Landlord and tenant – Ground rent – Collection fee – First-tier Tribunal deciding appellant landlord entitled to charge administration fee for collecting ground rent – Upper Tribunal allowing respondent tenant’s appeal – Appellant appealing – Whether covenant to pay landlord’s deemed expenses for collecting ground rent could include charge for giving notice under section 166 of Commonhold and Leasehold Reform Act 2002 – Appeal dismissed
The respondent held a 125-year lease of Flat 12, 6 Trinity Mews, London E1. The appellant was the freeholder. The ground rent payable in respect of the flat was £250 per annum, payable in equal half-yearly instalments.
Section 166 of the Commonhold and Leasehold Reform Act 2002 provided that ground rent was not owed by a lessee unless a notice in the form specified by section 166 was first given to him or her by the landlord. The notice had to set out the amount of the rent and the date when it was payable.
Because the rent for the respondent’s flat was payable in half-yearly instalments, the appellant freeholder had to provide two section 166 notices each year. It bought the block in 2017, and since July 2019 it had charged each tenant a “ground rent collection fee” of £30 plus VAT, twice a year. Rather than paying rent of £250 per annum, the lessees paid £322 per annum once the collection fee (£30 + VAT) was included.
The respondent applied to the First-tier Tribunal (FTT) for a determination of the reasonableness and payability of the ground rent collection fee. As the charge was an administration charge, the application was properly made under paragraph 5 of schedule 11 to the 2002 Act.
The FTT concluded that the service of the section 166 notice and associated work was part and parcel of the collection process. The Upper Tribunal allowed the respondent’s appeal against that decision finding that the lease contained no provisions entitling the freeholder to charge the ground rent collection fee: [2022] UKUT 68 (LC); [2022] PLSCS 49. The appellant appealed.
Held: The appeal was dismissed.
(1) The only question before the court was whether the ground rent fee fell within the lease as a charge for attending to the collection of rents from the building.
Although at common law rent became payable whether or not the landlord demanded it, that was not so in the case of a tenant under a long lease of a dwelling. Section 166 of the 2002 Act provided that such a tenant “… is not liable to make a payment of rent under the lease unless the landlord has given him a notice relating to the payment; and the date on which he is liable to make the payment is that specified in the notice”. Thus, the landlord had to give the lessee such a notice; and it had to be in the prescribed form: Gibbs v Lakeside Developments Ltd [2018] EWCA Civ 2874; [2019] PLSCS 1 considered.
The court rejected the appellant’s argument that the service of the section 166 notice had been part and parcel of the process of collecting the rent. Rent could not be collected until it was due. The effect of section 166 was that rent could not be collected unless and until the section 166 notice was served. The covenant in the lease to pay rent (and the reservation of rent) imposed only a potential or inchoate liability on the leaseholder, which did not become an actual liability until the section 166 notice was given. The effect of giving the notice was therefore to make payment due.
(2) Rent became due on the date specified in the notice, which could not be earlier than the date specified in the lease but could be later: in the sample notice before the court, the date specified in the notice was 5 January 2021 and the effect was that rent became due on that date, not on 1 January 2021 as specified in the lease. If no section 166 notice was served, rent never became due.
There was a conceptual difference between making the rent due and collecting it. Although they were both part of the means by which the landlord got its rents, they were in principle different stages. Giving the section 166 notice turned the lessee’s potential liability to pay rent into an actual liability. That was a necessary prerequisite to the collection of rent, as without it the rent did not become due and could not be collected at all, but it was not itself the collection of rent. It was a logically prior stage.
(3) There was a distinction between liability and collection: one could not collect rent unless there was liability but one could in principle have a liability for rent without it being collected. Giving the section 166 notice made the rent “collectable”, which was not the same as collecting it. If the process of collection included any step that was a necessary prerequisite to the rent being collected, it would logically include the granting of the lease itself as without that there would be no rent due. But that could not realistically be regarded as part of the process of collecting the rent.
It was noticeable that the lease contained a tenant’s covenant in familiar terms obliging the tenant to pay to the landlord the costs incurred by the landlord “in relation to or incidental to … the contemplation, preparation and service of” a notice under section 146 of the Law of Property Act 1925. The lease did not contain any similar express reference to service of a section 166 notice, despite the fact that the lease was granted in 2010, several years after the 2002 Act came into force in 2005.
(4) It was one thing for those drafting leases to be wary of re-writing traditional language in case some subtlety was thereby inadvertently lost, but that did not explain why the drafter should not add an express reference to a section 166 notice. There was some force in the point that parliament, which enacted section 166 to protect lessees from having their leases forfeited for trivial amounts, could scarcely have been expecting thereby routinely to impose extra costs on lessees; and that if landlords wanted to seek to pass those costs on, they should have included express provision to that effect. The point was unlikely to arise with new leases because ground rents for new long residential leases had in effect been abolished by the Leasehold Reform (Ground Rent) Act 2022.
Justin Bates (instructed by Scott Cohen Solicitors Ltd) appeared for the appellant; Rebecca Cattermole (acting pro bono) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Stampfer v Avon Ground Rents Ltd