Residential Tenancies Act 2004

Recovery of service charges and the application of the Residential Tenancies Act 2004 to residential sale leases

Recovery of service charges is becoming increasingly problematic for residential Management Companies who are more frequently forced to resort to litigation to recover sums due by residential property owners. While the establishment of the Private Residential Tenancies Board (the ‘PRTB’) and application of the Residential Tenancies Act 2004, (the "Act") introducing sweeping changes to the private residential sector it was not anticipated that same would have any impact on the relationship between the "landlords" and "tenants" of typical residential sale leases i.e. where the term is for in excess of 500 years.

The Act is often seen as being overly paternalistic: removing the ability of occupational residential landlords and tenants to contract on terms which suit them and imposing onerous obligations on landlords. While it was understood that the purpose Act was designed to protect vulnerable occupational tenants it was conventionally presumed that it would have no implications for purchasers of residential units, all be it that many of them held their properties by way of sale lease. This presumption largely arose due to the nature of the obligations imposed by the Act on landlords which in many cases (and in particular now, with the introduction of the Multi-Unit Development Act) are owner controlled management companies. However while s.3 of the Act expressly disapplied the application of the Act to certain tenancies, there was no express exclusion for sale leases.

The implications of this inclusion was the subject of discussion by Mr Justice Budd in the 2010 decision of PRTB v Ms Justice Linnane & Ors (Unreported (High Court) 23/4/2010, Budd J), and has since been the subject of legislative amendments. The application of the Act to sale leases would have had significant and presumably unintended implications for the choice of forum for the recovery by management companies of service charges from residential unit owners who derived their interest from sale leases.

The Linnane decision

In PRTB v Ms Justice Linnane & Ors, the High Court was given the opportunity to review the PRTB's jurisdiction to deal with disputes brought by management companies for the recovery of service charges under the Act.

In brief, an apartment owner held the property pursuant to a lease for a term of 500 years from S&L Management Company Limited (the "Management Company") subject to a nominal yearly rent with the lease containing an obligation to pay service charge.  Arrears of service charge in the sum of €1,862.56 had accrued and the Management Company successfully brought proceedings in the District Court to recover same. This District Court decision was successfully appealed by the apartment owner in the Circuit Court with Ms Justice Linnane presiding who decided that s.182 of the Act, which denies jurisdiction to the courts of matters within the jurisdiction of the PRTB, applied in these circumstances, as none of the reliefs contained in that provision were satisfied. This meant that the courts could only have jurisdiction in sale lease disputes where damages payable would exceed €20,000, or where there were arrears of rent in excess of €60,000. Since the amount owed for service charges in the Linnane case was far below these thresholds, Ms Justice Linnane found that the dispute would have to be adjudicated by the PRTB, and that the District Court did not have jurisdiction to deal with the matter when it made its ruling on the dispute. Ms Justice Linnane noted that even if the exclusion of long leases from the Act was an error by the draftsperson, the Courts would not be in a position to rectify such an error. The section, she stated, was clear and unambiguous and the Court's role was to interpret it rather than rectify it.

The PRTB, which was a notice party in the original action, brought judicial review proceedings seeking to quash the Circuit Court’s order and compel Ms Justice Linnane to hear the appeal in the Circuit Court. It contended that she had erred in law in holding that s.182 of the Act applied to sale leases of residential units, thereby denying jurisdiction to the courts and remitting the matter to the PRTB for determination. The PRTB argued that the Circuit Court decision, if correct, would lead to absurd results and that it was never the intention of the Oireachtas that sale leases be within the ambit of the Act.

Counsel for the apartment owner argued that the relationship between the "landlord" i.e. the management company which held the reversionary interest in the sale lease, and the apartment owner, being the "tenant", was in fact one of landlord and tenant within the definition of s.3 Deasy’s Act. This states that: ‘The relation of landlord and tenant shall be deemed to be founded on the express or implied contract of the parties, and not upon tenure or service, and a reversion shall not be necessary to such relation, which shall be deemed to subsist in all cases in which there shall be an agreement by one party to hold land from or under another in consideration of any rent'. He argued that as his was a relationship of landlord and tenant to which none of the exclusions or reliefs in Sections 3 or 182 applied, the Act applied to the lease and the courts therefore had no jurisdiction to hear the dispute.

Mr Justice Budd held against the PRTB upholding the original decision of Ms Justice Linnane to quash the District Court order. He held that if the Act was intended not to apply to sale leases, this would have been expressly excluded by the legislature. He stated that it is not the position of the Courts to decide what was or was not intended to be included by the Oireachtas when drafting a piece of legislation. Both Ms Justice Linnane and Mr Justice Budd examined the various exclusions set out in s.3 of the Act and concluded that there was no statutory exclusion for sale leases. He stated, summarising Ms Justice’s Linnane’s reasoning: “If the intention was that long leases of owner/occupied apartments should be specifically excluded from the ambit of the Act, then on this her reasoning was clearly stated: "in my view if that was the intention then the legislature should have expressly excluded such dwellings as it did with other dwellings specified in s.3(2). If the draftsperson omitted such a dwelling as this in error then it is not the function of the court to add to any express statutory provisions to rectify such a mistake..."

Analysis

The application of the Act to sale leases of residential property would have significant consequences for both residential "landlords" (mainly management companies) and the PRTB itself including:
(i) jurisdiction for all disputes would be imposed on the PRTB leading to a dramatic increase in referrals to the Board which it would not have the resources to address; and
(ii) the application of s.12 of the Act to residential sale leases would place undue requirements on sale lease landlords including those provided for in: S.12(1)(b) of the Act which provides that a landlord shall carry such out repairs to the interior of the premises and replace fittings as are necessary from time to time and that the landlord must reimburse the tenant for any repairs that they carry out themselves; and S.12(1)(c) of the Act which places an obligation on the landlord to keep the dwelling insured to a minimum cover of €250,000. This obligation would be wholly inappropriate in the context of sale leases as a landlord would be obliged to insure a property in which it no longer owns an interest.

S.18(2) of the Act renders void any attempt by a landlord to contract out of s.12 and accordingly there was no way for parties to contractually agree to disapply the provisions of the Act to sale leases. As a result of the reasoning in the Linnane decision, the Act would override the contractually agreed position contained in residential sale leases including those imposing the standard internal repairing and insuring obligations on the tenant with the landlord taking responsibility for structures only.

As absurd a result as the Linnane case produced, Ms Justice Linnane and Mr Justice Budd were correct in refusing to imply the exclusion of sale leases from the Act. It is a long established principle of law that clear and unambiguous words in a statute must be read literally. Thus as residential sale leases were not expressly excluded from the Act, in the view of the learned Justices, this must mean that the legislature intended them to be included. Consequently, in the absence of legislative amendment in this regard, residential sale leases were governed by the Act in spite of the difficulties that would arise.

Response

The legislature however reacted quickly and introduced S.100 of the Housing (Miscellaneous Provisions) Act 2009 which inserts a new S.3(3) into the Act. Under the new provision, the Act no longer applies to leases for a term greater than 35 years. S.100 came into force three months after the Circuit Court decision and was in force at the time of the Judicial Review hearing. Thus the potential absurdities discussed above did not materialise.

Indeed the successful employment of more traditional Court proceedings has been seen in a recent service charge dispute involving the K Club. Bessilton Holdings Limited and Karsavina Management Limited, the operating companies of the K Club, were owed sums in respect of unpaid service charges from two of their holiday home owners for the period 2006-2009. The operating companies sued in the Circuit Court and successfully obtained a decree for €17,730.

Parties seeking to recover sums due in respect of service charges levied in pursuance of sale leases should now be advised that according to the law as it stands, they are fully entitled to utilise the Courts in order to resolve such disputes.

Contact

If you require any further information or advice in relation to service charge disputes or any other landlord and tenant matters, please do not hesitate to contact Catherine Guy.