England and Wales Lands Tribunal

[2004] EWLands LRX_25_2003 (23 January 2004)

LRX/25/2003

LANDS TRIBUNAL ACT 1949

Landlord And Tenant Act 1985 Sections 18 and 19 – Service Charges – Management fees – whether fee of 15% of service charge is itself a service charge – whether agreement void for purporting to determine reasonableness – jurisdiction of LVT to construe leases.

IN THE MATTER OF AN APPEAL FROM THE DECISION OF THE

LEASEHOLD VALUATION TRIBUNAL

BETWEEN

LONGMINT LIMITED

Appellant

and

RUBIN MARCUS

Respondent

Re:

Flat 2

126 Anerley Road

London SE20 8DL

Before: His Honour Judge Michael Rich QC

Sitting at 48/49 Chancery Lane, London WC2A 1JR

On Thursday 15 January 2004

The following cases are referred to in this decision:

Re 98/100 Crystal Palace Road (LRX/52/1999)

Gilje v Charlegrove Securities Ltd [2001] L & TR125

Stapel v Bellshore Property Investments Ltd (No.1) [2000] CLY 3948

Andrew Bruce, counsel for the e appellant.


 


DECISION

INTRODUCTION

1. This is an appeal by the landlord (whom it is convenient to refer to as such) against that part of a decision of the Leasehold Valuation Tribunal ("LVT") (Chairman Professor J T Farrand QC) dated 17 April 2003, whereby the LVT determined that the management fees, payable as service charge under a lease of Flat 2, 126 Anerley Road, London SE20, for the year 1999 were not reasonable in so far as they exceeded £1,000. The landlord had demanded the sum of £2,087.36 which amount had been incurred by them as due to the managing agent in accordance with para 8 of the third schedule to the lease being 15% of the total service charges.
2. The grounds of the appeal as advanced to the Lands Tribunal were:

"1. The LVT had no jurisdiction to determine the true construction of paragraph 8 of the third schedule to the lease …

2. The LVT erred in construing paragraph 8 of the third schedule to the lease so as to determine the landlord's entitlement to a management fee of just £1,000 in that year, instead of the "£2,087.36 incurred."

3. The application to the LVT for permission to appeal which was referred by the LVT on 5 June 2003 made clear however that

"In essence the grounds given for the application was first, that the Tribunal had no jurisdiction to construe the provisions of the lease as to the Landlord's entitlement to management fees and, second, that the Tribunal had construed the provisions erroneously. In support of the second ground the Appellant cited a decision on appeal to the Lands Tribunal by Mr P R Francis FRICS in relation to 98/100 Crystal Palace Road" (which had not been cited at the hearing).

The LVT refused permission because they said that they had not construed the lease, accepting that they had no jurisdiction to do so, but had construed the definition of "service charge" in s18 of the Landlord and Tenant Act, 1985. The issues which they determined were not, they said, addressed in the Crystal Palace Road decision.

4. This appeal is therefore brought with the permission of the President of the Lands Tribunal given on 15 August 2003. He made two observations in granting permission. Firstly, that the management charge element of the service charge varies not according to the cost of management but according to changes in the service charge costs. That was argued to go to the LVT's jurisdiction. Secondly he said:

"Under s.19(2C)(2) .. no application [under s.19(2A)] may be made to the LVT in respect of a matter that has been agreed by the tenant. As in [the Crystal Palace Road case] the lease in this case embodies an agreement that the management charge should be 15% of certain other charges … there is a strong argument which the decision in 98/100 Crystal Palace Road supports, that the 15% is excluded by s.19(2C)(2) as a matter agreed by the tenant."

5. The respondent to the appeal whilst writing to draw attention to the provisions of s.19(3) of the Act, has elected to take no part in the appeal. Accordingly Mr Andrew Bruce has appeared to present the appeal without opposition. In doing so, he has both been careful to be helpful to the Tribunal and fair in addressing argument to both sides of the issues raised, and the Tribunal is indebted to him.
6. The landlord has, in the absence of any respondents, appealed exclusively on the ground that the LVT had no jurisdiction to review the amount of the management charge. It has not invited the Lands Tribunal to review the LVT's decision as to the amount that they determined to be reasonable.

Construing the lease

7. As will appear from my decision, when I turn to the appeal itself, the jurisdiction of the LVT to make the determination which it did in this case, is dependent not only upon the proper construction of the statutory provisions, but also upon the proper construction of the lease. It has been said by the LVT (London) (Chairman Mr J Goulden ) in Stapel v Bellshore Property Investments Ltd (No.1) [2000] CLY 3948 that the LVT has no power to give a final ruling on the meaning of the terms of a lease. I accept that it has no jurisdiction to make a declaration, and as I said in Gilje v Charlegrove Securities Ltd [2001] L & TR125 at p.192

"I accept that the LVT may well wish to avoid construing a lease as a mere incident to a decision within its own jurisdiction even if doing so is necessary for the purposes of its decision."

I there made a number of suggestions for alternative procedures open either to the LVT or the parties. One of those suggestions namely adjourning the LVT proceedings pending application to the court, is the course followed in the Stapel Case. It is in my judgment however quite wrong for the LVT to decline jurisdiction to construe a lease, if its true construction is determinative of a matter which the LVT has to decide. It may, as a matter of discretion, decline to determine a point of construction, because it is better determined by other means. If however no provision is made or accepted by the parties for such other determination, the LVT, in my judgment, not only has jurisdiction but has a duty to construe the lease in so far as is necessary in order either to determine its own jurisdiction to determine an application made to the LVT under s.19 of the Act, or to determine how it should exercise such jurisdiction as it decides that it has.

The LVT's jurisdiction

8. In this case the landlord had sought to recover from the present tenant certain service charges, said to be due under the lease which was originally granted on 8 November 1988 to Kenneth MacKinnon and Samantha Cailes. It brought an action in the Shoreditch County Court to recover the amounts due in accordance with accounts delivered for the years 1999 to 2001. By s.19(1) of the Act of 1985 however it is provided that:

"Relevant costs shall be taken into account in determining the amount of a service charge payable for a period –

(a) only to the extent that they are reasonably incurred …

and the amount payable shall be limited accordingly."

9. Section 31C of the Act of 1985 provides that:

"(1) Where in any proceedings before a court there falls for determination a question falling within the jurisdiction of a leasehold valuation tribunal under this Act, the Court –

(a) may by order transfer to such a tribunal so much of the proceedings as relate to the determination of that question …."

10. By a consent order in the County Court it was ordered that:

"The claim for service charges shall be transferred to the Leasehold Valuation Tribunal for determination as to their reasonableness."

If it was the landlord's contention that the LVT had no jurisdiction to determine the reasonableness of the management charges in this case, it should not have consented to that transfer, because the county court had jurisdiction to transfer to the LVT only such questions as fell within the LVT's jurisdiction.

11. As however is apparent from the introduction to this decision, the question of the LVT's jurisdiction was raised by the landlord only on appeal from the LVT's decision, and permission has been given for the appeal on such ground.
12. The landlord now therefore contends

(i) that on a proper construction of s.18 the management charges are not service charges within the meaning of that section;

(ii) that if they are, the jurisdiction of the LVT is excluded by section 19(2C) which provides that:

"No application … may be made in respect of a matter which –

(a) has been agreed … by the tenant …"

13. Section 18 of the Act of 1985 defines "service charge" in subsection (1) to mean

"an amount payable by a tenant of a dwelling as part of or in addition to rent –

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

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

By subsection (2)

"The relevant costs are the costs … incurred by or on behalf of the landlord, … in connection with the matters for which the service charge is payable."

14. It seems to me to be obvious that it is only by reference to the lease that it can be determined what is "payable", whether it varies according to the relevant costs, and whether the matters for which it is payable are or are not relevant costs. Often none of these matters is in dispute, but whenever a dispute arises it must be determined by reference not only to the statutory provisions but also to the particular provisions of the lease, and if no other provision has been or is made to resolve such dispute, the LVT must determine it as incidental to its determination under section 19(2A) as to whether there are "costs for services etc which were [not] reasonably incurred."
15. It is, therefore, for that purpose that I turn to the provisions of the lease.

The Lease

16. Clause 2(3) of the lease is a tenant's covenant

"To pay to the landlord the due proportion of all necessary costs charges and expenses from time to time incurred by the landlord in the performance of his obligations specified in the Third Schedule hereto and in the proper management and maintenance of the building…"

17. The third schedule sets out in paragraphs (1) to (7) the various obligations of the landlord in respect of which by clause 3(2) of the lease the landlord covenants

"subject to prompt payment of the additional rents hereby reserved to perform and observe the obligations set out in the Third Schedule hereto…"

18. In fact the only material additional rent reserved is in respect of "the amount the landlord may expend in effecting and maintaining the insurance of the Building in accordance with clause 4 of the Third Schedule."

That is evidently a clerical error for clause 6, and I would so read it. The reddendum adds

"and such sum shall include the Landlord's Managing Agents charge of fifteen per centum (if applicable) hereinafter referred to."

The reference must be to paragraph 8 of the Third Schedule, which is the critical provision in this case, and to which I will come shortly. I refer to this provision, firstly to draw attention to the fact that the additional rents subject to which the landlord covenants to perform the obligations set out in the Third Schedule do not refer to the cost of all such obligations; secondly to note that the obligation whereby the tenant undertakes to pay for insurance is repeated, being both a covenant to pay as additional rent and a covenant to pay under clause 2(3); and thirdly to note that the obligation to pay the Managing Agents charge of 15% is in regard to insurance expressed as "if applicable", thereby, no doubt, indicating that the draftsman accepted that it might not be payable.

19. Paragraphs (1) to (7) of the Third Schedule are obligations to repair, to observe regulations in respect of use of unlet parts, to pay taxes, to decorate the external parts, to clean and light the common parts, to insure and to maintain wireless and television aerials. Paragraph (8) does not contain any similar obligation. It is as follows:

"The Landlord shall cause an account to be taken on the first day of January in each year … which shall incorporate the reasonable administration costs and expenses of the Landlord's Managing Agents' charges of fifteen per centum and all costs charges and expenses properly incurred by the Landlord carrying out his obligation under the terms of this Lease … PROVIDED THAT in the event of the tenant failing to make such payment within the period of twenty eight days from the date that such payment shall become due … such payment shall bear interest at a rate specified in clause 2(8) of the Lease until the same shall have been paid."

Clause 2(8) of the lease provides for interest on payment of the costs of repairs undertaken by the landlord on the tenant's default.

20. Mr Bruce accepts that this paragraph is badly drafted. It does not say 15% of what, but presumably means of the costs of complying with paragraphs (1) to (7) of the Schedule. He accepted in the course of the hearing that the grammatical construction has clearly broken down, but accepted that sense would be achieved by substituting for "of" after "charges" the word "being" and replacing the word "and" after "centum" with "of". The effect is then that "the Landlords Managing Agents' charges of 15%…" has the function of a definition of "reasonable administration costs and expenses," which the tenant covenants to pay under Clause 2(3) of the lease as "reasonable costs charges and expenses … incurred … in the proper management and maintenance of the building." In my judgment that is the true meaning of the paragraph and it must be so construed.
21. Paragraphs (8) to (11) of the Third Schedule are not obligations of the landlord save as to the mechanism of delivering the accounts. Their functions is to provide the triggers to the tenant's obligation to pay what he has already covenanted to pay in Clause 2(3). Paragraph 10 requires the tenant to pay "within 28 days of receipt of the … account … such sum as is due." Paragraph (11) provides for an advance payment by the tenant.
22. Thus I hold that on its true construction, the amount payable under Clause 2(3) of the lease is the sum of:

(i) the reasonable costs … incurred by the landlord in performance of his obligations specified in the Third Schedule (which I shall call 'Third Schedule costs') and

(ii) the reasonable costs charges and expenses incurred by the landlord in the proper management and maintenance of the Building which are referred to in paragraph 8 of the Third Schedule as 'the reasonable administration costs and expenses' and are there defined as 'the Landlord's Managing Agents' charge of 15%' of all costs charges and expenses previously incurred by the Landlord carrying out his obligation under the terms of the lease [i.e. the reasonable costs referred to under (i)].

I will refer to the sum claimed under (ii) as "management charges".

Whether Management Charges are Service Charges

23. Clause 2(3) of the lease provides for an amount to be payable in addition to rent, which is payable for services, repairs, maintenance or insurance or the landlord's costs of maintenance. There is no issue that at least part of that amount "varies according to the 'relevant costs', being the costs incurred … in connection with the matters for which the service charge is payable." In my judgment even it was right that some part of that amount was not so varied, it would not take the amount payable under clause 2(3) out of the definition of service charge. As I read s.18(1)(b) of the Act, it is sufficient if part varies according to relevant costs, the reference to 'part' being to extend rather than to restrict the scope of the definition.
24. In giving permission to appeal, the President appears to have treated it as, at least, arguable that if part of the amount is not variable according to the amount incurred in connection with the matters in respect of which that part is payable, then that part is not a service charge for the purposes of section 19. Mr Bruce submits that such restrictive construction is the right construction of the section. It does not seem to me that such is the necessary literal construction of the words, and since it would be contrary to any reasonable purposive construction, I reject it.
25. Even, however, if I were wrong, it does seem to me that the management charges do vary according to the cost incurred in connection with management. It is of course right that the Managing Agents' charge is to be 15% of the Third Schedule costs, which themselves vary according to the cost of complying with the obligations in the Third Schedule. But, as Mr Bruce accepts, the liability to pay the management costs arises only if they are incurred. The percentage of the Third Schedule costs determines the amount of the management costs, but that then is the cost of management for the year, and the amount payable to the landlord varies according to the cost of management so determined.
26. In my judgment therefore, the management costs fall within the definition of service charges for the purpose of s.19 of the Act, whichever way s.18 falls to be construed.

Exclusion by agreement

27. Mr Bruce's alternative submission is that the LVT's jurisdiction is excluded by s.19(2C) which provides that no application to determine the reasonableness of a service charge "which (a) has been agreed … by the tenant", may be made. It is said that the words of paragraph 8 of the Third Schedule constitute an agreement by the tenant to pay 15% of the Third Schedule of costs by way of management charges. I confess to some difficulty in construing the acceptance of the assignment of a lease containing a provision to a pay a fixed proportion of the Third Schedule costs as a management charge, as an agreement by the incoming tenant that such sum is reasonable. For the purposes of argument however, I have accepted that the tenant in this case has agreed to pay 15% of such costs as management fees.
28. Such agreement has however to be unravelled from the language of paragraph 8, which is for the incorporation into the account of "reasonable administration costs and expenses" which are then defined as 15% of the Third Schedule of costs. If that is, indeed, an agreement, it is, in my judgment, one that "purports to provide for a determination in a particular manner… of [the] question (a) whether costs incurred for … management were reasonably incurred" and is therefore void by reason of section 19(3) of the Act.
29. Mr Bruce urged on me that s.19(3) was directed against "the commonly found provision in leases of dwellings for certification of the amount of the service charge by the landlord's surveyor or accountant" (see Woodfall para 7.195). I accept that that was probably the chief mischief at which the sub-section is aimed, although the phrase "determined … on particular evidence" is more directly aimed at such certification. The words of the sub-section seem to me however, to be clear and comprehensive. The lease calls for the determination of the reasonable costs by the application of arithmetic. Had it provided for the payment of an extra 15% of costs as part of the rent rather than as a definition of reasonable costs recoverable under clause 2(3) of the lease, the sub-section might well have had no application. Once however the meaning of paragraph (8) has been teased out in the way in which I have recorded in this decision, its effect follows and, in my judgment, s.19(3) renders it void in so far as it purports to determine the issue , which, on the merits, the LVT has determined against the landlord in one year out of three.
30. It follows that this appeal must be dismissed.

The Crystal Palace Road Decision

31. I have not thought it necessary to refer further to Mr Francis' Decision in the case to which reference was made in the application for permission to appeal, because, as I have endeavoured to make clear, the application of the Act is absolutely dependent upon the terms of the lease to which it is applied.
32. In Re 98/100 Crystal Palace Road (LRX/52/1999) Mr Francis FRICS determined an appeal by the same landlord as now appears before me, also represented by Mr Bruce without any appearance by any of the respondents. The LVT had held that under the terms of the lease in that case, a management fee could be charged on top of the costs of the Service Obligations only where the carrying out of the particular obligation involved an element of management. Mr Francis concluded at paragraph 23 of his Decision that

"to conclude … that no management fees at all should be charged on the cost of the major works or the surveyor's fees amounts, … to a misinterpretation of clause 1(d) of the lease",

and for that reason allowed the appeal. He had recorded at paragraph 18 of his Decision that

"the question was not whether the charges for the works, or the surveyor's fees relating thereto, were reasonable – there being no issue between the parties in that regard, but purely whether the landlord was entitled to a fee in respect of those elements of the Service Obligations."

33. Although on a quick reading of the Decision it does appear to uphold the fixing of a 15% management charge as being unchallengeable before the LVT, it is clear on proper analysis that the LVT was right in this case to conclude that the Decision determined nothing contrary to their decision in this case. It is not therefore necessary or proper for me to comment upon it further.

Dated 23 January 2004

(Signed) His Honour Judge Michael Rich QC