One Housing Group Ltd v (1) David Wright (2) Abdul Moner and Afruja Begum [2015] UKUT 0124 (LC)

The action takes place on the Isle of Dogs, on the Barkantine Estate. The blocks on the estate carry Romantic, sea-faring names: Mr Wright was the long lessee of 65 Bowsprit Point, and Mr Moner and Ms Begum of 63 The Quarterdeck.

I hope that I will be forgiven for saying that the sums at issue were not great in the general scheme of things: £5,881.92 and £3,032.58 for each flat respectively.

This is the text of the section. It is, happily, quite short.

“No action shall be brought, and the power conferred by section 72(1) of the Tribunals, Courts and Enforcement Act 2007 shall not be exercisable, to recover arrears of rent, or damages in respect of arrears of rent, after the expiration of six years from the date on which the arrears became due”.

This Court of Appeal case – memorably omitted from Sir Andrew Morritt’s judgment in Freeholders of 69 Marina v Ghooram, Oram [2011] EWCA Civ 1258 – provides that where a lease describes a service charge as payable “by way of rent/additional rent”, that service charge was invested with the character of rent.

Nourse LJ said, in relation to the leases before him that:

“Each of those leases, by providing that service charge should be deemed to be sums due by way of additional rent, had the effect of conferring the like attributes on the service charge, an effect confirmed by the further provision that it should be recoverable as rent”.

Appropriation is the process by which the party who receives a payment – in this case the landlord, One Housing – decides which debt the payment should relate to.

In this case some of the service charge debts related to demands raised in 2005. The lessees had made payments, and the dispute between the parties was whether the landlord had applied those payments to the satisfaction of the 2005 demands, or to the most recent demands.

If it had applied them to the most recent demands, Escalus was authority for the proposition that the landlord was time-barred from recovering any sums due more than six years before the date of issue of the claim.

One Housing’s argument was that it had applied the lessees’ payments to the earliest demands: Mr Wright’s service charge account was completely up to date on 01 April 2008.

It was, it argued, entitled to apply the lessees’ payments that way because the lessees had not specified, when making their payment, that the money was to be applied to the satisfaction of a specific demand. Paragraphs 21:059-061 of Chitty on Contracts, 30^th edition, supported the argument.

Mr Wright also relied on Chitty in his submissions in response to the landlord. Paragraph 21:061 included the following, which supported him:

“An entry in the creditor’s books [here, One Housing] applying a payment to a particular debt does not constitute an election [by the creditor to appropriate a payment to a particular debt] unless the entry has been communicated to the debtor: Simson v Ingham (1823) 2 B & C 65”.

The FTT decided that One Housing was statute-barred from recovering certain service charges by the operation of section 19 of the Limitation Act 1980.

It reached that decision on two grounds:

1)    One Housing had appropriated payments by the lessees to the most recent debt;

2)    If it had appropriated the payments to the oldest debt, it had not communicated that fact to the lessees.

It reached that decision on four grounds, none of which were upheld by Edward Cousins.

The running account

One Housing produced a statement of account for the lessees, which appeared to show that they had debts dating back to December 2005.

The statement was however a running account showing the dates when sums were charged and payments made. It gave a snapshot of the state of the account at any given time, but it did not show which payment was allocated to which charge.

On Edward Cousins’s analysis, the running account was neutral as evidence in the dispute.

Interest calculations

One Housing produced calculations which demonstrated that “the [amount of] interest owed is the same whether payments are allocated to the earlier or later debt”.

Edward Cousins accepted those calculations, and paraphrasing one Housing’s argument, said: “Interest accrues on a daily basis on the total amount owed, and once accrued it cannot be reduced by a payment”.

Again therefore, this evidence was neutral.

Counsel’s opening

In opening the case, Counsel for One Housing informed the FTT that the arrears dated from 2005.

Edward Cousins agreed that that was not inconsistent with One Housing’s position that the older arrears had later been paid.

Landlord’s evidence

Mr Wright’s limitation argument did not become clear to One Housing until the FTT hearing.

Once it had understood that argument, it adduced schedules which showed the allocation of payments to early debts, and through which Counsel guided the Tribunal.

Despite this, the FTT held that none of the landlord’s evidence indicated that it had applied the lessees’ payments to the earliest arrears, but it gave no reason for rejecting it.

Edward Cousins held that its decision on this ground could not stand.

The FTT determined that One Housing did communicate to the lessees that the payments had been appropriated to the latest debts.

“Certainly no evidence was put before us to suggest otherwise either at the hearing or in the brief submissions provided by the landlord…”, it said.

It would appear that the FTT’s decision was based on the running account, interest calculations and Counsel’s opening constituting an appropriation of payments to the latest debts.

Having found that the FTT had been mistaken in its interpretation of the running account, interest and Counsel’s opening, Edward Cousins held that this conclusion was unsustainable.

He instead accepted that the presentation of the schedules at the FTT hearing “amounted to One Housing communicating how the payments had been appropriated. There was no evidential basis for the Tribunal to conclude that One Housing had failed to communicate this appropriation to the [lessees]”.

The upshot of Edward Cousins’s findings on appropriation and communication was that, contrary to the FTT’s decision:

1)    One Housing had appropriated the lessees’ payments to the earliest debts, and

2)    It had communicated that appropriation to the lessees at the hearing before the FTT.

Accordingly, the earliest debts – those which would otherwise have been time barred by section 19 of the Limitation Act 1980 – had been satisfied, and there was no limitation issue. All of the sums claimed had fallen due less than six years before the issue of the claim.

The Escalus principle, transferred

In Escalus, the issue was the grant of relief from forfeiture, not limitation.

In Graham Peter Wrigley v Landchance Property Management Ltd [2013] UKUT 0376 (LC) we have, however, Upper Tribunal authority that service charges reserved as rent are subject to a six year limitation period and that the Escalus principle is transferable.

The three graces

Limitation can exercise the Tribunal in three, quite different, ways. Chronologically in the life of a service charge, they are the following:

Section 20B, Landlord and Tenant Act 1985

Section 20B of the Landlord and Tenant 1985 Act requires a landlord to demand a service charge within eighteen months of the cost being incurred, or to notify the lessee in writing that the demand will not be issued within the time limit.

See here for the full text of that section, accurate as at 31 March 2015.

Section 19, Limitation Act 1980

Once the demand has been issued, section 19 of the Limitation Act 1980 bars the issue of:

• A claim for payment of the service charge, or
• An application under section 27A of the Landlord and Tenant Act 1985,

more than six years after the service charge fell due for payment.

This applies only where the service charge is reserved as rent in the lease.

If the service charge is not reserved as rent, on the assumption that the lease is made by deed, a twelve year limitation period will apply.

Section 8 of the Limitation Act 1980 provides as follows:

(1)  An action upon a specialty shall not be brought after the expiration of twelve years from the date on which the cause of action accrued.

(2)  Subsection (1) above shall not affect any action for which a shorter period of limitation is prescribed by any other provision of this Act.

A deed is a specialty. The combined effect of sections 52 and 54 of the Law of Property Act 1925 is that all leases for a term of more than three years must be granted by deed.

Section 27A, Landlord and Tenant Act 1985

Third, and finally, we have the unresolved question of whether there is a time limit for the issuing of an application under section 27A of the Landlord and Tenant Act 1985. There was a close call in Andrew Parissis v Blair Court (St John’s Wood) Management Ltd [2014] UKUT 0503 (LC), but we have nothing definitive – yet.

Appropriation and forfeiture

Appropriation can play an important role in forfeiture actions, specifically in the context of waiver by the landlord of the right to forfeit.

This is not the place to engage in an overview of forfeiture and waiver, but the following example is an illustration of the power of appropriation of a payment where forfeiture is envisaged:

• The landlord seeks to forfeit a lease for a once and for all breach of covenant;
• There are rent/service charge arrears pre- and post-dating the breach;
• The lessee makes a payment, to be expressly applied in satisfaction of the most recent rent and/or service charge demand;
• The landlord accepts that payment without demur.

The result is that the lessee is likely to find him/herself in a good position to argue that the landlord has waived the right to forfeit.

In this context, where there is a choice, a payment in satisfaction of rent is tantamount to waiving a landlord’s right to forfeit. There are arguments both ways where service charges are concerned.

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