England and Wales Lands Tribunal

Rigby v Wheatley [2005] EWLands LRX_84_2004 (30 June 2005)

LRX/84/2004

LANDS TRIBUNAL ACT 1949

SERVICE CHARGE – insurance rent – fair proportion of cost of insurance payable by tenant – fair proportion to be determined by the landlord's surveyor – demands issued at figures not determined by landlord's surveyor held to be invalid and not payable – appeal allowed – Landlord and Tenant Act 1985, ss18(1) and 27A

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF A LEASEHOLD VALUATION TRIBUNAL OF THE LONDON RENT ASSESSMENT PANEL

BETWEEN LIONEL RIGBY Appellant

and

MICHAEL JOHN WHEATLEY Respondent

Re: Flat 8 & Garage 8

Moray House

Rickmansworth Road

Northwood

Middlesex HA6 2QT

Before: P H Clarke FRICS

Sitting at Procession House, 110 New Bridge Street, London EC4V 6JL

on 17 June 2005

The following cases are referred to in this decision:

Jervis v Harris [1996] 1 All ER 303

Concorde Graphics Limited v Andromeda Investments SA [1983] 1 EGLR 53

Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896

Finchbourne Limited v Rodrigues [1976] 3 All ER 581

CIN Properties Limited v Barclays Bank [1986] 1 EGLR 59

Yorkbrook Investments Limited v Batten [1985] 2 EGLR 100

J E Kennedy, solicitor, J E Kennedy & Co, for the appellant

T C Dutton of counsel for the respondent


 


DECISION

1. This is an appeal by the tenant of a flat and garage from part of the decision of a leasehold valuation tribunal determining the liability for, and reasonableness of, insurance premiums for the years 2000-04.
2. J E Kennedy, solicitor, appeared for the appellant; T.C. Dutton, of counsel, appeared for the respondent.

Facts

3. The property which is the subject of this appeal, Moray House, Rickmansworth Road, Northwood, Middlesex, is a three and four-storey block of ten flats with five integral garages and eight rear garages in a separate block. The flats are set back from a busy road with access along a carriage drive. They were built some 40 years ago.
4. The appellant, Lionel Rigby, is the tenant of the Flat 8 and Garage 8, Moray House. The respondent, Michael John Wheatley, is the freehold owner of Moray House and is Mr Rigby's landlord. There is a residents association, Moray House Residents Association. Each tenant is a member of this Association with one share.
5. Mr Rigby holds Flat 8 and Garage 8 under a lease dated 10 March 1975 originally granted for 99 years from 25 March 1974 and extended by a deed of variation dated 12 November 1999 to a term of 124 years from the original commencement date. Mr Rigby purchased the lease in 1999. For the purposes of this appeal it is only necessary to look at the provisions regarding insurance. Under clause 1, in addition to a ground rent, the tenant is required to pay "by way of further rent a fair proportion (to be determined by the Lessor's Surveyor for the time being) of the amount from time to time expended by the Lessor in insuring all the buildings on the Estate in pursuance of the Lessor's covenant." This covenant (clause 6(vi)) requires the landlord to insure the buildings against loss or damage by fire, lightning, storm and other specified risks to the full value, including two years loss of rent and fees, in the specified or a nominated company through the agency of the landlord. The names of the tenant, his mortgagees and the residents association are to be included on the policy if requested. The landlord is required to utilise the insurance monies to rebuild or reinstate the buildings.
6. On 30 March 2004 Mr Rigby made application to the leasehold valuation tribunal of the London Rent Assessment Panel (the LVT) under section 27A of the Landlord and Tenant Act 1985 (the 1985 Act) for determinations regarding payments and amounts of a service charge and an application under section 20C of the 1985 Act to limit the landlord's costs of the proceedings. Following a hearing on 23 and 24 August 2004 the LVT gave a decision on 24 September 2004 dealing with: the liability and reasonableness of insurance premiums for the years 2000 to 2004; liability for the repair of the rear garage block; the application for reimbursement of the application and hearing fees; and the application for costs.
7. This appeal is solely concern with insurance. The decision of the LVT on this issue may be summarised as follows:-

(i) the insurance premiums for 2000-2004 are relevant and reasonably incurred and properly chargeable to the service charge account (para 24);

(ii) the determination by the landlord's surveyor of a fair proportion of insurance costs payable by the tenant is not a condition precedent to the tenant's obligation to pay the insurance rent (paras 29 and 30);

(iii) the insurance for the separate garage block should not be stripped from the costs of insurance for the block of flats and, on a broad brush approach, each tenant should pay one-ninth of the cost of the annual insurance premium for 2000-2004 (paras 31-34);

(iv) these determinations are limited to the years in dispute and the parties are free to revert to the lease terms and to instruct a surveyor to determine the apportionment for future years (para 35).

8. On 13 October 2004 Mr Rigby sought permission from the LVT to appeal to this Tribunal. This was refused on 16 November 2004. On 1 December 2004 Mr Rigby applied to this Tribunal for permission to appeal solely in respect of insurance (the LVT decision in paras 24, 31, 34 and 35). This was granted by the President on 17 February 2005. In granting permission he stayed the appeal for 28 days to enable Mr Wheatley to arrange for his surveyor to make the necessary determination as to the apportionment of the insurance premiums and for the parties to reach agreement on the basis of that determination. On 14 March 2005 Mr P L Glover FRICS MCIArb sent to Mr Wheatley on his instructions a letter regarding insurance which included his calculation of a fair proportion for each flat of the amount expended by the lessor in insuring all the buildings on the estate. Mr Glover's figure for the appellant's flat and garage (11.53%) differed slightly from the LVT's determination (11.1%). On 16 and 17 March 2005 Mr Wheatley wrote to all residents of Moray House regarding insurance with a copy of Mr Glover's letter. The parties to this appeal have not reached agreement.

Appellant's case

9. Mr Kennedy said that the insurance question which the LVT were asked to determine was whether the four demands for the years 2000-2004 were invalid and thus not payable under the lease and under section 27A(1) of the 1985 Act. The LVT wrongly construed the lease as granting a right to recover damages rather than a claim for recovery of a debt, as the wording suggests. Such clauses are common and their status was considered in Jervis v Harris [1996] 1 All ER 303.
10. For the respondent to recover his insurance expenditure under the lease he is required to do two things. First, he must obtain the determination of his surveyor; second, he must demand what is due. This construction of the lease is the inevitable consequence of the observations of Millett LJ in Jervis at 307A-308C. Until a demand is supported by a surveyor's determination it is not payable by the tenant. It is not agreed that Mr Wheatley's letters of 16 and 17 March 2005 are demands for insurance rent.
11. The insurance rent is a service charge under section 18(1) of the 1985 Act and, by virtue of section 27A, the LVT had jurisdiction to determine whether a service charge is payable and, if so, to consider the five matters under section 27A(1). The LVT found that the respondent had never instructed a surveyor to determine the insurance proportions payable by the tenants and the respondent's statement (through his solicitor) that he had obtained a surveyor's determination was untrue. He has not appealed these findings. The LVT nevertheless decided that they could determine the insurance proportions by a broad brush approach. In giving permission to appeal the Lands Tribunal found the LVT to have been in error and suggested that the surveyor's determination be now obtained so as to give rise to liability on the part of the tenant.
12. Following permission to appeal the respondent obtained the determination of a surveyor dated 14 March 2005. This showed that the appellant should pay fractionally more than he would have been liable to pay under the LVT's approach. For present purposes the appellant accepts the landlord's surveyor's determination. This should hold good for some time in the future. Not one calculation out of the ten has been found to be correct. It has to be realised that these are service charges under a strict regime (see sections 21(6) and 25 of the 1985 Act and the new section 21, soon to be brought into effect). It is therefore as well to adopt a system of insurance apportionment that is capable of meeting as nearly as possible the exactitude called for by the lease. In its scientific presentation of all relevant and material matters, the surveyor's determination of 14 March 2005 appears adequately to answer that requirement.
13. In the permission to appeal it is suggested that the mere issue of the surveyor's determination may be sufficient to give rise to liability on the part of the tenant. But this determination would not have been available to the LVT and it is not open to the Lands Tribunal to make any order by reference thereto, except the one implicit in the permission to appeal, that the insurance demands were invalid. This is supported by section 175(4) of the Commonhold and Leasehold Reform Act 2002 (the 2002 Act). It has been noted by the respondent that the appellant would appear to be only £50 worse off over four years under the new determination. But de minimis considerations are not ordinarily applicable in service charge disputes (see Yorkbrook Investments Limited v Batten [1985] 2 EGLR 100 at 102K). It should not apply here. The appellant is justified in insisting upon strict compliance with the lease. The service charge legislation gives him the right to accurate accounts. This appeal is made to establish the principle that the landlord must demand an insurance rent at the fair proportion determined by his surveyor.
14. The establishment of liability is a two-stage process – determination by a surveyor and then the demand – and there is a separation of years between the demands and the later determination. In making his determination the surveyor is not holding the ring between the tenants and the landlord (ie setting a dispute) but making a prior determination before liability can arise. Furthermore, the respondent has declined to issue any proper replacement demands, faced with the appellant's prospective plea under section 20B of the 1985 Act in relation to the excess. In the absence of any further demands, however, there is no reason for the Lands Tribunal to become exercised in any further aspect of this matter when the only relief claimed is the declaration of invalidity sought by the appellant's notice dated 2 July 2004 in the LVT proceedings, as now varied by a draft order in this appeal.
15. Mr Kennedy referred to the respondent's offer of settlement dated 11 April 2005 (following permission to appeal) and subsequent correspondence between the parties which has failed to resolve the appeal. The only remaining action required by the Lands Tribunal is that there should be a declaration that the insurance rent demands for 2000 to 2004 are invalid, as claimed by the appellant's notice to the respondent dated 2 July 2004 and that, in accordance with the subsequent draft order, none of those demands is, or was, payable within the meaning of section 27A of the 1985 Act. There are no other issues between the parties and there cannot be unless (and until) the respondent serves further replacement insurance demands for the above period.

Respondent's case

16. Mr Dutton said that on the true construction of the lease a fair proportion of the cost of insurance is due, whether or not a surveyor has identified that proportion. The LVT found that there had never been a determination by the landlord's surveyor and were entitled to impose their own views of what a fair proportion might be. If the LVT were not so entitled, the issue as to the amount due was determined on 14 March 2005 by the landlord's surveyor and demands were sent to the appellant on 16 and 17 March.
17. The LVT decided that the appellant's obligation to contribute a proportion of the cost of insurance is not conditional upon a determination as to the size of that contribution (paras 29 and 30). The lease permits the landlord to make a valid demand for insurance even though there may not yet have been a determination. If the landlord makes a demand at an incorrect figure (ie if the surveyor subsequently determines a different proportion) then that may sound in damages.
18. The critical issue of law in this appeal concerns the meaning and effect of the insurance rent provision in the appellant's lease. The crucial words are: "a fair proportion (to be determined by the Lessor's Surveyor for the time being)." This provision is not the same as one that requires the proportion to be "the proportion determined by the Lessor's Surveyor (acting fairly)". The lease makes it clear that what is to be paid is "a fair proportion" but it also makes it clear that any determination is to be by the landlord's surveyor for the time being, ie the person who is the landlord's surveyor at the relevant time. This might be: when the landlord incurs the costs of insurance, or disburses that cost, or the landlord's accounting period, or the time of the demand to the tenant, or the time for payment. The most natural way of interpreting the expression "Lessor's Surveyor for the time being" is to say that it refers to the person who is the lessor's surveyor at the time when he is asked to make the determination. This strongly suggests that the relevant point of time may be any of the times identified above.
19. The reservation of the insurance rent works as follows. The tenant is required to pay to the landlord a fair proportion within seven days. This obligation is independent of any determination by the landlord's surveyor: his task is to place a figure on the "fair proportion" payable by the tenant. It does not make commercial sense to construe the insurance rent provision to require the landlord to obtain a surveyor's determination every year. There is no provision in the lease for recovery of the cost of that determination. If the landlord demands a sum which does not represent a fair proportion, then one tenant may be asked to pay too much and another tenant too little. It is in the landlord's interest to ensure that he demands a fair proportion. If any tenant believes that his proportion is not such a fair proportion then he may demand that the landlord's surveyor identify what is fair. The surveyor is, in essence, holding the ring between the tenants (see Concorde Graphics Limited v Andromeda Investments SA [1983] 1 EGLR 53).
20. Section 27A of the 1985 Act entitles the LVT to determine whether a service charge is "payable" and the date by which it is payable. This entitles the tribunal to make determinations in respect of sums which are contingently due. Even if the LVT's decision is wrong, that does not entitle the appellant to a determination that nothing is due in respect of those years' insurance. It merely allows a determination to the effect that a sum is contingently due, that the amount is the appellant's fair proportion of the insurance costs and that liability is contingent on two matters, ie a determination of what that proportion might be (now made by the letter of 14 March 2005) and the making of a demand (now made by the letters of 16 and 17 March 2005).
21. This appeal concerns an arid point which has little (if any) practical consequences to the parties; the appellant will only be £50 worse off (excluding interest and legal costs). The LVT were right to say that insurance rents were due and payable by the appellant. The question whether the LVT were able to impose their own view of what a fair proportion might be turns on whether the parties to the lease conferred upon the landlord's surveyor an exclusive power to determine the fair proportion. If the surveyor is not given an exclusive power, then it was open to the LVT to say what is fair. If the surveyor is given an exclusive power, then that power has been exercised and the proportions are now known and demands based on the determination of 14 March 2005 were subsequently made on 16 and 17 March. Either way the sums identified in the LVT's decision are due. If the LVT were wrong to impose their own view of the fair proportion then that figure needs to be increased by £76.03 (the additional sum demanded from Mr Rigby by the letters of 16 and 17 March).
22. The appeal should be wholly dismissed. There could be a middle way between dismissing and allowing the appeal, that is to determine that the LVT were right in their interpretation of the lease but wrong to put their own figure on the fair proportion payable.

Discussion

23. This appeal is concerned with the meaning and effect of part of clause 1 of the lease of the appellant's flat which requires the tenant to pay a fair proportion (to be determined by the landlord's surveyor for the time being) of the amount expended by the landlord in insuring the buildings on the estate. I look first at the relevant statutory provisions.
24. Section 27A(1) of the 1985 Act provides as follows:-

"An application may be made to a leasehold valuation tribunal for a determination whether a service charge is payable and, if it is, as to –

(a) the person by whom it is payable,

(b) the person to whom it is payable,

(c) the amount which is payable,

(d) the date at or by which it is payable, and

(e) the manner in which it is payable."

Under subsection (2) these provisions apply whether or not any payment has been made and under subsection (5) payment by a tenant (as in this case) is not to be taken as an agreement or admission, which, by subsection (4)(a), would have prevented application to an LVT under subsection (1). Section 175(1)-(3) of the 2002 Act give a right of appeal to the Lands Tribunal (with permission) and subsections (4) and (5) provide that this Tribunal may exercise "any power which was available to the" LVT and allow a decision of the Lands Tribunal "to be enforced in the same way as a decision of the" LVT. Thus, in service charge disputes, the initial tribunal is the LVT, with a right of appeal to the Lands Tribunal (with permission). On appeal this Tribunal has the same powers as the LVT and its decision may be enforced in the same way as an LVT decision.

25. Section 27A of the 1985 Act allows an application to be made "for a determination whether a service charge is payable". The term "service charge" is defined in section 18(1) of the Act in terms which are wide enough to include the insurance rent in this appeal. Section 18(1) provides as follows:-

"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 improvements 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."

26. The appellant seeks a determination that the four insurance demands for the period 2000-2001 to 2003-2004 are invalid and that none of the demands was, or is, payable under section 27A of the 1985 Act. As I have said this determination rests on the meaning and effect of the insurance rent provision in clause 1 of the appellant's lease. Before looking at these matters, however, it is necessary to refer in a little more detail to the material facts underlying this appeal.
27. The four insurance demands are dated 5 May 2000 (for 2000-01), 1 June 2001 (for 2001-02), 25 June 2005 (for 2002-03) and 27 May 2003 (for 2003-04) and are for varying amounts, £329, £345.45, £398.44 and £455.13. All refer to Flat 8 at Moray House and were sent by Mr Wheatley (the landlord and respondent) to Mr Rigby (the tenant and appellant). None of the demands state how the sum has been calculated and, in particular, none refer to any determination by the lessor's surveyor. The amounts claimed have been paid.
28. I consider next the parts of the LVT decision under appeal. In para 15 the tribunal set out the questions raised by the appellant (Mr Rigby) but did not refer to the invalidity point which is the central issue in this appeal, although it is set out in some detail in a notice dated 2 July 2004 sent to Mr Wheatley by Mr Rigby's solicitors. The tribunal then referred to the evidence (paras 16-20) and clause 6(vi) of the lease (the landlord's covenant to insure) (para 21) and in paras 22 and 23 made some general comments, including criticisms of Mr Wheatley for not supplying information to the tenants. Para 24 is the first paragraph under appeal. The LVT determined that the insurance premiums for 2000-2004 "are relevant and reasonably incurred and properly chargeable to the service charge account."
29. The tribunal then considered the question of apportionment. In para 25 the tribunal set out the provisions for the payment of insurance rent and in paras 26-28 they summarised the evidence and submissions, including that relating to apportionment (which I consider in more detail below) and Mr Rigby's submission that the insurance demands were invalid in the absence of a determination by the landlord's surveyor. The tribunal referred very briefly to a decision of the House of Lords in 1978 (para 29) and then gave their reasons for rejecting the invalidity point (para 30):-

"In this case, it has been admitted by the Respondents that there has been a breach of the lease. In the view of this Tribunal if, on the pertinent facts, there is a loss, this can be remedied by damages (if appropriate) rather than such a breach being considered a condition precedent which would allow all the tenants to obtain a refund of all the insurance premiums paid for the service charge years in dispute. The Tribunal considers that if this had been the intention of the parties when the leases were drawn up, the wording would have gone much further and been more mandatory. The Tribunal would have expected the clause to have made it plain that unless a surveyor's determination had been made, the landlord would lose his right to demand payment of the insurance premium. The clause is not framed as a condition precedent. The provision in the lease merely refers to a determination and not, for example a certificate to be issued. Can it really be the case that if no determination is made by the landlord's surveyor, the parties to the original leases (which have not been varied in this respect) could have intended that no insurance premiums could be demanded? The Tribunal rejects this contention."

The tribunal then made its own apportionment, concluding that each tenant should pay one-ninth of the annual insurance premiums for 2000-2004 (paras 31-34) with the comment that these determinations are limited to the years in dispute and that the parties are free to revert to the lease terms and instruct a surveyor to determine the apportionment for future years (paras 35).

30. In giving permission to appeal on 17 February 2005 the President of this Tribunal made the following observations:-

"The LVT appears to have been in error, firstly, in concluding that there could be a liability to pay an amount in respect of insurance premiums in the absence of a determination by the lessor's surveyor of the fair proportion, and, secondly, in itself determining what proportion of the annual premium each tenant should pay."

He then stayed the appeal for 28 days on the grounds that the amount in issue is small and "there appears to me to be no reason why the fair proportion should not now be determined by the lessor's surveyor so as to give rise to liability on the part of the lessee." He reminded the parties of the Tribunal's power to award costs if agreement cannot be reached.

31. On 14 March 2005 the respondent landlord obtained a letter from a surveyor regarding insurance which included an apportionment of the premium which differed from the LVT's apportionment. On 16 and 17 March 2005 Mr Wheatley wrote to all residents in Moray House referring to this revised apportionment. Mr Dutton submitted that these letters were demands for insurance rent under the lease. This was disputed by Mr Kennedy.
32. Against this background there are three issues for my determination. First, what is the true construction of the provision in clause 1 of the appellant's lease which requires the payment of an insurance rent? Second, were the insurance contributions in the landlord's demands made in May and June 2000, 2001, 2002 and 2003 based on a fair proportion of the landlord's expenditure on insurance as determined by the landlord's surveyor? Third, if not, what is the effect of the failure by the landlord to comply with the requirements of the lease?
33. I look first at the true construction of the insurance rent provision. The general considerations applicable to the interpretation of contractual documents are set out in Lord Hoffmann's speech in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896. I need not refer to the whole of this guidance but draw attention to the following remarks (at 912F-913E):-

"But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, …., is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows:

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) ….

(3) ….

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean…

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. …"

34. The insurance rent provision in the appellant's lease requires the tenant to pay:-

"SECONDLY by way of further rent a fair proportion (to be determined by the Lessor's Surveyor for the time being) of the amount from time to time expended by the Lessor in insuring all the buildings on the Estate in pursuance of the Lessor's covenant hereinafter contained such sum to be paid within seven days after demand"

How is that provision to be interpreted in the light of the above guidance? What meaning would it convey to a reasonable person "according to the common sense principles by which any serious utterance would be interpreted in ordinary life"?

35. In my judgment, the insurance rent provision is clear and unambiguous. It has two parts. First, the landlord is required to serve on the tenant a demand for further rent equal to a fair proportion of the premium paid by the landlord for insuring the buildings on the estate, of which the tenants' flat and garage form part. This fair proportion is to be determined (ie calculated or decided or fixed) by the landlord's surveyor for the time being. Second, upon receipt of such a demand the tenant is required to pay the amount demanded within seven days. Thus, a demand in the required form, containing a surveyor's determination of the fair proportion payable by the tenant, is a condition precedent to the tenant's obligation to pay the insurance rent. This determination is an essential part of the landlord's request for further rent and cannot be disregarded if the demand is to have effect. I believe this to have been the intention of the parties when the lease was granted. The requirement of a surveyor's determination is to protect the tenant from incorrect or arbitrary demands by placing the calculation in the hands of an independent and professional third party.
36. I reject Mr Dutton's submission that the demand for insurance rent exists independently of the surveyor's determination and that it can be made after the demand when a dispute arises. It is not the function of the landlord's surveyor to settle disputes (as it was in the Concorde case) but to give an expert and objective opinion as to the fair proportion payable by each tenant before a demand is made. This is a task given exclusively to the surveyor. Furthermore, I cannot accept Mr Dutton's argument that an annual determination does not make commercial sense due to the cost imposed on the landlord. Unlike the cost of reinstatement the fair proportion of insurance costs payable by each tenant is likely to remain constant for many years, in the absence of alterations or rebuilding. The initial calculation will no doubt give rise to a fee but thereafter the surveyor's determination will require merely a check and brief confirmation at negligible cost.
37. In my experience the certification or determination of varying expenditure by a third party, surveyor or accountant, is a common feature of modern leases. In Woodfall, Law of Landlord and Tenant (at para 7-180) it is stated that certification of a service charge will usually be a condition precedent to the tenant's liability to pay the charge. In Finchbourne Limited v Rodrigues [1976] 3 All ER 581, the lease of a flat required the tenant to pay a contribution towards maintenance etc, that contribution to be ascertained and certified by managing agents acting as experts and not as arbitrators. Certificates were issued by managing agents who were controlled by the owners of the flats. The Court of Appeal found these certificate to be invalid on the grounds that the certifying managing agents were intended to be persons other than the landlords. In the county court, the judge was asked whether the issue of a valid certificate was a condition precedent to the recovery of service charges under the lease. He replied: "Of course the answer is Yes. Otherwise the tenants could not know what sums they had to pay" (at 585c). This finding was not challenged on appeal and was referred to in CIN Properties Limited v Barclays Bank [1986] 1 EGLR 59, where Oliver LJ said (at 61D):-

"… in Finchbourne … it was held that under a covenant … for the payment of service charges to be certified by the landlord's managing agent, the issue of a proper and valid certificate was a precondition to any liability, since it was only thus that the extent of any liability could be quantified."

In CIN Properties the Court of Appeal held that a proviso in a lease, requiring the landlords to submit to the tenants estimates or orders for repairs for approval before acceptance, was a condition precedent to the tenants' liability under the lease to contribute towards the cost of repairs.

38. An interpretation of the insurance rent provision, as subject to a requirement of independent determination before liability arises, is consistent with the legislation which has become more onerous as to certification, eg section 21(c) of the 1985 Act (certification of service charge costs to be by a qualified accountant) and 25 (summary offence to fail to comply with duties under sections 21 to 23).
39. In my judgment the decision of the LVT contained in para 30 of their decision is wrong. The tribunal gave three reasons for their conclusion that a surveyor's determination is a not a condition precedent to the tenant's liability to pay the insurance rent. First, they said that it had been admitted by Mr Wheatley that there has been a breach of the lease, but this can be remedied by damages and not by refusal of the insurance premiums. This is an incorrect analysis of the position. The tribunal confused debt with damages. I was referred to the decision in Jervis v Harris [1996] 1 All ER 307, where the Court of Appeal held that the failure by a tenant to repair, where the lease expressly gave the landlord the right to carry out repairs and recover the costs, gave rise to a claim for debt when the landlord exercised that right, and not to a claim for damages for breach of the tenant's covenant to repair. Millett LJ said (at 307h):-

"The short answer to the question is that the tenant's liability to reimburse the landlord for his expenditure on repairs is not a liability in damages for breach of his repairing covenant at all. The landlord's claim sounds in debt not damages; and it is not a claim to compensation for breach of the tenant's covenant to repair, but for reimbursement of sums actually spent by the landlord in carrying out repairs himself. I shall expand on each of these distinction in turn.

The law of contract draws a clear distinction between a claim for payment of a debt and a claim for damages for breach of contract. … a debt is a definite sum of money fixed by the agreement of the parties as payable by one party to the other in return for the performance of the specified obligation by the other party or on the occurrence of some specified event or condition; whereas damages may be claimed from a party who has broken his primary contractual obligation in some way other than by failure to pay such a debt."

40. Second, the LVT said that the wording of the lease would have gone further and have been more mandatory if it had been the intention of the parties that the surveyor's determination should be a condition precedent allowing a refund of premiums. The LVT would have expected the clause to have made it plain that, unless a surveyor's determination had been made, the landlord would lose his right to demand the premiums. I cannot accept this reason. In my experience, parties to an agreement do not usually set out in detail the position which would arise on breach of the contract. They set out the obligations of the parties; the result of failure by one or more parties to meet those obligations rests on the general law of contract, in this case the law relating to the consequences of failure of a condition precedent. The wording of the insurance rent provision is, in my view, sufficiently mandatory to set up the surveyor's determination as a condition precedent to the tenant's payment. The clause provides that the fair proportion payable by the tenant is "to be determined by the Lessor's surveyor" (my emphasis). An analysis of the wording used indicates that the clause is framed as a mandatory condition precedent to liability.
41. Third, the LVT said that the lease merely refers to a determination and not, for example, to a certificate. I cannot accept this distinction. I do not think that a determination is any less binding or mandatory than a certificate. In my judgment, the LVT have confused substance with form. A "determination" is defined as an "exact ascertainment of amount etc" and "determine" as "ascertain precisely, fix." The determination by the landlord's surveyor, that is to say his exact ascertainment of the fair proportion of the insurance expenditure recoverable from each tenant, is incorporated into the landlord's demand for that amount, payable by the tenant within seven days. A "certificate" is a "document formally attesting a fact." There is no requirement for the landlord's surveyor to issue a certificate but there is a requirement for him to determine the fair proportion due from each tenant. The absence of reference to a certificate does not, in my judgment, prevent the determination being a condition precedent to the tenant's obligation to pay, nor remove the mandatory nature of that determination.
42. Following the grant of permission to appeal by the President, Mr Wheatley obtained a letter from a surveyor which included a determination of the fair proportion of the landlord's insurance payments payable by each tenant. The proportion determined in respect of Flat 8 (11.53%) differed marginally from that fixed by the LVT (11.1%). Mr Dutton referred to this small difference as an arid point. I agree with Mr Kennedy that a point of principle is in issue in this appeal. In Yorkbrook Investments Limited v Batten [1985] 2 EGLR 100, the county court judge upheld the landlords' claim for arrears of rent, service charge and mesne profits with a slight modification and accepted the tenant's counter-claim for damages for breach of contract in part, the result being judgment for the landlords for a small balance and an order for possession with relief on payment of the balance. The Court of Appeal varied the judge's order. As to the small amount involved, Wood J (giving the judgment of the Court) said (at 102K):-

"Thus, subject to the question of de minimis, we would allow a reduction from the claim of £8.57. In cases such as this tenants are looking to the court for decisions on matters which, although small in quantum, may be of considerable moment to the parties concerned. In our judgment, it must only be in very exceptional circumstances that the de minimis principle should be applied. We would not apply it here."

Mr Rigby is seeking a decision in principle, that the landlord is required under the lease to issue insurance demands containing his surveyor's determination as to the fair proportion payable by each tenant. It is a matter of principle, not amount, and properly the subject of appeal.

43. For the reasons given above, I am of the opinion that the true construction of the provision as to the payment of an insurance rent is that it requires the landlord to issue a demand including his surveyor's determination of the fair proportion of the landlord's insurance expenditure payable by the tenant, which demand is a condition precedent to the tenant's obligation to pay that rent.
44. The second issue is: were the insurance contributions in the landlord's demands made in May and June 2000, 2001, 2002 and 2003 based on a fair proportion as determined by the landlord's surveyor of the expenditure on insurance?
45. Each demand is in similar form. They all refer to Flat 8, give the year for which payment is required, set out brief details of the insurance cover and conclude with a statement setting out the sum due. None indicate that this sum is a figure determined by the landlord's surveyor nor do they explain how it has been calculated. I heard no evidence on this matter but the LVT did and found that Mr Wheatley had admitted a breach of the lease (para 30) and summarised the evidence as follows:-

"26. In oral evidence Mr Wheatley confirmed that he had never instructed a surveyor for this purpose, but had followed the apportionment originally made by his late father in law who, in turn, had follow advice from his accountant. The Tribunal notes letters from Mr Wheatley's solicitors dated 7 September 2000 and a letter from a different firm of solicitors dated 24 April 2000, both of which confirmed that the apportionment of the premium had been determined by Mr Wheatley's surveyor. This was untrue. Mr Wheatley explained the purpose of the contents of his solicitors' letters was 'to snuff a fire out'.

27. Mr Wheatley pointed out that although the Applicant had written to him on 6 June 2001, there had not been at that stage any objection to the proportion of the insurance premium."

46. Mr Wheatley has not appealed against the LVT's finding as to his breach of contract. Mr Dutton acknowledged that the LVT found that there had never been a determination by the landlord's surveyor but added that this was "contrary to the actual position." He did not, however, put forward any evidence to support this statement. In the absence of any evidence to the contrary I accept the evidence before the LVT and find that the sums stated to be due in the four insurance demands in issue were not determined by the landlord's surveyor as required by clause 1 of the tenant's lease.
47. I have found that a determination by the landlord's surveyor of the fair proportion of the amounts spent on insurance is a condition precedent to the tenant's obligation to pay the insurance rent and that no such determination was made in respect of the insurance demands made in May and June 2000 to 2003. The third issue is what is the effect of this failure by the landlord to comply with the terms of the lease?
48. The LVT took the view that the landlord's breach could be "remedied by damages (if appropriate)". I have explained my disagreement with this conclusion. In my judgment, the correct position is that the determination by the landlord's surveyor is a condition precedent which operates to suspend this part of the contract until that condition is satisfied. It is well-settled that a condition precedent may suspend operation of the whole or part of a binding contract until it is satisfied (see Halsbury's Laws of England, volume 9(1) para 670). Thus, the absence of the surveyor's determination as to the fair proportion of insurance expenditure payable by the tenant has the effect of suspending the tenant's obligation to pay the sum demanded until the landlord issues a demand for insurance rent which contains such a determination, ie until the condition precedent is satisfied. There is a contract between the landlord and the tenant (the lease) but the obligation imposed on the tenant to pay the insurance rent on demand is suspended until he landlord issues a demand which satisfies the terms of the lease. In the absence of a surveyor's determination to support the four demands issued and paid, they are not valid demands under the lease. Following this appeal Mr Wheatley obtained a surveyor's letter regarding insurance dated 14 March 2005, which Mr Kennedy accepted as a determination under the lease. Mr Wheatley then wrote to all residents at Moray House on 16 and 17 March letters which Mr Dutton argued are valid demands for insurance rent, a proposition which Mr Kennedy did not accept. Having regard to my conclusion that the surveyor's determination is a condition precedent to a valid demand at the time it was made, this further dispute is not a matter for my decision in this appeal.
49. For the reasons given above, I determine under section 27A of the 1985 Act that the insurance rents for Flat 8 demanded on 5 May 2000, 1 June 2001, 25 January 2002 and 27 May 2003 were not payable by Mr Rigby. I allow the appeal. It follows that the decision of the LVT on this matter was wrong and the tribunal therefore should not have gone further and made the decisions set out in paras 24 and 31-34 of their decision. It is clear from the wording of section 27A(1) of the 1985 Act that a tribunal can only consider the matters set out in paragraphs (a) to (e) of this subsection (including the amount payable) where a determination has been made that a service charge is payable. Where the correct decision is that a service charge is not payable (as I have found) then the jurisdiction of the tribunal (LVT or Lands Tribunal) extends no further and I therefore set aside the whole of the LVT's decision on insurance (effectively paras 24,30, 31-34).
50. This decision determines the substantive issues in this appeal. It will take effect as a decision for the purposes of an appeal when the outstanding issue of costs has been determined. The parties are invited to make representations as to the costs of this appeal. A standard letter accompanying this decision sets out the procedure for representations in writing. Having regard to the Tribunal's limited power to award costs the parties are requested to make any application for costs in a specified amount with supporting documents or explanation.

DATED: 30 June 2005

(Signed) P H Clarke