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England and Wales High Court (Chancery Division) Decisions
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Williams & Anor v London Borough of Southwark [2000] EWHC 292 (Ch) (23 March 2000)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2000/292.html
Cite as:
[2000] BLGR 646,
(2001) 33 HLR 22,
[2000] EG 44,
[2000] EWHC 292 (Ch),
33 HLR 22
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Neutral Citation Number: [2000] EWHC 292 (Ch) |
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Case No: CH 1997 W No 5383 |
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
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Royal Courts of Justice Strand, London, WC2A 2LL |
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Date: 23/03/2000 |
B e f o r e :
THE HONOURABLE MR JUSTICE LIGHTMAN
____________________
Between:
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Michael John Williams Lilian Margaret Williams
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Claimant
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- and -
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The Mayor and Burgesses of the London Borough of Southwark
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Defendant
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____________________
Mr Christopher Maynard (Instructed by Messrs Osbornes) appeared on behalf of the Claimants.
Mr Andrew Arden QC & Miss Kerry Bretherton (Instructed by Southwark Borough Solicitor and Secretary) appeared on behalf of the Defendants
Hearing dates: 14th15th March 2000
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
Mr Justice Lightman:
INTRODUCTION
- These proceedings raise questions of construction of a standard form lease granted by the Defendants, the Mayor and Burgesses of the London Borough of Southwark ("the Council"), to some 6,046 purchasers under the "Right to Buy" provisions of the Housing Act 1985. The Claimants are two of such purchasers. The standard form lease requires the Council to insure and entitles the Council to charge the lessees in respect of premiums paid by the Council. Questions have arisen as to the rights and obligations of the Council and the lessees by reason of the fact that since 1989 the Council has entered into a series of insurance policies which have entitled the Council to discounts and commissions of various kinds (in total of some £1.3 million) and has charged the lessees the full premiums without making any allowance for them. The Council is anxious that an authoritative answer is given to these questions, and it has accordingly agreed to pay the costs of both parties of these proceedings which are (in effect) a test case designed to provide such an answer.
- The Claimants are the joint lessees of a flat known as 31 Yarnfield Square, Clayton Road, London SE15 under a lease dated the 18 th December 1989 ("the Lease") for the term of 125 years from that date. The Lease contains the following material provisions. By clause 2(3)(a) the Claimants covenanted to pay the annual Service Charge. By clause 4(6) the Council covenanted to insure the building of which the flat formed part. The Third Schedule provided as follows:
"
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(1) Before the commencement of each year
the Council shall make a reasonable estimate of the amount which will be payable by the Lessee by way of Service Charge (as hereinafter defined) in that year and shall notify the Lessee of that estimate.
(2) The Lessee shall pay the Council in advance on account of Service Charge the amount of such estimate by equal payments on 1st April 1st July 1st October and 1st January in each year (hereinafter referred to as 'the payment days'.)
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(1) As soon as practicable after the end of each year the Council shall ascertain the Service Charge payable for that year and shall notify the Lessee of the amount thereof.
(2) Such notice shall contain or be accompanied by a summary of the costs incurred by the Council of the kinds referred to in paragraph 7 of this Schedule and state the balance (if any) due under paragraph 5 of this Schedule.
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(1) If the Service Charge for the year
exceeds the amount paid in advance under paragraph 2
of this Schedule the Lessee shall pay the balance thereof to the Council within one month of service of the said notice.
(2) If the amount so paid on advance by the Lessee exceeds the Service Charge for the year (or the apportioned part thereof for the first year hereof) the balance shall be credited against the next advance payment or payments due from the Lessee (or if this lease has then determined be repaid to the Lessee).
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(1) The Service Charge payable by the Lessee shall be a fair proportion of the costs and expenses set out in paragraph 7 of this Schedule incurred in the year.
(2) The Council may adopt any reasonable method of ascertaining the said proportion and may adopt different methods in relation to different items of costs and expenses.
7. The said costs and expenses are all costs and expenses of or incidental to
(3) Insurance under sub-clause (6) of Clause 4 of this lease.
(5) Any insurance against liability to the Lessee or others
(6) The maintenance and management of the building and the estate (but not the maintenance of any other building comprised in the estate).
(7) The employment of any managing agents appointed by the Council in respect of the building or the estate or any part thereof PROVIDED that if no managing agents are so employed then the Council may add the sum of 10% to any of the above items for administration.
13. Money paid under this Schedule to the Council shall become part of the general funds of the Council and shall not be impressed with any trust requiring them to be set aside as a separate fund for any particular purpose."
- The parties have agreed a statement setting out what steps were taken by the Council to insure, and this statement reads as follows:
- "1. From 1 October 1990 to 31 March 1993 the Council sought to comply with the covenant to insure under the Claimants' lease by including the premises in a block insurance policy with Municipal Mutual Insurance Ltd ('MMI'). Under the agreement with MMI, MMI agreed to discount the gross premium payable for the block policy by 33% in consideration of the Council having agreed to maintain the insurance with MMI for at least ten years from 1986. (Prior to that a discount of 36.5% was given in consideration of the Council having agreed to maintain the insurance with MMI for at least five years from 1982). This discount was styled as a 'commission'. It is accepted by the Council that it cannot resist the claim that benefit of this discount should have been passed on the Claimants.
- 2. Between 1993 and 1998 the Council sought to comply with the covenant to insure by including the premises in a block policy with Zurich Insurance Company ('Zurich'). Under the agreement with Zurich, Zurich agreed to discount the gross premium payable for the block policy by 25% in consideration of the Council agreeing to maintain the insurance with Zurich for at least five years.
- 3. By further terms of agreement, signed in 1995 but purporting to take effect from 1993, the Council agreed that of the 25% commission 5% should be attributed to the five-year loyalty bonus and the balance of 20% should be treated as consideration for handling and administration carried out by the Council on behalf of Zurich ('local claims handling').
- 4. For the purpose of this case only it is assumed the average proportion of the gross premium paid taken up by insurance administration costs(including local claims handling) was about 14%".
I shall refer to the further terms of agreement signed in 1995 as "the 1995 Agreement". I should add that the 1995 Agreement authorised the Council to retain the 25% commission and pay only the balance of 75% of the premium to Zurich.
- I am asked by the parties to determine three questions of constriction of the Lease and to determine these questions on the bases (which are agreed for this purpose only) that: (1) the 1995 Agreement is to be treated as valid and effective as between the Council and Zurich and as between the Council and the Claimants; (2) the Council under the Lease owes no fiduciary duty to the Claimants; and (3) the 1995 Agreement (vis-α-vis the Claimants) was a perfectly proper agreement for the Council to enter into.
- The first question is how much of the premium payable to Zurich is the Council entitled to include as a cost or expense in respect of which the Claimants are liable to pay a proportion as part of the Service Charge due from them. It is common ground that the benefit of the 5% loyalty payment should have been passed on to the Claimants. The Claimants contend that the Council should have passed on the balance of the commission (namely the 20%): the Council contend that they were entitled to retain this. It is clear that under the 1995 Agreement the full premium (less the 5% loyalty payment) continued to be payable by the Council for the insurance cover provided, but Zurich agreed to assign to the Council responsibility for local claims handling and to pay to the Council 20% of the premium in return for these services. The insurance premium was not reduced by this arrangement: the full 95% remained payable, but the Council became entitled to pay itself 20% out of the premium as remuneration for the services which it agreed to provide. By clause 4(6) the Council covenanted to insure; by clause 2(3)(a) the Claimants covenanted to pay the Service Charge; and paragraph 7(3) of the 3rd Schedule provided that the Service Charge should include all costs and expenses of and incidental to insurance. It is I think clear that even as the full 95% was the premium payable, so the full 95% was the cost and expense of insurance within the meaning of paragraph 7(3). I recognise that some concern may be felt that the Council has taken advantage of its position as landlord to enter into the 1995 Agreement and to obtain the benefits flowing to it from it. But the Claimants make no complaint in this respect and there is no reason to believe that the lessees have in anywise been prejudiced. In the circumstances I can see no reason why the position should be any different in the case where Zurich's contract for local claims handling is with the Council from the case where Zurich retained the responsibility or employs some other agent to fulfil it. The 20% payment to the Council is not in law or fact a rebate or deduction from the premium payable. It is a payment for services. The Council was accordingly under no obligation to pass it on to the Claimants. The Council is therefore correct in maintaining that it is entitled to retain the 20% and include the full 95% of the premium as a cost and expense a fair proportion of which was chargeable to the Claimants.
- The second question raised is whether, if the Council was obliged to credit the 20% to the Claimants, the Council could nonetheless include the costs and expenses actually incurred in claims handling (which for the year 19978 are for present purposes agreed at £87,805.87) as costs in respect of which the Service Charge is payable. This turns on whether they fall within paragraphs 7(3) and 7(5) of the 3rd Schedule as cost and expenses of and incidental to the provision of insurance. In view of my answer to the first question, this second question does not arise. But I should say that, if it did, I would answer it in the affirmative. For these are the costs of discharging the duties ordinarily assumed by the insurance company in return for the premium as part of its services as insurer. I may add that the cap of 10% in paragraph 7(7) of the 3 rd Schedule could not have any application. Paragraphs 7(3) and 7(5) entitle the Council to the full costs and expenses incurred in respect of insurance: paragraph 7(7) does not purport to cut down that entitlement, but merely provides that (over above reimbursement of costs and expenses incurred) in default of appointment of a managing agent the council is entitled to add in respect of all items of recoverable expenditure an administration charge of 10%.
- The third and final question raises the question as to the rights of the Claimants in respect of overpayments made by them to the Council and in particular overpayments made because the Council has overcharged them by wrongly failing to give credit to the Claimants for the commissions and rebates the benefit of which should have been passed on to the Claimants. The scheme of the Lease is clear. The Council first makes an estimate of the recoverable costs and expenses for the coming year and serves a notice on the Claimants requiring payment of their share; at the end of each year the Council calculate the actual recoverable costs and expenses and of the share which the Claimants in fact should have paid; and in cases when the Council's estimate is too high, provision is made for the Claimants to have credit for the excess against their liability in the succeeding year and (if the credit exceeds their liability in that year) in the next following year. The Lease makes no specific provision for reimbursement by the Council save in the case when the Lease has come to an end. Accordingly (save in case when the Lease has determined) where an overpayment has been made, the Council is under no obligation to repay : it is merely obliged to give credit against sums which subsequently become due as Service Charge until the credit is exhausted. But the obligation is upon the Council to give full credit for the overpayment in the next estimate of Service Charge and to demand no payment to the extent that any liability is covered by the credit. That is the limit of any "running account" between the parties. If the Council does not give credit for the overpayment and the Claimants make full payment of sums demanded without deduction of the credit, the Council is in breach of contract and the Council is contractually bound to make immediate repayment of the sum for which credit should have been given. The liability of the Council to pay, and accordingly the limitation period in respect of such liability begins to run, on the date that the Claimants make any further payment which they were not obliged to pay by reason of the credit to which they were entitled.