Section 106 and pay less notices: court endorses evidence-based and common-sense approach 

The Court of Appeal in RBH Building Contractors Ltd v (1) Mr Ashley James, (2) Mrs Tracy James [2026] EWCA Civ 511 (CA) has provided clarity on two significant points:  

1. the scope of the residential occupier exception in section 106 of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) 

2. what a valid pay less notice must contain under section 111 of the Construction Act. 

Background  

In early 2022, the Appellant, a building contractor (RBH), was engaged by the respondents (Mr and Mrs James) under an oral agreement to provide site and project management services for the construction of a luxury home in North Devon (the property). RBH started works in January 2022 and ceased in April 2024 before completion of the works, leaving the works to be completed by a third-party contractor. On 18 November 2024, RBH served an application for payment for £663,016.16 supported by a spreadsheet of invoices (payment notice). Nine days later, on 27 November 2024, Mr and Mrs James responded to the payment notice with a letter which stated they intended to withhold the full sum and the sum due to pay was £0. The letter set out a bullet-point list of  reasons why Mr and Mrs James considered this was the case (the pay less notice).  

RBH argued that this was not a valid pay less notice and commenced a “smash and grab” adjudication against Mr and Mrs James in December 2024. Mr and Mrs James challenged the adjudicator’s jurisdiction, stating they were residential occupiers, and the section 106 exception should apply, meaning the statutory right to adjudicate under the Construction Act was unavailable. The adjudicator rejected that objection and found that the pay less notice was not valid and thereby awarded RBH £663,016.16 plus interest and fees.  

RBH issued TCC proceedings to enforce the decision. Mr and Mrs James brought their own Part 8 claim for a declaration that the pay less notice was valid. The court rejected RBH’s claim on the basis that there was a real prospect of Mr and Mrs James establishing a defence under section 106 and further held that the pay less notice was valid. RBH appealed. 

Issue one: residential occupier exception  

Section 106 of the Construction Act provides that the statutory right to adjudicate does not apply. 

“106   

(a) to a construction contract with a residential occupier (see below) 

(2) A construction contract with a residential occupier means a construction contract which principally relates to operations on a dwelling which one of the parties to the contract occupies, or intends to occupy, as his residence.” 

In this case, Mr and Mrs James presented evidence that they intended to occupy the property, including living in a caravan on site, GP/electoral registration, and personal design choices. 

RBH relied heavily on a development loan and undertakings signed by Mr and Mrs James, which stated they had no intention to reside. RBH argued these should be determinative. The court rejected the idea that those documents were a legal “trump card” overriding all other evidence on a summary application.  

In considering this limb of the appeal, LJ Coulson laid out the seven principles which should be applied when determining whether a person “intends to occupy”. 

1.  The party relying on the s.106 exception must prove it applies. 

2. Intention is a factual issue. (not suitable for summary judgment if genuinely disputed). 

3. Relevant intention to occupy assessed at contract date. 

4. Requires genuine subjective intention to occupy in the future.  

5. Subjective intention is strengthened by objective evidence. 

6. The intended occupation must be realistically achievable in practice. 

7. The intention to occupy must relate to occupation within a reasonable time after completion. 

In assessing the evidence, Coulson LJ dismissed the evidence presented by RBH, and the court ruled that RBH’s appeal failed on ground one.  

Issue two: the pay less notice  

RBH’s second ground of appeal was in relation to the pay less notice produced by Mr and Mrs James in response to RBH’s application for payment.  

Section 111(4) of the Construction Act requires a Pay Less Notice to specify: 

1. the sum the payer considers due at the notice date; and  

2. the basis on which that sum is calculated.  

It is immaterial for the purposes of this subsection that the sum referred to in paragraph (a) or (b) may be zero. 

In the initial judgment, the judge concluded that the letter was a pay less notice because it made “tolerably clear” what was being withheld and why.  

On appeal, Coulson LJ considered the existing legal principles and assessed how the pay less notice should be construed in light of this. Coulson LJ concluded:   

1. pay less notices are judged objectively and in context (i.e. what would a reasonable recipient understand) 

2. labels are secondary, and there is no “magic title” required if, viewed objectively, the document is intended to operate as a pay less notice.  

Coulson LJ also cautioned against turning notices into a technical tick‑box battleground or “traps for the unwary”.  

With the above in mind, the court held the letter issued by Mr and Mrs James was a valid pay less notice: it clearly stated their intention to pay £0 and set out the principal reasons why. In context, RBH’s application was a large invoice bundle with limited explanation, so a concise response was sufficient. 
 

Conclusion  

This is a significant Court of Appeal decision confirming that the residential occupier exception can apply where intention to occupy is credibly evidenced, and that pay less notices will be judged on substance, not form. The court upheld the TCC’s refusal to enforce the adjudicator’s award and dismissed RBH’s appeal. 

The Birketts view 

This decision is helpful for two distinct reasons. 

1. Firstly, it offers some clarity as to the meaning of “intention to occupy” within Section 106, which will turn on the factual evidence available at contract formation, and conflicting evidence may defeat summary enforcement.  

2. Secondly, it is a helpful indicator that a pay less notice valued at £0 can be valid if it identifies the key reasons 

3. And that the court favour a practical, common-sense reading of pay less notices over technical challenges. 

If you would like advice on how this decision may affect your projects or payment processes, please do get in touch – we would be pleased to assist.