United Kingdom Upper Tribunal (Lands Chamber)

UT Neutral citation number: [2012] UKUT 244 (LC)

UTLC Case Number: LRX/124/2010

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charges – security services – whether costs reasonable – held that they were – service charge collection fees – whether properly included in service charge and whether reasonable – held that they were – legal fees for proceedings by lessees against third party – whether properly included in service charge – held they were not – appeal allowed in part

IN THE MATTER OF AN APPEAL AGAINST A DECISION

OF A LEASEHOLD VALUATION TRIBUNAL FOR THE

NORTHERN RENT ASSESSMENT PANEL

BETWEEN LIVERPOOL QUAYS MANAGEMENT LIMITED Appellant

and

CAROL ANN MOSCARDINI Respondent

Re: Apartment 165

6 Royal Quay

Liverpool L3 4EX

Before: The President

Sitting at Liverpool Employment Tribunal, First Floor, Cunard Building,

Pier Head, Liverpool, L3 1TS

on 13 July 2012

Lawrence McDonald instructed by J B Leitch LLP solicitors of Liverpool for the appellant

Victoria Roberts instructed by QualitySolicitors Jackson & Canter solicitors of Liverpool for the respondent

No cases referred to in the decision

The following cases were referred to in argument:

Veena SA v Chong [2003] 1 EGLR 175

Forcelux Ltd v Sweetman [2001] 2 EGLR 173

Metropolitan Property Realizations Ltd v Silver LRX/155/2007

Westminster City Council v Fleury [2010] UKUT 136 (LC); LRX/103/2008

Sella House Ltd v Mears [1989] 1 EGLR 65

DECISION

Introduction

1.        The appellant in this case is the management company for a residential development on Liverpool waterfront consisting of 93 flats, duplexes and penthouses in three blocks.  It forms part of a larger development known as Royal Quay.  Constructed about 10 years ago, it is a high class development.  Each block has its own lift, door entry system, smoke and fire alarm system and car parking area.  The respondent is the lessee of a flat in one of the blocks.  She holds her flat under a lease for125 years less 10 days from 8 October 1999 made between Liverpool Housing Trust Ltd and Riverside Housing Trust Ltd of the first part, the appellant of the second part and herself of the third part at a rent of £100 per annum.  There is provision for the payment of a service charge to the management company, but the respondent has not paid any service charges since 2006. 

2.        On 15 October 2009 the appellant applied to the leasehold valuation tribunal seeking a determination under section 19 of the Landlord and Tenant Act 1985 of the reasonableness of the service charges sought from the respondent for the years 2007, 2008 and 2009.  The respondent’s case before the LVT was that she did not object to the payment of a service charge or to the proportion payable in respect of her flat.  She said, however, that she was entitled to accounts showing how the service charge had been expended.   She had never received such accounts despite the service of a notice by her solicitors under section 21(1) of the 1985 Act.  She was also concerned that a director of the appellant company, who was also a director of other companies that were employed by the appellant, had failed to make the requisite declaration of interest.

3.        The LVT heard the application on 2 February 2010 and 1 June 2010.  In its decision of 13 July 2010 it held that the appellant was in breach of section 21(1) in failing to provide the information requested in the notice served by her solicitors, and it determined that no service charge was payable in respect of the flat unless and until the appellant supplied to the respondent accounts of the service charge prepared in accordance with the terms of the lease.  It said that it had no jurisdiction to deal with the respondent’s complaint about the director’s failure to declare an interest.  

4.        Despite the fact that it was no part of Mrs Moscardini’s case that the costs on which the service charge was based were not reasonable or had not been reasonably incurred the LVT, as it said, “proceeded to consider the various payments, invoices and receipts which had been provided by the Appellant.”  It disallowed items relating to travel expenses, food and beverages and credit card payments.  It then disallowed other payments, saying,

“20. There are also payments to firms of solicitors for legal advice for pursuing a claim against the developer for defects to the development of which the property forms part.  The Tribunal could find no provision in the Lease for such payments as a service charge item.  Accordingly, such payments were disallowed by the Tribunal in calculating the service charge payable in respect of the Property.  The Tribunal also disallowed other payments for which no satisfactory explanation was available.  There is appended to this decision at Appendix 1 the Tribunal’s decision as to what they considered to be reasonable service charge expenditure for the periods in question, taking the above into account.  The appendix shows the total expenditure incurred.  The Tribunal found that the liability attributable to the Property is one equal share of such expenditure…”

5.        The appendix was in the form of a schedule listing 23 items of expenditure, with columns for each of the years 2007, 2008 and 2009 headed “Claimed”, “Allowed” and “Comments”.  In respect of item 4, Security, the amounts claimed for 2007 (£7,617.80) and 2008 (£12,070.64) were allowed in full; but for 2008 of the £18,815.60 claimed only £12,000.00 was allowed, the comment being “Excessive Increases Over Previous Years”.  In respect of item 11, Legals, in 2007 £16,713.79 was claimed but only £1,584.50 was allowed, the comment being “Non S/C Recoverable Items DWF”; in 2008 £2,382.99 was claimed but only £980.04 was allowed, the comment being “Disallow £1402.95 DWF Non S/C”; and in 2009 £16,978.79 was claimed but only £656.46 was allowed, the comment being “Disallow £16,322.33 Non S/C”.  In respect of item 17, Service Charge Collection Fee, in 2009 £10,898.69 was claimed but only £3,540.00 was allowed, the comment being “Disallow £7358.69”.  The totality of the LVT’s reasoning in relation to these items is contained in these comments and in the passage in paragraph 20 of the decision, which I have quoted above.

6.        The appellant applied for permission to appeal in respect of the LVT’s determinations on these three items.  On 15 February 2011 I granted permission to appeal.  I said in relation to the security costs that on the face of it the LVT had not provided adequate or satisfactory reasons for the reduction that it made in the amount claimed for 2009 and that there was nothing to indicate that it had taken into account the explanation that the appellant said that it had given for the increase in that year or, if it had, why the explanation was unsatisfactory.  In relation to the service charge collection fee I noted that no explanation had been given for disallowing this, and I said that there was an arguable case that the LVT was in error on doing so.  In relation the legal fees I said that this appeared to be a potentially significant matter and that the contention advanced by the appellant should be considered on appeal.  I directed that the appeal be determined by way of review.

7.        At a hearing before me in Liverpool on 28 September 2011 counsel for the appellant and counsel for the respondent said that they were in agreement that the appeal should be determined by rehearing rather than by review, and having heard them I agreed with this and I gave directions that counsel had agreed.  Witness statements with exhibits were subsequently filed and served by Sarah Moore, a director of the appellant company, on behalf of the appellant, and by the respondent, Mrs Moscardini.  At the hearing on 13 July 2012 both these witnesses gave evidence, and I heard submissions from counsel.  I will deal in turn with the three items in dispute.

Security

8.        There is no dispute that the appellant is entitled to include in the service charge the cost of providing security services for estate.  Ms Moore produced the invoices that the company had received for such services for each of the three years.  She said that in her capacity as director of the management company she had contributed to key decisions regarding the selection of contractors and suppliers and also the level of expenditure on management services.  Vertex Security Services had been retained to provide security services at the development at weekends and bank holidays, but they ceased to do this after May 2007, when the company changed to Stone Security Services Ltd.  Vertex had not given good value for money.  Stone increased the hours in which security was provided, to cover from 1900 hours each Friday to 0700 hours on Monday.  Towards the middle of 2008 Stone increased their charges.  This reflected their realisation that providing manned services at weekends was an increasing job.  There was a further increase in 2009.  To start with Stone provided a patrol service, but this was later changed to a stationary guard on site.  They had proved invaluable on site.  They made no charge for bringing extra staff or making additional visits when asked to do so.

9.        Ms Moore said that the increases in security costs were due in large part to the opening in 2008 of the Liverpool Echo Arena on the King’s Dock site immediately adjacent to the development.  The Arena was a development by Liverpool City Council and various private investors to provide world-class conference and arena facilities.  It has a capacity of 11,000 with 7,513 permanent seats, and is the only such facility in Europe.  It was licensed to open late and it also had a licence to sell alcohol.  A new hotel, the Jury’s Inn Hotel, was opened alongside the arena at about the same time.  Figures available on the Liverpool Echo Arena website showed tin the 30 months up to June 2011 the arena had attracted 1.9 million visitors and 230,000 delegates to conferences, the equivalent of 71,000 per month.  The hotel also increased the number of visitors, particularly at weekends. 

10.    Mrs Moscardini said that the real reason for the increase in security costs was the fact that the management company had failed properly to police or control short-term and hotel-type lettings in the Royal Quay apartments, and there had been a large number of incidents which had resulted in the police being called.  She herself had had to call out Stone on many occasions because of noise and nuisance.  The true reason for the increase in security costs was that Stone had demanded increases in their fees because the management company had failed to enforce the covenants in the underleases that allowed only assured shorthold tenancies that had been duly registered with the company.  Ms Moore agreed in cross-examination that short term, including weekend, lets of flats in the development had caused problems in terms of damage and rowdy parties and that part of Stone’s function had been to deal with these.  On a number of occasions the police had been called.  There was, however, no legal action that the management company could take to prevent the problems from arising.

11.    For the appellant Mr Lawrence McDonald submitted that the evidence showed that there was an increased need for security on site both because of the opening of the Liverpool Echo Arena next door and because of the problems arising from the short term lettings of the flats.  The leases contained no covenant against short term letting and the enforcement of a covenant against nuisance etc was not straightforward.  Even if action for breach of covenant could be taken, that was a long-term solution and did not alter the present need for security.  The covenant contained in paragraph 5 of the Sixth Schedule obliged the management company if required by the lessee for the reasonable protection of the demised premises to enforce or assist the lessee in enforcing the covenants entered into by the other lessees, provided that the lessee must if required indemnify the company against the costs of such enforcement.  Mrs Moscardini had never made any such request to the company.  Mr McDonald said that it was reasonable for the company to incur costs in providing security services.  It was not necessary to show that the amount of costs was the lowest that could be achieved or that all landlords would have acted in the same way.  It could not be said that the amount of the security costs was unreasonable.

12.    For the respondent Mrs Victoria Roberts submitted that the figure of £18,815.60 for the 2009 security costs was excessive and that the full amount should not be allowed because the security services provided were not of a reasonable standard and the management company had failed to consult Mrs Moscardini before the contract for the supply of security services was entered into, contrary to section 20 of the 1985 Act.  The use of apartments for holiday lets was contrary to paragraph 13 of Part II of the Fourth Schedule to the lease, which prohibited the use of the premises for any purpose whatsoever other than as a private apartment and in particular prohibited the carrying on of any trade, business or profession from the premises.  Mrs Roberts submitted that the management company had failed to take any adequate steps to prevent the breaches of covenant, that it was the persons occupying the apartments for holidays and short vacations that created the security problems, and that the increased costs ought not to be recoverable from innocent lessees.  Moreover the disruption was not satisfactorily managed and the security services were not of an adequate standard.  In any event the management company had failed to provide a summary of the security costs as it was required to do under paragraph 4 of the Seventh Schedule, and this failure meant that the costs were not recoverable.

13.    The invoices produced by Ms Moore relate to security services for the whole of the Royal quay development, and the amount attributable to that part of the development for which the management company was responsible was entered in manuscript on each invoice.  The invoices show that in the first half of 2007, when Vertex were providing the service, the basic weekend cost was about £141.  In the second half of 2007, after Stone had taken over, the cost had become about £151, and it remained at this level until June 2008.  From July 2008 the cost more than doubled to about £317 per weekend, and from July 2009 it increased to about £323.  It appears that the Vertex charges were based on an hourly rate of £7.50.  Stone’s hourly rate in December 2008 was £10.50, and in December 2009 it was £10.93.  I am satisfied on the evidence that the substantial increase was attributable to the additional security that was provided as a response to the large numbers of people that were attracted to the new arena and the problems arising from short term lets in the development.  I am satisfied in addition that this response was appropriate, and that the service provided was of a reasonable standard.

14.    The respondent’s principal contention was that the increase was due to the problems arising from the short-term letting of flats and that it should be disallowed because the management company should have taken action against the short-term letting by enforcing the covenants in the leases.  Ms Moore’s view was that there was no legal action that the management company could have taken to prevent the problems from arising.  I am not sure about this, however, and it seems to me that the management company ought to give serious consideration to the steps that it might take in this respect.  But there is nothing that would lead me to conclude that any such steps could have been taken successfully within the period of the service charges that are in issue so as to reduce the need for the security services. 

15.    The respondent also contended, without any elaboration of the point, that the management company was in breach of the consultation requirements in section 20 of the 1985 Act, but in view of the small amount in issue this is not a matter that has any consequence for the amount payable by her and accordingly does not require consideration.  The contention that no service charge in respect of security costs is payable because there has been a failure to provide a summary under paragraph 4 of the Seventh Schedule is not, in my judgment, correct, since the lease does not make liability contingent on the provision of such a summary.

16.    My conclusion in relation to the charges for security services, therefore, is that the evidence establishes that these were reasonable and were reasonably incurred.

Service charge collection fees

17.    The LVT, as I have noted above, gave no reason for disallowing £7,358.69 out of the £10,898.69 claimed for 2009 in respect of service charge collection fees.  Ms Moore said that the management company instructed solicitors, J B Leitch LLP to recover on its behalf service charges and ground rents due under each lease at the development.  J B Leitch invoiced the company quarterly for their fees for this, and Ms Moore produced what she said were the relevant invoices.

18.    Under paragraph 7 of Part II of the Seventh Schedule the following are recoverable as part of the service charge:

“The fees and disbursements paid to any Accountant Solicitor or Surveyor or other professional person in relation to the preparation audit or certification of any accounts of the costs expenses outgoings and matters referred to in this Schedule and collection of the rent and service charges from the lessees of the apartments and dwellinghouses within the Property.”

19.    Mrs Roberts submitted that paragraph 7 of Part II of the Seventh Schedule did not entitle the management company to recover the rent and service charge collection charges.  She said that the first part of the provision dealt with the preparation, certification and auditing of accounts, so that the second part, after the word “and”, must mean that the only rent and service charge collection costs that are recoverable are those incurred when the rent and service charges have been so prepared, certified and audited.  The second part could not be read in isolation from the first.  The provision was obviously targeted at those instances where the service charge had required auditing and certification, thereby justifying the professional fees in the first part of the provision and, if the rent and service charges so audited were unpaid) the professional fees in the second part.  I cannot accept this argument.  Rent is not mentioned in the first part of the provision, and I cannot see how professional fees for its collection could only become part of the service charge if they had appeared in audited accounts.  The second part of the provision is clear in its terms.  It covers solicitors’ fees and disbursements for the collection of the rent and service charges from the lessees.  Such amounts may be included in the service charge, and are payable subject to the statutory limitation of reasonableness in section 19 of the 1985 Act.  The use of solicitors for the routine collection and handling of rent and service charges on behalf of the management company seems to me to be clearly reasonable and I can see nothing that would suggest that the fees charged were unreasonably high.

20.    Included in the invoices were ones in respect of charges for professional services for action taken to recover unpaid charges from particular lessees.  Included in the latter, for example, were two invoices totalling £2,383.86 relating to recovery proceedings taken against a Mr and Mrs Uzoma.  Ms Moore said that that amount had now been paid by Mr and Mrs Uzoma.  Mrs Roberts submitted also that the cost of recovering service charges from defaulting tenants should not fall upon those tenants who had observed the terms of their leases.  Such a cost is, however, in my view manifestly reasonably incurred because failure to recover the amount would mean that the deficit would fall on the service charge account.  Ms Moore made clear that such costs would be sought from the tenant and, when recovered, would be credited to the service charge account, as had happened with Mr and Mrs Uzoma.  But the costs had to be incurred and met.

21.    My conclusion on service charge collection fees, therefore, is that the amount claimed for service charge fees in 2009, £10,898.69, was reasonably incurred and reasonable in amount.

Legal fees

22.    The legal fees that were disallowed by the LVT, and which totalled over £30,000, related to advice received in relation to defects in the building with a view to a claim being made against the developer.  Ms Moore said that there were many and extensive defects, the cost of dealing with which would fall on the service charge unless they were remedied at the developer’s expense.  Moreover it appeared impossible to get to the bottom of some of the defects, in particular water ingress, without the developer being brought back to remedy them.  An extraordinary general meeting of the company was held at the beginning of 2008 and all the lessees had been invited to attend.  Over 100 did so, including Mrs Moscardini.  Advice was given by a solicitor and a surveyor and the meeting resolved to authorise the directors to take proceedings against the developers.  The management company itself could not take action because it had no proprietary interest in the development, although, Ms Moore said, it was very soon going to acquire the lessor’s interest.  In consequence proceedings had been commenced with a number of lessees as the claimants.

23.    At my request the minutes of the meeting that Ms Moore had described were produced following the hearing.  They are the minutes of joint annual general meetings of Kings Waterfront (Management Company) Ltd and Liverpool Quays Management Ltd on 26 September 2007.  They record as having been in attendance Chris Scott, partner in DWF, solicitors, the director and chairman of the Kings Waterfront management company, the director and chairman of the Liverpool Quays management company, a director and company secretary, two other directors (including Ms Moore) and 12 lessees.  I was told that additional lessees attended but were not recorded as having done so.  Mr Scott is recorded as having spoken about the large number of defects that had been “formally put to the developers” and the minutes set out a summary of the discussion that took place.  The chairman asked for ratification for the management companies to continue to use DWF “in provision of their services to the Royal Quay site and its case against the developers”, and the minutes give the names of those who proposed and seconded this in relation to each of the companies.

24.    The case for the appellant was that it had power to incur legal expenses for the purpose of legal proceedings against the developers under paragraphs 18 and 19 of the Seventh Schedule, which relate to:

“18. All other expenses (if any) incurred by the Management Company in and about the maintenance and proper and convenient management and running of the Property including in particular any interest paid on any money borrowed by the Management Company to defray any expenses incurred by it and specified in this Schedule

19. All costs and expenses (other than those specified above) of whatsoever kind incurred by the Management Company (including any proper sum for future or contingent liabilities and any reasonable reserve) and a certificate under the hand of the Secretary of the Management Company as to the amount under this paragraph at any time shall be conclusive.”

25.    Although it could be said that the financing of legal advice to enable the lessees to take proceedings against the developer was related to the maintenance of the property, in that, if the proceedings were successful, the amount that the company would have to spend on maintenance would be reduced, the cost of such financing was not, in my judgment, incurred “in and about the maintenance” (or, I should add, “the proper and convenient running”) of the property.  Paragraph 18 in these words seems to me to be prescribing a much more immediate connection between the expenditure and the maintenance, and I do not think that it assists the appellant.

26.    Paragraph 19 is expressed so widely that I find it hard to see what it might cover.  As expressed (“All costs and expenses…of whatsoever kind incurred by the Management Company”) it covers everything that the company might choose to spend money on, but if given effect to in this way it would render of no significance all the limitations contained, expressly or impliedly, in the earlier, specific paragraphs.  For this reason I do not think that it is possible to give effect to it in the terms in which it is expressed.  Paragraph 17 contains express provisions dealing with the cost of proceedings.  It provides:

“17. Any expenses costs and fees incurred by the Lessor or the Management Company under or in relation to Section 136 of and Schedule 19 to the Housing Act 1980 (or any enactment modifying or replacing the same) and any expenses costs or fees incurred by the Management Company or the Lessor under in relation to or otherwise howsoever arising out of the arbitration or contemplated arbitration or any proceedings or dispute between two or more of the Lessor the Management Company the Lessee and the lessee or lessees of any of the Other Apartments under any of the provisions of this Lease as a consequence of the alleged default of the Lessee (or the equivalent provisions of any lease of any of the Other Apartments or in consequence of the alleged default of a lessee of any of the Other Apartments.”

27.    In the light of this very specific provision dealing with circumstances in which the costs of legal proceedings are recoverable as part of the service charge I do not think that it is possible to construe paragraph 19 as conferring an extra power (in unlimited circumstances) to include in the service charge costs relating to proceedings.  The fact that the costs in question here are related to proceedings taken not by the management company but collectively by individual lessees puts them, in my view, even further beyond whatever scope the paragraph may have.  The contra proferentem rule would also work against a wide meaning being given to it.

Conclusion

28.    The appeal is allowed in respect of the costs of security services and service charge collection fees.  Nothing requires to be deducted from the amounts included in the service charge for these in the relevant years.  The appeal is dismissed in relation to the costs of legal services.  The lease does not permit the management company to include these in the service charge.

Dated 25 July 2012

George Bartlett QC, President