RBH Building Contractors Limited v Ashley James & Anor

Introduction

This appeal raises two issues of general importance in the world of construction adjudication. The first concerns s.106 of the Housing Grants, Construction and Regeneration Act 1996 (“the 1996 Act”) and the ‘residential occupier’ exception. The second concerns the proper form and content of a payless notice issued under s.111(3) and s.111(4) of the 1996 Act. I am grateful to Mr Frampton and Mr Hanna for their clear written and oral submissions on these two issues.

The Factual Background

The Appellant (“RBH”) is a building contractor, acting primarily through its owner, Mr Roger Huntley. In about January 2022, RBH was engaged by the Respondents (“Mr and Mrs James”) to provide site and project management services in relation to the construction of a large luxury house on a site at Ferndown, Saunton, in North Devon. Mr and Mrs James had purchased the site for around £2 million in 2019, and the existing property was subsequently demolished.

This was an oral contract. Originally, RBH was to be paid a fee of £1,000 per week for supervision and project management and an additional £10,000 per month for 18 months, again for supervision and project management. This arrangement was then significantly modified, with an agreement that RBH was to be reimbursed any costs incurred in procuring sub-contractors and materials. Although they are disputed, RBH also claim to be entitled to other sums, including an additional fee to cover its own overheads and profit. In this way, the contract became a sort of construction management contract, with no direct contracts between Mr and Mrs James and the sub-contractors who were actually carrying out the works.

Construction work started in about January 2022. Following disputes, RBH ceased work in about April 2024, when the works were incomplete. The property has since been completed by others.

On 18 November 2024, without warning, a Mr Ed Ranns (who described himself as “Adjudicator, RICS Expert witness, Adjudication Party Representative”) acting on behalf of RBH, served an application for payment on Mr and Mrs James in the sum of £633,016.16. It is RBH’s case that this was a payment notice in accordance with s.110B of the 1996 Act. The application stated that the due date for payment was 18 November 2024, so that the final date for payment was 5 December 2024 (just 17 days later).

The application attached a spreadsheet made of three elements, or sheets. The first element ran to 10 pages and 527 line items, which were individual invoices. The total came to £1,973,055.20. It was said that £1,310,039.04 had been paid so far, so that the net balance due was £663,016.16. It appears from the spreadsheet (and Mr Frampton confirmed in his oral submissions) that no part of the net sum said to be outstanding had been previously invoiced to Mr and Mrs James. The second element grouped the invoices into particular types but provided no further information. The third showed the invoices which had been paid. Some line items were marked in green, purple or yellow, but the colour scheme was not explained.

On 27 November 2024, Mr and Mrs James served a letter in response. They say, and the judge found, that this was a valid payless notice under the 1996 Act. That is one of the issues on appeal. The letter read as follows:

The Adjudication and the Subsequent Court Proceedings

RBH served a notice of adjudication on 6 December 2024 and its referral notice on 11 December. In the absence of a written contract, the statutory Scheme for Construction Contracts applied. Mr and Mrs James took a preliminary objection to the adjudicator’s jurisdiction on the basis that they were residential occupiers, so that the Scheme could not apply to them. The adjudicator rejected that submission and made a non-binding decision that he had the necessary jurisdiction.

In the adjudication itself, the adjudicator concluded that the letter of 27 November 2024 was not a payless notice. In the absence of such a notice, he concluded that Mr and Mrs James had no defence to the claim for £663,016.16 and he ordered them to pay that sum together with interest and his fees and expenses.

Mr and Mrs James did not pay any sums consequent upon the adjudicator’s decision. Accordingly, RBH commenced proceedings in the Technology and Construction Court and sought summary judgment pursuant to CPR Part 24.3. In turn, Mr and Mrs James sought a declaration pursuant to CPR Part 8 that the letter of 27 November 2024 was a valid payless notice. Those twin applications were heard and decided together by Neil Moody KC, as he then was, sitting as a deputy High Court Judge (“the judge”).

By the time of the hearing before the judge, it had long been apparent to Mr and Mrs James that, for financial reasons, they could not afford to live at the property. It was first put on the market when it was unfinished in October 2023. Despite having been subsequently completed, the property remains unsold.

The Judgment Below

Since the argument about the ‘residential occupier’ exception went to the adjudicator’s jurisdiction, the judge set out his approach at paragraphs 16 and 17 of his judgment. He said:

22.

The judge then addressed this issue between [19] and [45] of the judgment. He identified the evidence in favour of Mr and Mrs James being residential occupiers at the date of the contract, and the evidence that was said to point the other way. He went through each of the six points that Mr Frampton had relied on, on behalf of RBH, as being determinative of the issue in their favour. I shall consider those paragraphs more closely in Section 6 of this judgment, where I deal with the residential occupier exception.

The judge’s conclusions harked back to what he had said about the test under CPR Part 24:

The parties had agreed that, even if the judge declined to enforce the decision of the grounds of jurisdiction, the judge should go on to decide the Part 8 claim, namely whether the payless notice was valid. The judge considered that second issue at [46]-[53]. He summarised the relevant principles at [49]. He then considered the payless notice by reference to the RBH payment notice of 18 November and the detailed excel spreadsheet that had been attached to it. Having done that exercise at [53] on an item by item basis (to which I refer in Section 7 below when dealing with the second ground of appeal), the judge’s conclusions were as follows:

This last sentence was a reference, which had also been made in Advance JV v Aniska Limited [2022] EWHC 1152, to a view of the authorities I had expressed elsewhere, that “provided that the notice makes tolerably clear what is being withheld and why, the Court will not strive to intervene or endeavour to find reasons that would render such a notice invalid or ineffective”

.

The Issues on Appeal

As noted above, there are two issues on appeal. First, RBH say that the judge was wrong in law not to conclude that Mr and Mrs James were not residential occupiers within the meaning of s.106. Accordingly, they say the judge was wrong to conclude that it was arguable that the adjudicator did not have the necessary jurisdiction.

Secondly, RBH say that the letter of 27 November was not a payless notice because it did not specify the sum that the payer considered to be due, and/or the basis on which that sum was calculated. It was therefore not in accordance with s.111(4) of the 1996 Act, and the judge should have so found.

Ground 1: The Residential Occupier Exception

The Judgment

At [19], the judge set out s.106 of the 1996 Act, which is in the following terms:

As the judge rightly noted at [21], until now, there has been no reported case where this exception has been held to apply. He summarised the authorities, which were all first instance decisions and all decided on their facts, at [21] – [25].

At [26] the judge noted that Mr and Mrs James “have never occupied the house” and they had now put it up for sale. Their case, however, was that from 2019, until about November 2022, it was their intention to occupy the house when it was completed. That was therefore their intention at the time that the contract was made in January 2022. They say that intention changed because their finances became increasingly parlous, and they were compelled to alter their plans and decided that, on completion, the property would have to be sold.

At [27], the judge noted that there was a substantial body of evidence dealing with this issue: three statements from Mr James, three statements from Mrs James, and two from Mr Huntley. There was an additional statement from Mr and Mrs James’ architect, Mr Plant.

Much of this evidence supported Mr and Mrs James’ case that they intended to occupy their new home as their main residence. The judge noted at [28] that, when they purchased the site in 2019, it was the culmination of years of planning, after they decided that they would move from Essex to the Devon coast. When they purchased the site in 2019, they paid an additional 3% stamp duty surcharge for a second residential property. In accordance with their plan, they subsequently sold their house in Essex and moved to Devon.

Moreover, as the judge noted at [29], Mr and Mrs James lived in a caravan on the site during the works. They registered with the local GP and were put on the electoral register. There was also evidence that particular elements of the design of the property were personal to Mr James, such as the separate lap pool.

The judge noted at [30] that Mr Huntley had given contrary evidence as to the intentions of Mr and Mrs James, and at [32], that there were “clearly potential factual disputes on the evidence”. On the face of it, the existence of such factual issues was fatal to RBH’s application for summary judgment. But the judge went on to note that, regardless of the factual disputes, Mr Frampton relied on six points which, he said, were determinative of the dispute in RBH’s favour. Mr Frampton relied in particular on the terms of the Development Loan to fund the project which Mr and Mrs James had secured, and the undertakings that had been provided to obtain it which, on their face, were contrary to their stated intention to occupy on completion.

The judge went through those six points between [32]-[44]. He accepted that each were points (of varying strength) which RBH could rely on in support of the proposition that, at the time of the contract, Mr and Mrs James did not intend to occupy the property when it was completed. But the judge did not accept that any of these six points were or could be determinative. It was for that reason that he concluded that the evidence relied on by Mr and Mrs James enabled them to surmount the Part 24 test, and meant that he declined to award RBH summary judgment.

I set out two specific paragraphs of the judgment because they relate to two particular points raised on appeal. The first concerned the argument about Mr and Mrs James’ intention to rent out the property for part of the year as an AirBnB. The judge said:

The second point concerned the alleged unlawfulness of the intended occupation, because of the fact that the Development Loan said that they did not intend to occupy the property. The judge said:

The Parties’ Submissions on Appeal

On behalf of RBH, Mr Frampton took three points. First and foremost, he relied on the terms of the Development Loan dated 10 November 2021

, two months before the contract was entered into. Mrs James and a related company were the borrowers, and Mr James was one of the guarantors. The property was referred to as the “development property”; the amount of the loan was £3,768,200 (which was subsequently increased); the loan was to be paid off 17 months later, on 30 April 2023; and the interest was 2.25% per month.

Clause 2.13 was in these terms:

Clause 2.14 added this:

In addition Mrs James signed an undertaking relating to clause 2.13 that said:

Mrs James signed a second undertaking relating to clause 2.14 that said that she was entering into this agreement “wholly or predominately for the purposes of a business carried on by me or intended to be carried on by me…”. She signed a third declaration to the same effect. It appears that these declarations were designed to exclude the protection and remedies that might otherwise have been available to Mr and Mrs James under various pieces of consumer credit legislation.

Accordingly, Mr Frampton’s primary argument was that Mr and Mrs James should not, as a matter of law, be entitled to rely on the residential occupier exception given the terms of the undertakings and the Development Loan. He said that the Development Loan and the undertakings were determinative of the objective intentions of Mr and Mrs James. In answer to questions from my Lord, Lord Justice Males, Mr Frampton agreed that, in order to succeed, he had to show that the terms of the Development Loan were a trump card which must defeat any evidence adduced by Mr and Mrs James of their subjective intention, no matter how extensive that evidence might be.

Secondly, Mr Frampton submitted that any occupation by Mr and Mrs James would have been unlawful, as it would have been in breach of their undertakings and the terms of the Development Loan. Relying on Howsons Limited v Redfearn & Anr [2019] EWHC 2540 (TCC); [2019] 186 ConLR 223, where HHJ Bird held that occupation in breach of planning permission to convert the barn was not protected by the s.106 exception, he submitted that the intended occupation of the property by Mr and Mrs James would have been a breach of the Development Loan and the undertakings and therefore unlawful, and so could not fulfil the residential occupier test under s.106.

Thirdly, he relied on Mr and Mrs James’ own evidence, that they intended to rent out the property “AirBnB style during holiday periods” (around 13 weeks a year), and that this would pay the interest on the further loan they would take out in order to repay the Development Loan. That further loan would be a holiday let “buy to let” mortgage. Mr Frampton submitted that a property rented out for 25% of the time, financed by a holiday let “buy to let” mortgage was not a dwelling occupied as a residence. As we have seen, both this point, and the unlawful occupation argument, were expressly considered, and rejected, by the judge.

In response, Mr Hanna’s starting point was that, as the judge had explained, the test was simply whether the respondent had identified enough evidence to raise a real prospect of establishing the jurisdictional defence: National Insurance Company v Alliance Global Corporate and Speciality AG [2007] EWCA Civ 1066. There should not be a mini-trial: E.D.F. Mann Liquid Products v Patel [2003] EWCA Civ 472. The gravamen of his submission was that the judge was entitled to conclude that Mr and Mrs James had identified sufficient evidence to surmount the Part 24 test.

Secondly, addressing the “intends to occupy” part of the test, Mr Hanna relied on s.30(1)(g) of the Landlord and Tenant Act 1954, which also used the expression “intends to occupy…as a residence”. Mr Hanna submitted that the authorities under that section established that a party intending to occupy must establish i) a bona fide intention to occupy; and ii) a realistic and not fanciful prospect of bringing about that occupation. Mr Hanna said that i) was subjective and ii) was objective, and that Mr and Mrs James had met both those tests.

As to the arguments about the Development Loan and the undertakings, Mr Hanna submitted that that was simply part of the evidence. It was wrong in principle to say that Mr and Mrs James should not be entitled, as a matter of law, to rely on the residential occupier exception because of the terms of the Development Loan and the undertakings, overlooking any factual matters going the other way. It amounted to the court concluding, on a summary judgement application, that Mr and Mrs James were not to be believed, and that, he said, was impermissible.

Moreover, Mr Hanna pointed to the evidence of Mr James, which explained why the Development Loan was taken out, namely because conventional consumer mortgages were not available for construction of a new home. Mr James explained that his intention was to repay those loans once the build was complete and to replace them with a conventional consumer mortgage. He said that, as he understood it, the language in the undertakings simply meant that he could not live in the house until the Development Loan was paid off.

As to the argument based on the Howsons case, Mr Hanna submitted that there was nothing in the 1996 Act which suggested that an occupier would be deprived of the protection of s.106 because of a potential breach by the occupier/employer of a contract with a third party. That would be contrary to the purpose of s.106. In any event, he said that Howsons was a different case, because occupation in breach of planning law carried with it public policy considerations and potential criminal liability. That was why Howsons was decided in the way that it was. Those considerations did not arise here.

As to the AirBnB point, Mr Hanna relied on the judge’s rejection of that argument at [34], and in particular his conclusion that, if they were letting the property out for a few weeks a year, and they otherwise lived in the property, and had no other home, the employer intended to occupy the property as their residence within the meaning of s.106.

The Law

Section 106 and the Authorities

Authorities concerned with the residential occupier exception under s.106 are rare, doubtless because a genuine residential occupier is not difficult to discern, so building contractors have not sought to bring adjudication claims against such employers. The reported cases (all at High Court level) can be seen to be cases at the extreme margin where, one way or another, the court has been unimpressed with the attempts by property developers, or those who were going to rent out the properties on completion, to rely on this exception to avoid paying sums found due to the contractor. In addition, many are concerned with the fact of residential occupation at the outset (rather than the alternative limb of s.106, namely “intends to occupy”, which is in issue here): see Samuel Thomas Construction Limited (2000) (unreported); Edenbooth Limited v Cr8 Developments Limited [2008] EWHC 570; and Shaw v Massey Foundations Piling Limited [2009] EWHC 493 (TCC).

There is really only one s.106 case which deals with the intention to occupy, namely Westfields Construction Limited v Lewis [2013] EWHC 376; [2013] 1 WLR 3377. That started life as a summary judgment application by the claimant seeking to enforce an adjudicator’s decision. The case was unusual because the parties sought a final determination of the issue as to whether or not the residential occupier exception applied, and Akenhead J had given directions to achieve that end. Thus, there was not only documentary material, but also oral evidence, including cross-examination. Indeed, one of the reasons for my decision against the defendant in that case was the unsatisfactory nature of his evidence to the court (see in particular [16] and [17]).

I found as a fact in Westfields that the defendant never intended to occupy the property once the works were complete. He always intended to rent it out and he made that plain to the contractors both before the contract was made, at the time that the contract was made, and afterwards, when the works were ongoing. The defendant repeatedly said to the claimant’s director that he was “well aware” that “the purpose” of the refurbishment work was “in order to let” the property. Again therefore, the attempt to rely on the s.106 exception failed.

In my judgment, I noted at [6] that “what mattered was the employer’s intention at the time of formation of the contract” (a conclusion relied on by the judge in this case at [25]). More generally, I said about s.106:

The only other first instance case of direct relevance to this appeal is Howsons. There, HHJ Bird found that, to fall within the exception, the occupation of the property had to be lawful. The defendant employer had obtained planning permission to develop the barn in question only because they said they intended to convert it into a “live/work” unit. The council’s local plan generally did not permit barn conversions to residential use, save where the living accommodation was ancillary to a general business use that would increase employment in the region.

In those circumstances, the attempt to rely on the residential occupier exception failed. Judge Bird concluded:

It is important to note that, in the alternative, Judge Bird concluded that, because of the extent of the works required for the business element of the project, the works did not principally relate to a dwelling in any event. He said:

The 1954 Act and the Authorities

Pursuant to s.30(1)(g) of the Landlord and Tenant Act 1954, a landlord can oppose an application for the grant of a new tenancy on the basis that, on the termination of the current tenancy, “[he] intends to occupy the holding for the purposes, or partly for the purposes, of a business to be carried on by him therein…”. In Gregson & Anr v Cyril Lord Limited [1963] 1WLR 41, Diplock LJ (reading the judgment of Upjohn LJ, with which he agreed) said that, to satisfy this test, two things were required. The first was “a genuine bona fide intention on the part of the landlord that they intend to occupy the premises for their own purposes”. The second was that the landlord must prove that they had a reasonable prospect of being able to bring about that occupation by their own act of volition. That mattered in that case because any reoccupation of the building was a potential breach of a planning condition, and the issue was the extent to which that condition might be modified on application, so as to allow the landlords to fulfil their intention.

In Gregson, Upjohn LJ’s judgment went on at p47 to say:

In Gatwick Park Services Limited v Sargeant [2000] 3 P.R. 25, Laws LJ commented at [61] that the hurdle of establishing an intention to occupy “is by no means a high one”. It might be added that, if the hurdle is to establish a case of an intention to occupy which has a realistic prospect of success, for the purposes of defeating a claim for summary judgment under Part 24, the hurdle is even less high.

Housing Act 1985

Section 118 of the Housing Act 1985 provides that a secure tenant of a dwelling house in England has the right to buy the freehold or leasehold (depending on which the landlord owns) of that property, if statutory preconditions are satisfied. The secure tenant must have resided in the property for a qualifying period (s.119). If an individual ceases to be a secure tenant before the completion of a purchase, for instance if they move out after initiating purchase, the right to buy is no longer available: Sutton LBC v Swann [1986] 18 HLR 140. Accordingly, whether an individual has occupied or intends to occupy a property as a primary residence, for the purposes of a secured tenancy, is a critical ingredient in determining their right to buy.

In The Mayor and Burgesses of the London Borough of Islington v Boyle & Anr [2011] EWCA Civ 1450 (“Islington”), Etherton LJ articulated the principles to be applied when deciding whether a tenant continues to occupy a dwelling as their home, despite living elsewhere [55]:

a)

b)

c)

The assessment of occupancy will be carried out objectively: London Borough of Islington at [63]. In this context that assessment requires that the objective facts around an intention to return must accord with the tenant’s subjective intention. If it is impossible to fairly describe the dwelling as being occupied as a primary residence, despite the party’s own belief to that effect, then the residence requirement will not be satisfied.

Applicable Principles

Drawing those various strands together, I would suggest that the following principles should be applied when determining whether a person “intends to occupy” the property as their residence for the purposes of s.106 of the 1996 Act.

52.1

52.2

52.3

52.4

52.5

52.6

52.7

Discussion and Conclusion

The starting point must be the limited scope of the s.106 issue before the judge. The issue as to the intention to occupy on the part of Mr and Mrs James arose in the context of RBH’s claim for summary judgment for in excess of £600,000. The first line of defence was that the adjudicator had no jurisdiction to decide the dispute, let alone award that sum, because, at the time of the contract, Mr and Mrs James intended to occupy the property. Thus, as the judge rightly noted, the question for him was whether there was a realistic prospect that, on the evidence, Mr and Mrs James could show that they intended to occupy the property on completion. He was not making a final determination. He concluded that there was sufficient evidence to show that the argument had a realistic prospect of success. For the reasons noted below, I consider that, in accordance with the principles set out in paragraph 52 above, the judge was quite entitled to conclude that Mr and Mrs James had crossed that relatively low threshold.

First, of course, there was the subjective evidence from Mr and Mrs James as to what they intended to do at the time that the contract was made. Their statements were clear and unequivocal: at the time of the contract they intended, when the works were finished, to live at the property. That is important evidence, and in this case it had the benefit of being supported by their architect, Mr Plant.

Secondly, there was other relevant evidence which, when considered objectively, supported those statements of subjective intent. Amongst a list of such matters, I would pick out just a few: the fact that Mr and Mrs James bought the site as a second home, paying the additional stamp duty, which they reclaimed when they sold their house in Essex and so had no other home; the fact that they lived in a caravan on site during the works because they had no other home; the fact that they registered with the local GP and were put on the electoral register; the fact that there were specific elements of the house which were designed to provide particular facilities, like the lap pool and the kite space, which Mr James wanted for himself. Those were all matters which, when viewed objectively, supported Mr and Mrs James’ position that they intended to occupy the property when it was completed.

Moreover, the evidence from Mr Huntley – viewed objectively - was not very persuasive the other way. His second statement said that Mr and Mrs James did not tell him at the time of the contract that they wanted the property for themselves; he does not suggest (other than the AirBnB point, addressed below) that they told him that they intended to rent out the property fulltime, and he certainly does not say that they told him they intended to sell the property on completion of the works.

Thirdly, whilst the Development Loan and the undertakings clearly point in the other direction (although, I am bound to note that, despite their centrality in the case now advanced by RBH, RBH were not aware of the terms of the Development Loan until part way through the enforcement proceedings), I do not accept, either as a matter of law or as a matter of fact, that they could override or render nugatory all the other evidence to which I have referred.

Mr Frampton agreed that, on his argument, no matter how overwhelming the evidence might be of the subjective intention of Mr and Mrs James and the supporting material, the terms of the Development Loan and/or the undertakings trumped them and provided a conclusive answer. In my view, that is wrong as a matter of principle: there is nothing about the Development Loan and/or the undertakings in this case which somehow means that they must take priority over everything else. They are simply elements of the evidence which, when viewed objectively, may suggest that there was no such intention to occupy.

In addition, it should also be noted that Mr and Mrs James provided explanations for the terms of the Development Loan and/or the undertakings which, as the judge found, could not be dismissed as fanciful or unrealistic. There was Mr James’ evidence about the difficulty of obtaining loans to build a house rather than to buy an existing house, and how MSP were the only realistic option. There was also his statement of belief that, once they had paid off the Development Loan, he thought that the terms would no longer bind them. Those explanations seem to me to be at least plausible: whether or not they will ultimately succeed will depend on a final determination of the issue.

So I reject the proposition that the terms of the Development Loan and the undertakings are somehow a trump card in law. They were properly assessed by the judge, who came to the conclusion that, on all the evidence, and notwithstanding the terms of the Development Loan and/or the undertakings, the relatively low bar of demonstrating a realistic prospect of success had been cleared by Mr and Mrs James.

So far, I have been dealing with the first element of the ‘intends to occupy’ test, namely whether there was evidence on which Mr and Mrs James could realistically demonstrate their intention that, at the time of the contract, they would occupy the property when the works were complete. But in the present case there was also a debate about the second element, namely whether, if there was such an intention, it could realistically be achieved. Mr Frampton said not because, by reference to the decision in Howsons, any occupation by Mr and Mrs James would have been unlawful, as it would not have complied with the Development Loan and/or the undertakings.

Like the judge at [41], I do not accept that proposition. As I have already noted, it is plainly arguable that, once the Development Loan had been paid off, there would have been no breach by Mr and Mrs James in any event. But even if that were wrong, I do not accept that any occupation would have been unlawful, and certainly not in the way that it was in Howsons. In Howsons, the property was only being converted at all because of the grant of planning permission. The carrying out of the works was predicated on the assumption that the residential element was subservient and ancillary to the works necessary for the conversion for business purposes. I understand why HHJ Bird said that occupation of the whole property as a dwelling would have been a breach of that planning permission, and so would have been unlawful (and also a potential criminal offence). But the real point, reflected in his alternative finding, was that the works were primarily for the business element of the project, as opposed to residential use.

By contrast here, at most, occupation of the house as a dwelling may have rendered Mr and Mrs James in breach of the terms of the Development Loan. That would then have been a matter for the lenders, MSP, and I consider that issue in greater detail in the next paragraph. But it would certainly not have been a matter for RBH, and it would not somehow have given rise to unlawful occupation. Plenty of homeowners occupy their properties when they are behind with their mortgage payments. They may be in breach of the terms of their contract with the mortgagee, but they cannot be said to occupy their homes unlawfully.

I should add that, on the face of the evidence, an intention to occupy on completion on the part of Mr and Mrs James was arguably known to MSP at the time of the loan agreement and thereafter: certainly Mr James gave evidence to that effect. But MSP would have had no substantive interest in that intention anyway. The undertakings, on the face of it, were simply a way in which MSP ensured that Mr and Mrs James did not have the benefit of certain consumer protection rights. Provided that the loan was paid off, MSP would have had no interest in whether or not Mr and Mrs James actually occupied the property. Mr Frampton’s suggestions that somehow they would have been interested, even after the loan was paid off, and that in this way Mr and Mrs James could never change their minds about occupation without being in breach of the undertakings, were both untenable.

The last point on this aspect of the jurisdiction issue concerned the plan to rent out the property for part of the year. This was known about by RBH. I reject Mr Frampton’s argument that this was fatal to the jurisdiction case: on the contrary, I consider that the judge’s answer on the AirBnB point at [34] was correct. Plenty of people occupy their homes as residential occupiers, but rent them out for some of the year as AirBnB’s. Others swap homes for the whole of the summer with people in other countries for holiday purposes. They do not forfeit their right to be called residential occupiers. I consider that a dwelling that the owner intended to occupy, save for renting it out for one quarter of the year, is within the exception in s.106.

Mr Frampton accepted that there had to be a line somewhere so that if, for example, the property was intended to be rented out for just one week a year, the argument would not run. He declined to identify where the line would be. I understand his reticence: I consider that, ultimately, it will always depend on the facts. For example, an intention to rent out the property for more than half of the year may well fall on the wrong side of the line. But on the facts here, I am content to accept the judge’s reasoning that 25% did not cross that line.

For all these reasons, therefore, I consider that the judge was entitled to conclude that the evidence raised by Mr and Mrs James was sufficient to clear the Part 24 hurdle. In those circumstances, the appeal on ground 1 fails. Whilst that makes the appeal on ground 2 academic, I go on to deal with the issues raised with respect to the payless notice, acknowledging that they may be of some wider importance.

Ground Two: The Payless Notice

The Judgment

The judge set out the relevant law at [47]-[49]. It is not suggested that he erred in his analysis of the principles.

The judge then dealt with the arguments before him at [51] and [52]. He noted that the particular points made by RBH were that the letter of 27 November did not set out the sum that Mr and Mrs James considered to be due; did not provide an adequate basis for saying why the sum payable should be £0; a number of the bullet points did not say what sum Mr and Mrs James accepted was due; and where the bullet points contained figures, they came to about £295,000 odd, which was less than half the sum claimed.

The judge rejected those arguments. He concluded that the letter of 27 November was a payless notice because it made tolerably clear what was being withheld and why. In particular, he had regard to the table, prepared by Mr Hanna, which set out the 11 bullet points in the payless notice and explained how they were referable to sums claimed in the payment notice, by reference to the excel spreadsheet attached to that notice.

It is therefore appropriate to set out that table again. All I have added is a number for each of the eleven items:

Item	Payment application	27 Nov 24 Letter
1 Sheldon South West	RBH had claimed £94,084.17 (see lines 171, 180, 191, 202, 204 of the spreadsheet)	“Sheldon South West of £94,083.67, insufficient evidence has been presented to confirm what sum (if any) might be due…”
2 Longcross scaffolding	RBH had claimed £19,720 (lines 297 – 308)	“Longcross Scaffolding of £19,720, insufficient evidence has been presented to confirm what sum (if any) might be due..”.
3 Roof Access	RBH had claimed £5,839.50 (line 309)	“50% roof access of £5,839 is an unpaid invoice and therefore is not due”
4 CES Engineering	RBH had claimed £45,450 (line 231)	“50% roof access of £5,839 is an unpaid invoice and therefore is not due”
5 Easy Bathrooms	RBH had claimed £9,582.28 (line 453)	“Payment application for Easy Bathrooms tiles of £9,582.28, insufficient evidence has been presented to confirm what (if any) sum might be due”
6 Contract Welding Services	RBH had claimed £394,327.20 (lines 313 – 320)	“Regarding Contract Welding Services, insufficient evidence has been presented to confirm what sum (if any) might be due…”
7 Bespoke Timber	RBH had claimed £43,149.50 (lines 432, 436, 442, 450)	“Regarding payment application for Bespoke Timber of £43,149.50, insufficient evidence has been presented to confirm what sum (if any) might be due”
8 PGR Timber	RBH had claimed £287,686.56 (see lines 365, 366, 370 – 377, 380 – 389, 391 – 400, 405, 408 – 414, 429 – 431, 437, 452).	“Regarding PGR Timber insufficient evidence has been presented to confirm what (if any) sum might be due”
9 Overheads and profit	RBH had claimed £77,798.52 for overheads and profit (see line 535 of the spreadsheet)	“RBH Building Contractors Ltd is not entitled to overheads and profit of £77,798.52.”
10 Rental Income bonus	BH had claimed £148,000 in respect of rental income (see line 537 of the spreadsheet)	“share of rental income was agreed as a project/performance related bonus. No such bonus is due including but not limited to given that the project ran significantly over time.”
11 VAT	The VAT element of the sums claimed by RBH was £119,502.82 (see column K of the spreadsheet and the total figure at line 533).	“Regarding VAT, it was our understanding that this would remain in the build fund.”

The judge noted at [54] that the items referred to in the 11 bullet points amounted to £1.2 million odd. He therefore said that it was clear that the notice was saying that, because of those disputed items, no part of the sum claimed of £660,000 odd was due to RBH.

The Parties’ Submissions

Mr Frampton made the same criticisms of the purported payless notice as he had made before the judge. The six bullet points (items 1, 2, 5, 6, 7 and 8), that stated that insufficient evidence had been presented to confirm what sum (if any) might be due, did not say what sum Mr and Mrs James accepted was due for the work covered by those six items. As for the remaining items (items 3, 4, 9, 10 and 11), which seemed to suggest that the sums claimed were disputed in full, it was again said that no figures were provided by Mr and Mrs James as to what was accepted.

Mr Frampton’s principal point, expressed at paragraph 79 of his skeleton argument, to the effect that the figure of £1,245,140.55 – namely the total sum of the 11 bullet points allegedly disputed in the letter – was nowhere set out in the letter. He said that there was a mismatch between the £0 noted in the letter, and the total of the disputed items. That total meant that Mrs and Mrs James were saying that RBH actually owed them £600,000 odd, but that sum was not stated in the letter. Mr Frampton also noted that the language at the start of the letter referred to a “withholding notice” which was a reference to the earlier version of the 1996 Act (before the change to payless notices), and perhaps explained why the letter was not a proper payless note. In addition, he said that the analysis adopted by the judge required reading each bullet point against many different line items in the RBH application, and that it was inappropriate for RBH to have to try and discover the gross valuation figures being suggested. Those should have been set out in the payless notice and they were not.

On behalf of Mr and Mrs James, Mr Hanna said that the payless notice was clearly just that. He referred to the words at the beginning of the notice: “we…hereby notify you of our intention to withhold payment of the sum claimed. We intend to withhold payment of £663,016.16 and accordingly intend to make payment of £0.” He said that the 11 bullet points explained the basis on which the £0 sum had been arrived at. Those details were all referrable to items claimed in the payment application. He therefore said that the judge was correct in his conclusions.

The 1996 Act and the Authorities

Section 111(3) of the 1996 Act provides that:

Section 111(4) sets out the requirements for a valid payless notice:

This is commonly called a payless notice.

The law relating to the content of notices generally is set out in Mannai Investment Co. Limited v Eagle Star Life Insurance Co. Limited [1999] AC 749. As for payment and payless notices under the 1996 Act, the relevant principles have been set out in a number of first instance judgments, including Thomas Vale Construction PLC v Brookside Syston Limited [2006] EWHC 3637 (TCC); Henia Investments Limited v Beck Interiors Limited [2015] BLR 704; Surrey and Sussex Healthcare NHS Trust v Logan construction (Southeast) [2017] BLKR 189; Muir Construction Ltd v Capital Residential Ltd [2017] CSOH 132; Grove Developments Limited v S&T (UK) Limited (“Grove”) [2018] BLR 173; and Advance JV. The only Court of Appeal judgment touching on payment and payless notices is S&T (UK) Limited v Grove Developments Limited (“S&T”) [2019] BLR 1, in which the Court of Appeal upheld the first instance judge on this issue at [57] and [58].

I derive the following principles from the authorities, acknowledging the helpful synthesis in the judgment of Joanna Smith J in Advance JV.

First, what matters is not how the recipient of the notice in fact understood it; the question is how a reasonable recipient would have understood the notice (Mannai at 767G; Grove at [21]-[22] and S&T at [58]).

Secondly, the notice must be construed in context, or as Lord Steyn said in Mannai at 767H, the court must consider “the relevant objective contextual scene”. In this way the reasonable recipient will, amongst other things, be credited with knowledge of the relevant contract: Mannai at [768-B]. If the notice in question is a payless notice, the recipient will be taken to know the detail of its own payment notice, to which the payless notice is a response.

Thirdly, a payment notice or a payless notice must comply with the contractual requirements or, in this case, the statutory Scheme: Henia at [17]. The notice must clearly set out the sum that is due and/or the sum to be paid (even if it is £0), and the basis on which that sum is calculated. Beyond that, it is a question of fact and degree (Grove at [29] and S&T at [53]). But the court will be “unimpressed by textual analysis or arguments which seek to condemn the notice on an artificial or contrived basis” (Thomas Vale at [43], Grove at [26]).

Fourthly, whilst there is no principled reason for adopting a different approach to the construction of different kinds of payment notices merely because some may give rise to more draconian consequences than others, “the particularly adverse consequents for an employer, that follow from, say, a contractor’s unanswered application/payment notice are relevant to the test of the reasonable recipient”: Grove at [27].

Fifthly, there is no requirement for a valid notice to have a particular title, or to make specific reference to a relevant contract clause or term of the Scheme, because the question is whether, viewed objectively, the notice had the requisite intention to fulfil that function: Surrey and Sussex at [65].

Sixthly, one way of testing whether the payless notice was a valid notice is to see whether “it provided an adequate agenda for adjudication as to the true value of the works”: see Henia at [32] and Grove at [26]. In this way, it will be insufficient for the notice merely to identify a figure and state, without more, that that is the relevant amount of the payment notice or the payless notice. Thus in Muir, the payless notice was invalid because it had none of the information which could have allowed the reasonable recipient to work out the basis on which the zero sum had been calculated. A very similar point (albeit obiter) was made about the payment notice at [196] of the judgment of Alexander Nissen QC in Everwarm Ltd v BN Rendering Ltd [2019] EWHC 3060 (TCC).

In summary, the content of payment notices and payless notices should be considered in a common-sense way. They should not be allowed to become tick box exercises, or traps for the unwary. In reality, the question is a simple one. Does the payment notice explain in a tolerably clear way what is due and why? Does the payless notice explain, also in a tolerably clear way, what (if any) part of the payment notice is said to be due, and why less is being paid than has been sought? It is tempting to regard everything else as lawyerly over-complication.

Discussion and Conclusion

I have concluded that, in accordance with the principles set out in paragraphs 79-85 above, the judge was right to find that the letter of 27 November was a payless notice. There are a number of reasons for that conclusion.

First, I consider that RBH’s payment application of 18 November (to which the payless notice was a response, and is thus an important part of the context) was an unsatisfactory document. Although Mr Huntley’s first statement suggested that it itemised all the work done, and Mr Frampton submitted that it was “a valuation of all the works”, I consider that both statements are over-optimistic. It is in truth just a list of invoices; some are from RBH to Mr and Mrs James but some seem to be from the sub-contractors to RBH. Many do not indicate the work done other than in very general terms (i.e. “groundworks”); others just give the name of a sub-contractor (i.e. “Hanson”); and some are so vague as to be useless (i.e. “RBG recharge”, “Misc items”; “labourer top-up”; “groundworks estimate”; “groundworks (awaiting amended invoice”); “scaffolding 25x damaged boards”; and “waiting”). They do not explain why the sums are due and owing.

Essentially, the application of 18 November required the recipient to do all the work in trying to identify what was due and why, particularly in circumstances where the net sum of £660,000 odd said to be due had apparently not been the subject of previous invoices and was not separately explained. It was a poor presentation of what was, to all intents and purposes, a final account claim. If it was a payment notice under s.106 of the 1996 Act (about which I express no concluded view), it barely limped over the threshold. The payless notice has to be considered against that background.

Secondly, the letter of 27 November expressly said that Mr and Mrs James intended to withhold payment of the entirety of the sum claimed. It could not therefore have been clearer that they were not paying any part of that sum. The fact that it referred to ‘withholding’ rather than not paying the sum claimed is nothing to the point: as noted at paragraph 83 above, when considering the validity of a notice under the 1996 Act, titles and references to particular clauses or functions do not matter. It is all about substance. So the only other thing that the notice needed to do, in accordance with the authorities set out above, was to make it tolerably clear on the figures why Mr and Mrs James said that nothing was due to RBH.

Thirdly, I consider, as the judge did, that the letter of 27 November goes on to do just that. The 11 bullet points take issue with 11 different features of RBH’s claim. Five of those, namely items 3, 4, 9, 10 and 11 explain why nothing at all was due under each of those items. They were either not part of the contractual agreement, or they related to invoices that RBH themselves had arguably never paid. Those items amount to £349,590.84, over half the net sum claimed.

The remaining six items (items 1, 2, 5, 6, 7 and 8) are those where it was said that insufficient evidence had been provided to identify what sum, if any, might now be due. Such disputes are all too common under construction management contracts where the employer is removed from any dealings with those actually carrying out the work. In those circumstances, it is plain that, at the very least, the letter was saying that no further sums beyond those already paid had been shown to be due. That position might, on a detailed assessment, be harder to sustain, but since no-one has yet undertaken such an analysis, that must wait for another day.

Fourthly, the amount of work carried out by or on behalf of Mr and Mrs James in order to set out the 11 items cannot be underestimated. It required considerable drilling down into the spreadsheet provided by RBH. In this way, it is wrong in principle for RBH to complain that they had to scrabble around through the excel spreadsheet to try and work out what the complaints were and in particular, what they might be worth. That was a problem that arose out of the sketchy nature of their own payment notice. RBH had months to prepare what was effectively a final account claim, and they must be taken to know every line item in the spreadsheet. As the recipient of the payless notice which challenged that claim, they must be taken to have known the value of those line items which were being disputed. That is again a relevant part of the context against which the payless notice has to be considered.

Fifthly, another relevant element of the context is the timing. RBH’s payment notice had clearly taken some time to prepare. But it came to Mr and Mrs James without warning and, despite the fact that the £663,000 had apparently never been invoiced to them before, it gave them just over a fortnight to prepare a response. That was, objectively, an unreasonably short period to consider and respond to a final account claim, although it was in accordance with the Scheme. So that leads me to conclude that this was what is known in adjudication circles as a ‘smash and grab’ claim, made in the hope that there would be no proper payless notice in the short time allowed by the Scheme, thus entitling the contractor to payment in full of the large sum claimed. The content of the payless notice must be considered against that background too.

Sixthly, I consider that the criticism of the alleged mismatch in the figures is misconceived. The total of the disputed items was £1.2 million. That is the maximum amount of the potential dispute between the parties. That explains why, on Mr and Mrs James’ case, no part of the £663,000 claimed was due to RBH. It was not necessary for them to go on and counterclaim any balance.

Seventhly, in accordance with the principle noted at paragraph 84 above, the payless notice provided a clear and unequivocal agenda for an adjudication: the eleven disputed items. So subject to the jurisdiction point, the payless notice again did exactly what it was supposed to do.

Finally, I would add this. It is very important that payment notices and payless notices do not become some sort of technical battleground where one or other party seeks a potentially unfair advantage by relying on the short time periods applicable to payment and payless notices in order to recover sums (or to withhold sums) that could not be justified on a detailed analysis. That is contrary to the principles I have noted at paragraphs 79 – 85 above. Unhappily, I consider that that was what RBH were endeavouring to do, and that the payless notice of 27 November was sufficient to prevent that from happening.

Ultimately, the issue was whether a reasonable recipient would have understood that the letter of 27 November amounted to a statement by Mr and Mrs James that, by reason of the 11 challenged items, they did not owe any part of the £633,000 odd claimed by RBH. In my view, for the reasons that I have given, such a reasonable recipient would have realised that immediately. The fact that the reasonable recipient would have to know the detail of its own claim, as set out in the payment notice, in order to understand the detail of the response, is simply part of the context of this particular payless notice.

I would therefore dismiss the second ground of appeal.

Conclusion

If my Lady and my Lord agree, for the reasons that I have given, I would dismiss this appeal.

I agree

I also agree