England and Wales Lands Tribunal

[2000] EWLands LRX_42_1999 (13 September 2000)

LRX/42/1999

LANDS TRIBUNAL ACT 1949

SERVICE CHARGES – roof repairs – LVT's failure to determine whether costs of repair were reasonable – notional rent for caretaker's flat, other caretaker's costs and bad debt provisions – jurisdiction of LVT – appeal allowed in part. Landlord and Tenant Act 1985 s.19

IN THE MATTER of an APPEAL AGAINST A DECISION of the

LEASEHOLD VALUATION TRIBUNAL for the

SOUTHERN AND SOUTH EASTERN RENT ASSESSMENT PANEL

BETWEEN PAVILION COURT LIMITED Appellant

and

MR. J ALLEN and MR. B P ROGERS Respondents

Re: Pavilion Court, Marine Parade, Folkestone, Kent

Before: P R Francis FRICS

Sitting at: Ashford County Court, Orchard House, Tannery Lane,

Ashford, Kent, TN23 1PL

on 15 August 2000

P J Goodwin, a director of the appellant Company, with leave of the Tribunal.

B P Rogers, one of the two respondents, with leave of the Tribunal.


 


DECISION

1. This was an appeal under s.19 of the Landlord and Tenant Act 1985 ("the 1995 Act"), with leave of the President given on 19 January 2000, against certain elements of a decision of the Leasehold Valuation Tribunal for the Southern and South Eastern Rent Assessment Panel ("LVT") issued on 20 July 1999. It was heard in accordance with the Simplified Procedure provisions (Rule 28, Lands Tribunal Rules 1996). Mr. Peter John Goodwin, who had been appointed a director of Pavilion Court Limited ("the appellant") on 15 January 2000, appeared in place of Dr David Price, another director, who was unavailable but had prepared the appeal documentation and had appeared before the LVT. Mr. B P Rogers of 15 Pavilion Court and Mr. J Allen of 21 Pavilion Court were the respondents, Mr. Rogers appearing on their behalf.
2. Pavilion Court is a development of 102 flats in two adjoining blocks (known as the north and south blocks) occupying a prominent sea-front position in Folkestone. The flats are on four floors and are of brick construction under flat roofs. They are let on long leases (125 years from 24 June 1980) and all but the caretaker's flat are subject to a generic lease. In 1997 the majority of the lessees purchased the freehold, following a period of dissatisfaction with the management. The freehold was vested in the appellant company.
3. The elements of the LVT decision upon which this appeal was based were firstly its failure to determine whether or not the cost of the repairs carried out to the South Block roof was reasonable on the grounds that it had insufficient information regarding the expenditure incurred. Secondly, the LVT's decision that whilst the principle of a charge of rent for the caretakers flat was valid as an element of the service charge, the proposed amount was too high. Thirdly, the determination that the proposed provision for caretaker's costs should be halved and fourthly, its findings in respect of the proposed bad debt provisions.
4. It was agreed that an inspection of the premises would not be of benefit to me in determining the issues, which I now deal with in turn.

Flat Roofs

5. The LVT had decided that there was insufficient information before it, to reach a conclusion as to the reasonableness of the expenditure of £63,000 plus VAT. for the replacement of the roof coverings to the South Block roof. It was the appellant's submission that one of the reasons for the transfer of the original case to the LVT, from the County Court, had been because the presiding Judge believed he did not have the necessary technical skills to be able to reach a conclusion, and the LVT, being a specialist tribunal, should have been able to reach a decision. This was particularly so as the tribunal's chartered surveyor member had seen the property, together with photographic evidence of the work in progress, and had also had the opportunity to question the roofing contractor who was present.
6. In response to a pre-hearing direction from me, the appellant had made available details of the competitive tender process that had taken place in 1997. The process had resulted in the appointment of Challock Developments Limited to undertake the renewal of the roof coverings to the South Block in the sum of £54,100 plus VAT. Mr. Goodwin explained that as the works progressed, inevitably some unforeseen problems arose including the need for repairs to the parapets and renewal of some rainwater goods, which resulted in the final price rising to £63,215 which, when VAT had been added, amounted to a total of £74,277.
7. Mr. Goodwin said that a similar exercise was now being undertaken in respect of the roofs to the North Block, which were now in desperate need of renewal, and following a formal tender process, quotes were currently awaited. He said that, despite the fact Challock Developments had originally priced for the replacement of both roofs (the North Block being quoted at £44,360 plus VAT), there had only been £70,000 in the 'kitty' in 1997, and thus it was not possible to do both.
8. Mr. Rogers said that this was the crux of the respondent's case. If the appellant had not 'borrowed' money from the maintenance fund in order to purchase the freehold, the roof repairs could have been done several years earlier at a resultant considerable saving in cost. He said the roofs to both blocks could have been replaced in 1995 for a 'contribution' from the lessees of £65,000 plus VAT. This was in connection with a plan to replace the flat roofs with pitched ones that would incorporate additional new flats, and therefore the existing lessees would only have had to bear a part of the cost. Following objections, that plan did not proceed, but Mr. Rogers said that the lessees were now paying the price of delay.
9. In response to a question from me, both Mr. Rogers and Mr. Allen (who was also present at the hearing) said that they had no objection to the actual costs that were incurred, and expressed no dissatisfaction with the quality of the repairs. Their argument related to the use of maintenance monies for other purposes, and the delays that had occurred to the repairs being proceeded with as a result.
10. I explained the limitations of this Tribunal's jurisdiction, that the issue being appealed related solely to the LVT's failure to determine the question of 'reasonableness' under s.19 (2A)(a) of the 1985 Act.
11. The question for me to determine is whether or not the costs for the actual repairs were reasonably incurred. On the basis of the additional information provided to this Tribunal, I am satisfied that the costs were reasonable, at the time, for what was done. As to the respondents contentions that there was a considerable delay before the works were executed, resulting in the works costing more, no evidence was produced, such as quotes or costings for the original scheme as described, that would enable me to conclude that there would have been savings, and thus that the proportion by which the actual charges exceeded the original quotes had been unreasonably incurred.

Caretaker's Flat.

12. The LVT decided that the rent payable for the caretaker's flat by the lessees was a proper element of the service charge (as per the Service Charge (Residential Management Code (RICS) 1997 at 8.15), but in its opinion the charge of £4,800 pa exceeded the market rent. An appropriate figure would be £3,900 pa, and thus £900 of the charge was unreasonable. Mr. Goodwin said that it was the appellant's case that the respondents to the LVT hearing did not challenge the magnitude of the rent, and thus it was applying to have that part of the decision struck out.
13. Mr. Rogers said that the notional rent for the caretaker's flat should be part and parcel of the next appeal item – caretaker's costs, and whether or not the magnitude was in question, it should not be shown as a separate levy. In any event, he said that it was evident from the LVT's decision that there was a challenge to the amount of the caretaker's costs, and as in the respondent's view the rent formed a part of those costs, then that element was also being challenged. Not only was the landlord charging £24,000 for caretaker's costs but in addition there was a separate charge of £4,800 (now £3,900) for the notional rent which should be included within the former figure, because to separate them out meant that, effectively, the 'caretaker's costs' being collected were £27,900.
14. The obligation for each lessee to pay 100^th share of the notional rent is not, Mr. Rogers said, provided for in the lease. Also, the LVT had concluded that the rent was 'a proper element of the service charge, subject to the test of reasonableness' and so, whatever the right amount was, if it was correct to charge it, it should form part of the caretaker's costs heading. Notwithstanding the LVT's decision, it was the respondents' view that the charging of a notional rent was illegal as the appellant and the freeholder were one and the same thing. There was no clear distinction between the two, and it appeared that the Company was paying rent to itself.
15. Mr. Goodwin said in response that the obligation for the lessees to pay rent on the caretaker's flat was clearly set out in the lease, (clause 6(h)) and that that rent should be a rack, or market, rent (clause 7(b)). He accepted, however, that the reasons why the rent and other caretaker's costs were separated out in the lease were not clear, and in an effort to achieve total transparency for the future, had arranged an independent audit of the management accounts and would be acting upon recommendations.
16. Firstly, whilst I accept the respondents' submissions that there was a challenge to the charge in respect of the caretaker's flat at the LVT, it is not clear to me whether that was in relation to the validity of the charge, or to the reasonableness thereof. Whichever it was, if such a charge is valid, and at whatever level that charge may be, there is also the question of how it is presented (or where it sits) in the accounts.
17. The following sections of the lease provide the answers:

6. The Company HEREBY COVENANTS with the Tenant that provided that the Tenant shall pay the Specified Proportion the Company will:

(h) Employ and/or retain managing agents surveyors and accountants and such staff (including a porter) as may be reasonably necessary for adequate supervision and performance of the Company's covenants hereunder and if the Company shall deem it desirable to employ the porter upon terms that include the provision of accommodation either within or outside the block to discharge the rent rates and other outgoings attributable thereto.

Clause 1 of the lease sets out the definitions, the relevant parts being:

(e) "The Service Obligations" means the obligation or obligations to provide those services and other things hereinafter covenanted to be so provided by the Company.

(f) "The Service Charge" means the total cost of the service obligations.

(g) "Specified Proportion" means the proportion of the Service Charge specified in part 5 of the Third Schedule the payment of which the Tenant herein covenants to pay such amount to be recoverable by distress or otherwise as rent in arrear.

Part 5 of the Third Schedule states:

THE SPECIFIED PROPORTION: One Hundredth Part (1/100)

Clause 5(c)(i) deals with the tenants obligation to pay:

5. The Tenant HEREBY COVENANTS with the Company and as a separate covenant with the Landlord as follows:

(c) (i) Upon the dates ……….to pay the Company in advance the sum specified in Part 10 of the Third Schedule or such greater sum on account of the Specified Proportion as the Company or its agents may reasonably consider sufficient (together with the proportions paid or payable by the other tenants and by the Landlord under Clause 7(c) hereof) to meet the cost of the Service Obligations for the period until the next due date TOGETHER WITH (if demanded) such further sums as shall be considered reasonable and proper for the purpose of creating and maintaining a Reserve Fund for future anticipated expenditure of a periodical nature which further sums (whilst unexpended) shall be placed in a deposit account and upon the execution hereof to pay to the Company a proportionate part of the initial payment on account of the Specified Proportion calculated from the date hereof until the next due date.

Clause 7(b) states:

7. The Landlord HEREBY COVENANTS with the Tenant as follows:

(b) To ensure that any Lease (other than a Lease at a rack rent) entered into by other tenants in the Block is in substantially similar form to this Lease.

18. It is clear from these clauses that the Company is entitled to employ a caretaker (the parties having agreed that the difference between porter and caretaker in this context is purely a question of semantics), to provide him with accommodation, either within or outside the block, and to discharge rent and other outgoings in connection therewith. Clause 1(e), (f) and (g) define the obligation on the Company to provide services, and the obligation of the Tenant to pay the specified proportion of the total cost of those services. The proportion, at 1/100 is specified in the Third Schedule. Thus, the charge for the notional rent on the caretaker's flat is a valid head of Service Charge expenditure, and the proportion to be collected from each lessee is clearly defined.
19. The question of the amount of rent to be charged to the accounts is not so easily answered. Mr. Goodwin said that clause 7(b) of the lease meant that a rack rent had to be charged. Whether or not that clause can be considered to relate to the rent that may be chargeable on the caretaker's flat is a matter of interpretation, but in this context it matters not. In reality, if the caretaker were to be accommodated elsewhere, a rack rent would be payable, and that cost would be recoverable. If no accommodation were provided, the wages of the caretaker would need to be increased to allow for his accommodation costs, which he would be having to pay at a market rate (and in that instance there would additionally be the employers National Insurance and superannuation costs). If the Company was not providing the flat for the caretaker, it could let it in the open market at a rack rent (indeed, in accordance with clause 7(b) it would be obliged to).
20. It would make no sense, therefore, for the notional rent to be anything other than at rack, or market, rent level. As to the amount determined by the LVT to be reasonable, neither of the parties have adduced evidence to this Tribunal to challenge its decision, and I am therefore unable to find that it was wrong. The LVT's decision will therefore stand, in that the rack rental value of the caretaker's flat was, at the relevant time, £3,900 pa. It will, I suggest, be for the appellant to demonstrate to the lessees, in future years, what the rack rental value is.
21. This leaves the question of why the rent on the caretaker's flat is not included as part of the caretaker's costs. This is purely an accounting matter, and as I indicated to the parties at the hearing, it is not for this Tribunal to make a ruling on that point. On the one hand, it could be argued that by separating out the rental element from the other costs of employing a caretaker (because this is the only 'notional' cost), this is creating the transparency to which Mr. Goodwin referred. On the other, budgeting the notional rent in with all the other caretaker's costs (as proposed by Mr. Rogers) might seem more logical. Although, as I have said, I am not in a position to make a finding on this point it seems to me that being a notional amount, it should be budgeted for, and shown separately from the rest of the costs of employing the caretaker.

Caretaker's Costs.

22. The LVT decided that the provision in the accounts (for 1998/99) should be £12,000 based upon the previous year's costs. It was the appellant's case that the LVT's decision to reduce the provision from the £24,000 proposed effectively precluded the appointment of a caretaker because there would be insufficient funds to defray all his costs. It was not just the caretaker's salary that had to be allowed for, but also the costs of his accommodation (other than the rental which has been dealt with above), cost of holiday and sickness cover and the like. The previous landlord had been charging £19,000 as a budget sum in 1995/96 and so £24,000 was considered to be an appropriate sum now.
23. Mr. Rogers said that the respondents concurred with the LVT's decision, and suggested that if additional costs were incurred they ought to be analysed through the accounts as expense items. It would not be difficult for these costs to be shown in the income and expenditure account under the relevant property and administration costs.
24. I think Mr. Rogers was slightly missing the point. How the analysis of the caretaker's costs is dealt with in the accounts is a matter for the appellant, but it appeared from the discussion on the subject at the hearing that, in the past, the accounts had not been altogether as transparent as they might have been. I welcomed Mr. Goodwin's comments regarding the role of the independent auditor that has been brought in to look at the accounts, and also to advise as to how they might be more effectively presented in the future. In that respect, a more open approach than may have been the case in the past could well go a long way towards preventing future disputes and ultimate references to LVTs. The auditor's appointment had been suggested by the respondents in their submissions to this Tribunal, and I understood from Messrs. Rogers and Allen's comments at the hearing that they welcomed this move. In my view, if there is to be a provision for caretakers costs (and it is this amount that is in question) it would be helpful if those were analysed in the year-end accounts as a separate income and expenditure account, so that comparison between budgeted and actual costs becomes simple.
25. As to the amount of the provision, I do think that the LVT was wrong to set it at such a low figure if the costs allowed for therein are to cover items other than pure wages costs. However, as I indicated at the hearing, I do consider £24,000 to be well in excess of what is required (especially if the flat rent is to be itemised separately). Having said this, the information provided by the appellant was vague, and without carrying out a detailed analysis of previous years' accounts (which were not provided to me), it is difficult to be precise as to the most appropriate figure. Doing the best that I can, I consider that a provision of £15,000 would be sufficient to provide the funds necessary to cover the caretaker's costs (excluding the notional rent element).

Bad debts.

26. The LVT had been unclear as to whether the item in dispute related to existing irrecoverable debts, or as a provision against future anticipated bad debts. It determined that if it were the former, they should be written off, and if the latter, the proposed charge was unreasonable.
27. Mr. Goodwin said it was the appellant's case that past debts have to be provided for as, otherwise, those lessees in arrear effectively get a free ride. Although he was unsure of his facts, Mr. Goodwin said that he thought the Company was providing for past bad debts as well as the costs of recovery. The appellant felt that the mechanism by which bad debts were collected was, in any event, outside the remit of the LVT, despite the comments made by it in a letter of clarification following its decision, that "naturally the Company should strive to recover costs from debtors. If unable to do so, the expenses, if prudently incurred, would have to be met by the maintenance fund".
28. Mr. Rogers said that there was provision in the lease for the enforcement of covenants (which included collection of debts) at Clause 7(d):

7. The Landlord HEREBY COVENANTS with the tenant as follows:

(d) At the reasonable request of and at the expense of the Tenant (security for costs on a full solicitor and client basis having been provided if demanded and the Tenant indemnifying the Landlord against any loss arising) to use its best endeavours to enforce against other tenants in the Block covenants entered into by those tenants similar to those covenants entered into by the Tenant under this Lease.

There was, therefore, no need for a separate provision in the accounts.

29. The LVT had said that if the proposed charge in the accounts was for the recovery of future debts, that was unreasonable, but they did not say what the charge was, and neither of the parties before me have provided that information. Whilst I have some sympathy with the respondents, and agree that Clause 7(d) does create the mechanism for debt recovery, it is not, in my view, unreasonable to budget for anticipated recovery costs, along with any other expenditure allowed for under the Service Charge provisions.
30. As to the amount, the appellant has adduced no evidence to prove that the LVT decision was wrong. The burden in cases such as this, as I have said before, is upon the appellant to prove that the LVT's decision was wrong, and that burden of proof has not been discharged here.
31. In summary, as to the four issues in this appeal, I determine that the charges actually incurred for the roof repairs were reasonable. The rent for the caretaker's flat was a valid charge under the terms of the lease, but as no evidence was presented to me in respect of the LVT's determination of the level of reasonable rent, I have no grounds to determine that its decision was wrong.
32. I determine that the provision for costs of employing the caretaker set by the LVT at £12,000 was unreasonably low, and should be revised to £15,000 for the forthcoming year. Finally, as I have said, no evidence was before me to prove the LVT's decision in respect of the reasonableness of the bad debts provision was wrong, and in that respect it must stand.
33. The appeal is therefore allowed in part. The above decision concludes my determination of the substantive issues in this appeal. The hearing was held in accordance with the Simplified Procedure (Rule 28, Lands Tribunal Rules 1996), and there were, in my judgment, no special circumstances to warrant making an Order for costs.

DATED: 13 September 2000

(Signed:) P R Francis FRICS