Mohammadi v Anston Investments Ltd & Anor

Section 81 of the Housing Act 1996 prevents a landlord of residential premises from exercising re-entry or forfeiture for unpaid service charges unless the amount is agreed, admitted or determined. Where forfeiture remains available for unpaid ground rent, section 138 of the County Courts Act 1984 limits relief to rent in arrear and the relevant costs. Service charges are not rent unless the lease makes them rent or additional rent. After re-entry, equivalent sums may be recovered as mesne profits without contractual service-charge formalities, provided they are proved. Clear pleadings should be given effect, and insubstantial procedural technicalities should not defeat an established claim.

Leila Mohammadi held a long residential lease of a flat and withheld ground rent and service charges. The landlords served a section 146 notice and later counterclaimed for arrears, possession and forfeiture. The Central London County Court rejected most of the tenant’s repair claim, gave judgment for arrears, and ordered possession unless relief from forfeiture was obtained on terms including service charges, interest, notice costs and costs.

The tenant appealed on the effect of section 81 of the Housing Act 1996, the statutory terms of relief, and the landlords’ entitlement to recover service charges without later demands. The central issues concerned the construction of the lease’s service-charge machinery, the treatment of post-re-entry charges as mesne profits, and the possible application of section 20B of the Landlord and Tenant Act 1985.

May LJ gave the leading judgment. Sedley LJ agreed with it and with the proposed disposition. The appeal was therefore allowed in part.

1. Section 81. Re-entry was effected in November 1996 by service of the amended defence and counterclaim, consistently with the principle illustrated by Canas Property Company Limited v. K.L. Television Services [1970] 2 QB 433. By then section 81 of the Housing Act 1996 was in force. The service-charge amounts had not been admitted, agreed or determined by a court or arbitrator. They therefore could not support re-entry or forfeiture. The arrears of ground rent supplied an independent ground for forfeiture. The tenant had adequately pleaded section 81 in the context of relief from forfeiture, so no further amendment was required. May LJ left open whether the court would have been required to consider the section even without an express pleading.
2. Relief from forfeiture. The counterclaim was a county court action within section 138 of the County Courts Act 1984. The mandatory terms of relief were payment into court of the ground rent in arrear and the relevant costs. Service charges were not rent under this lease because it did not deem them to be rent or additional rent. The court explained and distinguished Maryland Estates Limited v. Joseph [1999] 1 WLR 83, and applied Escalus Properties Limited v. Robinson [1996] 2 QB 231 and Khar v. Delmounty Limited 75P & C.R. 232. The terms could not include outstanding service charges or the cost of preparing the section 146 notice, which was unnecessary for re-entry for non-payment of rent. Costs attributable to service-charge claims or service-charge-based mesne profits had to be excluded from the costs payable as a term of relief, without affecting the general costs order.
3. Service-charge accounts and mesne profits. Under clause 2(2)(h), an account had to be furnished before the balancing adjustment operated, but no particular formality was required. The schedules supplied by the landlords were sufficient accounts, and “as soon as practicable” did not make time of the essence. After re-entry, clause 2(2)(j)(ii) removed the need to operate the contractual machinery. The landlords could recover equivalent sums as mesne profits, subject to evidential proof. If relief reinstated the lease, the same sum could be recovered contractually. The clear pleading and proof of the claim meant that no amendment was necessary.
4. Section 20B. Section 20B of the Landlord and Tenant Act 1985 did not apply to the post-re-entry mesne-profit claim and could not be applied retrospectively merely because relief might reinstate the lease. The refusal to permit an amendment relying on section 20B was a proper case-management decision because there was no evidential basis for the proposed defence.
5. Disposition. The terms of relief were varied by removing the service-charge, interest and section 146 notice-cost requirements and modifying the costs term. An additional money judgment was ordered, subject to consequential amendments. The tenant was awarded 75 per cent of the appeal costs, subject to detailed assessment if not agreed; the costs order below remained unchanged.

Sedley LJ added an obiter observation that county courts may need to give effect to section 81 even where it has not been pleaded in a forfeiture claim based on undetermined service charges.

• Court of Appeal (Civil Division) On appeal under [2003] EWCA Civ 981, allowed the appeal in part and varied the terms of relief from forfeiture.
• Central London County Court HH Judge Hallgarten QC gave substantive judgments in May and June 2002 and a final judgment on 24 October 2002. He awarded arrears, ordered possession subject to relief from forfeiture, and imposed terms including service charges, interest, notice costs and costs.