DECISION
Background
1. The
Appellants are the freeholders of the Quadrangle Tower, Cambridge Square, London W2. The Respondent holds a long lease of flat 172.
2. On 28th June 2010, the Appellants issued a claim in the Central London County
Court for £2,749.10 being the balance of service charge arrears principally in
respect of service charge years 2007 and 2008 although some amounts were
claimed in respect of 2009 and 2010.
3. By her
Defence dated 14th July 2010 the Respondent disputed “the balancing
service charge” because “they have not given me a service warranting to
ask for more money as balancing service charge”.
4. On 9th
November 2010, the matter having been transferred to the Leasehold Valuation
Tribunal (“LVT”), the LVT gave directions requiring the Appellants to serve “a
detailed statement of case setting out under appropriate headings the issues
and the amounts sought in respect of which a determination is required”
following which the Respondent was ordered to set out a detailed reply as to
“which issues are in dispute and the reasons why they are in dispute” (“Directions”).
5. Instead of
serving a detailed statement as ordered by the Directions, the Appellants
elected to adopt the Particulars of Claim served in the County Court, which
merely set out the balancing sums claimed rather than the total service charge
for each year and their respective component parts.
6. This
confused the Respondent who was expecting a detailed statement as per the
Directions. Once the Appellants’ position was made clear to her, by letter
dated 29th December 2010 the Respondent set out her case (“the
Respondent’s Statement of Case”). She made clear that “my main objection is to
the very poor service that does not at all warrantee (sic) the money we
pay. It is therefore difficult to show you evidence…”. She then illustrated
her complaint by providing examples of poor service – such as the entry phone
being broken for three years, dirty and shabby common parts, repeatedly broken
lifts, intermittent hot water, stopped gas supply, broken heating and so on. She
enclosed a large volume of documentation in support, which included specific
references to certain items in the 2007 and 2008 accounts.
7. The
Appellants replied to the Respondent’s Statement of Case by witness statement
made on 20th January 2011 by Rebecca Sanchez (“Miss Sanchez”) an
associate of the present managing agents Knight Frank LLP. It is a relatively
short statement in which she does not deal in detail with the substance of the
complaint – poor management – principally because it relates to the conduct of
the previous managing agents Cluttons, but she does deal with some (but not
all) of the specific accounting points raised by the Respondent.
8. The
hearing took place on 21st January 2011, and the LVT issued its decision
on 24th January 2011 (“Decision”). The kernel of the Decision is
that the amounts claimed in the 2007 and 2008 service charges in respect of some
of those items which the Respondent referred to as demonstrating “poor
management” were reasonable and therefore recoverable save that management had
been poor in relation to those issues and generally thereby warranting a
reduction in the management fees charged for each of those two years.
9.
The LVT went on to consider, and acceded to, the Respondent’s request
for an order under section 20C of the Landlord and Tenant Act 1985 (“the 1985 Act”).
Its summary reasons are set out in paragraph 16 of the Decision thus:
“16. The respondent asked
for an order that the costs of the proceedings should not fall on the service
charge. Mr Hammond [Counsel for the Applicants/Appellants] invited the
tribunal to make such order as follows the award. In that case there would be
no order as the monetary effect of the tribunal’s determination is largely for
the applicant. However the tribunal has found that Mrs Derdabi had grounds for
her complaint about poor service and that appearance before the tribunal was
her only recourse. Accordingly the tribunal makes the order.”
10.
The LVT elaborated on its reasons in its 24th February 2011
refusal to grant the Applicants permission to appeal thus:
“1. With regard to proportionality, and the
guidance issued by His Honour Michael Rich Q.C., each case has to be determined
on its facts. The respondent’s complaints had always been about the poor
quality of management and in that, albeit that she did not in her statement of
case quantify the proper cost of what she received, she succeeded. Many of her
disputes were not about how much things cost but such matters as: equipment
that was broken and not repaired quickly enough, that cleaning staff were not
properly supervised, careless accounting and budgeting and lack of adequate
communication of information to tenants.
“2. It would have been simplistic in this case to
allocate money values to the specific items whose costs were not themselves challenged
(other than via the management fee) and calculate the fee as a proportion of
the whole for the purpose of determining whether and to what extent a section
20C order should be made.
“3. The respondent’s only course to ventilate her
complaint about poor service due to poor management was to the LVT and in that
she succeeded.
“4. With regard to the
landlord’s claim to have no knowledge prior to the hearing that management fees
were an issue, the respondent’s statement of case was dated 29 December 2010. This
was recognised to be late and for that reason little criticism could be
directed at the applicant for the lateness of their own response – delivered to
the respondent and the tribunal the night before the hearing.
“5. But the explanation
given for that late delivery was the need to investigate the respondent’s
claims. It was perfectly plain from her statement of case that, although
specific service items were the subject of complaint, it was poor management of
the building that formed the bulk of her dissatisfaction rather than the cost
of the items themselves.”
11. By letter dated
9th May 2011, the Respondent replied to the Appellants’ renewed Application
to the Upper Tribunal (Lands Chamber) for Permission to Appeal succinctly
stating that the Decision should be upheld and commenting that Miss Sanchez had
not dealt with the bulk her evidence was irrelevant to the issue of poor
management because neither she nor Knight Frank were then managing agents.
12. On 18th
May 2011, the President of the Upper Tribunal (Lands Chamber) granted
permission to the Applicants to appeal the Decision by way of review only
observing that “there is a good argument that the LVT’s decision to make the
section 20C order was wrong in principle”.
13. For the reasons
set out in their Statement of Case dated 15th June 2011, the
Appellants submit that the section 20C Decision was wrong as the LVT had erred
in the exercise of its discretion as insufficient weight had been given to the
issues mentioned below such that the order was not just an equitable in the
circumstances. The Respondent did not elaborate on the objections set out in
her 9th May 2011 letter. The determination of this Appeal has been
without oral argument, both parties being content with that course of action.
Law, and relevant
authorities
14.
Section 20C of the 1985 Act (as amended) so far as relevant provides
that:
“(1) A tenant may make an application for an order
that all of any of the costs incurred, or to be incurred, by the landlord in
connection with proceedings before a… leasehold valuation tribunal… are not to
be regarded as relevant costs to be taken into account in determining the
amount of any service charge payable by the tenant or any other person or
persons specified in the application.
“(3) The court or tribunal to which the application is
made may make such order on the application as it considers just and equitable
in the circumstances.”
15.
By section 20C(3), the LVT is vested with a discretion. In Iperion
Investments Corporation v Broadwalk House Residents Limited [1995] 2 EGLR
47 (CA) Peter Gibson LJ referred to section 19 of the 1985 Act (which
he said “prevents a landlord from recovering so much of a service charge as
consists of costs unreasonably incurred”) and section 20C (“which goes
further”) and then said at 49F:
“Thus it is apparent that the court has a discretion to
direct that litigation costs be excluded from a service charge, even if the
costs have passed the test of section 19 and have been reasonably incurred. The
obvious circumstances which Parliament must be taken to have had in mind in
enacting section 20C is a case where the tenant has been successful in
litigation against the landlord and yet the costs of the proceedings are within
the service charge recoverable from the tenant.”
And at 49H:
“To my mind, it is unattractive that a
tenant who has been substantially successful in litigation against his landlord
and who has been told by the court that not merely need he pay no part of the
landlord’s costs, but has had an award of costs in his favour should find
himself having to pay any part of the landlord’s costs through the service
charge. In general, in my judgment, the landlord should not ‘get through the
back door what has been refused by the front’: Holding & Management Ltd
v Property Holding & Investment Trust plc [1989] 1 WLR 1313 at p1324
per Nicholls LJ.”
16.
In The Tenants of Langford Court (Sherbani) v Doren Limited
LRX/37/2000 His Honour Judge Rich Q.C. (sitting as a member of the Lands
Tribunal) set out the principles upon which the discretion under section 20C
should be exercised:-
“28. In my judgement the only principle
upon which the discretion should be exercised is to have regard to what is just
and equitable in all the circumstances. The circumstances include the conduct
and circumstances of all parties as well as the outcome of the proceedings in
which they arise.
29. I
think that it can be derived from [Iperion] that were a court has power
to award costs, and exercises such power, it should also exercise its power
under s20C, in order to ensure that its decision on costs is not subverted by
the effect of the service charge.
30.
Where, as in the case of the LVT, there is no power to award costs, there is no
automatic expectation of an Order under s.20C in favour of a successful tenant,
although a landlord who has behaved improperly or unreasonably cannot normally
expect to recover his costs of defending such conduct.
31. In
my judgement the primary consideration that the LVT should keep in mind is that
the power to make an order under s.20C should be used only in order to ensure
that the right to claim costs as part of the service charge is not used in
circumstances that make its use unjust. Excessive costs unreasonably incurred
will not, in any event, be recoverable by reason of s.19 of the Landlord and
Tenant Act 1985. Section 20C may provide a short route by which a tribunal
which has heard the litigation giving rise to the costs can avoid arguments
under s.19, but its purpose is to give an opportunity to ensure fair treatment
as between landlord and tenant, in circumstances where even although costs have
been reasonably and properly incurred by the landlord, it would be unjust that
the tenants or some particular tenant should have to pay them.
32.
Oppressive and, even more, unreasonable behaviour however is not found solely
amongst landlords. Section 20C is a power to deprive a landlord of a property
right. If the landlord has abused its rights or used them oppressively that is
a salutary power, which may be used with justice and equity; but those
entrusted with the discretion given by s. 20C should be cautious to ensure that
it is not itself turned into an instrument of oppression.”
17.
In Schilling v Canary Riverside Development PTE Limited
LRX/26/2005 His Honour Judge Rich Q.C. said in cases (such as the instant case)
where the LVT had not exercised its discretion to order that the landlord pay
the tenant’s costs on the basis that it had acted improperly or unreasonably:
“13. … The ratio of the [Doren]
Decision is “there is no automatic expectation of an Order under s20C in favour
of a successful tenant.” So far as an unsuccessful tenant is concerned, it
requires some unusual circumstances to justify an order under s20C in his
favour.
“14. … the outcome is to be
given weight in considering whether to make an Order and may affect whether the
right of recovery should be limited to part only of the costs incurred by the
landlord… “the outcome of the proceedings” [is] one of “the circumstances” to
which sub-section (3) requires the consideration of what is just and equitable
to have regard. This was said in the context of an application for the
appointment of a manager, which meant that the tenants had undoubtedly been successful,
in service charge cases, the “outcome” cannot be measured merely by whether the
applicant has succeeded in obtaining a reduction. That would be to make an
Order “follow the event”. Weight should be given rather to the degree of
success, that is the proportionality between the complaints and the Determination,
and to the proportionality of the complaint, that is between any reduction
achieved and the total of service charges on the one hand and the costs of the
dispute on the other hand”.
18. In very broad
terms, the usual starting point will be to identify and consider what matter or
matters are in issue, whether the tenant has succeeded on all or some only of
them, whether the tenant has been successful in whole or in part (i.e. was
the amount claimed in respect of each issue reduced by the whole amount sought
by the tenant or only part of it), whether the whole or only part of the
landlord’s costs should be recoverable via the service charge, if only
part what the appropriate percentage should be and finally whether there are
any other factors or circumstances which should be taken into account.
19. Where the tenant
is successful in whole or in part in respect of all or some of the matters in
issue, it will usually follow that an order should be made under s20C
preventing the landlord from recovering his costs of dealing with the matters
on which the tenant has succeeded because it will follow that the landlord’s
claim will have been found to have been unreasonable to that extent, and it
would be unjust if the tenant had to pay those costs via the service charge.
By parity of reasoning, the landlord should not be prevented from recovering via
the service charge his costs of dealing with the unsuccessful parts of the
tenant’s claim as that would usually (but not always) be unjust and an
unwarranted infringement of his contractual rights.
20. However, whether
and if so to what extent such an order should be made may depend on many factors.
In some cases, “proportionality” will be material. If the reduction is but a
fraction of that sought by the tenant, it may follow that the landlord should
only be prevented from recovering the costs of dealing with that fraction. If
the tenant succeeds on only one of three issues, it may be that the landlord
should only be prevented from recovering his costs of dealing with the successful
issues. Sometimes these points will make no difference because it has not cost
the landlord any more to deal with the unsuccessful elements of the tenant’s
claim.
21. In other cases,
“conduct” will be relevant: even though the tenant has succeeded and perhaps
substantially, has he unnecessarily raised issues with which the landlord has
had to deal such that the landlord should not be prevented from recovering any
associated costs via the service charge. There will also be cases where
“circumstances” may be relevant – such as the landlord being a resident-owned
management company with no resources apart from the service charge income.
22. Where the
landlord is to be prevented from recovering part only of his costs via the
service charge, it should be expressed as a percentage of the costs recoverable.
The tenant will still of course be able to challenge the reasonableness of the
amount of the costs recoverable, but provided the amount is expressed as a percentage
it should avoid the need for a detailed assessment or analysis of the costs
associated with any particular issue.
23. In determining
the percentage, it is not intended that the tribunal conduct some sort of “mini
taxation” exercise. Rather, a robust, broad-brush approach should be adopted based
upon the material before the tribunal and taking into account all relevant
factors and circumstances including the complexity of the matters in issue and
the evidence presented and relied on in respect of them, the time occupied by
the tribunal and any other pertinent matters. It will be a rare case where the
appropriate percentage is not clear. It is the tribunal seized with resolving
the substantive issues which is best placed to determine all of these matters.
24. These
observations are confined to exercise of the s20C discretion. They are not
intended to deal with the tribunal’s power to make an order for costs under
paragraph10(2) of Schedule 12 to the Commonhold and Leasehold Reform Act 2002
which raise quite different issues.
Grounds of appeal
25. The Appellant
did not suggest that the LVT applied the wrong principle, but that it exercised
its discretion as to what was “just and equitable in all the circumstances”
wrongly in that it failed to give appropriate weight to the following three
matters, and that had it done so it would not have made the s20C order.
26. First, it is
said that the LVT failed to make a true assessment of the degree of success
enjoyed by the Respondent. The LVT should have calculated that the balance of
success rested with the Appellants because the Respondent had only achieved an 8%
reduction in service charge arrears. The Respondent was therefore unsuccessful
so that “it requires unusual circumstances to justify an order under s20C in
his favour” as per Schilling (supra).
27. Secondly, since
the Respondent did not specifically challenged the amount of management fees in
her Statement of Case it follows that the Appellants did not address that issue
in Miss Sanchez’s witness statement so they should not be prevented from
recovering those costs. Miss Sanchez’s witness statement was addressed to the
amount of various sums claimed, not the complaints about poor quality of
management, and since the LVT upheld those amounts it must follow that the
Appellants should not be prevented from recovering those costs.
Discussion, and decision
28. The first point pre-supposes
that the Respondent’s case was capable of simple arithmetical calculation by
calculating the amount deducted from the service charge (£219, being part of
the management fees) as a percentage of the service charge arrears claimed
(£2,749.10), namely, 8%.
29. The LVT took the
view that this was too simplistic an approach because the gravamen of the
Respondent’s complaint was poor management, not the amount charged for
particular items, which involved consideration of a number of issues all of
which the Respondent succeeded in.
30. In my judgment,
the LVT correctly identified the matter in issue – poor management in 2007 and
2008, and therefore the level of management fees in those two years – and was
entitled to take the view that it was too simplistic to make a simple
arithmetical calculation. This was because the Respondent had highlighted
various matters which she alleged were illustrations of poor management,
virtually all of which the LVT upheld. It was necessary to investigate those
matters to enable a decision to be reached about the quality of management.
Whilst the actual amounts of those other issues were not challenged, and the
LVT found them to be reasonable, it was nonetheless necessary to consider the
quality of the Appellants’ management in relation to them.
31.
If however the Appellants are right that the matter is capable of
arithmetical calculation, they have adopted the wrong formula. Instead of
calculating the percentage reduction in the amount in issue (management fees
for 2007 and 2008), the Appellants have calculated the percentage reduction
from the total service charge arrears claimed which were not the subject matter
of complaint. If the calculation is approached by reference to the matter in
issue, the Respondent succeeded in reducing the 2007 and 2008 management fees
by 42% as set out in paragraph 15 of the Decision:
“15. Accordingly the tribunal determines that the
fees in each of the years 2007 and 2008 should have been £150 plus VAT per unit
– a total of £42235 instead of £72789, a reduction of £305,554 and reducing Mrs
Derdabi’s liability by £210.”
32.
Reliance was placed on Schilling (supra) where it is submitted
that at paragraph 17 Judge Rich indicated that a 6.4% reduction in recoverable
service charges “was hardly a successful outcome”. Judge Rich made no such
indication. What he said was:
“17. … Thus on the LVT’s
determination, the landlords were held to have been unreasonable in their
claimed service charges to the extent of 6.4% as I calculate the reduction in
the charges payable by Dr and Mrs Schilling, it is … less than £2. The LVT …
described this as having achieved “significant successes”. I do not suggest
that the total over four years is insignificant but when compared with either
the reductions sought or even the tenant’s own costs before the LVT it was
hardly a successful outcome.”
33. There are three points
here. First, the 6.4% reduction was the percentage reduction from the three matters
in issue in that case, not (as the Appellants have calculated it in this
case) from the whole service charge arrears. The 6.4% reduction equated
to £570,361 which on any basis could not be described as insignificant, even if
as a percentage of the amount claimed it was “only” 6.4%. Secondly, that
reduction translated into a £2 annual saving for the Schillings. Judge Rich did
not suggest that an annual reduction of £2 over four years (£8) was
“insignificant” – in other words, it was significant. Thirdly, however, when
the £2 (or £8) was compared with the reductions the tenant had sought or
the tenant’s costs before the LVT the annual cash value to the Schillings “was
hardly a successful outcome”.
34. In other words,
the saving to the Schillings was out of all proportion to what they had sought
– the implication being that there were a huge amount of costs associated with
their inflated claim – and also to their own costs before the LVT – the
implication being that they had spent a huge amount more than was at stake. However,
the judgment does not stop there. It is clear from other paragraphs,
particularly paragraphs 18 and 19, that Judge Rich was not impressed by the
Schillings’ conduct or approach to the case, which was large-scale,
wide-ranging and complex.
35. None of these considerations
apply here: not only was the Respondent unrepresented in the LVT, but she had
not over-stated her claim, there was no real criticism of her conduct and the
instant case concerned a fairly straight forward issue within a narrow compass
requiring limited evidence. Schilling is a mere illustration of an
exercise of the s20C discretion in a case where it was relevant to consider
circumstances wider than the actual matters in issue. In the usual case, such
as this, it is quite appropriate to focus as the LVT did on the substance of
the matter in issue.
36. The second point
pre-supposes that Miss Sanchez’s witness statement does not deal with any of
the complaints about poor management. Given that that is what the Respondent
was complaining about, one of course is entitled to wonder what it was thought the
purpose of her witness statement was. If it was not addressed to the issues
raised, that would be a good reason for not allowing the Appellants to recover
its costs via the service charge. If it is intended to say that Miss
Sanchez dealt with issues which were subsequently dropped, that would be
inaccurate as the matters she dealt with were all part and parcel of
determining whether or not the Respondent had made out her case that management
was poor.
37. It is clear from
her witness statement that, so far as she is able to, Miss Sanchez does deal
with the complaints raised and that she well understood the points being made. It
is therefore incorrect to submit that Miss Sanchez did not deal with the
management issues complained about by the Respondent. Whilst she did deal with
some (but not all) of the questions raised about the amounts claimed, that was
all part and parcel of dealing with the complaints about poor management.
38. For example, the
Respondent complained that there was a huge discrepancy between budgeted and
actual costs resulting in large balancing service charge claims. Miss Sanchez
researched the complaint but could not really come up with an explanation. The
LVT found that “budgeting was careless” albeit that the actual amounts claimed
in the service charge were reasonable. The fact that the actual sums claimed
were reasonable does not mean that budgeting was not poor – it was held to be,
and it was necessary to consider Miss Sanchez’s explanation, such that it was
(the LVT noting that it was hearsay and would have been helpful to have had
evidence from Cluttons). Poor budgeting was an illustration of poor management
justifying reducing the management fee because it did not represent “value for
money”.
39. The Respondent
complained that the accounts and records were such a mess that it may well be
that expenditure had been mis-apportioned between blocks. Miss Sanchez
researched the point and acknowledged that an error had been made but
corrected. The LVT held that “accounting had been less than accurate”. There
was no suggestion that the accounts and records were not a mess –
self-evidently indicative of poor management. Whilst the actual amounts
claimed was not undermined, poor accounting and record keeping was another
illustration of poor management.
40. The Respondent
complained that the reception was not properly cleaned. Miss Sanchez
researched the matter and put forward an explanation which was not accepted by
the LVT who found that “cleaning was inadequately supervised”. Again, whilst
this did not affect the amount charged for cleaning, it was yet another
illustration of poor management justifying a reduction in the fee claimed. And
so on all through Miss Sanchez’s witness statement.
41. None of this is
altered by the fact that the Respondent does not specifically mention
“management fees” or what she thought was an appropriate reduction. As the LVT
said, it was plain from her Statement of Case that those fees were in issue. It
is in the nature of theses sort of cases that it is very difficult to reach an
assessment of the appropriate reduction to reflect poor management. More
pertinently, the approach taken by Miss Sanchez was that whatever the
Respondent’s complaints about poor management, they did not justify her not
paying the whole of the service charge arrears. The Appellants did not seek to
protect their position by offering a reduction in the management fees to
resolve matters.
42. In conclusion,
the first instance tribunal is usually best equipped to evaluate and give
weight to appropriate matters when exercising its discretion whether or not to
make a s20C order. In this case, I can see nothing to suggest that they did
not give sufficient weight to the matters they should have or in any way act
contrary to principle. Whilst it is strictly irrelevant how I might have
exercised the discretion, when considered purely on the basis of the papers I
suspect that I would most probably have reached the same decision as the LVT.
43. There is one
final point. The Appellants suggest that the LVT was wrong to conclude that
the only recourse the Respondent had to ventilate her complaint was the LVT
because she did not choose it as the case was transferred to the LVT from
Central London County Court and she did not pick up the suggestion of
mediation.
44. This is a
puzzling line of argument. Once litigation has been commenced, that is the
only forum for resolution of the dispute whatever the ultimate jurisdictional
destination of the litigation unless, of course, the parties reach agreement. The
Appellants had ample time to consider and attempt to resolve matters once they
had received the Statement of Case but, as is evident from Miss Sanchez’s
witness statement, simply dismissed the Respondent’s complaints as not
justifying not paying the whole of the service charge arrears.
45. It may also be
that matters would have been assisted had the Appellants complied with the
Directions and set out a readily digestible summary of service charge items for
the relevant service charge years which at least would have put the Respondent
in a position to respond specifically and precisely to each item.
46. For those
reasons, I dismiss the appeal.
Dated 27 September
2011
His Honour Judge
Gerald
