Residential occupiers and pay less notices: key lessons from recent construction law judgment

The Court of Appeal has recently delivered judgment in the case of RBH Building Contractors Limited v Ashley James & Anor*. In his judgment, Lord Justice Coulson considered two aspects common to construction disputes:

1. The scope of the ‘residential occupier’ exception under section 106 of the Housing Grants, Construction and Regeneration Act 1996.

2. The formal and substantive requirements of a valid pay less notice under sections 111(3) and (4) of the Housing Grants, Construction and Regeneration Act 1996.

This is therefore a case which will be of interest to developers, contractors, and construction professionals alike.

This article examines the Court of Appeal's decision in the case, providing guidance on the residential occupier exception under the Housing Grants, Construction and Regeneration Act 1996 and the requirements for a valid pay less notice in construction disputes

Interpretation of ‘residential occupier’ under section 106

The section 106(2) exception applies to construction contracts with residential occupiers where one of the parties to the contract occupies, or intends to occupy the property as their residence. Where the exception applies, the contract for construction work will not be a construction contract for the purpose of the Housing Grants, Construction and Regeneration Act 1996, meaning that neither the payment provisions nor the right to adjudicate will be implied into those contracts.

There have long been arguments over what the requisite intention for a residential occupier is, not least where the intended occupancy is not purely residential.

In this particular case, Mr and Mrs James said that they intended to rent out the property for up to three months a year as an Airbnb. RBH Building Contractors Limited argued that this was evidence, in a more complex factual background, of an intention not to occupy the property being developed as residential occupiers.

The judge emphasised that although the burden of proving the exception applies rests with the party relying on it, the threshold for establishing residential occupier status under section 106 is relatively low. This is particularly the case when the exception is being relied upon to defeat an application for summary judgment in adjudication enforcement proceedings, where it is only necessary to show a realistic prospect that the exception applies.

Against that backdrop, the judge held that renting out a property for 25% or approximately 13 weeks of a year is not inconsistent with an intention to occupy the property as their dwelling. The judge declined to give a hard and fast rule on how many months a year a property could be rented on Airbnb before the residential occupier exception would not apply, but he did note that renting out a property for more than half the year “may well fall on the wrong side of the line”.

One other point of note in the judgment on this particular point is that the contractor argued that as Mr and Mrs James could not lawfully be residential occupiers as the development loan they had taken to fund the construction work contained a promise that the property would not be used a dwelling by Mr and Mrs James. There is case law in the context of the grant of planning permission which suggests that unlawful occupation cannot be deemed occupation, and if that applied to the Housing Grants, Construction and Regeneration Act 1996 then that could have been fatal to Mr and Mrs James’ defence.

However, the judge in this case distinguished between the breach of the development loan terms which Mr and Mrs James’ occupation would have been, and a breach of planning permission which otherwise prevented occupation which did not apply in this case. In other words, even where a person’s intention to occupy a property would amount to a breach of a legal promise, that will not necessarily mean that they are not a residential occupier for the purpose of the Housing Grants, Construction and Regeneration Act 1996 unless it was also a breach of statutory regulations such as planning permission.

Key lessons on the validity of pay less notices

The judgment also addresses the validity of pay less notices, and there are three noteworthy comments.

1. The pay less notice was considered against the appellant’s final account claim, which Lord Justice Coulson stated was a “poor presentation of…a final account claim”. It was observed that if this final account payment notice had been given under section 110 of the Housing Grants, Construction and Regeneration Act 1996, it would have barely met the requisite threshold. This weak nature of the final account claim was said to form part of the background in which the pay less notice would be considered. In other words, a poorly presented pay less notice is more likely be to valid if the payment application is also poorly presented, and the inverse may well also be true.

2. Similarly, the very fact that this was a pay less notice against a final account application, which had clearly taken some time to prepare, was deemed to be relevant, in that it gave Mr and Mrs James an “unreasonably short period to consider and respond”. It's curious that the judge called the timeframes unreasonable given that the timescales were in accordance with those given in the Housing Grants, Construction and Regeneration Act 1996 and the Scheme for Construction Contracts. The implication is that a poorly presented pay less notice, which in other circumstances would be invalid, may nevertheless be valid if the final payment application comes ‘without warning’, as in this case.

3. The pay less notice did not need to have an arithmetical calculation in order to amount to a valid pay less notice. RBH Building Contractors Limited was taken to have known the line items referred to in the pay less notice and thus the amounts being disputed. The judge was specific that overly prescriptive approach to the contents of a notice which would be contrary to the established case law.

One reason for this decision is that a party that has prepared a final account submission will find it more difficult to argue that a pay less notice is unclear or defective. The court is likely to assume that a reasonable recipient would have a good understanding of the issues, having prepared the payment application to which the pay less notice relates.

Neither of these comments from the judge are ‘new’, as they arise squarely from established principles, but they are nonetheless significant as they demonstrate that the court will, generally speaking, decline to take an overly technical or restrictive approach to pay less notices.

Takeaways

What emerges from this decision, both in respect of the section 106 exception and in respect of pay less notices, is that both matters are highly fact specific, and although there is established authority in both areas, the complex factual matrices in which construction works take place means that how clear principles will be applied is not clear at all.

For further information please contact our construction team.