Tom Marshall: When is a factor not a factor?
The recent decision of the Inner House in Proven Properties (Scotland) Limited, reported in Scottish Construction Now on May 15, raises questions about the effectiveness, or at least the scope, of the Property Factors (Scotland) Act 2011, writes Tom Marshall.
Briefly, the case concerned a block of 15 flats in Helensburgh which had been built by the appellants in 2007. Sales of the flats were adversely affected by the recession and by 2017 only two had been sold with the appellants letting the remainder. Until 2011 the block was factored by a separate company but after that the appellants took over the management of the building including servicing the lift, and cleaning, maintaining and seeing to repairs of the common parts and grounds.
They billed the owner/occupiers for a pro rata share of the costs but charged no management fee. One of the owner/occupiers got into dispute with the appellants over a leaking roof and applied to the First-Tier Tribunal under section 17 of the act for a determination that the appellants had failed to carry out their duties as factors and complied with the property factor code of conduct. The appellants raised a preliminary issue that they were not factors. Both the First-Tier Tribunal and the Upper Tribunal rejected this but the Inner House has allowed the appeal holding that the appellants are not factors for the purposes of the act.
From the point of view of an owner/occupier this is an extremely disappointing decision. The object of the 2011 act was to regulate property management and to provide a low-cost dispute resolution mechanism for owner/occupiers when difficulties like these were encountered. The homeowner in this case had bowed out of the proceedings before they got to the Inner House. So what has gone wrong?
The issue turned on the interpretation of “property factor” in section 2 of the act. Section 2(1)(a) says a property factor is “a person who, in the course of that person’s business, manages the common parts of land owned by two or more other persons and used to any extent for residential purposes”. Other parts of the definition deal with circumstances where a housing association or local authority manage the common parts, including where the common parts are owned by the association or authority and one other person.
The First Tier Tribunal and subsequently the Upper Tribunal both took the view that it was enough the appellants had a business interest and not just a proprietorial interest in the upkeep of the common parts, irrespective of whether or not they charged for carrying out the management function. The appellants were not just the owners of the other flats they were the landlords and were running the properties as a business. The Inner House disagreed and considered that the business had to be that of property factoring before the definition would be satisfied. As the appellants were not running a property factoring business the act did not apply to them.
Lord Menzies said that the ordinary principles of statutory interpretation applied. The act was rectifying the mischief that property management for profit was unregulated. There were criminal sanctions for failing to register and registered factors had to comply with a code, subject to a statutory dispute resolution mechanism. Certain people would not fall within the definition, such as an owner/occupier running a business from their home who happened to take on the responsibility for keeping the common stairs clean. Lords Drummond Young and Pentland agreed. The act was not meant to apply to people undertaking property management functions on a gratuitous or non-professional basis.
With respect, I would argue that this is not the correct approach. Some aspects of the act and its application in practice seem to have been overlooked. To begin with, the definition of property factor extends to local authorities and housing associations who own, let and manage dwellings in the same buildings as owner/occupied flats. They, just as much as traditional factoring businesses, require to register and be regulated under the act. Their principal interest, as with the appellants in the present case, would be to see that the building as a whole is maintained to a satisfactory standard so that they fulfil their obligations as landlords to their tenants. Doing the job on behalf of the owner/occupiers as well would undoubtedly be a secondary consideration. Nonetheless they are regulated.
Part of the mischief the act was designed to tackle was the lack of low-cost dispute resolution for owner/occupiers faced with large organisations unwilling to fulfil their obligations. Paragraph 2 of the Policy Memorandum for the act states that the absence of a “statutory framework regulating the behaviour and conduct of property factors in Scotland… causes significant consumer detriment. The Bill’s primary objective is to create a statutory framework which would protect Scottish homeowners who contract with property factors”.
Paragraph 3 referred to a Scottish Consumer Council report noting that homeowners, whose factor was a local authority, “found it was almost impossible… to obtain redress when they were dissatisfied with repair works”. In the present case the nature of the relationship between the homeowner and the appellants was not examined in detail by the Inner House. Against the background that the appellants, as owners of 13 out of 15 units, had effectively dispensed with the services of the original factor, who would have been subject to the act, and elected to take on the responsibility itself, there must at least have been an implied contract between the appellants and the homeowner that the appellants would fulfil the functions of a factor. Arguably a purposive interpretation of section 2 would have allowed a distinction to be drawn between an owner/occupier, who happened to be running a business from its unit, and a landlord whose business included letting one or more units in the block.
Since the Proven Properties case will not be going any further on appeal, the answer must be for the Scottish ministers to exercise their powers under section 2(3) and amend the 2011 act so that private landlords like Proven Properties, who also perform factoring functions, are subject to the same rules as local authorities and housing associations.