Have You Got the “Property Factor”?

In Proven Properties (Scotland) Limited [2020] CSIH 22, the Inner House of the Court of Session has decided that a restricted interpretation is to be taken to words contained in the definition of a “property factor” under section 2(1) of the Property Factors (Scotland) Act 2011.  This offers property developers considerable comfort, as the facts of the case demonstrate.

The Property Factors (Scotland) Act 2011

The Property Factors (Scotland) Act 2011 (“2011 Act”) requires property factors to register and comply with a Code of Conduct and for homeowners to apply to First Tier Tribunal for Scotland (“FTT”) to determine whether a property factor failed to comply with their duties or the Code of Conduct. 

The relevant definition of a “property factor” in this case was “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”, emphasis added.

Background

Proven Properties (Scotland) Limited (“Proven”) are property developers.  In 2007, they built 15 flats.  Most of the flats remain in Proven’s ownership.  The flats were factored by a third party until 2011, at which point Proven took on the management of the building.  This included arranging servicing of the lift, cleaning of the common stairs and hallway, maintaining the landscaped area and any maintenance of the common parts of the building.  There was no contract between Proven and the other flat owners for this arrangement. Proven sent accounts to the other owners of flats in the building for a 1/15^th share of the costs of the management of the building but not a factoring or management fee.

A dispute arose between another flat owner and Proven about a leaking roof. The other flat owner applied to the FTT for a determination that Proven, as a property factor, had failed to comply with its duties and the Code of Conduct. The FTT and Upper Tribunal (“UT”) found that Proven were a property factor; Proven appealed.

Judgment

The Inner House allowed Proven’s appeal against the UT and FTT’s decisions. 

To determine how “in the course of that person’s business” was to be interpreted, the Court found that the intent of the 2011 Act was to regulate the provision of management services by persons who were charging fees to homeowners for such services.

The court found “in the course of that person’s business” must be given a more restricted meaning, to mean in the course of their business as managers of the common parts of properties, rather than in the course of any business, however far removed its main purpose may be from management of the common parts. 

Parties who choose to manage or organise the management of the common parts themselves, without payment for the services so rendered (other than recovering costs paid to third parties), are not property factors.  Proven were in this situation. It made no difference that Proven operated as a property development business, because it was not the business of a property factor.

Comment

The Inner House’s conclusion is a welcome clarification, which aligns with the scheme of the 2011 Act.  The determining issues were (i) that Proven was an owner of properties within the building; and (ii) that no factoring or management fee made to the other flat owners by Proven; all that Proven sought to recover was a share of the costs incurred to third parties.  

This points to the warning that, as soon as a charge capable of being characterised as a factoring or management fee is made (even by a homeowner), there is a risk that this could lead to the 2011 Act applying.  Actions could then be argued to be tasks “in the course of their business as managers of the common parts of properties” and care should be taken by any party that finds themselves in that situation.

If you are concerned about the maintenance or factoring arrangements in your tenement, whether or not it is operated by a regulated property factor, Davidson Chalmers Stewart’s Dispute Resolution team can assist.

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.