UT Neutral citation number: [2011] UKUT 42 (LC)

LT Case Number: LRX/24/2010

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charge –LVT holding service charges irrecoverable by reason of landlord’s failure to comply with provisions of lease and under statutory provisions – LVT failing to make findings as to reasonableness of costs – appeal allowed – Landlord and Tenant Act 1985 ss 20B, 27A

IN THE MATTER OF A NOTICE OF APPEAL AGAINST A

DECISION OF THE LEASEHOLD VALUATION TRIBUNAL

FOR THE LONDON RENT ASSESSMENT PANEL

BETWEEN EMBER HOMES LIMITED Appellant

and

HOWARD LUCAS Respondent

Re: 21-28 & 31-40 Canons Park Close,

Donnefield Avenue,

Edgware, Middlesex HA8 6RL

Before: The President

Decision on written representations

The following cases are referred to in this decision:

Gilje v Charlesgrove Investments Ltd [2004] 1 All ER 91

Brennan v St Paul’s Court Ltd [2010] UKUT 403 (LC)

Holdings & Management (Solitaire) Ltd v Sherwin [2010] UKUT 412 (LC)

DECISION

Introduction

1.           This is an appeal by the landlord against a decision of a leasehold valuation tribunal for the London Rent Assessment Panel dated 19 May 2009 on an application made to it under section 27A of the Landlord and Tenant Act 1985.  The applicants were the tenants of 8 out of the 14 flats and 4 maisonettes in a purpose-built block on 2/3 storeys, built in about 1930 and set in its own grounds, with garaging to the rear.  The applications sought a determination of whether the service charges for each of the four years 2005, 2006, 2007 and 2008 were reasonable and payable.  On 10 December 2009 the LVT granted the landlord permission to appeal to the Upper Tribunal on five grounds, and on 14 May 2010 I granted permission to appeal on one further ground.  Only one of the tenants responds to the appeal, which has been dealt with on the basis of written representations, the appellant having filed a statement of case and a bundle of documents that were before the LVT and the respondent not having added to the ground stated in his notice of intention to respond, “Trust did not represent value for money.”

2.           I have, as I shall say, found the LVT’s decision confused and confusing, and there is no doubt, in my judgment, that it cannot be allowed to stand.

3.           The provisions relating to service charges were the same in the leases of each of the 8 properties that were the subject of application.  In its original form, the provision creating the liability to pay the service charge, clause 4(ii) said this:

“4. (ii) To contribute and pay upon demand 5.5 per cent of the cost expenses outgoings and matters mentioned in the Fourth Schedule hereto and in respect of such liability to pay to the Lessor on account the annual sum of Fifty pounds on the 24^th day of June in each year … PROVIDED ALWAYS that the Lessee shall pay to the Lessor or be entitled to receive from the Lessor the balance by which the said contribution respectively exceeds or falls short of the amount of the service charge payable hereunder.”

4.           With effect from 2 September 2005 this provision was varied by the LVT under section 38 of the Landlord and Tenant Act 1987 to read:

“4. (ii) (a) to contribute and pay on demand one eighteenth of the costs and expenses outgoings and other matters referred to in the fourth Schedule hereto (‘the Service Charge’) and to pay to the Lessor on account such sum as the Lessor or its surveyor certifies as a reasonable amount having regard to the likely amount of Service Charge.  A budget shall be prepared for this purpose by the Lessor or its surveyor no later than three months prior to the start of each financial year commencing on 24^th March in any year.  The Lessor or its surveyor may revise the contribution to the Service Charge during the current financial year to take account of any actual or reasonably anticipated increase in expenditure and as soon as reasonably practicable after a revision the Lessor must certify the amount of the revised contribution.

(b) As soon as reasonably practicable after the end of the financial year the Lessor shall produce to the Lessee an account of the Service Charge for that financial year prepared by independent auditors, credit being given for payments made by the Lessee in advance.  Any shortfall in the Service Charge shall be paid by the Lessee on demand following the production of the account.”

5.           It is to be noted that in its original form clause 4(ii) provided for a payment on account to be made on 24 June in each year.  As varied the provision specifies no date for payment, although it identifies 24 March as the start of each financial year for service charge accounting purposes.  It appears from the invoices provided that each tenant was invoiced for the sum of £250 for each quarter from 1 October 2004 to 31 December 2007.  In its statement of case the appellant states that interim charges in excess of £1000 pa were levied on each tenant, but I can see nothing in the LVT’s decision or the documentation to substantiate this.  Nothing, however, turns on this for the purposes of this decision.  Accounts were prepared for the landlord for the years to 31 March 2005, 2006, 2007 and 2008, and the parties and the LVT appear to have proceeded on the basis that each year so defined was the appropriate period to be considered for the purposes of applying the provisions of the leases.  No distinction was drawn between the period before 2 September 2005 and the period after that date, reference being made only to clause 4(ii) as varied.

6.           As provided for by the Fourth Schedule to the lease the costs in respect of which the service charge is payable include those incurred in maintaining the structure of the building and the common parts, painting the exterior, lighting and repairing the gardens and footpaths, insuring the premises and employing persons for the purpose of performing the landlord’s covenants (paragraph 1 of the Fourth Schedule and clause 5(b), (c), (d), (e) and (f)) and in addition water rates and other matters.  Under paragraph 10 the lessor is entitled to add to these items its administration expenses and the fees and disbursements paid to the managing agents.

7.           For the year to 31 March 2005 the landlord’s managing agents were Nesbitt and Mire, Chartered Surveyors.  The accounts prepared by them for the year were certified on 30 August 2005.  For the other 3 years the managing agents were Trust Property Management Limited, Chartered Surveyors.  The accounts prepared by them for the year to 31 March 2006 and 31 March 2007 were not certified until 3 June 2008.  The accounts for the year to 31 March 2008 were certified on 9 December 2008.

8.           It was the tenants’ case before the LVT that the conduct of Trust Property Management Ltd was unacceptable.  They had failed to provide accounts for the years to 31 March 2006, 2007 and 2008 within 6 months of the year end, and only did so very late after numerous requests; they had not been able to provide complete invoices to support the alleged expenditure; there were numerous inconsistencies in the preparation of the accounts for the years in dispute; and that they had provided no information on building works to which the tenants had made significant contributions.  The tenants also asserted that the landlord was not entitled to charge the service charges as it had not notified them of the expenditure within 18 months, as required by section 20B of the Landlord and Tenant Act 1985.

9.           On the direction of the LVT the parties prepared a Scott schedule for the LVT hearing, and each of the items of expenditure questioned by the tenants for each of the years was commented on by the parties.

10.        The tribunal expressed its decision as follows:

“14. The sums demanded for the years 2005, 2006, 2007 and 2008 do not comply with the terms of Clause 4(ii) and Schedule 4 of the lease and are therefore not recoverable.

15. The exception to the above is in relation to works carried out in respect of cleaning and gardening, the service charges cost for these items have been reasonably incurred and the works are of a reasonable standard. 

Reasons for the decision of the Tribunal

16.        Dealing firstly with the sums being claimed within the relevant period the starting point is the lease.  Clause 4(ii) provides that the leaseholders are to pay on demand one eighteenth of the cost and outgoings, a budget should however, be prepared by the Lessor or its Surveyor three months prior to the start of the financial year commencing on the 24^th March in each year.  On the evidence the Tribunal found that this had in the main not been complied with by the respondents.  The Tribunal accept the evidence of the applicants in that the accounts were provided late some 18 months after the expenditure had been incurred and not in accordance with the terms of the lease.  Section 20B of the Landlord and Tenant Act provides ‘the relevant cost 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 the tenant shall not be liable to pay’.  The failure of the respondents to provide the relevant information in accordance with the lease is that the management of the accounts had become confused due to changes and difficult to obtain information relating to events which occurred some time ago.  Some of the information had simply gone astray.  The Tribunal on the evidence concluded that the information provided to the applicants was ad hoc and insufficient.  The information could partially have been obtained by the applicants from BLR, but the respondents should have provided them to the respondents anyway, particularly when they realised that serious concerns were being raised.  The poor management of information by the managing agents also led the Tribunal to conclude that the management and professional fees were also not claimable as the service provided was not reasonably incurred or of a reasonable standard.  The Tribunal also found that the respondents could not delegate the responsibility on these issues to BLR, who themselves did not receive all the information at the handover stage.

17.        As regards the items that are not claimable within the relevant periods are gardening and cleaning.  The applicants claimed that the respondents provided insufficient information and even started to combine the invoices of the gardening and cleaning together.  The applicants relied on the evidence of Mr Andrew Maclay, Property Manager of BLR in respect of the gardening.  He states that he visited the premises and he found that the garden was poorly maintained.  He therefore instructed the Company 51 Acres.  Mr Maclay does not state in his witness statement when he visited the premises, and unfortunately he was not present at the hearing to give evidence and to be cross-examined.  The Tribunal accepts that the maintenance of the gardening is important, however on the evidence concludes that the works were carried out to a reasonable standard.  The Tribunal noted in particular that in relation to the cleaning that there was a lack of evidence produced by the applicants regarding an alternative quote.”

11.        The LVT then went on, under the heading “Costs”, to determine under section 20C of the 1985 Act that none of the landlord’s costs in relation to the application should be counted towards the service charges.  In view of the conclusions I reach in relation to other matters there is no need for me to set out the LVT’s reasoning on this.

12.        After a substantial delay the LVT granted the appellant permission to appeal on 5 of the 6 grounds it had advanced in its application for permission.  These grounds in essence were:

(1)        The tribunal failed to determine in accordance with section 27A a figure for the service charge that was payable.

(2)        The tribunal erred in concluding that the service charges demanded for each year did not comply with clause 4(ii) of the lease.

(3)        In concluding that the accounts were provided some 18 months late and not in accordance with the lease the tribunal erred in failing to identify the date on which each service charge account was provided.

(4)        The tribunal wrongly concluded that the service charges were not recoverable by virtue of section 20B.

(5)        The tribunal erred in its determination under section 20C.

13.        The LVT refused permission on ground (2), which asserted that the Tribunal failed to give adequate reasons for its decision.  It said: “The reasons are adequately structured and sets out the case of both parties and the evidence and submissions made at the hearing and on the whole is intelligible.”  In granting permission on ground (3), however, it said:  “The reasons for the decision on the whole does not explain this adequately.”  I granted permission on ground (2), saying that, although in practice it might add little to the other grounds, it seemed reasonable that the appellant should be allowed to advance it.  The grounds of appeal were amplified in the appellant’s statement of case. 

14.        Three elements of the LVT’s conclusions on the section 27A application are to be noted:

(a) It determined that no service charges were payable for any of the 4 years under the terms of the lease

(b) It appears to have determined that no service charges were payable for any of the 4 years by virtue of the provisions of section 20B of the 1985 Act.

(c) Apart from concluding that “the [gardening] works were carried out to a reasonable standard”, it made no determination as to reasonableness or amount in respect of any of the costs in issue.

In my judgment the tribunal was in error in relation to each of these matters.  I will consider them in turn.

15.        In relation to (a) the LVT’s reasoning appears in paragraph 16, where it said:

“Clause 4(ii) provides that the leaseholders are to pay on demand one eighteenth of the cost and outgoings, a budget should however, be prepared by the Lessor or its Surveyor three months prior to the start of the financial year commencing on the 24^th March in each year.  On the evidence the Tribunal found that this had in the main not been complied with.  The Tribunal accept the evidence of the applicants in that accounts were provided late some 18 months after the expenditure had been incurred and not in accordance with the terms of the lease.”

16.        In this passage the LVT appears to be conflating two of the requirements of clause 4(ii) – to prepare a budget no later than 3 months before the start of each financial year for the purpose of determining the advance payment (clause 4(ii)(a)) and to produce to the lessee as soon as practicable after the end of the financial year an account of the service charge for that year (clause 4(ii)(b)).  In relation to the 4(ii)(a) requirement it “found that this had in the main not been complied with.”  In relation to the 4(ii)(b) requirement it accepted the evidence of the tenants “that the accounts were provided late some 18 months after the expenditure had been incurred.”

17.        The appellant says that it was not sufficient for the LVT to find that the requirement as to the preparation of the budget “had in the main not been complied with.”  That is clearly correct.  Before disallowing the service charge in any particular year on this ground the tribunal would have had to make a finding in relation to that year that the requirement had not been complied with.  Expressing itself as it has done, the tribunal has not made this finding in relation to any particular year. 

18.        Moreover, the appellant says, there was no evidence before the tribunal that it had failed to prepare budgets in accordance with clause 4(ii)(a).  From the material before me, this appears to be the case.  Although in paragraph 10 of the decision the tenants are recorded as saying, “Service charges are payable in advance and the budget should be prepared no later than 3 months in advance.  The sums being claimed have not been demanded in accordance with the lease”, this clearly falls short of an assertion that there was a failure in each year to prepare a budget.  In paragraph 20 of the Scott schedule the tenants said (in relation to management fees), “The managing agents failed to provide budgets, accounts …,” but, again, this is not an assertion that there was a failure to prepare a budget.  The requirement, of course, was to prepare a budget (not to produce it to the tenant – in contrast to the requirement in clause 4(ii)(b) to produce to the tenant an account for the service charge in the previous financial year).  The case advanced in the tenants’ statement of case to the LVT was that the landlord had “consistently under budgeted”, implying that there had been a budget, an assertion that the landlord answered by identifying the amount budgeted in each year.  There is thus nothing to suggest to me that the LVT had before it evidence on which it could conclude in relation to each or any of the years that no budget had been prepared in accordance with clause 4(ii)(a).

19.        As far as clause 4(ii)(b) is concerned, the LVT said that “accounts were provided late some 18 months after the expenditure had been incurred and not in accordance with the terms of the lease.”  It was no more specific than that.  The accounts for 2005 were certified 6 months after the end of the financial year; those for 2006 26 months afterwards; for 2007 14 months afterwards; and in 2008 8 months afterwards.  The expenditure to which they related would have been incurred during the year to which the accounts related.  There does not appear to have been any evidence before the LVT as to when the accounts were provided to the tenants, so that there was no basis for the generalised finding that it made on this.  In any event the requirement under the lease was to produce an account to the lessee as soon as practicable after the end of the financial year (and not within a period related to the date on which expenditure was incurred).

20.        It is clear, therefore, that the LVT did not establish in its decision the necessary factual basis for its conclusion that “The sums demanded for the years 2005, 2006, 2007, and 2008 do not comply with the terms of clause 4(ii) and Schedule 4 of the lease.”  In any event even if it had found as facts the date of preparation of the budgets and the dates when accounts were produced to lessee and had determined that in consequence the budgets and accounts, or some of them, were prepared or produced later than required by clause 4(ii)(a) and 4(ii)(b), the effect of that would have needed to be addressed.  It would by no means necessarily follow from a failure to comply with the time provisions in clause 4(ii) that the sums demanded for each of the years “are therefore not recoverable”.

21.        If the LVT did conclude that no service charges were payable for any of the 4 years by virtue of the provisions of section 20B of the 1985 Act (element (b) above) – and it is simply not clear from paragraph 16 whether it did – such conclusion was manifestly wrong.  Section 20B(1) provides as follows:

“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 services is served on the tenant … the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.”

22.        In order to reach a conclusion that service charges had been rendered irrecoverable by virtue of this provision an LVT would have needed to establish the date on which each service charge had been demanded and the period during which the costs to which it related had been incurred.  No such findings were made by the Tribunal here.  It appears, however, that the only demands were for payments on account under clause 4(ii)(a) and that no demands for additional payments under clause 4(ii)(b) were made.  Section 20B could thus have had no application: see Gilje v Charlesgrove Investments Ltd [2004] 1 All ER 91; Brennan v St Paul’s Court Ltd [2010] UKUT 403 (LC); Holdings & Management (Solitaire) Ltd v Sherwin [2010] UKUT 412 (LC).  There was thus no basis on which the LVT could have concluded on the evidence before it that no service charges for any of the 4 years were payable by reason of the landlord’s failure to prepare budgets or to produce accounts or by reason of section 20B. 

23.        In view of the fact that the LVT had concluded that none of “the sums demanded” for the 4 years were recoverable by reason of the provisions of the lease (and perhaps by reason also of section 20B) it was surprising that it should have concluded (which it did without explanation in paragraph 15) that the costs of cleaning and gardening were an exception to this.  It referred further to these costs in paragraph 17, which began with the incomprehensible sentence: “As regards the items that are not claimable within the relevant periods are gardening and cleaning.”  The conclusion was that the [gardening] works were carried out to a reasonable standard.  No cost figure for these was determined, however.

24.        The decision is, as I have said, confused and confusing and cannot be allowed to stand.  The LVT was wrong to conclude that no service charges were payable for any of the years.  The questions that it ought to have addressed, and did not, were whether the costs to which the service charges related had been incurred; the extent to which they had been reasonably been incurred; and whether the services or works to which they related were of a reasonable standard.  Virtually the entire burden of the tenants’ case rested on these matters and the LVT had before it the Scott schedule and documentary material on which it could have reached conclusions on them. 

25.        The appeal is allowed and the case is remitted to the LVT so that it can determine under section 27A the questions identified in paragraph 24.  Since its decision under section 20C was dependent on its decision under section 27A, the appeal is allowed in relation to this also and that matter remitted for re-determination.

Dated 28 January 2011

George Bartlett QC, President