HMOs: Apportionment of penalties for breach of housing standards revisited

In Sutton v Norwich City Council [2021] EWCA Civ 20; [2021] PLSCS 7, the Court of Appeal has provided useful guidance on the apportionment of civil penalties between a director and company arising from a breach of section 249A of the Housing Act 2004 (the Act). Nicholas Sutton was the sole director of Faiths Lane Apartments Ltd (FLAL). FLAL was the freehold owner of Max House, an “apart-hotel”. It was classed by Norwich City Council as a house in multiple occupation under section 257 of the Act. It therefore fell within the Licensing and Management of Houses in Multiple Occupation (Additional Provisions) (England) Regulations 2007. As the recipient of the rental income for Max House, FLAL was deemed a manager under section 263(3) of the Act and regulation 2. The council found FLAL to be in breach of some of its duties as a manager under the regulations. In February 2018, the council served improvement notices on FLAL owing to health and safety breaches. FLAL did not comply with the notices – an offence under section 30 of the Act. Pursuant to section 249A of the Act, the council imposed a combined penalty of £236,000 on Sutton and FLAL. Sutton’s liability arose from the council’s finding that FLAL’s failure to comply was with the “consent or connivance” of its director – Sutton. Both appealed. By the time of the appeal, FLAL had gone into administration. The Upper Tribunal (Lands Chamber) (UT) reduced the total penalty imposed on FLAL and Sutton to £174,000: Sutton was liable to pay £99,000 of that amount. Sutton appealed. First, on the grounds that the UT had inconsistently applied the penalties. Second, on the basis that the penalties were not applied in accordance with the law. Relying on R v Rollco Screw and Rivet Co Ltd and others [1999] 2 Cr App Rep (S) 436, Sutton argued that the UT should have asked itself: (a) what financial penalty the offence merited; and (b) what financial penalty the corporate and personal defendants could reasonably be expected to meet. The Court of Appeal noted that the UT’s assessment of the penalty was both a matter of evaluation and discretion. An appellate court could not overturn a decision simply because it would have imposed a different penalty. The decision could only be impugned if it was unreasonable or wrong due to “an identifiable flaw in the judge’s reasoning, such as a gap in logic, a lack of consistency, or a failure to take account of some material factor, which undermines the cogency of the conclusion”. In dismissing Sutton’s appeal, the Court of Appeal paid short shrift to his first ground. Sutton failed to advance any evidence to support his assertion that the UT’s penalty was excessive compared with penalties imposed in other cases or by the council. In regard to the second ground of appeal, the Court of Appeal found that the dual questions in Rollco did not specifically deal with how penalties imposed on a company and its directors should relate to one another. Later authorities highlighted that there was no guiding principle that a court or tribunal was bound to first ask itself what penalty the offence merited overall and then how that penalty should be apportioned. Equally, there was no general rule as to how a penalty imposed on a company should relate to a penalty imposed on its director. Such matters were fact-specific. The Court of Appeal identified that a key requirement was to avoid double punishment of directors when levying penalties – especially in sole director-owner cases. In such circumstances, the court or tribunal should have regard to the penalty imposed on the company when levying the penalty on the director. Appropriate adjustments may be required to the financial penalty policy being used. Additionally, it may be useful to pose the questions: what overall penalty was merited?; and how should that figure be divided between company and owner? In the present case, the UT had taken care to ensure that double punishment did not occur. Elizabeth Dwomoh is a barrister at Lamb Chambers