Inner House rules property development firm that managed flats “not a property factor”

Proven Properties Ltd erected the building, which consisted of 15 residential flats, in 2007. They took over management of the building in 2011, with a different property management firm having factored it before then. At first instance, the First-tier Tribunal for Scotland found that they were property factors within the meaning of the 2011 Act. This decision was upheld by the Upper Tribunal on appeal, leading them to appeal to the Inner House of the Court of Session.

The appeal was heard by Lord Menzies, Lord Drummond Young and Lord Pentland. All three judges gave opinions.

In the course of a business

At the time the case was originally heard by the First-tier Tribunal, the appellants owned 13 of the 15 flats in the building, the other two having been sold. They arranged for servicing of the lift, cleaning of the common stairs and hallways, payment of the electricity supply for the common parts, and the common insurance policy for the entire building. The appellants never sought a factoring or management fee, although the homeowner who originally brought the case to the FtT paid a proportion of the listed expenses.

The homeowner, who took no part in the appeal, and the appellants were in dispute over a leaking roof in their flat. They applied to the FtT for a determination of whether the appellants had failed to carry out the property factor’s duties and to ensure compliance with the property factor Code of Conduct.

The FtT determined that the appellants were property factors in terms of the 2011 Act, and the homeowner’s application could proceed to be determined on the merits. Its reasoning was that the appellants carried out the maintenance to the building in the course of their business as a landlord, and the fact that they did not charge for this service did not preclude them from being considered property factors.

In its treatment of the appeal, the Upper Tribunal considered it appropriate under the Pepper v Hart rule to refer to the Scottish Parliament Official Report for clarity on the definition of a property factor. The UT, examining previous case law interpreting the phrase “in the course of a business”, considered that, because the courts in addressing different statutes have not taken a consistent approach to defining the phrase, it might fairly be said that an ambiguity arises about whether the phrase should be taken at face value or read more narrowly.

The appellants submitted that it was open to them to manage their property without a property factor, and no contract existed that appointed them as such or required them to undertake the duties of one. The appellants carried on their business as a property developer and builder, which created a strong inference that property management was not within the course of their business.

They also submitted that the 2011 Act made it clear that not everyone who managed common property was a property factor, and the First-tier and Upper Tribunals had erred in law in reaching the opposite conclusion.

The business of a property factor

In his opinion, Lord Menzies, who chaired the appeal, began by considering whether the Pepper v Hart rule required to be used, saying: “The mischief which the 2011 Act was intended to rectify appears to me to be tolerably clear, namely the provision of management services by persons who were charging fees to homeowners for such services, whose conduct was not regulated by a Code of Conduct and for whom there was no regulated mechanism for dispute resolution. In order to address this mischief, the Act requires persons who, in the course of their business, manage, or intend to manage, the common parts of land owned by two or more other persons and used to any extent for residential purposes, to apply to the Scottish Ministers for entry in the register.”

In interpreting the phrase “in the course of a business”, he considered that a restrictive approach ought to be taken, saying: “[T]he owners of tenement flats, who clean the common stairs themselves, do not […] become property factors. To suggest otherwise would, in my view, be quite untenable. The fact that they may operate a business does not change this. If a lady in the top flat gives piano lessons, she may consider it appropriate to clean and maintain the common stair, to encourage aspiring pupils to become clients. She does not require to register as a property factor before doing so.”

Lord Drummond Young, who agreed with the reasoning of Lord Menzies, added: “[T]he purpose of the Act is to regulate those who carry on business as property factors and are paid for so acting. The reason for such regulation is clearly that property factors receive client monies and are responsible for spending those monies in a prudent manner, for the benefit of the property owners. Thus an element of trust is involved in arranging contracts for work on common property and handling the finances of such contracts. A professional factor, that is to say a factor who is paid by his clients, may reasonably be the subject of detailed regulation; an obvious analogy exists with solicitors, accountants and financial intermediaries who are paid for their work.”

He continued: “The position is otherwise, however, when a person who owns a flat or property within a tenement or housing development organizes activities such as cleaning or maintenance of common parts or the upkeep of garden ground, but does so without payment for the services so rendered, only recovering sums paid to contractors and others for their work. If persons of the latter sort were classified as property factors, a proprietor who wished to assist his or her neighbours by organizing cleaning or maintenance work could not do so without registration. In my opinion that cannot reasonably be considered the purpose of the statute.”

Lord Pentland, who also agreed with Lord Menzies, added: “The flaw in the tribunals’ reasoning is that they have treated it as sufficient to engage the provisions of the Act that the appellants were carrying on a business at the time that they were managing the common parts; they have taken insufficient account of the fact that the business was not the business of a property factor.”

For these reasons, all three judges allowed the appeal, quashing the decision of the Upper Tribunal and dismissing the homeowner’s application.