No Place Like Home? Court Of Appeal Guidance On The Residential Occupier Exception And Pay Less Notices

We previously reported on the first instance decision in RBH Building Contractors Ltd v Ashley James & Anor [2025], in which the Technology and Construction Court (TCC) declined to enforce an adjudicator's decision and held that the employers' Pay Less Notice was valid.

The Court of Appeal has now dismissed RBH's appeal, in a judgment handed down on 29 April 2026 by Lord Justice Coulson (with whom Lord Justice Males and Lady Justice King agreed): RBH Building Contractors Limited v Ashley James & Anor [2026].

The decision is significant for two reasons:

1. it provides the first appellate-level guidance on the "residential occupier" exception under section 106 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the "1996 Act"), and;
2. it reinforces the pragmatic, common-sense approach to the validity of Pay Less Notices.

Background to the dispute

• RBH Building Contractors Limited (RBH) was engaged by Mr and Mrs James under an oral contract in about January 2022 to provide site and project management services for the construction of a large luxury house in North Devon.
• The arrangement evolved into what was effectively a construction management contract, with RBH procuring sub-contractors and materials and seeking reimbursement of its costs. Following disputes, RBH ceased work in about April 2024, with the works incomplete.
• On 18 November 2024, a claims consultant acting on behalf of RBH served an application for payment in the sum of £663,016.16. The application attached a spreadsheet of 527 line items, none of which had previously been invoiced to Mr and Mrs James, and gave just 17 days for payment.
• On 27 November 2024, Mr and Mrs James responded with a letter setting out 11 bullet points disputing various elements of the claim and stating that the sum due was £0.
• RBH commenced adjudication proceedings. Mr and Mrs James objected to the adjudicator's jurisdiction on the basis that they were residential occupiers, so the 1996 Act could not apply to them.
• The adjudicator rejected Mr and Mrs James' submission, found that their 27 November letter was not a valid Pay Less Notice, and ordered payment of £663,016.16. Mr and Mrs James did not pay, and RBH applied to the TCC for summary judgment.

At first instance, the TCC declined to enforce the adjudicator's decision, holding that Mr and Mrs James had a real prospect of establishing the residential occupier exception, and separately found that the letter of 27 November 2024 was a valid Pay Less Notice.

Ground 1: the residential occupier exception under section 106

The first issue on appeal concerned whether or not Mr and Mrs James were "residential occupiers".

Section 106(2) of the 1996 Act provides that a "construction contract with a residential occupier" means one which "principally relates to operations on a dwelling which one of the parties to the contract occupies, or intends to occupy, as his residence".

Lord Justice Coulson, who had decided the leading first instance authority on section 106 (Westfields Construction Limited v Lewis [2013]), set out comprehensive principles for determining whether a person "intends to occupy" property as their residence for the purposes of the exception. These principles, drawn from the 1996 Act, the Landlord and Tenant Act 1954 and the Housing Act 1985, include:

• The burden of proof is on the party seeking to trigger the exception.
• The determination of intention to occupy is a matter of fact, and the relevant date is the time the contract was made, although evidence of intention before and after the contract may also be relevant.
• Two elements must be satisfied: first, a bona fide intention to occupy, which is largely subjective but can be supported by objective evidence; and second, a realistic (rather than fanciful) prospect of bringing that occupation about.
• The intention must have a temporal aspect - there must be an intention to occupy within a reasonable time after completion of the works.

Applying these principles, the Court of Appeal held that the judge was right to conclude that Mr and Mrs James had crossed the "relatively low threshold" of demonstrating a realistic prospect of success on the residential occupier defence. There was clear subjective evidence that they intended to live at the property when the works were completed, supported by objective evidence including the payment of the additional stamp duty surcharge, the sale of their Essex home, living in a caravan on site, registering with the local GP and being placed on the electoral register, and the inclusion of personalised design features such as a lap pool.

RBH's primary argument had centred on the terms of a Development Loan, under which Mrs James had signed undertakings that the property would not be used as a dwelling and that the loan was for business purposes. RBH argued these undertakings were determinative and amounted to a "trump card" that overrode any other evidence. The Court firmly rejected this, holding that the undertakings were simply part of the evidential picture and could not, as a matter of law, override all other evidence of subjective intention.

On whether any intended occupation would have been "unlawful" by breaching the Development Loan, the Court drew a clear distinction with previous case law concerning breach of planning permission: breach of a loan agreement with a third-party financier is a civil matter sounding in damages, not an unlawful act akin to a breach of planning permission with potential criminal consequences.

The Court also dismissed RBH's argument that a plan to rent the property on an AirBnB basis for approximately 13 weeks per year was fatal to the residential occupier defence, holding that a dwelling the owner intended to occupy - save for renting it out for one quarter of the year - fell within the section 106 exception.

Ground 2: validity of the Pay Less Notice

Although the dismissal of the first ground of appeal rendered the second ground academic, the Court of Appeal addressed it given its wider importance.

Lord Justice Coulson set out a comprehensive summary of the principles governing payment and Pay Less Notices which may be distilled as follows:

• A notice must be construed objectively, from the perspective of a reasonable recipient credited with knowledge of the relevant contract.
• The notice must clearly set out the sum due (even if zero) and the basis on which it is calculated, but beyond that it is a question of fact and degree.
• There is no requirement for a particular title or specific contractual references. One useful test is whether the notice provides an adequate agenda for adjudication as to the true value of the works.
• In summary, the content of notices should be considered in a common-sense way, and should not become "tick box exercises, or traps for the unwary".

The Court of Appeal upheld the finding that the letter of 27 November was a valid Pay Less Notice, for several reasons.

1. RBH's own payment application was an unsatisfactory document - essentially a list of invoices without proper explanation of why the sums were due.
2. The letter expressly stated that Mr and Mrs James intended to withhold the entirety of the sum claimed and to pay £0, such that it "could not…have been clearer".
3. The 11 bullet points took issue with specific features of the claim, and five of those items explained why nothing at all was due under each head.
4. Mr and Mrs James had undertaken considerable work to drill down into RBH's spreadsheet, and it was wrong for RBH to complain about having to cross-refer the challenges to its own payment application.

Lord Justice Coulson characterised the claim as a "smash and grab", served without warning and giving only a fortnight to respond to what was effectively a final account claim, and held that the Pay Less Notice must be judged against that background. He concluded that "a reasonable recipient would have realised immediately" that the letter amounted to a statement that no part of the sum claimed was due.

The Court also delivered a broader warning that payment and Pay Less Notices must 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".

Practical i0mplications for construction professionals

This decision is important for a number of reasons.

• First appellate guidance on the section 106 residential occupier exception: the two-stage test - bona fide subjective intention, plus a realistic prospect of occupation - provides a framework that will be applied in future cases.
• AirBnB-style letting does not necessarily defeat the exception: letting a property for a portion of the year (here, approximately 13 weeks) whilst otherwise residing in it does not deprive an owner of residential occupier status under section 106, although the position is fact dependent.
• The common-sense approach to Pay Less Notices is reinforced: the emphasis is on substance rather than style. The Court of Appeal has now endorsed at appellate level the principle that a Pay Less Notice need not contain an arithmetical calculation to be valid, provided it makes tolerably clear what is being withheld and why.
• "Smash and grab" claims will be scrutinized: the Court's observations about the nature of RBH's claim - served without warning, giving a fortnight to respond to a final account claim - and the standard to which a Pay Less Notice should be held in such circumstances, serve as a reminder that the courts will have regard to the overall context and fairness of the payment process.

Read the original article on GowlingWLG.com