One of the most vexing questions in service charge litigation is the interaction between default judgment and s.81, Housing Act 1996. In summary, s.81, 1996 Act requires that, before any notice under s.146, Law of Property Act 1925 (forfeiture) can be served, or any right of re-entry exercised, there must be a “final determination” that the amount of the service charge is due. This can be provided by the LVT, arbitral tribunal or court. Alternatively, the tenant can admit the sum is due.

Now, is a default judgment a “final determination” for these purposes? This is quite important because, in the overwhelming majority of service charge arrears cases, the landlord issues county court debt proceedings and, when no defence is filed, just claims judgment in default, which he sends to the mortgage company, who, in turn, pay the service charges (and legal costs), adding the same to the mortgage. If a default judgment isn’t good enough, then this common practice would have to change.

The White Book, Woodfall and one county court case (Hillbrow (Richmond) Ltd v Alogaily 2005) say that a default judgment isn’t good enough. The point being, in short, that a default judgment involves no determination or decision, but, rather, is an administrative act which comes from a failure to file and serve a defence or acknowledgement of service (although there are many other arguments). There is, however, an earlier county court case (LB Southwark v Tornaritis 1999), which, in relation to s.81 as enacted, says that a default judgment is enough.

And so, to add to this merry band, we now have a third county court case Church Commissioners v Koyale Enterprises and another, Central London County Court, Sept.22, 2011 (transcript on Lawtel, no doubt it’ll end up in the EGLR in due course) which has held that a default judgment is a final determination and does satisfy s.81, 1996 Act. I was first alerted to this case by a news item on the Tanfield Chambers website (here) which (briefly) discussed the case. I confess that I was quite amused to read that a county court case could “bring clarity to this hitherto opaque” area of law. And, now having read the transcript, that statement is, well, balls.

The defendant was the assignee of a lease. I presume the claimants were the freeholders. The second defendant was the guarantor of the first defendant. The first defendant had covenanted to pay service charges by way of additional rent, in advance, on the usual quarter days. The sums claimed were not paid and so proceedings were issued. No defence was filed, and judgment in default was entered. A claim for possession followed and, at that hearing, the s.81 point arose.

The DJ held that s.81 had not been satisfied and refused to make a possession order. He gave permission to appeal. By the time the appeal came on the whole case was academic – and, importantly, was not opposed – as the sums claimed had been paid. Despite this, HHJ Dight held that s.81 was satisfied by a default judgment, for five reasons (the transcript gives 6, but I’ve merged two into one as it’s really the same point):

(a) s.81 requires a “determination” and there is nothing in the wording of s.81 to suggest that this phrase was intended to exclude the normal remedies open to landlords, i.e. default judgment;

(b) there was copious privy council authority for the proposition that a default judgment was binding between the parties (quite why on earth anyone needed authority for that proposition is beyond me, but, if you need it: New Brunswick Railway Co v British French Trust Co Ltd [1939] AC 1);

(c) the policy behind s.81 was to give leaseholders a breathing space before forfeiture could result and that was not undermined by default judgments;

(d) nothing useful could be achieved at a trial in the absence of a defence, so what was a tenant losing by the court allowing default judgments to satisfy s.81;

(e) the costs involved in preparing for such a “trial” would be wholly disproportionate, both for landlords and the court.

This is, with all due respect, absolute rubbish. And here is why:

(a) it is as plain as a pikestaff that a default judgment is not a “determination” but is an administrative act arrived at without any judicial input: see Ostra Insurance Public Co. Ltd v Kintex Shareholding Company [2004] EWHC 1599 (Comm), per Cooke J at [7];

(b) s.81 can be satisfied by court determination, or LVT decision or arbitration. Neither LVT not arbitration permit for default judgment. How can it be that the nature of the case, evidence (and rights of the parties) depends on what forum is used;

(c) s.81 has to be seen with its sister provision, s.168, CLRA 2002 which is, in effect, s.81 but for all other breaches of covenant – how would one obtain default judgment for a determination that the tenant was in breach of covenant by keeping a cat? You can’t;

(d) there is no way of appealing a default judgment, but s.81 clearly contemplates that the decision becomes final only when the time for an appeal has passed;

(e) the Learned Judge is wrong to focus on the fact that a default judgment might give rise to a binding result between the parties; n0-one would dispute that it gives rise to enforceable rights, but it does not mean that those rights include forfeiture (which, obviously, is a most serious and draconian remedy); use default judgments if you want a money judgment, a charging order, an attachment of earnings order, etc;

(f) in addition, it is wrong to say that nothing useful would happen by requiring a trial. The court should check, for itself, that the relevant statutory notices have been served (s.21B, LTA 1985, ss.47,48, LTA 1987) and that there are no s.20B LTA 1985 problems. These are all clearly conditions precedent for the payment of a service charge and, as such, the court should check for itself that these have been complied with (not to mention that, it would seem to me, the court should conduct a cursory check on the quantum of the service charge, given that service charges are capped in accordance with s.19, LTA 1985). I know that courts don’t like to do this (and many DJs aren’t in the habit of doing), but they should.

None of these points are engaged with in the judgment in any meaningful way and so, with regret, I’m afraid that, rather than bringing clarity to this opaque area of law, we’ve just got another county court case, to be given such weight as you think appropriate.