When statutory interpretation yields a short answer: Rakusen and rent repayment orders

The Supreme Court handed down its judgment on the case of Rakusen v Jepsen on 1 March 2023, deciding that rent repayment orders cannot be made against superior landlords.

The case considered whether rent repayment orders (RROs) under the Housing and Planning Act 2016, could be made against immediate landlords only, or whether superior landlords are also liable. 

In coming to its decision, the Supreme Court carried out an exercise in statutory interpretation – including applying the presumption that a person should only be penalised under clear law. 

Law

The Housing Act 2004, as extended by the 2016 Act, is intended to defend residential tenants against rogue landlords.

S40(1) of the 2016 Act confers the power on the First-tier Tribunal (FTT) to make a RRO where a landlord has committed an offence as set out at s40(3) of the 2016 Act.

S40(2) of the 2016 Act provides that a RRO is “an order requiring the landlord under a tenancy of housing in England to:

(a) Repay an amount of rent paid by a tenant, or

(b) Pay a local housing authority an amount in respect of a relevant award of universal credit paid (to any person) in respect of rent under a tenancy”

S.40(3) of the 2016 Act sets out the various offences that can be committed by such rogue landlords, so as to attract the award of an RRO. These include the offence of having control of, or managing, an unlicenced house in multiple occupation (HMO). 

Tenants can apply to the FTT for a RRO where a landlord has been convicted of such an offence or where it can satisfy the Tribunal beyond reasonable doubt that the landlord has committed an offence. 

If successful, tenants can be awarded up to a maximum of 12 months’ rent.

Originally, an application could only be made against “the appropriate person”, defined in the 2004 Act as the person entitled to receive the rent. This meant that only the immediate landlord could be subject to an RRO.

The 2016 Act dropped that definition, and instead states at s.40(2) that a RRO can be made against “the landlord under a tenancy of housing in England” - note that the position in Wales differs. The change in wording does not, however, expressly widen the definition to include superior landlords.  

Case

In this case, Mr Rakusen was not the immediate landlord of the tenants. He was a long leaseholder of a flat in London, and granted a tenancy to a company, Kensington Property Investment Group Ltd (KPIG). KPIG sublet the individual rooms in the flat under purported licence agreements - falling within the 2016 Act.

There was no dispute that the flat was an HMO, and in November 2018 KPIG, via its agents, informed Mr Rakusen that it wished to apply for an HMO licence. It is not clear whether an application was made, but no licence was ever granted – in breach of s.40(3) of the 2016 Act.

In September 2019, the tenants made an application to the FTT for RROs against Mr Rakusen and his partner, although she had never been a party to any of the tenancy agreements. 

Mr Rakusen applied for the claim to be struck out on the basis that it had been brought against the wrong party, in that he was not the immediate landlord, and the claim should have been brought against KPIG. He also denied that he was in control of the HMO, or that he had a reasonable excuse if he were found to have committed an offence, although these points did not fall to be considered. 

The case, therefore, concerned a narrow but important point: while responsibility for licencing the property could fall to Mr Rakusen, meaning he had arguably committed an offence, it was not clear whether as a superior landlord, he could also be the subject of a RRO.

Previous decisions

The FTT and Upper Tribunal agreed with the tenants that, notwithstanding that Mr Rakusen was not their immediate landlord, he was ‘a landlord’ of the flat. 

The Upper Tribunal were particularly concerned that if the Tribunal did not have jurisdiction to make a RRO against the person who had committed the offence and not just the immediate landlord, this could provide a route for avoidance of liability by superior landlords to let property through insubstantial intermediaries. 

The Court of Appeal disagreed and allowed Mr Rakusen’s appeal on the basis that, on the face of the 2016 Act, there was no express jurisdiction for a RRO to be made against a superior landlord.

Supreme Court judgement

The Supreme Court unanimously dismissed the tenants’ appeal, agreeing with the Court of Appeal and finding that Mr Rakusen could not be made subject to a RRO.

The case turned on statutory interpretation. The Court found that the straightforward interpretation of the wording at s40(2)(a) of the 2016 Act must refer only to the landlord that has received the rent because only that person can repay that rent, and per s40(2) only that person is the “landlord under” the tenancy which generates the rent.

This can be distinguished from the wording at s40(2)(b) where, in the case of a local housing authority, universal credit may have been paid to the tenant rather than the landlord and the local housing authority is not the source of the universal credit. 

The use of the word ‘pay’ is appropriate as the monies are not being repaid from recipient to payor.

The Supreme Court set out seven factors consistent with its straightforward interpretation:

  1. When RROs were introduced by the 2004 Act, they were indisputably only permitted to be made against direct landlords, and there was no indication that the 2016 Act was intended to change that position
  2. While it was not in dispute that the purpose of RROs is to provide effective sanctions against rogue landlords, many of the relevant offences under s.40(3) could be committed by other persons, such as property agents – that could not be liable for an RRO
  3. There are a range of other civil and criminal sanctions that can be made against rogue landlords, including fines, penalties and banning orders
  4. Allowing RROs to be made against superior landlords could create wider issues – for example, who should be liable and how much should be repaid where the chain has numerous tenants horizontally, or numerous landlords vertically? 
  5. The straightforward interpretation was supported by provisions in other legislation, such as the Protection from Eviction Act 1977, which unlike the 2016 Act expressly defines ‘landlord’ to include superior landlords
  6. There was nothing in the pre-legislation evidence that suggested that the government had been considering extending the class of people against whom RROs could be made
  7. The straightforward interpretation was supported by the principle that, if in doubt as to whether a provision imposes a penalty, that doubt should be resolved in favour of not imposing a penalty. It is well established that a person should not be penalised except under clear law

On conclusion, the factors were consistent with the straightforward interpretation of s.40(2)(a).

As the Supreme Court notes in its own conclusion, “although not always true in the law, in this case the simple answer to the question posed is also the correct answer”. 

Comment

Whilst a ‘straightforward’ decision, it is interesting to note the different approaches taken by the Tribunals in seeking to afford a right to tenants to recover their rent when an offence has been committed, albeit not by their direct landlord, against the interpretation by the civil courts.

If the concern is that rogue landlords will now be aware of a gap in the law, allowing them to create insubstantial “rent-to-rent” companies to act as direct tenants, Parliament will need to amend s.40(2)(a).  

However, those rogue landlords would still be liable for other forms of civil and potentially, criminal penalties under the 2016 Act. Under that structure, directors of the rent-to-rent company might find themselves exposed to liability for wrongful trading under s214 of the Insolvency Act 1986. The view of the Court appears to be that it is unlikely that we will see a material increase in such arrangements.

What will give both landlords and tenants alike some comfort is that this important point, which has been the cause of much contention, has now been clarified. 

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.

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