Vadamalayan v Stewart and others (2020) UKUT 0183 (LC)

The Upper Tribunal (Land Chamber) changes the ground rules on rent repayment orders…

Ms Stewart and others were tenants of Mr V. The property was an unlicensed HMO and the tenants had applied for an RRO. The FTT had awarded a rent repayment order and the landlord appealed, on the basis that the amount he was ordered to pay was excessive in view of the amounts he had spent on the property. The tenants were assisted by University of London Housing Services.

The UT took the opportunity to revisit the basis for assessing the amounts of an RRO award.

The Housing and Planning Act 2016 provides at section 43:

“(1) Where the First-tier Tribunal decides to make a rent repayment order under section 43 in favour of a tenant, the amount is to be determined in accordance with this section.

(2) The amount must relate to rent paid during the period mentioned in the table: [The table provides, for the HMO licence offence, “a period, not exceeding 12 months, during which the landlord was committing the offence.”]

(3) The amount that the landlord may be required to repay in respect of a period must not exceed—

(a) the rent paid in respect of that period, less
(b) any relevant award of universal credit paid (to any person) in respect of rent under the tenancy during that period.

(4) In determining the amount the tribunal must, in particular, take into account—

(a) the conduct of the landlord and the tenant,
(b) the financial circumstances of the landlord, and
(c) whether the landlord has at any time been convicted of an offence to which this Chapter applies.

The approach taken by the FTT followed Parker v Waller (2012) UKUT 301 (LC) (our note) on sections 73 and 74 of the Housing Act 2004 (as have indeed all RRO cases). In that case, George Bartlett QC held

Section 74(5) of the 2004 Act provided that a rent repayment order in favour of an occupier had to be “such amount as the tribunal considers reasonable in the circumstances”. Where the order was made in favour of the local authority, by contrast, section 74(2) provided that the tribunal “may not require the payment of any amount which the tribunal is satisfied, by reason of exceptional circumstances, it would be unreasonable for that person to be required to pay.” The President said at paragraph 24 that the contrast between those two provisions was “marked”. With regard to orders made in favour of an occupier, therefore, he said at paragraph 26(iii):

“There is no presumption that the RRO should be for the total amount received by the landlord during the relevant period unless there are good reasons why it should not be. The RPT must take an overall view of the circumstances in determining what amount would be reasonable.”

However, there was no equivalent of this in the Housing and Planning Act 2016, in particular, there is no requirement that a payment in favour of the tenant should be reasonable.

Parker v Waller had held on rent

“I consider that it would not be appropriate to impose upon [the landlord] an RRO amount that exceeded his profit in the relevant period.”

However

It is not clear to me that the restriction of a rent repayment order to an account of profits was consistent with Parliament’s intention in enacting sections 74 and 75 of the 2004 Act. The removal of the landlord’s profits was – as the President acknowledged at his paragraph 26 – not the only purpose of a rent repayment order even under the provisions then in force. But under the current statutory provisions the restriction of a rent repayment order to the landlord’s profit is impossible to justify. The rent repayment order is no longer tempered by a requirement of reasonableness; and it is not possible to find in the current statute any support for limiting the rent repayment order to the landlord’s profits. That principle should no longer be applied.

So, the starting point for assessing the amount of an RRO was the full rent. And then:

That means that it is not appropriate to calculate a rent repayment order by deducting from the rent everything the landlord has spent on the property during the relevant period. That expenditure will have repaired or enhanced the landlord’s own property, and will have enabled him to charge a rent for it. Much of the expenditure will have been incurred in meeting the landlord’s obligations under the lease. The tenants will typically be entitled to have the structure of the property kept in repair and to have the property kept free of damp and pests. Often the tenancy will include a fridge, a cooker and so on. There is no reason why the landlord’s costs in meeting his obligations under the lease should be set off against the cost of meeting his obligation to comply with a rent repayment order.

In cases where the landlord pays for utilities, as he did in Parker v Waller, there is a case for deduction, because electricity for example is provided to the tenant by third parties and consumed at a rate the tenant chooses; in paying for utilities the landlord is not maintaining or enhancing his own property. So it would be unfair for a tenant paying a rent that included utilities to get more by way of rent repayment than a tenant whose rent did not include utilities. But aside from that, the practice of deducting all the landlord’s costs in calculating the amount of the rent repayment order should cease.

Moreover, nor should any civil or criminal penalty imposed by the local authority be taken into account:

The President deducted the fine from the rent in determining the amount of the rent repayment order; under the current statute, in the absence of the provision about reasonableness, it is difficult to see a reason for deducting either a fine or a financial penalty, given Parliament’s obvious intention that the landlord should be liable both (1) to pay a fine or civil penalty, and (2) to make a repayment of rent.

The only basis for deduction is section 44 itself. and there will certainly be cases where the landlord’s good conduct, or financial hardship, will justify an order less than the maximum. But the arithmetical approach of adding up the landlord’s expenses and deducting them from the rent, with a view to ensuring that he repay only his profit, is not appropriate and not in accordance with the law. I acknowledge that that will be seen by landlords as harsh, but my understanding is that Parliament intended a harsh and fiercely deterrent regime of penalties for the HMO licensing offence.

This is, it has to be said, a significant change in approach, which will increase the value of rent repayment orders.

The FTT had decided:

After considering the appellant’s schedule of deductions and the respondents’ representations about the items on the schedule the FTT decided to deduct £5,313.89, leaving the maximum amount payable at £23,226.07 (there is an arithmetical error there; the FTT deducted £5,373.89). It then considered what would be a reasonable amount to pay, and deducted 25% of £23,226.07 because, it said, the appellant had fixed a number of problems at the property that were not caused by any fault on his part. It did not say what those were. The appellant was ordered to pay £17,420.

The FTT had not been clear about what deductions it had made and on what evidence, to the point that how that figure was arrived at was mysterious.

I am grateful to the parties for setting out their thinking about the various items in the schedule. The FTT’s refusal to deduct items 1 to 6 and 11 to 14 is explained by the fact that none of those items fell within the period relevant to the rent repayment order; the fact that some or all of them were incurred during the tenancy is irrelevant. Aside from that, the parties have not been able to explain how the FTT made its calculation. The respondents concede that a number of items were agreed by them, although not all that the FTT said were agreed; it is not possible to understand why the FTT deducted some of the items that it said were agreed but not all of them and the figures for items 23 and 24 remain a mystery. On that basis the FTT’s decision is irrational, because its reasoning cannot be understood and is inconsistent with the decision it made, and has to be set aside.

But then

It will be apparent that in any event I take the view that the deduction of the landlord’s expenditure was not in accordance with the law, for the reasons I set out in paragraphs 9 to 19, and I set the decision aside for that reason also.

So, the amount that Mr V had been fined by the local authority (£8,000) would not be taken into account.

The maximum rent for the period was £28,599.96. There was nothing in the landlord’s conduct to be taken into account beyond the failure to licence, but eqyually nothing in the landlord’s attempts to suggest the tenants’ conduct should be taken into account.

That left the landlord’s financial circumstances.

There was no reason to decut the expenses the landlord had apparently paid on maintenance and repair

The landlord has to repay the rent, subject to considerations of conduct and his financial circumstances. There may be a case, as I said at paragraph 15 above, for deducting the cost of utilities if the landlord pays for them out of the rent (which was not the case here). But there is no justification for deducting other expenditure. The appellant incurred costs for his own benefit, in order to get a rental income from the property; most were incurred in performance of the appellant’s own obligations as landlord.

There was no reason to deduct the amount of the fine:

I bear in mind that the appellant has paid a financial penalty of £8,000. There is no reason why it should be deducted from the rent repayment order. There is nothing in the amount ordered that indicates to me that an unusually severe or lenient view was taken by the local housing authority, and so I do not think that the financial penalty takes matters any further.

There was no reason to deduct mortgage payments:

The appellant also wants to deduct what he had to pay by way of mortgage payments to the TSB and interest on another loan which has not been shown to relate to the property. The FTT refused to deduct the mortgage payments because the mortgage was taken out in 2016 whereas the property was purchased in 2014, so that the mortgage did not appear to have funded the purchase. The appellant says that the property was bought some years before that and that this was a re-mortgage. He did not produce evidence about that to the FTT and he could have done so. More importantly, what a landlord pays by way of mortgage repayments – whether capital or, as in this case, interest only – is an investment in the landlord’s own property and it is difficult to see why the tenant should fund that investment by way of a deduction from a rent repayment order.

However, the tenant respondents had not raised any dispute with the amount that the FTT had deducted as reasonable expenses, and neither party had advanced arguments on the amount that would be relevant to the UT’s findings, so the award was left undisturbed as £17,420. But future FTTs were directed to take note of this decision.

Comment

This is a big deal. It completely changes the basis for assessing rent repayment orders and significantly to the tenant’s benefit.

I would expect a further appeal, if not in this case then in another, not least on A1P1 grounds. But for now, the value of RROs has just increased quite a lot.