UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2010] UKUT 403 (LC)

LRX/121/2009

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charges – applicability of Landlord and Tenant Act 1985, s20B – payment from reserve funds – whether a demand – Gilje v. Charlegrove followed.

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF

THE LONDON LEASEHOLD VALUATION TRIBUNAL

BETWEEN FEARGAL BRENNAN Appellant

 

and

 

ST  PAUL'S COURT LIMITED Respondent

 

Re: 64 Colet Gardens,

London, W14 9DN.

 

 

Before: His Honour Judge Mole QC

 

Sitting at 43-45 Bedford Square, London WC1B 3AS

on 27 August 2010

 

 

The appellant in person

Dan McCourt Fritz instructed by Forsters LLP  for the respondent

 

 

The following case is referred to in this decision:

 

Gilje v Charlegrove Securities [2004] 1 All ER 91 ([2003]EWHC 1284)

 

DECISION

Introduction

1.           This is an appeal by way of review from a decision of the LVT dated the 13th of June 2009 on an application under section 27A of the Landlord and Tenant Act 1985.

2.           Mr and Mrs Feargal Brennan occupy 64 Colet Gardens, St Paul's Court, London, W14 9DN under a lease dated 5th of December 1982.  Their flat is in Main Block 9.  St Paul's Court Ltd is the landlord of the estate.  It is a company owned by the tenants.  Each tenant has one share.  Each of the six Main Blocks (numbered 1,2,3,7,8 and 9) elects a director, except for Main Block 3 which elects 3 directors as it is much bigger than the other blocks.  Mr Brennan has been elected by his block to serve as a director.  He was a director from May 2005 to April 2007 and was elected again in May 2009.

The Lease

3.           By clause 3 (1) the lessee covenants to pay an annual service charge as determined in accordance with clause 4 of the lease.  It is made up of proportions specified in part five of the sixth schedule of the various costs and expenses.  These costs and expenses are divided into Main Block Services, Heating Services, Estate Services, and Additional Services.  Main Block Services are defined in clause 5 (1) (A) and include maintaining, repairing and renewing the relevant block, including its windows and window frames.  The service charge year ends on the 24th of December each year and, by clause 4 (8), on each quarter day the lessee is to pay an estimated quarter of the service charge for the financial year in advance.  That quarter advance payment is such sum as the lessor or its agents shall determine to be a fair and reasonable interim payment.  Clause 4 (4) provides that as soon as practicable after the end of the financial year an independent accountant shall determine the amount of the annual service charge and prepare a written statement, known as the “Accountants Certificate”, containing a summary of the costs, expenses and outgoings incurred by the lessor during the financial year in respect of the specified heads of expenditure and specifying a sum as the amount of the aggregates service charge payable by the lessee.  Clause 4 (7) says that the Accountant's Certificate shall be “conclusive and binding on the Lessor and the Lessee as regards all matters contained specified or certified therein”.  On the provision to the tenant of the account of the service charge together with the Accountant's Certificate the lessee is to pay any balance stated to be payable or credit is to be given by the lessor to the lessee for any amount which may have been overpaid.  Clause 4 (10) deals with the right of the Lessor to re-enter.  The lessor is not entitled to re-enter simply by reason of non-payment of any interim payment before the date on which the Accountant's  Certificate is produced, although he may sue the lessee for non-payment “subject ... to the Lessor’s establishing in such action that the interim payment demanded and unpaid was of a fair and reasonable amount...” (my underlining.)

 

4.           Clause 4(11)(C) says that if moneys received by the lessor are not actually spent during that financial year on expenses “the Lessor shall hold those moneys upon trust to expend them in subsequent financial years on such heads of expenditure and subject thereto upon trust for the Lessee absolutely.”

The Facts

 

5.           In 2006 all the windows of all the blocks were refurbished by Everest.  The works to Main Block 9 were completed on about the 28th of June 2006.  The final account was invoiced on the 29th of May 2007.

6.           Mr Brennan was issued with an income and expenditure account for the year ended 24 December 2006 which included the sum of £40,155 for window replacement.  On the 18th of June 2007 Mr Brennan was sent a service charge certificate which included that sum for window replacement, of which £4238.36 was attributable to his property.  The total contribution he was liable to pay was £6,402.  But it would seem that he was only required to contribute £3,295, the balance being funded by funds held in the reserve account.  However, when the final account with Everest was being negotiated, it was discovered that the survey counting the windows, upon which the original division of the cost had been calculated was wrong; it was said that too much of the cost had been loaded on to Block 3 and more of the burden should be shifted on to the other blocks.

7.           The next certificate, dated 18th of June 2008, for the year ended 24 December 2007, showed a figure of £8,785 in respect of window replacement of which £927.26 was attributable to Mr and Mrs Brennan’s flat.  Since £102.41 represented Everest’s retention, £824.85 represented the reallocated costs.  This sum was part of a total share of expenditure of £3,655.  Mr and Mrs Brennan had paid a total of £3,424 on account and the remaining £221 was funded out of the reserve fund.

8.           The issue in this case arises out of that sum of £824.85 in respect of the reallocation costs of the windows.  It is agreed that the certificate of the 18th of June 2008 was the first notice Mr and Mrs Brennan received as to the reallocation of those costs and that he and his wife were liable to make that further contribution.  It is agreed that the work to the windows had been completed more than 18 months before the 18th of June 2008.  The form of the certificates declare it to be the Accountants' opinion that “the Summary of Funds Held at the foot of the statement correctly discloses the Aggregate Service Charge payable by you” for the year in question.  No other ‘demand’ was ever issued for payment of the £824.85 in dispute nor for any larger sum that included it.

9.           Mr and Mrs Brennan applied to the LVT and, amongst other matters, challenged the reallocation of window charges.

10.        What the LVT said about this in their decision was:

“The applicant does not challenge the value of the window contract only the allocation between blocks.  (The LVT’s underlining) The respondents provided the Tribunal with a windows replacement timeline.  The contract had been completed in 2006 and the sums had been paid at the relevant time.  When paid there had been no mention of outstanding charges.  There is evidence from correspondence, the invoices and certificate that the figures in 2006 were final figures.  These charges have however now been reallocated between the blocks.  We heard of this for the first time in the Service Charge certificates for 2007 issued on 18^th July 2008.  The change of the accountant is important to this reallocation because they consider their role to be more limited in that it is not to determine apportionment and allocation.  Mr Tropp, the current accountant says that they would only look at apportionment on a sample basis.  The new revised "Block cost window replacement" is therefore disputed as the calculation was produced after 1^st April 2008 and only became apparent after the 1^st April 2008 when the applicants had made the application.  The applicants contend that they were never informed prior to the issue of the service charge certificate on 18^th July 2008 that any monies for the 2006 window replacement programme were outstanding and are of the view that reserve funds collected for other purposes were used to give another block a rebate on its 2006 window charges.  The independent auditor has never indicated that the 2006 service charges were incorrect or that they were interim figures.”

11.        The LVT recorded the respondent's submissions on this point as follows:

“Re-allocation of Windows

The final figure reached was only reached in 2007.  Originally when the tenders were sought they were based on a speculative number of windows.  It transpired that the number and type of windows when installed were not the same and the cost for each of the blocks would therefore vary.  In 2008, there was a re-allocation of the cost.  The final figure was not ascertainable earlier.  The allocation was made by numbers of windows and not by blocks.  Additional costs were also incurred for the provision of security which was allocated equally between the blocks and for extras such as the removal of security grilles and associated making good.”

12.        The LVT's decision on this topic was as follows:

“The Tribunal considers that the management of this contract was poorly executed.  The lessor relied upon a survey commissioned some years before as the basis of the tenders sought.  These later proved somewhat inaccurate in that as well as minor differences the actual number of windows in block 3 was 846 not the 936 quoted for.  The 2006 service charge was apportioned on the basis of the original quotation leading to the need for substantial adjustments when the final account was agreed and actual numbers of windows installed was known.  Even this adjustment was somewhat rough and ready in that all that was known was the total number of windows per block and not the numbers of each size and hence cost from which an accurate costing for each block could be obtained.  In addition to the basic cost of windows additional costs were incurred for Planning and supervision, Direct charges such as building work and the provision of security.  Planning and supervision was charged on a per window basis, direct charges were charged to those blocks requiring the work and security was divided equally per block.

 

The Tribunal accepts that the costs involved in determining the exact number of windows and their type for each block and hence assessing an accurate cost is impractical.  It does not therefore intend to make changes to the amounts shown as “Total Everest Costs” on the schedule at page 75 of the bundle.  The Tribunal does not however accept the method of allocating Planning and supervision fees and Security costs and directs that they shall be allocated in the same proportion as the Total Everest Costs.  The Tribunal allows the additional costs directly charged as shown.”

13.        The appellant applied for leave to appeal on a number of grounds which included a challenge on the basis that the LVT had misdirected itself on the proper application of section 20B of the Landlord and Tenant Act.  The LVT considered that it had applied that provision accurately and refused leave.  Leave was granted by this tribunal, confined to the point about the proper application of section 20B.

Law

14.        The Landlord and Tenant Act 1985, section 18 defines "service charge" and “relevant costs” in this way:

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

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

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

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

(3) For this purpose-

(a) “costs” includes overheads, and

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

15.        Section 19 provides that;

(1) 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

(b)  where they are incurred on provision of services or the carrying out of works, only if the services or works are of reasonable standard;

and the amount payable shall be limited accordingly.

(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.

16.        A time limit on making demands is imposed by section 20B in these terms:

(1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.

(2) Subsection (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge.

17.        In the case of Gilje v Charlegrove Securities [2004] 1 All ER 91, ( [2003]EWHC1284) Etherton J. had to construe section 20B in a case where a landlord had required payments on account on the basis of projected budgets but proper accounts for the years in question were not supplied until over 18 months later.  Those accounts showed that the amount expended had turned out to be less than the interim quarterly service charge demands that had been paid.  It was claimed that section 20B meant that the landlord was not entitled to recover by way of service charge expenditure that had been incurred more than 18 months previously.  The matter first came before Master Price.  He held that -

“Section 20B has nothing to do with payments on account which fall to be dealt with under section 19 (2), by way of subsequent adjustment by repayment, reduction or further charges.  Section 20B only comes into play if the landlord spends more than he has demanded on account, in which case he must raise a further demand within the 18 month period.”

18.        Etherton J. held that the conclusion reached by Master Price was plainly right.  He said:

“20. I accept the primary submission of Ms Amanda Eilledge, counsel for the defendants, that section 20B of the 1985 Act has no application where (a) payments on account are made to the lessor in respect of service charges, (b) the actual expenditure of the lessor does not exceed the payments on account and (c) no request by the lessor for any further payment by the tenant needs to be or is in fact made.

21. In the first place, it is quite clear that section 20B (1) operates only way the relevant costs were incurred more than 18 months before a “demand for payment”.  Mr Dutton’s interpretation requires the supply of the accounts and certificates under clause 4 (2) of the leases to be treated as a “demand for payment”.  They were not, however, in substance or form, a demand for payment.  There was nothing to demand from the claimants since the interim sums paid under the leases exceeded the actual expenditure in the two years in question.

22. Further, I do not accept Mr Dutton’s submission that there was no actual payment of the service charge until the final accounts and certificates were issued under clause 4 (2) of the leases.  For the purposes of section 20 B of the Act, section 18 of the Act defines the meaning of “service charge”.  It is “an amount" is payable in respect of the matters specified in section 18 (1).  The quarterly payments on account were payable in respect of such matters, and were, therefore, undoubtedly payments of “a[ny] service charge” within section 20 B.  There was no metamorphosis of those payments once the final accounts and certificates were prepared.”

19.        After considering the terms of the leases in question, which were similar though not identical to the leases in this case, Etherton J. continued:

“25. Further, if Mr Dutton's interpretation of section 20B is correct, I would have expected the draughtsman of the Landlord and Tenant Act 1987 (which inserted section 20B into the 1985 Act) to have added what Mr Dutton claims is the substance of this section to section 19(1) of the 1985 Act which deals with the challenge to service charges after expenditure has been incurred.  In this connection, it is to be borne in mind that the legislation expressly contemplates the payment of service charges on account, and provides an express mechanism in section 19(2) for challenging such payment on account if and insofar as the demand for such payment is unreasonable.  Against that background, the failure to insert the 18 month limitation as an extra qualification under section 19(1) is extremely poor drafting if it was intended that the limitation is to apply to all costs falling within section 19(1) even where the payments on account, subject to the provisions of section 19(2), exceed the final expenditure of the lessor.

26. Further, I agree with Ms Eilledge that the provisions of section 20B fit extremely uncomfortably with the application of that section to payments on account.  Such payments must necessarily, by virtue of section 19(2), be related to particular contemplated costs of which the tenant is notified in advance.  While Mr Dutton is, strictly speaking, correct that the lessor is not restricted to expenditure of the interim payments only on those anticipated items of expenditure, the fact that the draughtsman appears to make no allowance in section 20B (2) for the situation (expressly anticipated in section 19 (2)) where the expenditure has been notified in advance and payments on account have been made, indicates that he did not have such a situation in mind as falling within the ambit of section 20B (1).

27. Finally, I agree with Ms Eilledge that, so far as discernible, the policy behind section 20B of the 1985 Act is that the tenant should not be faced with a bill for expenditure of which he or she was not sufficiently warned to set aside provision.  It is not directed at preventing the lessor from recovering any expenditure on matters, and to the extent, of which there was adequate prior notice.  This does not leave the tenant without a remedy for the failure of the lessor to prepare a final account.  In the event of wrongful delay by the lessor, the tenant can apply to the court for the taking of an account and, if the lessor’s delay is culpable, the lessor will have to pay the costs.”

Submissions

20.        Mr Brennan began his submissions by submitting that the point concerning section 20B had been raised and argued at the LVT hearing, albeit that it was then only one of a number of points.

21.        In his submission, the purpose of section 20B of the Landlord and Tenant Act was, or at least included, a desire to protect tenants from charges that they had not anticipated that arose from relevant costs incurred a substantial time before the charge was notified.  The service charge certificate dated 18 June 2007 certified that the summary of costs on the attached certificate represented a fair summary of the costs, expenses and outgoings and that the Summary of Funds correctly disclosed the aggregate service charge payable by him for the year ended 24^th December 2006.  He understood this to mean that the totals were final.  He had been aware of the consultation and the order of total costs.  But the important thing for a tenant was the specific allocation of a proportion of that cost to him.  On 18^th June 2008 the service charge certificate for the year ending 24^th December 2007 or served on him and this showed that he owed an extra £824.85 due to a reallocation of costs.  This was the very first he had heard that he was going to be required to make a further contribution.  No separate demand was made on him, he acknowledged.  That was because money had been collected from him for a different purpose, which was then applied without prior reference, to require him, in effect, to compensate leaseholders on another part of the estate.

22.        However the service charge certificate should be interpreted as a demand.  Clause 4(10) of the lease gives some support to that interpretation, he argued.

23.        Mr Brennan sought to distinguish the case of Gilje v Charlegrove Securities.  He drew attention to the differences between clause 4(2) of the lease in that case and clause 4 (9), (10) and (11)(c) of his lease.  He pointed out that it appears from paragraph 10 of the Gilje judgement that, in that case, the tenants had received budgets and did have prior notice that they might be required to make further payments.  He put particular emphasis upon the words of Etherton J (at paragraph 27)

“... the policy behind s20B of the 1985 Act is that the tenant should not be faced with a bill for expenditure of which he or she was not sufficiently warned to set aside provision.  It is not directed at preventing the lessor from recovering any expenditure on matters, and to the extent, of which there was adequate prior notice.”

24.        Mr Brennan comments that he was faced with a bill for expenditure of which he was not sufficiently warned to set aside provision.  He appreciated that there would be expenditure and he was told what his share of it was in the certificate of 18^th June 2007.  He regarded that as final.  There was no reason for him to set aside any further provision.  It could not be said that there was adequate prior notice that there was going to be a reallocation.  He first heard of that more than 18 months after the relevant costs had been incurred.  He fell squarely within Etherton J's statement of the policy of the act.  It would be easy to evade Parliament's intention if all it was necessary to do was to contrive an adequate surplus so that it was never necessary to actually make any demand for costs incurred more than 18 months previously.

25.        For the respondent, St Paul’s Court Limited, Mr McCourt-Fritz submitted that a clear distinction must be drawn between a request for payment on account for future expenses, which is prospective, and the demand for payment of a service charge in respect of an expense which has already been incurred, which is retrospective.  Section 20B of the Landlord and Tenant Act 1985 was concerned with the latter, not the former.  There never had been a ‘demand’ made of Mr Brennan in respect of the reallocation of the window charges.  Mr Brennan, pursuant to his obligations under clause 4 (8) of the lease, had made payments on the basis of anticipated expenditure and had built up a surplus on his account.  In accordance with clause 4(11)(c) the landlord held the money upon trust to expend it upon the very broad heads of expenditure set out in the sixth schedule.  When St Paul’s Court Limited became aware of the need to reallocate the windows costs and decided how that should be done, it already held enough money on account to meet that element of expense.  No further payment was required.  No demand needed to be made and no demand was made.  The case was indistinguishable from Gilje v Charlegrove, an authoritative decision which had been followed in a number of cases.

Conclusion

26.        I asked the parties about the stipulation in Clause 4(7) that the Accountant’s Certificate should be “conclusive and binding on the Lessor and Lessee as regards all matters specified or contained therein.”  Did the reallocation have the effect of reopening that certificate and would that be permissible in accordance with clause 4(7)? Mr McCourt –Fritz protested that this was neither a point raised by the appellant nor one of which he had received any notice, which was correct, and he was not in a position to make any submissions about it.  I accepted that; the parties were anxious to proceed with the appeal and I did not pursue that particular point further.

27.        I see the force of Mr Brennan's arguments that it would be strange if Parliament thought it worthwhile to give a tenant protection against being charged for "old" (that is, incurred more than 18 months previously) relevant costs where the landlord has not got enough on account to pay them, and therefore has to make a demand for payment of the service charge that includes them, but no such protection is provided where the landlord includes such old costs in his calculation of service charge which is duly paid by a compliant tenant by way of his quarterly instalments and the credit standing to his account.  The explanation offered is that Parliament's purpose was that a tenant should not be faced with a bill for expenditure of which he or she was not sufficiently warned to set aside provision.  Mr McCourt-Fritz says that in the case of a payment on account of the tenant has already made provision and needs no protection.  This does not seem to me to be a very good answer.  If an unexpected "old" cost, of which the tenant was not given warning, swallows all or part of provision made by a tenant to cover those amounts of which he was given warning, the tenant may still have to come up with more money, one way or another, than he reckoned for.  If the landlord takes the precaution of ensuring that he gets in enough credit so that he never needs to issue a demand (unless something goes seriously wrong) he will have little need to worry about "old costs" or section 20B.  I have some sympathy with Mr Brennan's argument that this is a strange result.

28.        Whatever the policy considerations behind the Act may have been, I have to interpret it according to its wording.  I find Etherton J's analysis of the wording of sections 19 and 20 B in Gilje v Charlegrove to be compelling.  Section 20B on its clear wording only has to do with circumstances where a demand for payment of the service charge incurred more than 18 months earlier is served on the tenant.  The act distinguishes between payment made on a demand after the costs are incurred and a payment made before the relevant costs are incurred, where an adjustment is to be made after they are incurred.  I agree with Etherton J. that if Parliament had intended the 18 month limitation to amount to an extra qualification under section 19, it would have said so.  I also agree that the provision of the Accountant’s Certificate cannot be taken to be a demand for payment.  In my view a better interpretation of the reference in Clause 4(10) to the interim payment ‘demanded and unpaid’ is that it refers to a demand made in the course of the lessor commencing an action for the money which is unpaid, rather than to the certificate.

29.        I also agree with Mr McCourt-Fritz that there was no demand made, of a sort that would engage section 20B, in this case.  Notwithstanding Mr Brennan's efforts to draw a distinction between the leases in the present case and Gilje v Charlegrove, I do not think that case is distinguishable and Mr McCourt-Fritz is right to say that it is a complete answer to Mr Brennan’s appeal.

Dated 11^th November, 2010

 

 

His Honour Judge David Mole QC

Judge of the Upper Tribunal