created in the tenant’s favour. The addition of the word “final” to the amended version of section 81 does not alter the position. The reference to finality merely underlines that the date after which the determination is held to be binding on the parties is to be calculated by reference to the period within which the tenant can seek to overturn the initial determination of the amount by an “appeal or other challenge”. An application to set aside a default judgment is not a “challenge” within the meaning of the section; consistently with the wording of the Arbitration Act 1996, the word “challenge” in section 81 bears a specific, quasi-technical meaning that refers only to a challenge to a decision made in the course of arbitration. Accordingly, the absence of any specific time limits for applying to set aside a default judgment does not mean that there can be no finality for the purpose of section 81. A default judgment is binding on the parties as a determination for certain purposes. Where a default judgment has been entered, the issues, if properly scrutinised and identified, are to be treated between the parties to that judgment as having been determined.
This was an appeal by the claimants, the Church Commissioners for England, from a decision of District Judge Lightman, sitting in Central London County Court, dismissing a claim against the defendants, Koyale Enterprises and Naresh Thaleshwar, for possession of a flat on the ground of forfeiture of the lease for non-payment of service charges.
Amanda Gourlay (instructed by Charles Russell) appeared for the claimants; Jennifer Meech (instructed by Sheridans) represented the defendants.
Giving judgment, HH Judge Dight said:
1. This appeal raises the question of whether a default judgment for arrears of rent or service charges (reserved as rent) is a final determination for the purposes of section 81 of the Housing Act 1996 (as amended).
2. There are conflicting County Court decisions on the question. In Southwark LBC v Tornaritis 11 May 1999, HH Judge Cox, sitting in Lambeth County Court, held in relation to section 81 as originally enacted, which did not include the word “final” in the relevant provision, that a default judgment was a determination for the purposes of section 81.
3. On the other hand, in Hillbrow (Richmond) Ltd v Alogaily 7 November 2005, HH Judge Rose, sitting in Wandsworth County Court, held that a default judgment was not a final determination for the purpose of section 81 (as amended). He declined to follow the decision of Judge Cox. The summary of his judgment given in the Current Law Year Book [2006] at para 2707 reads as follows:
“An analysis of the issues is required before a determination could be said to have taken place. Accordingly, there have been no determinations for the purposes of section 81 so that there had been no proper forfeiture.”
4. The current provision, which I am asked to construe on this appeal, reads as follows:
“A landlord may not, in relation to premises let as a dwelling, exercise a right of re-entry or forfeiture for failure by a tenant to pay a service charge or administration charge unless:
(a) It is finally determined by or an appeal from a leasehold valuation tribunal, or by a court, or by an arbitral tribunal in proceedings pursuant to post-dispute arbitration agreement that the amount of the service charge or administration charges payable by him; or
(b) The tenant has admitted that it is so payable.”
I should also set out at this stage the relevant subparagraphs of that provision, which are as follows:
(2) “The landlord may not exercise a right of re-entry or forfeiture by virtue of subsection (1)(a) until after the end of the period of 14 days beginning with the day after that in which the final determination is made.
(3) For the purposes of this section, it is finally determined that the amount of a service charge or administration charge is payable:
(a) If a decision that it is payable is not appealed against or otherwise challenged at the end of the time for bringing an appeal or other challenge; or
(b) If such a decision is appealed against or otherwise challenged and not set aside in consequence of the appeal or other challenge at the time specified in subsection (3A)
(3A) The time referred to in subsection (3)(b) is the time when the appeal or other challenge is disposed of:
(a) By the determination of the appeal or other challenge and the expiry of the time for bringing a subsequent appeal, if any; or
(b) By its being abandoned or other ceasing to have effect.”
5. In the case before me, District Judge Lightman, although not bound, was persuaded by the decision of HH Judge Rose that a default judgment was not a final determination and declined to grant the claimant a possession order forfeiting the lease in reliance on a default judgment for arrears of service charges. It is from that decision that the claimant, with permission of the learned district judge, appealed.
6. The facts of the case, which I take from the skeleton of the claimant, are as follows: The first defendant is the assignee of a 99-year lease, commencing on 25 December 1986, of Flat 213 The Quadrangle Tower, Cambridge Square, London W2 2PJ (referred to as “the lease”). The lease was assigned with the claimant’s consent to the first defendant on 29 August 1997. The second defendant is the guarantor of the first defendant’s obligations under the lease.
7. By para 1 of the fifth schedule to the lease, the first defendant covenanted to pay the rents at the times and in the manner set out in the second schedule to the lease. By paras 1 and 2 of the second schedule to the lease, the first defendant covenanted to pay £250 per annum by way of rent for the first 25 years of the lease and to pay service charges, by way of further or additional rent, in advance on the usual quarter days.
8. The lease contains a proviso for re-entry if and whenever all or any part of the rent or rents reserved should be in arrears and unpaid for 21 days after the same shall become due. The first defendant failed to pay the service charges which fell due for payment between 25 December 2009 and 25 December 2010 and the total amount of £6,509.10 became owing. The claimant claimed those unpaid monies by a Part 7 claim issued on 18 February 2011. Neither defendant filed an acknowledgment of service or a defence and on 17 March 2011, a default judgment was entered in favour of the claimant for the sum of £7,919.50 in respect of rent, service charges, contractual interest and contractual costs.
9. The claimant’s claim for possession on the grounds of forfeiture – in other words, the proceedings now before me – was issued on 20 April 2011 and was listed for hearing on 28 June 2011. It was heard by District Judge Lightman, who dismissed the claim on the ground that, where a landlord had obtained default judgment in respect of unpaid service charges, the amount of the service charge payable by the tenant was not finally determined within the meaning of section 81 of the 1996 Act.
10. In an approved note of his judgment, the learned district judge said:
“Since the decision in Hillbrow v Alogaily, notwithstanding my own feelings, I follow the decision of His Honour Judge Rose ever since. A default judgment is not considered by a judge and is not a determination. It is the practice since Hillbrow in order to get a determination for a landlord to bring a Part 8 claim and to have a summary hearing if the defendant does nothing. I personally think that it is a waste of time and money, but I am not prepared to go behind the practice and what I have been doing. Therefore, there is no determination.”
For those reasons he declined to make a possession order.
11. The claimant appeals on the single ground that:
“The learned judge erred in law in dismissing the claimant’s claim to possession on the grounds of forfeiture for failure to pay a service charge because, contrary to the proper construction of section 81 of the Housing Act 1996, he held that default judgment does not constitute a final determination by a court that the amount of the service charge was payable by the defendant.”
That ground of appeal is supported by a detailed skeleton argument filed on behalf of the appellant and today the arguments raised in that skeleton have been supplemented by submissions made orally by counsel for the appellant.
12. The respondent does not oppose the appeal for this reason: prior to the appeal coming on, a third party (whom counsel for the respondents has today confirmed was authorised to do so) cleared the arrears of service charges and paid the costs of the claim set out on the claimant’s costs schedule. Therefore, even if I were to overturn the decision of the learned district judge and declare that the lease had been forfeited on service of these proceedings, the respondents would be entitled automatically, by virtue of section 138 of the County Court Act 1984, to statutory relief from forfeiture. However, the claimant – because of its significant holding of property in central London – seeks clarification of the issue before the learned district judge and has therefore continued with this appeal.
13. In essence Ms Gourlay, on behalf of the appellant, submits the following (I do not recite the whole of her skeleton and I hope I do not do her any injustice by analysing it in the following way): first, that a default judgment is a determination within the meaning of section 81(1)(a) and she relies on decisions of the Privy Council and the Court of Appeal in support of that proposition. Secondly, the appearance of the word “final” in the new legislation and the reference in the new legislation to a failure to challenge a decision as to arrears does not alter the primary position. Thirdly, the policy lying behind the Act would not be defeated by the construction for which she contends. Fourthly, on the other hand, the construction favoured by HH Judge Rose and District Judge Lightman would place landlords at an unintended disadvantage and would be impractical and wasteful.
14. I respectfully agree with those submissions for the following reasons: first, in my judgment, there is nothing in the statutory background or the words of the statute that compel one to the conclusion reached by Judge Rose and by District Judge Lightman. The previous legislation was framed in the following way:
(1) “A landlord may not in relation to premises let as a dwelling exercise a right of re-entry or forfeiture for failure to pay a service charge unless the amount of the service charge:
(a) is agreed or admitted by the tenant; or
(b) has been the subject of determination by a court or by an arbitral tribunal in proceedings pursuant to an arbitration agreement within the meaning of Part 1 of the Arbitration Act 1996.”
There then appears the provision whose successor in the subsequent legislation is the subject matter of the appeal:
(2) “Where the amount is the subject of determination, the landlord may not exercise any right of re-entry or forfeiture until after the end of the period of fourteen days beginning with the day after that on which the decision of the court or arbitral tribunal is given.”
15. As counsel submits, prior to the appearance in the 1996 Act of that particular provision, a landlord reserving service charges as rent was under no obligation to put his tenants on notice of an intention to forfeit a long residential lease because of non-payment of even a small amount of service charges. What section 81 of the Act did was to provide the tenant with an opportunity to challenge the service charges before possession proceedings were brought. In other words, it provided a buffer zone to enable the tenant to put his affairs in order.
16. The provision itself does not expressly define the word “determination”, but, in my judgment, there is nothing in the wording of the provision which expressly or by necessary implication removes or detracts from the right of a landlord in accordance with the usual rules of procedure to seek a default judgment where the tenant has failed to engage with the process which has been created in his favour by the enactment of section 81.
17. The new Act changed the provision slightly by introducing (as I have already mentioned) the word “finally” into section 81(1)(a). It may be that it was the introduction of that word which persuaded Judge Rose that there had to be a hearing at which the sums involved were adjudicated upon rather than a default judgment, but it is apparent from the wording of section 81 as a whole that what the purpose of the word “finally” is to underline that the date after which the determination is to be held to be binding on the parties is to be calculated by reference to the period within which the tenant (or indeed the landlord) is entitled to seek to overturn the initial determination of the amount by an appeal or a challenge. The word “appeal” in section 81(3) bears, of course, its ordinary construction. The word “challenge”, the appellant submits, bears a specific semi-technical meaning. It does not mean any challenge to a judgment but only a challenge to a decision of an arbitral tribunal. It might be thought, by reference to section 81(3)(a), that a challenge could be brought by way of an application to set aside a judgment and that, given that finality only occurs (per section 81(3)) after the time for bringing a challenge has ended, that means that – where there has been a default judgment which is open to challenge – there can be no finality because, in theory, there are no specific time limits for applying to set aside a default judgment. However, it is apparent from the structure of section 81(1)(a) and section 81(3A) that the parliamentary draftsman was concerned to ensure that an appeal should not create difficulties with a process which had been started by an initial determination and that the word “appeal” is, therefore, in my judgment, to be equated with the word “challenge”, but only in the context of challenge to a decision made in the course of arbitration.
18. That the word “challenge” bears that specific and (as I say) quasi technical meaning is supported by a consideration of the relevant provisions of the Arbitration Act 1996, namely sections 67 and 68, which speak of “challenging” an award of an arbitral tribunal. When construed in that way it is plain that there is no open-ended time limit for applying to set aside a default judgment for service charge arrears if I am right in saying that such a default judgment is otherwise a determination for the purposes of section 81.
19. My second reason for agreeing with the construction advanced by the appellant is that the authorities to which Ms Gourlay referred me support the proposition that a default judgment is, for certain purposes, binding as a determination on the parties to the judgment. She referred me first to the decision of the Privy Council in New Brunswick Railway Co v British and French Trust Corporation Ltd [1939] AC 1. In that case the board were asked to consider whether an issue estoppel arose where, at first instance, declaratory relief was granted in respect of the construction of some bonds. Somewhat unusually in that case the application for a default judgment was considered at a hearing rather than administratively or on paper because the claimant in that case wanted declaratory relief which the court has not traditionally been able to grant without a hearing. Nevertheless, it is plain that the judgment of Lord Chancellor Maugham and the speech of Lord Wright coming to the same conclusions are authority for the proposition that an estoppel based on a default judgment arises between the same parties if they become involved in subsequent litigation. Lord Maugham said at p21:
“In my opinion we are at least justified in holding that an estoppel based on a default judgment must be very carefully limited. The true principle in such a case would seem to be that the defendant is estopped from setting up in a subsequent action a defence which was necessarily, and with complete precision, decided by the previous judgment”
As Lord Wright said at p35:
“A judgment by default, if not set aside by the court on a proper application under the Rules of Court, is binding on the parties (which term may in this as in other cases include privies) and constitutes res judicata in respect of the matter directly decided.”
20. It follows that, in deciding the scope of the estoppel’s operation, the court is concerned to identify precisely the issues which are determined by the default judgment and will limit the effects of the estoppel to those issues. But, nevertheless, the value from the claimant’s perspective of that decision is that the issues which were the subject matter of the default judgment were treated by the board as having been conclusively determined for the purposes of subsequent litigation between the same parties or their privies.
21. That decision was followed in the subsequent Privy Council case of Kok Hoong v Leong Cheong Kweng Mines Ltd [1964] AC 993. There were two sets of proceedings, one after the other, in the first of which judgment was obtained by default by the claimant. In subsequent proceedings between the same parties the respondent (that is the defendant to the litigation) raised a number of different issues by way of a defence which necessarily had not been raised in the earlier proceedings. The question of estoppel by res judicata arose and ultimately came before the Privy Council. Again, the board recognised the fact that an estoppel could operate in such circumstances, but went on to hold that the court has to scrutinise carefully the extent to which the estoppel would operate and limit it to the issues in respect of which default judgment had been given. Nevertheless, the board upheld the general principle that as between the parties those limited issues which had been identified after the appropriate scrutiny were issues which had been effectively determined between the parties and they could no longer challenge them.
22. To show me that the law has not changed as a result of the coming into force of the Civil Procedure Rules Ms Gourlay took me to the more recent case of Pugh v Cantor Fitzgerald International [2001] EWCA Civ 307 where, in giving the leading judgment, Ward LJ accepted the principles expressed by the board in the two cases that I have just cited.
23. Those three cases persuade me that it is right that, where a default judgment has been entered, the issues – when properly scrutinised and identified – are to be treated as between the parties to that judgment as having been determined. In my judgment, those decisions are also support for the contention that a default judgment is, for the purposes of section 81, a determination.
24. Thirdly, the policy of section 81 is to provide the tenant with a buffer or breathing space. My construction maintains and does not defeat that policy.
25. I should mention that the claimant also invites me to construe the legislation as affording the tenants a limited three week window within which to apply to set aside a default judgment. The basis for that submission is set out cogently in Ms Gourlay’s skeleton between [41] and [56]. But I decline to do so. First, the words do not bear the construction that is suggested namely that, in the event of there being a default judgment, a period has to elapse pending appeal or challenge before the determination has been made final. Secondly, there is no need to imply such provision; there is no gap or issue over the construction which requires one to do so. The mischief at which the provisions relating to an appeal or challenge are aimed does not exist in relation to an application to set aside a default judgment. Thirdly, in any event, there is as a result of the proper construction of section 81(2) a fourteen day buffer created after the determination to enable the tenant to pay the sums which had been determined before the new forfeiture proceedings can be started. Fourthly, it seems to me that it would run counter to the provisions and principles laid down in the Civil Procedure Rules relating to applications to set aside judgments for there to be in this particular case a specific time limit of three weeks.
26. My fourth reason is this: if, for there to be a determination, there has to be a hearing at which that determination is reached, one asks rhetorically: What would the issues be, what procedure would be adopted and what would the nature of the court hearing be? As far as the issues are concerned, given that our litigation process and structure is based on the adversarial system, the issue would only become identified when somebody challenges a claim which is being advanced. In the absence of any challenge or response to the claim form, how is the court to know what issues arise for determination by it? As to the procedure, how would the landlord in the absence of an effective opponent bring the matter before the court for there to be a hearing of the default judgment application? Even if there were a hearing the judgment would still be a default judgment. For there to be an application for summary judgment, in the absence of a defence or acknowledgment of service, the court would need to give leave. Alternatively there would have to be a trial. Again, I revert to the question: A trial of what? So far as the nature of the hearing is concerned, would it effectively be a determination of the issues in the way that one assumes Judge Rose and District Judge Lightman intended? It is apparent from CPR 39.3 and the notes at 39.3.5 in the current edition of the White Book, that what would effectively happen at a trial where the defendant (one assumes) fails to attend would be that the court would require the claimant to prove its case by (as it says in the notes) “referring to the statement of case with a statement of truth or tendering witness statements”. In neither case would the court look behind, it seems to me, the statements on the face of those documents and (as Ms Gourlay submits) the reasonableness of the service charges (if that is the purpose behind section 81) would not in fact be investigated.
27. My fifth reason is that the course which Judge Rose and District Judge Lightman’s construction would compel landlords to take would put them at a distinct and unnecessary disadvantage. They would never be able to obtain possession of property without, effectively, a trial. It would create a certain amount of uncertainty. It might involve landlords in disproportionate expenditure and preparation for hearings about uncertain issues. If one posits the not uncommon situation where a landlord seeks to recover service charges from one tenant in a mansion block – where the sum due from an individual tenant might be small, but the steps necessary to prove the claim because of the complexity of management of the building significant – for the landlord to prove the claim (notwithstanding the absence of opposition from the tenant) might involve him in considerable disclosure, preparation of evidence and other steps to prove the reasonableness and liability of the tenant for his/her share of the overall service charges.
28. I take on board and agree with Ms Gourlay’s further submission that a landlord in the interim period pending determination by trial would be put in the position where it would not want to serve demands for further rent or service charges because of the risk of waiving the rights to forfeit the lease, and the landlord would therefore be put into a grey or limbo position.
29. My sixth reason (and really this is very far down the list) is this: The effect on the court is that it might have to handle a not insubstantial number of unnecessary and ineffective hearings at which purely formal steps would be taken and at which formal hearings would be held for no real benefit. The effects on the courts and the courts’ resources is not a reason for construing the provision in the way I do, but it seems to me that it cannot have been the intention of legislature to create a process which has that effect.
30. So, for all those reasons, I have no hesitation in concluding that for the purposes of section 81 of the Housing Act 1996 (as amended) a default judgment is a final determination. I would therefore allow the appeal, but, I suspect that, as a result of the steps that have occurred since the appeal was originally launched, no one is going to seek any relief.
Claim allowed.
