Underhill (VP Court of Appeal, Civil) LJ; Moylan and Newey LLJ;
In this case, the Court of Appeal considered the civil penalties for a “relevant housing offence” imposed under s.249A of the Housing Act 2004 (the 2004 Act) by Norwich City Council on Mr Nicholas Sutton. The penalties were imposed following failure to comply with improvement notices served under Part 1 of the 2004 Act and failure to comply with the Licensing and Management of Houses in Multiple Occupation (Additional Provisions)(England) Regulations 2007 (the 2007 Regulations). In its judgment the Court gave general guidance on the approach to civil penalties for housing offences, including apportionment between a company and an individual. It also reaffirmed how far the appellate court will or will not go when revisiting value judgments made by a lower court. The premises under scrutiny was Max House, an office block converted into flats at 60 Faiths Lane in Norwich. On 30th October 2018 Norwich served a prohibition order in relation to Max House, preventing its use as residential accommodation with effect from 27th November 2018. The freehold to Max House was held by Faith’s Lane Apartments Limited (FLAL), now in administration. Mr Sutton owned 54.8% of FLAL’s shares, and was its sole director.
Mr Sutton brought the following grounds in the Court of Appeal:
– the penalties had been applied inconsistently; (Ground 1)
– the allocation of penalties between FLAL as a company and Mr Sutton as an individual was incorrect; (Ground 2)
– the amount of the individual penalties was unreasonable; (Ground 3) and
– that there had been no breach of Regulation 10 of the 2007 Regulations. (Ground 4)
Statutory and policy framework
Part 1 of the 2004 Act introduced the Housing Health and Safety Rating System (HHSRS), a method of assessing housing conditions and enforcing standards. Sections 1-4 of the 2004 Act created a framework for assessing housing hazards as either category 1 or category 2. Section 5 imposes a duty on a local housing authority to take appropriate enforcement action if it considers that a category 1 hazard exists. Section 7 confers a power to do so if an authority considers that a category 2 hazard exists. The Housing Health and Safety Rating System (England) Regulations 2005 prescribe the method of calculating the seriousness of the hazard. More serious hazards are classed as category 1, whilst lesser hazards are in category 2.
In each case the action available to an authority includes the service of an improvement notice (ss.11 and 12) or the making of a prohibition order (ss. 20 and 21). The general rule is that an improvement notice becomes operative 21 days after it is served (s.15(2)). The recipient of the notice may appeal to the First Tier Tribunal within the same period of 21 days. In the event of an appeal s.15(5) provides that the notice does not become operative until the appeal process is completed and the notice is finally confirmed.
By section 30(1) it is an offence for a person on whom an improvement notice has been served to fail to comply with it. A person who commits an offence is liable on summary conviction to a fine not exceeding £5,000. It is a defence that the recipient of the notice had a reasonable excuse for failing to comply (s.30(4)).
Section 251 of the 2004 Act is concerned with offences by companies, and provides:
“251 Offences by bodies corporate
(1) Where an offence under this Act committed by a body corporate is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of-
(a) a director, manager, secretary or other similar officer of the body corporate, or
(b) a person purporting to act in such a capacity,
he as well as the body corporate commits the offence and is liable to be proceeded against and punished accordingly.”
HMOs and the 2007 Regulations
The 2007 Regulations are made under powers conferred by section 234 of the 2004 Act and it is an offence to fail to comply with them, subject to a defence of reasonable excuse (section 234(3)-(4)). Section 251 (above) also applies to these offences, so a company director commits an offence if the company commits an offence with his or her consent or connivance, or if the offence can be attributed to his or her neglect.
The UT found that Max House was a specific type of HMO, “a s.257 HMO”, which brought the premises within scope of the 2007 Regulations. A block of self-contained flats can only be an HMO where it is a “converted block of flats” to which section 257 applies. A converted block of flats is a building or part of a building which has been converted into, and consists of, self-contained flats (s.257(1)). In the case of a converted block of flats on which building work was completed after 1 June 1992, section 257 applies if two conditions are satisfied: first, that the building works undertaken in connection with the conversion did not comply with the requirements imposed at that time under regulations under section 1 of the Building Act 1984 (in this case the Building Regulations 2010) and still do not comply with them; and second, that less than two-thirds of the self-contained flats in the block are owner occupied (section 257(2)-(3)).
Secretary of State’s guidance on civil penalties
A local housing authority is required by para 12 of Schedule 13A to the 2004 Act to have regard to any guidance given by the Secretary of State concerning the exercise of functions in relation to civil penalties. The Secretary of State published guidance in 2016, re-issued in April 2018, entitled “Civil Penalties under the Housing and Planning Act 2016 – Guidance for Local Housing Authorities” (the Guidance).
Para 2.4 of the Guidance provides while no more than one civil penalty may be imposed for a single offence of failing to comply with an improvement notice, subsequent improvement notices requiring the same work may result in separate civil penalties. Para 3.3 provides that a civil penalty of up to £30,000 can be imposed where a serious offence has been committed and that an authority may decide that a significant penalty, rather than prosecution, is the most appropriate and effective sanction for a particular case.
Para 3.5 refers to factors that will be considered as relevant to the level of civil penalties: (1) severity of offence; (2) culpability and track record of the offender; (3) the harm caused to the tenant (including potential for harm); (4) punishment of the offender; (5) deterrence of the offender from repeating the offence; (6) deterrence of others from committing similar offences; (7) removing any financial benefit the offender may have obtained as a result of committing the offence.
Norwich City Council’s policy
As required by the Guidance, Norwich adopted its own financial penalty policy in June 2017. It refers to the factors at para 3.5 of the Guidance, and states that Norwich will use a consistent approach based on the Magistrates’ Sentencing Guidelines in the assessment of culpability and harm. Eight separate penalty bands are identified, ranging from offences in band 1A meriting a penalty of £100, to those at band 6 meriting a penalty of £22,500 to £30,000. The band into which each offence is placed depends on an assessment of culpability and harm. An offence involving low culpability and low harm will fall into band 1A. A medium culpability offence which causes a medium level of harm is placed in band 4, which attracts significantly higher penalties in the range of £6,000 to £12,000 than lesser offences. The most serious band 6 is reserved for high culpability offences causing a high degree of harm.
Upper Tribunal decision
Mr Sutton and FLAL did not appeal the improvement notices but did appeal to the Tribunal against Norwich’s imposition of civil penalties. The amount of financial penalty imposed by Norwich was £236,000 for Mr Sutton and a further £236,000 for FLAL. Mr Sutton and FLAL also appealed on related grounds concerning service at the correct address and other matters. By the time the appeal was heard, FLAL was in administration and was not represented. The relative novelty of the civil penalty regime, plus the magnitude of the penalties imposed, led to the case being heard by the Upper rather than First Tier Tribunal.
The UT gave judgment on 20th March 2020 (Martin Rodger QC, Deputy Chamber President, and Peter D McCrea FRICS). The UT found that Norwich was entitled to impose financial penalties on both FLAL and Mr Sutton for breaches of five of the 2007 Regulations and for non-compliance with four of the eight improvement notices it had served. Contrary to Mr Sutton’s assertion that Max House was an “apart hotel” (serviced accommodation for long staying guests) it found it to be a s.257 HMO. The UT reduced the penalties imposed on FLAL to £32,000 for breaches of the 2007 Regulations, and £43,000 for non-compliance with the improvement notices. It reduced the penalties imposed on Mr Sutton to £50,000 for breaches of the 2007 Regulations, and £49,000 for non-compliance with the improvement notices. In total, the penalties were £75,000 for FLAL and £99,000 for Mr Sutton. The UT dismissed Mr Sutton’s other grounds of appeal.
Court of Appeal decision
Lord Justice Newey gave the leading judgment, in relatively brief terms, showing extensive deference to the UT’s exercise of discretion and evaluative judgments (para 30 CA). The other two justices agreed without further comment.
Ground 1: the penalties had been applied inconsistently;
This ground was not developed by Mr Sutton and was dismissed in a single paragraph.
Ground 2: the allocation of penalties between FLAL as a company and Mr Sutton as an individual was incorrect;
The UT had established that Mr Sutton was liable for offences committed by FLAL as its director in accordance with s. 251 of the 2004 Act, and this finding was not appealed. In the Court of Appeal, Mr Sutton relied on the judgment in R v Rollco Screw and Rivet Co Ltd (1999) 2 Cr App R(S) 441 to argue that, before imposing a financial penalty on a person or company, the Court must ask itself: (1) what financial penalty does the offence merit; and (2) what financial penalty can a defendant reasonably be ordered to meet (corporate or personal)? The judges considered this and more recent case law on the point, and also considered what weight the UT had given to the risks of double punishment. This the Court said must be given weight especially where there was a close relationship between the individual and the corporate entity, such as in Mr Sutton’s case where they were imposing penalties on the individual, as well as the company of which the individual was a sole director and principal shareholder. The judges considered R v Snaresbrook Crown Court ex parte Patel (2000) COD 255 and R v Western Trading Limited (2020) EWCA Crim 1234 but were not able to find a rule that needed to be followed in this area. They concluded that the UT had been alive to the risks of double punishment, and taken care to avoid these, even being too generous in their consideration that FLAL was now in administration (para 43 CA). However, each case where this was an issue would have to be considered on its facts. The judgment also refers to s.249A(4) which caps the amount of penalty that can be levied on an individual person at £30,000, but creates no bar on the aggregate of penalties imposed on two or more persons exceeding £30,000 (para 46 CA). This ground was dismissed.
Ground 3: the amount of the individual penalties was unreasonable;
The Court considered each of the regulations in deciding this ground, and two of the improvement notices, but was not persuaded. The UT had found “serious and extensive breaches” of these regulations, which Mr Sutton said was wrong because the HHSRS report had not classed these defects as a category 1 hazard, but a category 2, meaning a less serious breach. The Court held that the HHSRS report was not determinative on this point, and not sufficient reason to overturn the UT’s findings. It also rejected Mr Sutton’s attempt to rely on the Rollco case to argue that the apportionment of the fine between FLAL and Mr Sutton was not in accordance with Norwich’s civil penalty policy.
The UT penalties in respect of the following individual breaches were all upheld:
Regulation 5: means of escape from fire and smoke. The UT had imposed a penalty of £8,000 on FLAL; £12,000 on Mr Sutton for the breach of this regulation. Regulation 7: the failure to supply test certificates in relation to electrical installations, the UT imposed a penalty of £12,000 on FLAL; £18,000 Mr Sutton
Challenge to electrical installations improvement notice: penalty of £23,000 on FLAL; £25,000 on Mr Sutton;
Challenge to fire safety improvement notice and £14,000 on FLAL and £18,000 on Mr Sutton.
Regulation 8: pavement in the forecourt not in good order
The Court found no good reason to overturn the UT’s findings of the risk of harm and degree of culpability, and that the council’s policy on civil penalties had been applied in a reasonable manner. The UT had also considered the risk of double punishment in its apportionment of the penalty. The UT’s penalties of £6,000 for FLAL and £10,000 for Mr Sutton would be upheld.
Ground 4: that there had been no breach of Regulation 10 of the 2007 Regulations;
The final ground of appeal was against the UT’s finding of a breach of regulation 10, the requirement to supply sufficient bins. Mr Sutton said that the UT itself had found that the photographic evidence had not shown that the bins were overflowing on 19th December 2017 as alleged by Norwich. The Court of Appeal held that this did not mean there had not been problems with the supply of bins on days other than the 19th December, and that there was again no reason to overturn the decision of the UT. The UT penalty of £6,000 for FLAL and £10,000 for Mr Sutton was upheld.
This is a helpful and clear judgment in this relatively new area of law, giving guidance on the ‘double punishment’ risks where individuals are closely related to companies who have committed offences, whilst respecting the Upper Tribunal’s detailed analysis of the evidence and decision making. Local housing authorities may well find civil penalties a more effective route to enforcement in dangerous properties than seeking a criminal prosecution. The financial difficulties FLAL faced since the prohibition notice closed Max House, and ended its only income source, show there are likely to be limits on local housing authorities recovering money. There may be an incentive for those intent on avoiding payment to take legal action to delay payment.