Developer not a factor by performing factor duties

Out-Law News | 15 Jun 2020 | 9:38 am | 3 min. read

A property developer will not automatically be considered a factor merely by carrying out some of the duties that would normally be performed by a factor, the Court of Session in Edinburgh has ruled.

Stuart Fraser, an expert in property law at Pinsent Masons, the law firm behind Out-Law, said the ruling would be welcomed by both developers as well as homeowners who carry out works themselves. However, he said the ruling does not mean developers carrying out duties normally performed by factors in Scotland are not without potential liability to home owners in their development.

There will be periods when common areas intended to be factored in a residential development will remain under the control of the developer.  For example during the initial sales period when the developer wishes to keep the development looking its best the developer may maintain the common areas themselves.

In the circumstances of the case before the Court of Session, developer Proven Properties decided to let the units it had built rather than sell them after market conditions changed. The developer retained ownership of 14 of the 15 flats in the development in Helensburgh. 

Proven Properties initially appointed a property factor but when the appointment expired they took on the management of the building. This included cleaning the common hallways and stairs, maintaining the landscaped areas and servicing the lift. Proven Properties invoiced the one homeowner within the building for the appropriate share of the cost of this maintenance but did not include a factoring or management fee. 

As a result of issues with a leaking roof which Proven Properties failed to remedy, the homeowner raised an application under the Property Factors (Scotland) Act 2011 to determine if Proven Properties had failed to carry out their duties as property factor and to ensure compliance with the property factor code of conduct. Property factors are required to register under the 2011 Act and their non-compliance with the code of conduct can result in criminal offences and penalties under the Act.

Proven Properties argued that they were not property factors and therefore not subject to the registration requirement or the code of conduct, but this argument was rejected by both the first- and second-tier housing and property tribunals in Scotland. However, the company's appeal has now been upheld by the Court of Session.

The court's decision focused on the definition of 'property factor' in the 2011 Act, which includes "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". The words "in the course of that person's business" were of particular relevance in this case, with the court adopting a narrow view that a person will only be considered a 'property factor' if the management activities they carry out are undertaken in the course of their business as managers of the common parts of properties, rather than in the course of any business.

"This decision is to be welcomed, as to apply a broader interpretation would unfairly penalise homeowners who just happen to run a business from their property," Fraser said. "The court used the example of a piano tutor working from home in an upper flat who would want to ensure that the common stairs are kept clean and well maintained, otherwise potential clients could be put off. If the piano tutor cleans and maintains the stairs, they should not become a property factor as a result, nor should they become subject to the penalties for failing to comply with the Act. For Proven Properties, the proper maintenance of the common parts was an important aspect of the letting of their properties within the development."

"The 2011 Act is intended to regulate professional property factors who are paid for acting as such, not those who undertake such functions on a gratuitous, non-professional basis. In the event that Proven Properties had sought to recover a factoring or management fee from the homeowner, then their business would have been developer and property factor, which would have brought them within the scope of the 2011 Act," he said.

"This does not mean that developers in the same situation as Proven Properties or otherwise carrying out the duties of a factor will have no liability to the homeowners in their development. They will remain liable to their co-owners to the extent that any works undertaken cause damage or injury. However, provided that the work is carried out properly and no management or factoring fee is charged, the developer should have no issues, with the regulatory requirements of the 2011 Act," Fraser said.