Assessing 'final determination' in unpaid service charge claims

Is a default judgment in a claim for unpaid service charges sufficient for a landlord to commence proceedings for forfeiture of residential premises? Section 81 of the Housing Act 1996 requires the amount of a service charge to have first been “finally determined”. Many practitioners have argued – and courts accepted – that a default judgment is not a determination and hence does not satisfy section 81. The ruling in Church Commissioners for England v Koyale Enterprises & Anor (Central London County Court, 22 September 2011) has added support for the contrary position that a default judgment is sufficient. Although not binding, it should give practitioners confidence in pursuing this less costly route where service charges are outstanding, rather than making an application to the Leasehold Valuation Tribunal (LVT).

HHJ Dight’s judgment sheds an interesting light on the nature of default judgments, and the role of the court in determining an apparently simple money claim in an area surrounded by statutory law.

A determination

The first argument that is often raised is that an administrative judgment simply isn’t a judicial decision of anything, and hence cannot be a determination.

There is no definition of “determination” within section 81. Section 81(1) states that a landlord may not forfeit unless “it is finally determined by (or on appeal from) a leasehold valuation tribunal or by a court, or by an arbitral tribunal in proceedings pursuant to a post-dispute arbitration agreement, that the amount of the service charge or administration charge is payable”. Section 81(3) defines “finally determined” by reference to the possibility of “the decision” being “appealed against or otherwise challenged”. The word “determination” does not appear independently from the qualifier “final” or “finally”. Section 81 thus gives little guidance as to whether it must require a judicial act.

However, case law suggests that it is wrong to think of a default judgment as a purely administrative act which could not be a determination. In Koyale, the appellant cited the cases of New Brunswick Railway Company v British French Trust Corporation Limited [1939] AC 1, Kok Hoong v Leong Cheong Kweng Mines Limited [1964] AC 993, Pugh v Cantor Fitzgerald (7 March 2001) to show that a default judgment is a “determination”. It is clear from these cases that a default judgment creates an estoppel in relation to the issues covered by it.

It is often argued that the ‘determination’ required by section 81(1)(a) is “the amount of the service charge … payable by [the tenant]”, and hence the landlord in making its section 81 claim must prove that all the statutory requirements have been complied with, for example that the relevant costs are reasonable under section 19 of the Landlord and Tenant Act 1985. Thus, the landlord should make a claim for a declaration, and/or seek trial or default or summary judgment with a hearing. The court, even in the tenant’s absence, should require the landlord to prove that each part of the service charge falls to be recovered under the lease and the statutory provisions; a long undefended hearing indeed.

There are some contexts in which a court is required to be satisfied of some matter before making an order. For example, possession orders under the Housing Act 1988 cannot be granted unless the court is satisfied that an appropriate notice has been given. It is far from clear that undefended claims for service charges fall into the above category of cases, however. The legislation in relation to service charges does not explicitly require the court to be satisfied of any matter, unlike the Housing Act 1988.

HHJ Dight dealt with the issue of the role of the court. He said:

“As far as the issues are concerned, given that our litigation process and structure is based on the adversarial system, the issue would only become identified when somebody challenges a claim which is being advanced.” (para.26)

He continued:

“...It is apparent from CPR 39.3 and the notes at 39.3.5 in the current edition of the White Book, that what would effectively happen at a trial where the defendant (one assumes) fails to attend would be that the court would require the claimant to prove its case by (as it says in the notes) “referring to the statement of case with a statement of truth or tendering witness statements”. In neither case would the court look behind, it seems to me, the statements on the face of those documents and... the reasonableness of the service charges (if that is the purpose behind s.81) would not in fact be investigated.”

Finally determined

The second common objection to use of a default judgment is that since a default judgment cannot be appealed, and there is no time limit for an application to set aside, it is impossible to calculate when a default judgment would become a final determination, and hence section 81 does not envisage its use.

In truth, it is possible to appeal a default judgment given that pursuant to CPR52.10(2)(a) a party can appeal an ‘order or judgment’. Despite this, there are separate rules for applications to set aside a default judgment. An application for an automatic set aside under CPR 13.2 can be made at any time, and the only time limit for a discretionary set aside under CPR 13.3 is that it be made promptly.

If an decision is “finally determined” only at the point at which an order cannot be set aside or appealed, then whatever the method used to obtain the s81 order, that order could never become final. The court has discretion to extend the usual 21 day time-period for applying for permission to appeal in court. Even in the LVT an appeal to the Upper Tribunal (Lands Chamber) can now in principle be brought out of time pursuant to rule 21 of the Tribunal Procedure (Upper Tribunal) (Lands Chamber) Rules 2010.

Moreover, the other methods for bringing the claim to a hearing in court where the defendant plays no part would also face the problem that they would be open to a set aside application for which no specific time limits are given in the CPR:

(1)If default judgment by hearing was obtained, a defendant who had not attended could apply under CPR 13.2 or 13.3, and would be faced with no time limit for doing so.

(2) If the claim went to trial undefended, the defendant could make an application to set aside the order under CPR 39.3 provided he did so promptly.

(3) If summary judgment were sought, the defendant could apply under CPR 23.11 for the court to re-list (i.e. re-hear) the application.
 

Section 81(3) is not setting out some qualification as to the meaning of “determination” or listing the types of determination envisaged by subsection 1. It is setting out a numerical method of calculating the time period after which a decision becomes final. The time period is the standard time limit for an appeal and is dependent on the forum. It is 21 days for court, 21 days for the LVT, and 28 days in arbitration. “Otherwise challenged” specifically refers to a challenge in arbitration, not to the possibility of an application to set aside a court order.

As HHJ Dight stated at para.17: “it is apparent from the wording of section 81 as a whole that the purpose of the word “finally” is to underline that the date after which the determination is to be held to be binding on the parties is to be calculated by reference to the period within which the tenant (or indeed the landlord) is entitled to seek to overturn the initial determination of the amount by an appeal or a challenge”. In the case of a default judgment, HHJ Dight’s construction of the section was that the 14-day time period under section 81(2) starts running from the day after default judgment was entered.
 

No satisfactory construction

To some extent, no construction of section 81 is entirely satisfactory because each leaves some use of words unexplained. However, the construction in Koyale leaves fewer inconsistencies and relies on close analysis of the words used. The decision in Koyale is also dependent on an understanding of the adversarial nature of the claim process expressed by HHJ Dight. It is interesting that what might have seemed a simple statutory provision requires for its analysis consideration of the basis of our court system.

Of course, the decision in Koyale, also has a practical effect. Although the decision is not binding, and the meaning of section 81 has not yet itself been finally determined, for now practitioners can be more confident of seeking forfeiture for residential service charge arrears on the basis of a default judgment