England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON CIVIL JUSTICE CENTRE
MR RECORDER MITCHELL QC
CHY07423

		Royal Courts of Justice Strand, London, WC2A 2LL
		10 /12/2008

Lord Justice Mummery :

Introductory

1. The Landlord and Tenant Act 1985 (the 1985 Act) introduced limits, in circumstances set out in sections 18 to 30, on the amount of service charges payable to a landlord of residential premises. The general legislative scheme is that the relevant costs to be taken into account in determining the amount of a service charge payable for a period are limited. They are limited to the extent that they are reasonably incurred. Where the relevant costs are incurred in providing services and in carrying out works, they can only be taken into account in determining the amount of a service charge, if the services or works are of a reasonable standard. A tenant has statutory rights to be consulted and to be supplied with financial information by the landlord.
2. The appeal poses this question under the 1985 Act: what is a service charge? Section 18, as amended, contains this definition of a "service charge" for the purposes of the 1985 Act-

"(1) In the following provisions of this Act "service charge" means an amount payable by a tenant of a dwelling as part of or in addition to the rent-

(a) which is payable directly or indirectly for services, repairs, maintenance, improvement or insurance or the landlord's costs of management and

(b) the whole or part of which varies or may vary according to the relevant costs.

(2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which service charge is payable.

(3) For this purpose-

(a) "costs" includes overheads; and

(b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or a later period."

3. The main point of principle argued in the court below was whether the sum of £4,000 plus interest claimed from the respondent, Mr Leon Di Marco, by the appellant company, Morshead Mansions Limited (Morshead), under Article 16 of its Articles of Association is a "service charge" within the meaning of section 18.
4. Mr Recorder Mitchell QC decided two points of principle: the first, in favour of Morshead, was that Article 16 was valid and enforceable; the second, against Morshead was that section 18 applied to its claim against Mr Di Marco and that in consequence he should dismiss Morshead's claim. He gave permission to appeal against that ruling. In his order on 23 January 2008 he also gave liberty to Morshead to bring, and Mr Leon Di Marco to defend, new proceedings.
5. The recorder dismissed Mr Di Marco's counterclaim for breach of the landlord's repairing obligation. He has not cross appealed against that decision, which was founded on the facts found by the recorder. Nor has he appealed against the recorder's decision in favour of the validity of Article 16. Morshead was ordered to pay 50% of his costs
6. On a renewed application Arden LJ gave permission to appeal on other grounds advanced by Morshead in support of its contention that the recorder was wrong to dismiss its claim.
7. Morshead sought permission to raise a new ground of appeal that, even if the claim against Mr Di Marco, were for a "service charge" falling within section 18, he has advanced no reason for Morshead's claim to be dismissed. Mr Di Marco's defence was that Morshead was not entitled to collect the sums claimed from him by relying on Article 16. He has not, Morshead submits, alleged non-compliance with the statutory requirements, nor, has he contended that the sums claimed are unreasonable. He has shown no grounds for staying the proceedings in order to refer the issue of reasonableness to the Leasehold Valuation Tribunal.

Background

8. Mr Di Marco, who conducted his case in person below and in this court, is a leaseholder of Flat 2, Morshead Mansions, Maida Vale, W9 (the Flat). His lease dated 20 June 1993 is for a term of 999 years from 1 June 1993 at an annual rent of £100 for the first 100 years. The lease contains provisions for the payment of service charges to the landlord: clause 3.2 and the 4^th schedule. The 5^th schedule gave details of the services to be provided.
9. Like the other leaseholders of flats in the block Mr Di Marco owns 1 share in Morshead, a private company incorporated on 2 September 1992 and limited by ordinary shares. The lessee's share must be assigned to an assignee of the lease. The freehold reversion of the flats is vested in Morshead, which was established to undertake the management and administration of the block and to carry out such reconstruction, renewal, repairs, maintenance or renovations to it as may be necessary or desirable. There are 104 flats in the block in all. Initially 4 of the tenants were not members of the company, but now there is a complete identity of the members of the company and the tenants in the block. The Chairman of the company is Mr David Wismayer. The company needs money in order to carry out its objects and to perform the obligations under the leases, but it has no other assets apart from the freehold reversion, on which it is not easy to raise money, and such sums as it can raise for its purposes from its members. It does not trade.
10. Article 16 of the Articles of Association, which was passed by special resolution on 6 April 1994 to replace a previous provision, deals with establishing and raising capital reserves from members of the company-

"The Directors may establish and maintain capital reserves, management funds and any form of sinking fund in order to pay or contribute towards all fees, costs and other expenses incurred in the implementation of the Company's objects, and may require the Members to contribute towards such reserves or funds at such time, in such amounts and in such manner as the Members shall approve by ordinary resolution passed in general meeting and may invest and deal in and with such monies not immediately required in such manner as they shall from time to time determine."

11. Over the years, between 1997 and 2003, Morshead established a number of Recovery Funds under these provisions. The Funds were applied in defraying expenditure which had been incurred by Morshead in litigation and also in maintaining and repairing the block. There were disputes and litigation in the County Court and in the Leasehold Valuation Tribunal. For a period there was in post a manager appointed by the Leasehold Valuation Tribunal.
12. At the AGM of Morshead on 31 October 2006 two resolutions (Nos 5 and 6) were passed pursuant to Article 16: the first authorised the directors to establish a fund of £400,000 to be designated "The 2007 Recovery Fund" such sum to be payable by the members pro rata to their shareholdings in two equal instalments on 1 January and 1 April 2007; the second authorised the Directors to recover interest upon the late payment of contributions at a rate of 4% above the base rate from time to time of Barclays Bank plc compounded with quarterly rests. (That was the rate of interest specified in the lease on rent and service charges paid more than 7 days after falling due.)
13. Notice of that meeting was given to Mr Di Marco by letter dated 6 October 2006. The letter stated that

"Resolutions 5 and 6 are intended to secure the company's ability to ensure payment of the sums required to finance anticipated expenditure in the service charge funds in 2007. We intend to re-decorate the exterior of the building next year (it will then be four years since this substantial and costly task was last undertaken) and we have allowed the sum of £250,000 to pay for this work.

The company needs another £150,000 to finance the provision of normal services such as the buildings insurance premium, cleaning etc. Together, these sums amount to £400,000, i.e. the amount of the proposed Recovery Fund. The interim service charge for 2007 will also be £400,000.

Whilst each leaseholder will receive a demand for their respective share of the interim service charge, payment of the Recovery Fund demand…will entitle the payer to an equivalent credit against their respective service charge liability thereby eliminating it.

…There is almost no defence to a claim in proceedings for debts owed under the Company's Articles of Association …. Conversely, by comparison, the opportunities to avoid or delay payment of a service charge available to a member qua leaseholder are almost limitless.

In the light of the past deliberate obstruction of the Company's repair programme …it would be remiss of the Directors to fail ..to take every possible step available that would mitigate the consequences were the Company to face yet further opposition to the achievement of its objectives, the most important of which is to restore and then maintain the building in a state of repair…"

14. Mr Di Marco did not pay his two contributions of £2,000 each on the due dates. Morshead issued proceedings against him on 29 January 2007 and 26 April 2007 claiming payment of each said sum of £2,000 together with the interest approved in resolution 6. The total sum of £4,000 was 1% of the total fund to be raised for the Recovery Fund from members of Morshead. The proceedings were consolidated in August 2007.
15. Mr Di Marco defended the claim on the ground that the Recovery Fund was in fact a service charge, as defined by section 18, and that Morshead was not entitled summarily to collect the service charges which could be recovered under the terms of the lease by other means.

The judgment

16. The recorder heard no oral evidence on Moreshead's claims. He summarised the background to the proceedings, including the origins of Article 16 and previous litigation in the County Court and in this court, and then ruled on two points of principle.
17. On the Article 16 point, he rejected Mr Di Marco's contentions that Article 16 was invalid and of no effect on the grounds that it was inconsistent with the principle of limited liability, that section 16 of the Companies Act 1985 applied and that there was no written agreement on his part to the liability sought to be enforced against him.
18. On the section 18 point, however, the recorder held the section was applicable to the sums sought as they were "service charges" within the meaning of the section. He relied on "the clear wording of the letter of 6 October 2006." He said that the sums claimed in that letter fell "within the ambit of section 18."(paragraph 33). It was an

"..attempt to seek payment of an interim payment in relation to items which clearly would normally fall within a service charge provision."(paragraph 34)

Morshead's submissions

19. Mr Grant Crawford, who did not appear in the court below, submitted that the judge erred in law in his construction and application of section 18 to Morshead's claim under the Articles. He succinctly put his points in several different ways by direct reference to the detailed provisions of the definition of "service charge" in section 18.
20. First, the contributions by members of Morshead to the 2007 Recovery Fund are not amounts "payable by a tenant of a dwelling as part of or in addition to the rent" within section 18. Although Mr Di Marco is a tenant of a dwelling, the contributions are not payable by him in his capacity as a tenant and section 18 is concerned only with the obligations of a tenant qua tenant.
21. Secondly, the contributions claimed by Morshead are not payable "as part of or in addition to the rent" in his capacity as tenant. The parties have a different relationship as a company and one of its members.
22. Thirdly, the contributions are not "payable directly or indirectly for services, repairs, maintenance" and so on. The Recovery Funds can be used for other purposes, such as litigation costs. They are contributions to the funds of the company, which can be used as it thinks fit with the prior approval of the members.
23. Fourthly, the contributions are not payments "the whole or part of which varies and may vary according to the relevant costs" within section 18. The contributions vary according to the amount resolved by the members of the company in general meeting.

Mr Di Marco's submissions

24. In his written submissions and oral arguments Mr Di Marco sought to uphold the recorder's decision that section 18 applied so as to defeat Morshead's claim in its action against him. He said that the members of the company were tenants of the company and that sums claimed by Morshead in this action were for payments for service charges in addition to the rent paid to it and so were, albeit by a different route, indirect claims to recover service charges within the meaning of section 18. In some instances, there had been duplicated company and service charge demands.
25. This, he said, is a landlord and tenant matter. The proceedings were an impermissible and unsuccessful attempt to circumvent the statutory requirements and the protection given to him by section 18 in relation to demands for payment of service charge such as were made in a letter of 21 December 2006 sent to him by Morshead. That letter stated that Mordhead specified the sum of £1,923.08 as a fair and reasonable interim payment to be made on 1 January 2007. The letter, which Mr Di Marco contended was sent to him qua tenant in contrast to the letter sent to him qua member of Morshead on 6 October 2006 (see paragraph 13 above ), concluded-

"Provided that payment of your contribution to the Recovery Fund 2007 in the amount of £2000 is indeed received on or before the due date, your account will be also credited with the sum of £1,923.08 thereby discharging your liability to pay the interim service charge due on 1 January 2007."

26. He wished to dispute the entirety of the charges, contending that money has not been properly spent, that works have not been properly done, that the sums in question are unreasonable and that there has not been proper consultation under section 20 of the 1985 Act.
27. Mr Di Marco pointed to the fact that there was attached to the letter of 21 December 2006 a document headed "Interim Service Charge Budget for the financial year ending 31 December 2007" with a breakdown of the total figure of £400,000 into sums for management charges-managing agent, buildings insurance, cleaning refuse disposal gardens and maintenance, general repairs, external re-decorating, common parts, electricity, legal and professional, auditors' remuneration and sundry expenses. There was also attached another document headed "Global Statement of Account (Debts owed under the lease and under the Articles of Association)." The net balance was stated to be £17,309.41 as at 1 January 2007.
28. Mr Di Marco cited passages from a decision of the Leasehold Valuation Tribunal at another stage of his long running battle with Morshead. The tribunal expressed concerns about the lack of transparency with which Morshead's affairs were run and about the use of recovery funds to circumvent the rights of leaseholders to challenge the reasonableness of service charges under the 1985 Act. The tribunal noted that an assurance had been given by Mr Wismayer that all expenses on service chargeable matters would appear on service charge statements and demands and would thus be subject to challenge. The tribunal added that as the leaseholders were now all shareholders and hence members of the landlord, they are, like all such tenant-owned landlords, in the position of having in most circumstances to pay any shortfall in the service charge account out of their own pockets, subject to the risk, if a tenant-owned landlord persisted in making unreasonable service charge demands, that the directors might be held personally liable for misfeasance. The tribunal noted that Mr Wismayer had assured the tribunal that he proposed to establish a website and to report regularly to leaseholders about Morshead's actions.
29. Mr Di Marco strongly disputed the entitlement to the compound interest claimed by Morshead under the resolution, but not mentioned in the provisions of Article 16 which is only concerned with the establishment of funds and with contributions to these funds. He submitted that the claim was contrary to section 16 of the Companies Act 1985, now section 25 of the 2006 Act, being an attempt to alter the Articles so as to increase his liability to the company. For that reason the resolution was not binding on him.

Conclusion

30. In my judgment, Mr Di Marco's contentions, which were forcefully made, pay in sufficient regard to the crucial legal distinction between the liability of a tenant to the landlord under a lease containing service charge provisions, and the liability of the member of a company, in which all the tenants are shareholders, to the company under separate contracts made in and pursuant to the Articles to establish and recover contributions to a Recovery Fund. The two kinds of legal relationship can co-exist between the same parties, but they are different relationships incurred in different capacities and they give rise to different enforceable legal obligations. A defence to one of the claims is not necessarily available as a defence to the other legally separate claim.
31. This appeal is concerned only with the question of law whether Morshead is entitled under Article 16 and pursuant to the resolutions to be paid the money which it claims from Mr Di Marco as a member of the company. The judge did not decide and was not asked to decide whether section 18 applied to Mr Di Marco as a tenant. He was not deciding whether Morshead could avoid altogether the statutory protection which Mr Di Marco might enjoy as tenant if he were sued under the provisions of the lease or if he invoked the terms of the lease and the statutory provisions in his capacity as tenant. Whether Morshead, as landlord, is or was entitled to levy a charge or charges against him, as tenant, in the amount specified in its letter to him dated 21 December 2006 is a separate matter with which we are not concerned on this appeal. Nor are we concerned in these proceedings with any question whether the directors of the company or its managing agents may properly use money raised from Mr Di Marco pursuant to the Article 16 resolutions in payment of the sums alleged to be due from him as a member, if they are not due from him as a tenant.
32. For these reasons I have reached the conclusion that, although the judge was right on the first point of principle in respect of Article 16, he was wrong to dismiss Morshead's contract claim pursuant to that Article. Morshead was entitled, pursuant to the resolutions, to the money (including interest) claimed from Mr Di Marco as a member of the Company.

Result

33. I would allow the appeal. The judge wrongly held that section 18 applied to Morshead's claim for payment, which was expressly based on the Article 16 provisions and resolutions. He ought not to have dismissed the action on the basis that section 18 provided a defence to it. In those circumstances it is unnecessary to hear argument on whether, if the judge was right on the application of section 18, he was nevertheless wrong to dismiss Morshead's action

Lord Justice Wall:

34. I agree.

Lord Justice Toulson:

35. I also agree.