The Residential Occupier Exception: Section 106 of The Construction Act
Disputes can be referred to adjudication under the Housing Grants, Construction and Regeneration Act 1996 (Construction Act). However, there is an exclusion for construction contracts with residential occupiers set out in section 106 of the Act. It applies to contracts for house extensions, alterations and refurbishments intended to be used as a client’s main residence.
Solicitor Apprentice, Ellen Williamson, and Partner, Ross Galbraith, offer insight into the residential occupier exception from adjudication, as highlighted in the recent case of RBH Building Contractors Ltd v James & Anor.
RBH Building Contractors Ltd v James & Anor
RBH Building Contractors Ltd (RBH) were engaged by Mr and Mrs James in January of 2022 to provide site and project management services in relation to the construction of a large residential property in Devon.
The contract for the project management services was agreed orally, and RBH were to be paid £1,000 per week for “supervision and project management” and an additional fee of £10,000 per month for 18 months “also for supervision and project management”.
The parties’ relationship broke down and the construction work stopped in April 2024, at which time RBH had received payment of around £1.3 million in total.
On 18 November 2024, Mr and Mrs James were served with an application for payment by a claims consultant on behalf of RBH, requesting payment of £663,000. The payment application set out that the total sum owed to RBH was around £1.975 million, but that £1.3 million had already been paid. On 27 November 2024, Mr and Mrs James served a letter, claiming it to be a valid pay less notice, to RBH.
Adjudication
RBH served a Notice of Adjudication on 6 December 2024, followed by a Referral on 11 December 2024, claiming the sum due as there had been no valid pay less notice issued by Mr and Mrs James.
Mr and Mrs James said that the contract in question was a construction contract with a residential occupier, so the Construction Act did not apply, and therefore the adjudicator lacked jurisdiction to determine the dispute. They also sought a declaration that their pay less notice issued to RBH was valid.
RBH claimed that the couple never intended to occupy the property and, therefore, the adjudicator did have jurisdiction on the matter.
On 17 January 2025, the adjudicator found that it did have jurisdiction and that the pay less notice issued to RBH was valid. The adjudicator ordered that Mr and Mrs James must pay the amount due to RBH.
Mr and Mrs James did not pay and RBH subsequently applied for summary judgment.
What does section 106 of the Construction Act say?
Section 106 of the Construction Act exempts residential occupiers from being subject to the provisions of the Act (i.e. in relation to payment, suspension for non-payment and the ability to refer a dispute to adjudication). It says:
(1) This Part does not apply—
(a) to a construction contract with a residential occupier (see below),
(2) A construction contract with a residential occupier means a construction contract that principally relates to operations on a dwelling which one of the parties to the contract occupies, or intends to occupy, as his residence.
Were Mr and Mrs James residential occupiers?
In the summary judgment, the Judge sought to decide whether the couple had either: (i) occupied the property as their residence; or (ii) intended to occupy the property as their residence.
Coulson J in Shaw v Massey Foundations Piling Ltd [2009] stated that “what mattered was the employer’s intention at the time of occupation”.
RBH relied on the fact that Mr and Mrs James had taken out commercial loans to finance and build the property, including undertakings implying that they would not occupy the dwelling. Mr and Mrs James explained that they would not reside in the property until the loan had been paid off. In any event, it was found that these restrictions were related to a separate third-party financier, not statutory regulations, and would not inhibit lawful occupation of the property.
Mr and Mrs James lived on-site in a caravan, having sold their previous home. They were registered with the local GP and on the electoral register. They argued that the house was designed to their personal specification, one of their specifications being “the installation of a basement lap pool, which was specified because Mr James is a keen swimmer who has competed in Ironman competitions”.
Decision
It was found that the adjudicator did not have jurisdiction, seeing as Mr and Mrs James intended to occupy the property as their residence and could rely on the section 106 exception. Despite this, Mr and Mrs James were made to pay the adjudicators fees, as the judge decided they did not have jurisdiction to alter the adjudicator’s decision in relation to fees.
It was found that the pay less notice served by Mr and Mrs James was valid and, therefore, no sums were due to RBH.
Practical Implications
It is important to be aware of the s106 residential occupier exclusion and the fact that the Construction Act will not apply to construction contracts involving residential occupiers. Therefore, neither party will have the ability to rely on the Construction Act specific payment provisions and the parties will not have the automatic right to refer a dispute to adjudication.
For legal advice on construction contracts or disputes, contact Ross Galbraith at [email protected] or 0191 211 7999.