UPPER TRIBUNAL (LANDS CHAMBER)

`

UT Neutral citation number: [2013] UKUT 0375 (LC)

LT Case Number: LRX/105/2011 & LRX/178/2011

 

                            TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

 

LANDLORD AND TENANT – service charges – whether overheads payable in addition to administration charge – whether leaseholder’s service charge reasonably apportioned by reference to borough-wide costs – whether failure to consult renders no service charge payable – effect of “indulgent stance” taken by LVT – appeals allowed – cross-appeal allowed in part

 

 

IN THE MATTER OF AN APPEAL AGAINST TWO DECISIONS OF THE

LEASEHOLD VALUATION TRIBUNAL FOR THE

LONDON RENT ASSESSMENT PANEL

 

 

BETWEEN                    LONDON BOROUGH OF SOUTHWARK                        Appellant

and

                                         (1) GARY PAUL AND OTHERS         Respondent in LRX/105/2011

                                         (2) JURGEN BENZ                                Respondent in LRX/178/2011

                                                   

 

Re: (1) Chalfont House,

 Keetons Road,

 London SE16 4BZ

 

(2) 10 Denesmead,

 Herne Hill

 London SE24 9LX

                                                                    

            Before: Her Honour Judge Karen Walden-Smith and Mr Andrew Trott FRICS

 

        Sitting at: Upper Tribunal (Lands Chamber) 45 Bedford Square, London WC1B 3AS

on 13-15 May 2013

 

Philip Rainey QC and Angela Jack, instructed by Southwark Legal Services, for the Appellant

The First Respondent for himself and the other Respondents in LRX/105/2011

The Second Respondent in person.

 

 

 

© CROWN COPYRIGHT 2013

The following cases are referred to in this decision:

 

Lloyds Bank v Bowker Orford [1992] 2 EGLR 44

Westminster City Council v Pottle (Central London County Court, 10 April 2000, unreported)

London Borough of Brent v Hamilton LRX/51/2005 (unreported)

Norwich City Council v Marshall LRX/114/2007 (unreported)

Wembley National Stadium Ltd v Wembley London Ltd [2008] 1 P & CR 3

Palley v London Borough of Camden [2010] UKUT 469 (LC)

London Borough of Lewisham v Rey-Ordieres and Ors [2013] UKUT 014 (LC)

South Tyneside Council v Ciarlo & Hudson [2012] UKUT 247 (LC)

Carey-Morgan v de Walden [2013] UKUT 0134 (LC)

Taylor v London Borough of Southwark LON/00BE/LSC/2006/0152 (known as “Mandeville”)

London Borough of Southwark v Owolabi LON/00BE/LSC/2009/0487

 

DECISION

Introduction

1.           We are concerned with two appeals and a cross-appeal, heard together, against two decisions of the Leasehold Valuation Tribunal (LVT) for the London Rent Assessment Panel.  The appellant landlord in both appeals is the London Borough of Southwark (LBS or the appellant).

2.           The first appeal (LRX/105/2011) concerns properties on the St Crispins Estate in London SE16.  There are seven leaseholder respondents, the details of whom are given in Appendix 1.

3.           The second appeal and the cross-appeal (both LRX/178/2011) concern 10 Denesmead, Herne Hill, London SE24 9LX.  The leaseholder respondent and cross-appellant is Mr Jurgen Benz.

4.           The first appeal arises from a decision of the LVT dated 31 May 2011 and concerns an application made by the leaseholders under section 27A of the Landlord and Tenant Act 1985 (“the 1985 Act”) for a determination of the reasonableness of service charges for the five years ending 31 March 2004 to 2008.  The appeal is made against that part of the LVT’s decision headed “Overhead Allocations” (paragraphs 50 to 62) in which the LVT determined that overhead charges were not reasonably incurred and should be disallowed.

5.           The LVT refused permission to appeal on 3 August 2011.  The then President of this Tribunal, George Bartlett QC, granted permission to appeal on 20 October 2011 on each of the five grounds submitted by LBS.  Permission was confined to the LVT’s decision on overhead charges (paragraph 62 of its decision) and the appeal was to be by way of rehearing.

6.           The second appeal arises from a decision of the (differently constituted) LVT dated 26 September 2011  and concerns an application under section 27A of the 1985 Act made by the leaseholder, Mr Benz, for a determination of the reasonableness of service charges for the three years ending 31 March 2008 to 2010.  The appeal is made against the LVT’s decision to disallow that part of the service charge comprising overheads for each of those three years.

7.           The LVT granted permission to appeal on 10 November 2011 and did so in the knowledge of the President’s decision on the application for permission to appeal in the first appeal dated 20 October 2011.  Although the LVT did not so state, the second appeal was also by way of rehearing.

8.           The cross-appeal arises from the LVT’s decision dated 26 September 2011.  There were three grounds of appeal.  The then President of the Tribunal granted permission for the cross-appeal, on all three grounds, on 20 February 2012 stating that it was to be dealt with by way of review.

9.   Mr Philip Rainey QC and Ms Angela Jack of counsel appeared for the appellant and called Mr Gulam Dudhia FCCA, the Revenue Service Charge Accountant of LBS’s Home Ownership Services and Tenant Management Division (HOS), and Ms Louise Turff, the Service Charge Construction Manager in HOS, as witnesses of fact.

10.        Mr Gary Paul appeared as a respondent in person and for the other respondents in the first appeal.  Mr Jurgen Benz appeared as the respondent in person in the second appeal and as the appellant in person in the cross-appeal.  Mr Benz called Mr Peter Kokkinos, a leaseholder on the Dickens Estate, and Mr Ed Heron, a founder member of the Leaseholder Association of Southwark and a former Vice-Chair of the then Leaseholder Council, as witnesses of fact.

The leases

11.        Three sample leases were adduced.  Two of the leases (3 Chalfont House and 7 Chalfont House) relate to the first appeal while the third lease (10 Denesmead) relates to the second appeal and the cross-appeal.  The leases on 3 Chalfont House and 10 Denesmead, both granted in 1988, are in the same form.  The lease on 7 Chalfont House was granted in 2003 and although similar to the 1988 leases it differs from them in some respects, notably in the definition of the services to be provided by LBS and in not containing any provisions about a Capital Expenditure Reserve Charge in the Third Schedule.  Instead the 2003 lease contains an additional sub-paragraph 7(9) in the Third Schedule which provides for the installation, by way of improvement, of double-glazing and an entry-phone system should LBS, in its absolute discretion, decide to install them. 

12.        We were not told how many of the respondents had leases in the 1988, 2003 or other form.

13.        In both the 1988 and 2003 form of lease the lessee covenants with LBS to pay the service charge contributions set out in the Third Schedule.  Paragraph 6 of that schedule states:

“(1)   The Service Charge payable by the Lessee shall be a fair proportion of the costs and expenses set out in paragraph 7 of this Schedule incurred in the year.

(2)     [LBS] may adopt any reasonable method of ascertaining the said proportion and may adopt different methods in relation to different items of costs and expenses.”

14.        Paragraph 7 of the Third Schedule provides that “The said costs and expenses are all costs and expenses of or incidental to …” the carrying out and provision by LBS of various categories of works and services.  In particular they include the costs and expenses of LBS in complying with its repairing obligations under clause 5(2) to (4) of the 1988 lease (clause 4(2) to (4) of the 2003 lease) and, under paragraph 7(6), “The maintenance and management of the building and the estate.” In the 2003 lease a parenthesis is added to the end of this sub-paragraph: “(but not the maintenance of any other building comprised in the estate)”.

15.        Paragraph 7(7) provides for the recovery of the costs and expenses incurred by LBS for:

“The employment of any managing agents appointed by [LBS] in respect of the building or the estate or any part thereof PROVIDED that if no managing agents are so employed then [LBS] may add the sum of 10% to any of the above items for administration.”

The statutory provisions

16.        The relevant statutory provisions are contained in sections 18 and 19 of the1985 Act:

“18    Meaning of ‘service charge’ and ‘relevant costs’

(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, improvements or insurance or the landlord’s costs of management, and

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

(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.

19      Limitation of service charges: reasonableness

(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 the provision of services or the carrying out of works, only if the services or works are of a 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.

…”

The LVT’s decisions

The first appeal

17.        The first appeal is concerned only with the issue of overheads.  The relevant passage of the LVT’s decision is contained in paragraphs 50 to 62:

         “OVERHEAD ALLOCATIONS

50.     It was brought to the Tribunal’s attention, initially in connection with the Care and Upkeep costs, that the respondents added a further charge to cover their supervision of the contract.  It then became apparent, in the course of the hearing, that such additional costs were charged in respect of most service charge items.

51.     Asked to explain Mr Dudhia said that he worked out on an annual basis what staff time was allocated to specific jobs and, as a result, a percentage figure was achieved which was then applied.  The percentage varied from year to year.  He defended the practice on the basis that it was necessary for the respondents to recover their costs.

52.     Because the Tribunal expressed some disquiet about this practice the respondents called, on the second day of the hearing, Mr Munro, an accountant, to provide more information.

53.     Mr Munro read to the Tribunal the provisions of Section 18 of the Landlord and Tenant Act 1985 which provides a definition of service charges and says that ‘costs’ includes ‘overheads’.  He said that the respondents’ charge of 10% for administration, as provided for in the leases, covered only the administration of the service charge and not the supply of the services.

54.     The Tribunal noted that the applicants, according to their leases, were to pay ‘a fair proportion of the costs and expenses’ of specific listed items which included the employment of managing agents.  If no managing agents were employed then the respondents were allowed to add 10% to any of the specified items ‘for administration’.

55.     The lease is paramount in dealings between landlords and tenants and in the Tribunal’s opinion this provision does not permit the respondents to add annually varying percentages to any service charge cost and then add 10% to those already artificially inflated costs.

56.     In the private sector fees of managing agents are set to cover the administration and the provision of services and the Tribunal is not persuaded that these leases or public sector practice make acceptable such radically different provision as is being applied here.

57.     Whilst the Tribunal would accept that 10% of even the inflated costs produces a low cost for the work of managing the property, they see this as a fault of the leases as well as being in contravention of the Royal Institution of Chartered Surveyors preferred methodology of charging a flat fee per unit.

58.     Moreover, even if they are wrong in their interpretation of the leases the Tribunal would point out that the respondents are able only to recover reasonable costs.  With no explanation provided of the clearly complicated calculation of the annually varying percentages, the reasonableness of the additional costs cannot be determined.

59.     Further, the Tribunal notes that the practice becomes obvious only when supporting information is requested about specific costs, since the additional charges are not apparent on the service charge invoices sent to leaseholders.

60.     The Tribunal considers this lack of transparency particularly worrying in the context of so few actual invoices – much of the work considered above was done in house on the basis of scheduled rates – and the accuracy of those costs was not easily examined from the short computerized records of the works made available to the Tribunal.

61.     In this context, and whilst not drawing too many conclusions from one isolated example, the Tribunal recalls the invoice at paragraph 33 above [rubbish removal].

62.     Accordingly, the Tribunal is not satisfied that these overhead charges are reasonable and reasonably incurred and, therefore, determines that they should be omitted from each of the years in issue.”

The second appeal

18.        The second appeal is also only concerned with the issue of overheads.  This is first referred to by the LVT in its consideration of the service charge year 2007/8 at paragraphs 14 to16 of its decision:

         “14.   A sum appears in the printout to which reference has been made of £429.87 in respect of ‘estate overhead allocation at 2.66%.’  There was some discussion about this figure which the Applicant challenges.  It transpires that the Respondent, in addition to charging its management charge at 10% (described as ‘administration cost’) also includes within the ‘unitemised repairs’ another figure described as ‘overheads’.  This was explained on behalf of the Respondent as covering ‘our own administration’ in dealing with matters which the contractor will not deal with and also in dealing with the cost of the ‘home ownership department’.  As understood by the Tribunal, the Respondent was making a distinction between the work involved in producing the service charge accounts, collecting the charges and answering queries about work if necessary on the one hand – and separately the cost of a technical officer who might attend the scene of work, draw up a list of repair costs and thereafter, through the repairs section of the Respondent, possibly inspect the work and ensure that it is carried out to a satisfactory standard.

15.     The Respondent argued that the first aspect was all part of the administration or management charge but the second aspect of this work (drawing up specifications of works and inspecting to make sure they are carried out in an appropriate way) was an overhead which they were entitled to charge separately.  Moreover, of course, not only were they entitled to charge that as an overhead but thereafter they could charge 10% on this overhead as part of the main management fee.  The Applicant argued that 10% was a perfectly respectable management fee and the additional overlay as described above was unreasonable.  In this respect, the Tribunal is inclined to agree with him.  At the Third Schedule to the lease, paragraph 7(7) it is provided that the Respondent may appoint managing agents in respect of the building or the estate and that if no such managing agents are so employed then the Respondent may itself add the sum of 10% to any of the items of cost provided for in the lease as a service charge, by way of administration.  In addition paragraph 7 starts with the words ‘the said costs and expenses are all costs and expenses of or incidental to…’.  The Respondent argued that these words ‘of or incidental to…’ was the peg upon which this ‘overheads’ charge was permissible.

16.     It seems to the Tribunal that the contractual entitlement is not as clear as suggested on behalf of the Respondent, and no express provision is made for this overheads charge.  In any event the matter is subject to the qualification imposed by the Act that the sum charged should be reasonably incurred.  It seems to the Tribunal that, as already indicated, the Respondent is properly reimbursed for its administration management service by the 10% already provided for in the lease, and the distinction made by the Respondent and alleged to entitle this ‘overheads’ charge is not well made out.  By comparison with the private sector, a party appointing a managing agent might be surprised to be told that a reasonably generous fee of 10% of the overall cost, covered only the preparation of relevant paperwork and that no ‘management’ would be offered in respect of supervision or checking of any maintenance or other works, unless an additional fee was paid.  Of course often where major works are concerned there may be such an additional fee in many management agreements.  That was not however how the Tribunal understood the point to be made on behalf of the Respondent, but rather that the two areas of activity were completely distinct and separately chargeable.  For the reasons indicated the Tribunal does not agree with this approach, and the overheads fee should be taken out of the calculation and the appropriate reduction made.”

19.        The LVT reached the same conclusion about overheads for subsequent years at paragraphs 23 and 26 of its decision, adopting the same reasoning as that described above.

The cross-appeal

20.        The first ground of the cross-appeal concerns the LVT’s approach to borough-wide costs which it explained in paragraphs 7 to 9 of its decision when considering the service charge year 2007/8:

         “7.     The first matter challenged by the Applicant was the cost as listed in the service charge accounts for this year appearing at page 57 in the bundle of £244.21p in respect of ‘Care and Upkeep’.  As understood by the Tribunal this involves essentially the cleaning of the block and the Estate within which it is situate.  The Applicant’s main objection to this was that this figure is derived from a ‘Borough-wide’ figure of £5,572.81p appearing at page 59 in the bundle.  He said that this method of calculating such costs was entirely unreasonable and that he should not be paying for anything other than those costs that were referable to his block and his Estate within the meaning of his lease.  He cited the Grant Thornton report as support for the contention that this approach is unreasonable, and indeed an earlier Tribunal Decision.  He had no particular complaint about the quality of the work either directly or through his tenants.  He did make a comparison with another flat which he owns in Wandsworth, which he told the Tribunal was bigger, but yet in respect of which he was paying 20% or 30% less.

8.       The Respondent’s position, as explained by Mr Gulam Dudhia, an accountant for the Respondent, was that it was accepted that the calculation had indeed been carried out on a ‘Borough-wide’ basis which overall had been about £11,000,000, and then costs were allocated to individual estates by reference to a familiar bed-weighting calculation.  He argued that this approach was sustainable within clause 6(2) of Schedule 3 to the lease, which entitled the Respondent to adopt ‘any reasonable method’.  Of course this is rather circular in some respects, because the Tribunal had to determine whether the method and consequent cost is indeed ‘reasonable’ for the purposes of the Act.

9.       The conclusion of the Tribunal on this matter is that it is very doubtful that the incorporation of Borough-wide costs within this calculation was in fact sustainable under the provisions of the lease (and indeed Mr Dudhia told the Tribunal that the methodology changed in later years).  It is not proposed to go into a detailed analysis in this regard, simply because notwithstanding the method adopted, it seems to the Tribunal that the sum claimed is in itself perfectly reasonable.  On a weekly basis it amounts to less than £5 for cleaning of the block and the estate, and in respect of which the Applicant candidly made no complaints as to the quality of the service.  In all the circumstances, this sum is allowed as claimed.”

21.        The second ground of the cross-appeal concerns the LVT’s misgivings about the costs of road surfacing and drainage works which it dealt with at paragraphs 13 and 22 of its decision respectively:

         “13.   As to these items [perimeter wall and road surfacing], the evidence in respect of the wall was not particularly satisfactory from either party but, on balance, the Tribunal accepted the account given on behalf of the Respondent, albeit somewhat reluctantly in the absence of invoices, to the effect that the overall cost for the rebuilding of a perimeter wall as charged was not excessive.  This sum is allowed.  Similarly, so far as the work described as ‘works to reduction of surface road’ is concerned, the Tribunal heard evidence from the Respondent to the effect that it accepted that the cumulative cost of these works indeed exceeded the threshold necessary for consultation to take place.  For this reason a credit was applied to the account (which indeed appears at page 63 in the bundle) to bring the cost of the works below the threshold.  Accordingly, it seems to the Tribunal that the Applicant has suffered no prejudice in this regard, and has had the sum paid reduced to take into account the lack of consultation.  The sum is allowed as claimed (although it does seem to the Tribunal, that it would be preferable for the future, if both the spirit as well as the letter of the Act were complied with, and early consultation given, rather than this type of ex post facto reduction).

         …

22.     The Applicant took the further point that some works carried out to the drainage system (see page 71 of the bundle) required consultation under Section 20 of the Act which did not take place.  The Respondent accepted this and has undertaken at page 174 of the bundle to apply a credit in order to ‘bring the individual contribution of the Applicant within the allowable limit.’  On the basis that this credit is given and applied to the Applicant’s service charge account, no further finding is made in this regard.”

22.        The final ground of the cross-appeal concerns the LVT’s reference in paragraph 25 of its decision to an “indulgent stance” about LBS’s lack of invoices to support the charges that it seeks to recover:

         “25.   The Tribunal is not unsympathetic to the Applicant in this respect and indeed in his challenge of some other estate charges appearing at page 81 in the bundle.  It seems to the Tribunal that it would be much more helpful on the part of the Respondent to have something very much more specific to supply leaseholders with, in order to reassure them that works have been legitimately and satisfactorily carried out.  The Respondents appear to have a system whereby work is entered on a data system kept on file in a computer for internal purposes, but no paperwork is otherwise raised itemising and costing the work on an individual basis, in the way that normally would be available to leaseholders in the form of invoices or primary documents.  On this occasion the Tribunal proposes not to interfere with these charges, and was satisfied on the evidence that they represent reasonable charges for work which was indeed carried out.  The Respondent may wish to think carefully about whether or not a subsequent Tribunal would take a similarly indulgent stance, and particularly given the detailed provisions of Section 21 of the Act.”

The issues

23.        The issues in the first and second appeals are:

(i)      whether the charges for overheads and administration are recoverable in principle;

(ii)    whether these charges are recoverable as a matter of fact; and

(iii)   whether the amounts demanded from each respondent are a “fair proportion” of the total.

24.        The issues in the cross-appeal are:

(i)      whether the LVT was wrong to allow an allocation for the comprehensive cleaning contract (CCC) that was based upon borough-wide costs;

(ii)    whether the LVT was wrong to have allowed costs in respect of certain major works where LBS had not consulted its leaseholders; and

(iii)   whether the LVT was wrong to allow costs that were not supported by invoices and in so doing had taken an indulgent stance towards LBS.    

The first and second appeals:  issue (i) – whether charges for overheads and administration are recoverable in principle

25.      The service charge provisions are set out in paragraphs 6(1), 6(2) and 7 of the Third Schedule to the leases which are recited in paragraphs 13 to 15 above.

The case for the appellant

26.        It is the appellant’s case that, by virtue of the lease provisions, the overheads and the administration charge both form part of the true costs recoverable under the leases and that the respondents are liable to pay them.

27.        The details of the overheads and the administration charge are discussed under issue (ii) below (paragraph 41 et seq), but in summary the appellant’s (Ms Turff’s) evidence was that the administration charge of 10% was designed to (but in practice did not) cover the costs of HOS in calculating, invoicing and collecting service charges from leaseholders, in addition to responding to queries, being a first point of contact and conducting litigation.  Overheads were the indirect costs that were incurred by other parts of the appellant’s Housing Department, excluding HOS, such as rent, stationery, IT and, especially, salaries in providing services to LBS’s residential property portfolio but which could not be associated directly with a particular activity.  It was the appellant’s case that there was no overlap between the administration charge (which was solely concerned with the costs of HOS) and overheads (which was not concerned at all with the costs of HOS).  

28.      Mr Rainey helpfully referred to a number of authorities on the issue of what properly ought to be included in the service charge.  In Lloyds Bank v Bowker Orford [1992] 2 EGLR 44, David Neuberger QC (then sitting as a Deputy Judge of the Chancery Division of the High Court) held that “the expression ‘a total cost to the lessors … of providing services’ is a wide one, and I think that, as a matter of normal language, it would include the cost of employing managing agents to organise and supervise the provision of such services.”  He went  on to say that if the managing agents were employed for the organisation and supervision of different services, then the cost of employing managing agents would need to be apportioned in accordance with the liability of the leaseholders under the terms of the lease.

29.      In the unreported decision of His Honour Judge Green QC sitting at Central London County Court in Westminster City Council v Pottle (2000),  Westminster City Council were suing Mr Pottle for the service charge in relation to a particular year where the lessees were contending that the service charges were too high. The leaseholders were disputing their obligation to pay centrally incurred overheads in a similar way to the respondents in the current appeals.  In Pottle the challenge to paying the overheads failed.

30.      The lease in Pottle provided in clause 3 that:

         “The lessee hereby further covenants with the lessor that the lessee will …

(c)                 from expiry of the reference period or the initial period, as the case may be, pay to the lessor during the remainder of the term hereby granted such annual sum as may be notified to the lessee by the lessor from time to time as representing the due proportion of the reasonably estimated amount required to cover the costs and expenses incurred or to be incurred by the lessor in carrying out any improvements or providing any additional services to the reserve property or to the estate as the lessor may in its absolute discretion from time to time … consider necessary and which are for the benefit of the demised premises or lessee…

(d)                Pay to the lessor on demand the amount by which the estimated sum paid by the lessee to the lessor under sub-clause (c) of this clause in respect of the management charges is less than the due proportion of the total monies properly and reasonably expended or retained by the lessor, such due proportion being a proportion of the total sum expended or retained by the lessor as aforesaid in respect of or otherwise for the benefit or use of the property.”

On his construction of the lease, the judge found that clause 3(c) permitted the lessor to charge the “amount required to cover the costs incurred” in carrying out the obligations or functions contained in clauses 3, 4, and 6 or in performing the covenants in the Ninth Schedule.  Clause 3(d) permitted the lessor to charge the “total monies properly and reasonably expended as aforesaid”, and clause 6(a) obliged the lessor to “manage in a proper and reasonable manner”.  The effect of the three clauses being, amongst other things, that the charge for each item of management and each item of service and repair must be proper and reasonable, and the decision to carry out each item of service, repair and management must be proper and reasonable.

31.        The judge further construed the lease:

“…as entitling the claimants to charge a ‘reasonably estimated’ amount of overheads, whether at Little Venice and/or at the central housing department level.  Most of the services are provided by outside contractors, but the cost of providing the services does not end with paying the contractor.  His work has to be commissioned, monitored and then paid for.  That all costs time and money.”

 The judge found that the issue to be determined was whether the share of overheads had been “reasonably estimated”.  Counsel for the lessee accepted that where a charge is based on apportionment, the basis of apportionment must be fair and reasonable.    

32.        The Lands Tribunal in London Borough of Brent v Hamilton LRX/51/2005 (unreported) considered the recoverability of indirect costs where Brent sought to recover a management fee of 15% in the absence of an express term in the lease permitting the recovery of a management fee. The lease provided that the respondent was liable to pay a reasonable part of the expenditure incurred by the council during the financial year “in fulfilling the obligations and functions set out in clause”.   The Tribunal had to consider whether the management fee was recoverable and whether 15% was a reasonable part of the expenditure incurred.   The former President of the Lands Tribunal, George Bartlett QC, held the following (at paragraph 11):

“If repairs are to be carried out … someone will have to be paid for doing the work and someone will have to arrange for the work to be done, supervise it, check that it has been done, and arrange for payment to be made.  Since the Council can only act in these respects through employees or agents it will have to incur expenditure on all these tasks.   If it does incur such expenditure, the lessees will be liable to pay a reasonable part of it.

…

13.          The provisions are clear.  Under clause 4(A)(i) and (ii) it is the total expenditure incurred in fulfilling the clause 6 obligations that is recoverable.  That certain of the work done in fulfilment of those obligations – for example, arranging for work to be done or approving payment for it – may be classified as management does not take it outside the scope of clause 4(A)(i) and (ii).  It is a question of fact what management tasks were performed in the financial year in question in fulfilling the council’s obligations under clause 6.  It is also a question of fact what expenditure was incurred on them and (for the purpose of applying the statutory provisions) whether such expenditure was reasonable.  The cost of employing agents to carry out any of the functions under clause 6, both for managerial and other tasks, would be covered by clause 4(A)(i) and (ii) provided that it was reasonable.”

33.      The decision in Brent supported the contention of the appellant that overheads are a recoverable sum and in Norwich City Council v Marshall LRX/114/2007 (unreported) the then President reiterated what was said in Brent and referred to the decision that had been made by the then Chancellor, Sir Andrew Morritt, in Wembley National Stadium Ltd v Wembley London Ltd [2008] 1 P & CR 3 in which he held as follows:

“44.        The principal dispute in this context was whether the costs of management might be included and if so to what heads of expenditure they might extend.  For WNSL it was contended that provisions relating to service charges are restrictively interpreted, see Mummery LJ in Gilje v Charlgrove Securities Ltd  [2002] 1 EGLR 41, [32].  No doubt, too, it is appropriate for the interpretation to be more restrictive in the case of residential tenancies as opposed to a commercial transaction between two substantial parties.  At all events I can find nothing in the wording of this lease in general and the definitions of “Expenditure” in particular to confine the relevant services to the actual service to the exclusion of any management cost incurred in its provision.  Why, for example, should the wages of the employee who actually applied the tarmac to the surface of the car park be included but the salary of he who arranged for the employee to do it and for the tarmac to be available for such application be excluded.   In my judgment the wording of the definition embraces both.

…

46.          In relation to the heads of expenditure to which the cost of management might extend Mrs Viazzani set out a list in para 17(b) of her witness statement.  The list included office accommodation, training, medical insurance and pensions.  It is said that these items of expenditure are all ingredients in the cost of providing the lessor’s services.  It is contended on behalf of WNSL that such costs could not be shown to have been ‘properly incurred by the Lessor in complying with its obligations.’   This does not appear to me to be a sufficient response to the contention of WLL.  If such expenditure can be shown to have been so incurred I see nothing in the definition to exclude it.   The further from actual compliance with the Lessor’s obligations the incurring of the cost or expense lies the less likely it will be that such expenditure was incurred ‘in’ such compliance.  But I see no reason in principle to exclude indirect costs of management and corresponding ‘overhead’ expenses.”

34.      Mr Rainey submitted that an administration fee could be added to a charge which included indirect costs such as the overheads in the present appeals.  He relied upon Palley v London Borough of Camden [2010] UKUT 469 (LC) in which His Honour Judge Mole QC considered a similar issue.   In Palley the “Service Charge” was defined in the relevant lease as:

“All those costs and expenses incurred or to be incurred by the Landlord in connection with the management and maintenance of the estate and the carrying out of the Landlord obligations and duties and providing all such services as are required to be provided by the Landlord under the terms of the Lease…” 

After reference to the authorities referred to above, including Pottle, Wembley National Stadium, LB Brent v Hamilton, and Norwich City Council v Marshall, His Honour Judge Mole concluded  that the plain and natural meaning of the leases in Palley was that the landlord was entitled by way of service charge to all those direct and indirect costs and overheads, including management costs, that were incurred by the landlord in carrying out his obligations under the lease together with an additional management charge for the estate and the building in which the flat was situated, calculated as 10% of all other items included in the relevant service charge.

35.      Mr Rainey said that subsequent to Palley, the Lands Chamber of the Upper Tribunal had given further consideration to whether the landlord is entitled to recover the incidental or indirect costs of carrying out the lease obligations in a number of appeals.  In each of these decisions, London Borough of Lewisham v Rey-Ordieres and Ors [2013] UKUT 014 (LC), South Tyneside Council v Ciarlo & Hudson [2012] UKUT 247 (LC) and Carey-Morgan v de Walden [2013] UKUT 0134 (LC), the Lands Chamber determined that the incidental costs were properly charged as part of the service charge costs.

The case for the respondents

36.      The respondents contended that the authorities cited by the appellant were all determined on their own facts and should not give rise to support for the principle that indirect costs, charged as overheads, should be recoverable.  Mr Benz said that every case had to be determined on its merits and he did not see the relevance of the appellant’s authorities.  It was still necessary to consider the details of what the appellant had actually done in these appeals.

Conclusion

37.      The decisions of the President in Brent and then Norwich City Council v Marshall, and the decision of the Chancellor in Wembley National Stadium provide a clear line of authority for the proposition that the overhead costs incurred in the maintenance and management of the building and estate falls within the provision “all costs and expenses of or incidental to …” (see paragraph 7 of the Third Schedule to the lease).   The respondents contend that these authorities are all determined on their own facts and do not support the principle that indirect costs, charged as overheads, should be recoverable.   We do not accept that contention. While the cases are clearly on their own facts with respect to whether a charge is reasonable, the issue as to whether indirect costs properly form part of the service charge is an issue of principle which we consider to be now well established. 

38.        We find, therefore, that the costs and expenses of or incidental to the provision of services under the terms of the lease are not limited to the direct costs of the provision of the services.    The indirect costs of providing those services, for example the staff costs and the costs of accommodation in arranging and managing those works, are all part of the costs and are all properly chargeable under the terms of the lease.  The words used in paragraph 7 of the Third Schedule to the leases are to be widely construed and there is no justification to limit the ambit of the costs and expenses.  In our judgment the LVT fell into error in both the cases under appeal in determining that overheads and the administration charge were not both recoverable.  In our opinion, based upon the authorities referred to above, the carrying out and provision of various categories of works and services includes being able to recover all those direct and indirect costs and overheads, including management costs, incurred in connection with the various categories of works and services that the landlord is obliged to carry out.  If a cost or expense incurred by the landlord is either a direct cost or expense of carrying out the necessary works or services or is an incidental or indirect cost or expense of carrying out the necessary works or services, then it is recoverable.  Whether the amount charged for overheads and its method of charging, including whether it should be charged on a block by block basis or on an estate-wide basis is a matter for determination as to whether the charge is reasonable or not.  That is a separate point (considered under issue (ii) below) to the point of principle that overheads are a separate, and chargeable, cost.

39.      We also find, following Palley, that the administration charge can be raised on indirect costs (overheads) as well as direct costs.

40.      We therefore conclude that both LVT decisions in these appeals were wrong in law on this issue.   

The first and second appeals:  issue (ii) – whether charges for overheads and administration are recoverable as a matter of fact

Evidence for the appellant

41.        Mr Dudhia explained how LBS calculated the charge for overheads for each of the years 2003/04 to 2009/10.  Although the same basic methodology was adopted in each year, Mr Dudhia said that improvements had been made over time as better information became available.  The accounting procedure underpinning the method of calculating the overheads was known as Activity Based Accounting (ABC).

42.        The basic method was broken down into a number of stages:

(i)              Establish the total annual cost (borough-wide) of all estate expenditure incurred against the Housing Revenue Account (HRA).

(ii)            Establish the gross salary costs of staff involved in the provision of communal services to all of LBS’s housing estates.  “Communal services” refers to any service provided for the benefit of leaseholders and council tenants of a particular block or estate.  It excludes any service provided for the benefit of a single resident or dwelling.

(iii)          Estimate what proportion of the gross salary costs was directly attributable to the provision of communal services.  This was done by Area Housing Managers providing a percentage figure for the time spent by their staff on communal services.

(iv)          The gross salary costs under (ii) were multiplied by the percentages under (iii) to give a gross payroll cost for communal services.

(v)            The total under (iv) was then expressed as a percentage of the total under (i) to give the overhead percentage that was then applied to all of the individual cost elements that comprised the total annual expenditure.

(vi)          The overheads figures for those elements to be included as a service charge were then apportioned to the estate, block and dwelling by the bed-weighting system.

43.        For the years 2003/04 and 2004/05 the apportioned gross payroll costs for communal services were increased by 8% in respect of “office running costs”, e.g. rents, rates, telephones etc.  This adjustment was not made in subsequent years except 2008/09 when an allowance of 10% was made.

44.        In 2003/04 LBS agreed with the Leaseholder Council to reduce the total costs under stage (iv) (including office running costs) by 17.5% to reflect the changes created by the introduction of this new methodology in that year.

45.        In 2008/09 and 2009/10 overheads were allocated directly rather than indirectly.  In previous years the stage (iii) estimate of the time spent on communal services was not broken down between different cost elements such as estate lighting or repairs.  The area managers estimated the percentage of time that their staff spent on communal services as a whole which was then used as the common basis for calculating the overhead rate for all the communal services.  From 2008/09 the area managers estimated the percentage of time that their staff spent on each communal service, separately identified.  This percentage was then applied to the cost of the corresponding cost element which meant that the overheads were now specific to each communal cost element.

46.        Mr Dudhia produced and explained the individual calculations for the respondents’ properties showing how he had arrived at the figure for overheads for each year and cost element.  He supported his calculations with print-outs from LBS’s SAP computer management system and the I-World integrated housing management system.  He also produced copies of the service charge invoices that were sent to the respondents. 

47.        Mr Dudhia explained that he had been responsible for LBS’s service charge calculations since 2003/04.  Prior to his appointment the service charge calculations had not been transparent.  He said that the original raw data was questionable and that he had checked every works order line by line and was satisfied that he had sent out accurate service charge demands.  He acknowledged that the method used to calculate the service charge could be improved.  He pointed to the adoption in 2008/09 of the direct apportionment of overheads against each cost element as an example of such an improvement.

48.        Mr Dudhia did not accept the conclusion of Grant Thornton’s “Independent Review of LBS’s Leasehold Service Charges 2005/06” published in August 2009 that the automatic pricing of jobs through I-World and the appellant’s inspection regime and control processes left LBS exposed to contractors overcharging for their work.  Mr Dudhia said that Grant Thornton had not found one error in his calculations.  But he accepted that the I-World system did have some problems.  It provided raw data but was then checked and audited by using other filters to ensure accurate costings.

49.        Mr Dudhia said that it would be too expensive for a timesheet system to be introduced so that staff could record the amount of time they spent on communal services.  The cost of introducing such a system would fall entirely on leaseholders because it would only be for their benefit.  There would be no guarantee that staff would accurately record the time spent in any event.

50.        LBS did not use paper invoices but relied upon I-World to manage the huge number of works orders that were generated each year (25,000 to 30,000).  It was a paperless system that saved time and money and which was checked by random sampling.

51.        Table 1 below summarises the overhead percentages for each of the years in issue as calculated at stage (v).  The figures for 2008/09 and 2009/10 are the overhead rates as directly apportioned to individual cost elements.  The figures for the earlier years are a single rate that was applied to all cost elements.

TABLE 1

OVERHEADS: PERCENTAGE OF TOTAL COSTS

YEAR	OVERHEADS %
2003/04	4.45
2004/05	5.75
2005/06	5.82
2006/07	3.20
2007/08	2.65
2008/09	4.91, 7.33
2009/10	6.56, 12.33, 15.13, 16.83

 

52.        LBS was required under the Local Government and Housing Act 1989 to maintain a housing revenue account separately from the general fund.  The HRA was used to account for expenditure on LBS’s functions as a landlord including the costs of the staff employed to manage and run property management services.  Ms Turff explained that it was important for LBS to try and recover all chargeable expenditure under the service charge provisions of the leases.

53.        Ms Turff reviewed the ABC accounting system and explained how it was used to identify the costs of chargeable activities.  One of those activities was headed “administration”.  Costs were not specifically allocated against this activity.  Instead 10% of the total costs of the other chargeable services was added to the service charge.

54.        The charge for administration and that for overheads concerned different costs.  The administration charge was intended to cover the costs of HOS, which was the department responsible for calculating, invoicing and collecting the service charge from leaseholders as well as responding to leaseholder enquiries, acting as a first point of contact and conducting litigation.  Estates which were managed by tenant management organisations were not directly administered by HOS and were therefore not subject to the 10% administration charge.  The charge for overheads was to recover the indirect costs incurred by other divisions of the Housing Department in relation to the costs and expenses for which a service charge could be made.  Ms Turff emphasised that the costs of HOS were excluded from the calculation of overheads and that there was no overlap between overheads and the administration charge.

55.        Ms Turff said that the 10% charge for administration was inadequate to cover HOS’s actual costs.  She produced an analysis of the costs for the service charge year 2008/09.  This showed that HOS’s total expenditure on administering LBS’s leasehold estate was some £1.493m.  The 10% administration charge amounted to some £1.296m, leaving a shortfall of approximately £0.197m.  Ms Turff believed that there had been similar shortfalls every year and that the administration charge had never adequately covered the actual costs of HOS.  If the actual costs of HOS were to be less than the 10% administration charge then Ms Turff said LBS would charge the actual figure, although she felt this was unlikely to happen.

56.        Ms Turff said that, in theory, it would be possible to introduce a timesheet system for recording the staff time spent on each activity.  But she thought this would be an “incredibly” expensive, complicated, time-consuming and inefficient way to determine the time spent on communal services.   It would be difficult to implement and to justify.  Over a thousand staff would be involved and it would be necessary to establish a team of people to check and interpret the timesheets.

Evidence for the respondents

57.        Mr Kokkinos said that LBS’s annual estimate of the amount of staff time spent on the delivery of communal services was not supported by timesheets or documents.  The estimates were guesswork by the area housing managers.  LBS had not explained how any of the overheads were actually incurred at the respondents’ properties.  It was inappropriate and unreasonable for LBS to use borough-wide figures as the basis to determine overheads on individual properties.  Referring to the breakdown of estimated and actual service charges for Mr Paul’s property for the year 2003/04, Mr Kokkinos said that LBS had failed to provide details of the amount of its charge for overheads in its service charge demands.  The process was not transparent and it was difficult for the respondents to obtain meaningful information from LBS.  He did not accept Mr Rainey’s argument that by taking the estimated staff time as a percentage of the total costs of services, including the cost of works done to tenanted as well as to leasehold properties, LBS had applied an overheads percentage in the early years that was favourably low to the respondents.  Mr Kokkinos said that that did not excuse the use of staff time estimates that were not objectively calculated.  He thought that the figures used by LBS had no legitimacy and had been plucked from thin air.  Ultimately he did not care what the costs were provided they could be properly identified and justified.

58.        Mr Heron was a founder member of the Leasehold Association of Southwark (LAS) and although he had not been a leaseholder in Southwark since 1998 he had continued to devote time and energy to assisting leaseholders obtain transparency in the service charges raised by LBS.  He was nominated by LAS to undertake an audit of the service charges for the three years 2003/04 to 2005/06.  He did this working closely with Mr Dudhia.  Mr Heron said that the ABC accounting method was flawed and that the salary cost estimates were not accurate.  He had 17 years of experience working with the area housing managers and they had never taken an interest in accurately estimating the amount of time spent on communal services.  Mr Heron said that he did not have a problem with the basic charges on any of the leases but he did have a problem with the way in which the overheads had been calculated, namely in the way in which the amount of staff time had been estimated and how this had been allocated to individual cost centres.  He felt it was unsafe to calculate overheads by using a formula that could be manipulated by the area managers.

59.        Mr Heron thought Mr Dudhia had done his best to present accurate figures.  The problem was not with him but with the quality of the information that he was using.  It was based on unsafe subjective estimates of the time spent by staff.  Mr Heron favoured the use of timesheets which should give a better indication of the amount of time that individuals were spending on communal services.

Submissions for the respondents

60.        Mr Benz submitted that LBS’s use of the ABC accounting system meant that there was no audit trail of costs.  The system did not show which council officers did what work and it was unfair to expect the leaseholders to make up any shortfall in LBS’s recovery of costs.  Mr Dudhia’s figures were fundamentally flawed because they relied upon estimates and guesses by area managers.  There was no factual information because there were no timesheets.  It would be technically feasible to introduce a timesheet system and LBS was wrong to suggest that such timesheets could be falsified; there was no reason why they should be.  Mr Dudhia had expressed doubts about the I-World system employed by LBS and the Grant Thornton audit report had said that the system was prone to a level of errors.  There was no reason to suppose that Mr Dudhia’s figures were correct or reliable.

61.        LBS said that the 10% administration charge covered only the costs of HOS.  That was not a term of the lease.  Other costs were also included, such as the costs of LBS’s sales and acquisition (S&A) team and LBS’s litigation costs.  HOS’s costs had been artificially inflated to make it appear that the 10% charge did not cover the actual costs.

62.        The leaseholders had been charged excessively because LBS demanded payment for overheads as well as the 10% administration charge.  The LVT in the second appeal was right to say that LBS’s charges were high by comparison with the charges that a leaseholder would expect to pay under private sector management.  The overheads should be covered by the administration charge.  LBS should be held to account in order to become more efficient.                   

Submissions for the appellant

63.        Mr Rainey submitted that, other than in the cross-appeal, the base costs were not in dispute in these appeals.  The appeals were solely concerned with the charges for overheads and how they had been calculated and apportioned.  The appellant’s evidence had shown that the administration charge of 10%, which LBS took as a cap and not an absolute right, was distinct from the charge for overheads.  The one did not duplicate the other.  Ms Turff had shown that the administration charge failed to recover that part of LBS’s actual costs attributable to leaseholders.  The method of calculating the overheads had evolved and improved over time, as Mr Dudhia had explained in detail.  As a matter of fact the appellant had shown that the overheads and administration charge were separately recoverable under the leases.     

64.        LBS could not obtain a costs order against leaseholder litigants since it was a no costs jurisdiction.  That assisted leaseholders to challenge service charges.  But it was still a cost of leasehold management that had to be met from the HRA.  It was reasonable that such costs should be included as part of the 10% administration charge.

65.        Mr Rainey said that the system by which area mangers estimated the amount of time their staff spent on communal services was rigorous although not perfect; but it did not have to be.  Under paragraph 6 of the Third Schedule to the leases the service charge had to be a fair proportion of the costs and expenses as set out in paragraph 7 and LBS could adopt “any reasonable method of ascertaining the said proportion”.  Mr Rainey submitted that the approach taken by Mr Dudhia was reasonable for the purposes of the lease.  It was based upon the input of six area managers and Mr Dudhia had taken average estimates for the amount of staff time spent.  For the years 2003/04 to 2007/08 the method favoured the leaseholders because the overhead percentage was calculated by reference to the total costs allocated to the HRA and not just the costs of the communal services.  This resulted in relatively low overhead percentages.  In 2008/09 and 2009/10 the method was refined by expressing the staff time spent on specific communal services as a percentage of the corresponding direct cost element in the HRA.  This led to an increase in the amount of overheads but the later refinement of the method gave a more accurate assessment of the appropriate amount.

66.        LBS was not arguing that local authorities had different legal rights to private sector landlords.  But in practice local authorities were structured and operated differently which meant that their costs arose in a different way.  LBS’s overheads did not represent profit nor did they “artificially” inflate costs; they were simply part of the actual cost of carrying out the works and providing the services required under the leases. 

67.        The LVT in the first appeal said that the 10% administration charge contravened the RICS Service Charge Residential Management Code which recommended a flat fee per unit.  But this code did not apply to public sector authority landlords and so it was an irrelevant factor for the LVT to have taken into account.

68.        The respondents had put forward no positive evidence to show that LBS was wrong in its calculation of overheads.  There were presentational issues but the quality of the working was robust and Mr Dudhia had shown how the overheads charges had been derived. The service charge for overheads for each leaseholder was soundly anchored and reasonable.

Conclusion

69.        The base costs are not in dispute in these appeals although the respondents’ witness statements, and some of the witnesses’ oral evidence, overlooked this fact at times. We are only concerned in this part of our decision with whether the administration charge and the charge for overheads are separate and distinct.  If the answer to that question is affirmative then it is necessary for us to consider whether the overheads charge was reasonably incurred.

70.        We had the benefit of a detailed explanation of both the administration charge and the charge for overheads.  We are satisfied on the evidence that the overheads and administration charges cover two separate areas of expenditure and that there is no duplication between them and no element of double recovery.  They cover different costs.  The administration charges relate solely to the costs of the HOS.  The overheads cover those indirect costs necessarily incurred in enabling work to be carried out.  Running an office, including the paying of salaries, is an expense.  It is not a direct cost of carrying out the work, but it is a cost nonetheless and the burden of that cost has to be borne by those benefiting from the work carried out.  The alternative to overheads being charged to the long leasehold owners is that the burden improperly falls upon the local authority and/or the tenants through the rent that they pay.  We agree with what Mr Rainey said in his skeleton argument that if the leaseholders are not obliged to pay the overheads then that is “an unfair cross-subsidy to the long lessees who have exercised Right to Buy at the expense of the secure tenants who have not”.

71.        Ms Turff explained how HOS operates and described the costs that are covered by the 10% administration charge.  We are satisfied that a very small part of the cost of the S&A team (said by Ms Turff to be 2%) and the costs of leaseholder litigation are properly allocated to the administration account to which the 10% charge applies.  We also accept Ms Turff’s evidence that there is a need to undertake administrative tasks with respect to bills for utilities.  Mr Benz suggested that LBS could load up the administration costs in such a way that they would always appear to be more than the 10% charge but there was no evidence to support this assertion.  

72.         In the first appeal the LVT said that the lease did not permit LBS to add annually varying percentages to the service charge cost (as overheads) and then add 10% “to those already artificially inflated costs”.  We do not accept, on the detailed evidence before us, that the overheads charge can be described as artificial.  Its provenance was fully explained by Mr Dudhia for each of the disputed years.  We found Mr Dudhia to be a fair and honest witness who, as Mr Heron acknowledged, was trying to do a difficult job to the best of his ability.  At times Mr Dudhia’s calculations were not clearly set out and some of his apportionments required careful exposition with the assistance of Mr Rainey during examination-in-chief.  The method of calculating the overheads also changed over the years which may have added to the respondents’, and the LVTs’, belief that they were in some sense contrived and artificial. But we are satisfied, unlike the LVT in the second appeal, that LBS’s entitlement to a separate charge for overheads has been made out.  It is then necessary to determine whether the overheads charge was reasonably incurred.

73.        The calculation of the total cost of overheads should not be conflated with the apportionment of that cost to individual leaseholders.  The total cost of overheads is incidental to the costs and expenses of the services described in paragraph 7 of the Third Schedule to the leases.  The apportionment of those costs and expenses (including the overheads) under paragraph 6 of that schedule, which allows for the adoption of any reasonable method of ascertainment, does not, in our opinion, apply in terms to the calculation of the total cost of the overheads.  The subsequent apportionment of the total cost of overheads to individual leaseholders is a separate matter which we consider as issue (iii) in the first and second appeals.

74.        The main overhead in these appeals is the salary cost of non-HOS LBS staff.  That cost is, in our opinion, properly taken to be incidental to the costs and expenses of providing the services defined in paragraph 7 of the Third Schedule to the leases.  We also consider that the on-costs of accommodating such staff should be taken as an incidental cost.  The treatment of on-costs such as rent and rates has been inconsistent, and has only been included for three of the disputed years (2003/04 and 2004/05 at 8% and 2008/09 at 10%).  We consider those amounts to be reasonable.  LBS’s failure to include an allowance for such costs in the other four years favours the respondents.       

75.        The respondents criticised LBS’s method of calculating the overheads charge using the area managers’ estimates of the amount of time their staff spent on communal services.  It was submitted that this was little more than guesswork.  Instead the respondents said that LBS should introduce a system of timesheets for completion by individual members of staff.  It is likely, in our opinion, that such a system of timesheets would give more credibility and reliability to the estimation of staff time and we do not accept Mr Rainey’s closing submission that the differences between the two methods are “likely to be very, very small.”  There is simply no way of knowing what the difference would be unless and until a timesheet system were introduced.  But we acknowledge the practical difficulties and expense of introducing a timesheet system on such a large scale (Ms Turff said that a thousand employees would be involved) and we also recognise that timesheets will not necessarily be accurately completed.  Furthermore the cost of implementing and maintaining a timesheet system would fall entirely upon the leaseholders since it is not otherwise required by LBS or its tenants.  In Pottle His Honour Judge Green commented on the use of a timesheet system (at paragraph 18E):

“Of course detailed time recording (‘DTR’) would produce the most accurate available allocation of time.  If there is a league table for accuracy, DTR comes at the top as number one.  But the best possible accuracy is not the end of the story, for DTR is also much more expensive.  It might well result in higher, not lower, service charges for long lessees.  There has to be a balance struck between what Mr Watson called effort and accuracy, meaning a balance between the achievement of superior accuracy and the extra cost of achieving it.  In my judgment, Westminster have achieved the right balance by their [apportionment] methodology.”   

76.        LBS’s method of calculating overheads is crucially dependent upon the estimates of area managers about the amount of time their staff spend on communal services.  Those estimates remain a central feature of the method as it has been refined over the years.  There is no means of checking or verifying those estimates.  There are variations in the descriptions of staff job titles from year to year and also in the percentage of the time that the same job-holders spend on communal services.  In the last two years significant time was allocated to “non budget posts” for which there is no explanation.  But there is no reason to suppose that these variations indicate a flawed method; one would expect changes to council job titles over time and for the amount of time spent on communal services to vary year on year depending upon the need for repair and maintenance of the estates and blocks for which LBS is responsible.  On balance we consider that the estimates provided by the area managers are reasonable and appropriately used to calculate LBS’s overheads. 

77.        We had the benefit of a detailed explanation from Mr Dudhia of how LBS applies the ABC accounting system and of how it has been refined over the years.  In particular the system now identifies overheads directly to the cost element to which they relate.  The method was subject to a thorough examination at the hearing.  While there are weaknesses in the approach we are satisfied that LBS has attempted to give a fair and accurate estimate of its overheads for the seven disputed years and that the resultant amounts were reasonably incurred.               

The first and second appeals:  issue (iii) – whether the amounts demanded from each respondent are a “fair proportion” of the total.

The case for the appellant

78.        We outlined Mr Dudhia’s method of apportioning overheads to individual leaseholders in paragraph 42 above.  Each direct cost element is quantified at the borough-wide level (or at an estate or block level if known) and the appropriate percentage allowance is added for overheads.  The overheads figure is apportioned to a block level by a pro rata bed weighting adjustment. (The exception is the year 2003/04 where a unit weighting system was used.)  The figure for the block is then further adjusted by the bed weighting (or unit) factor appropriate to the unit in question.  This gives the overhead for that unit for each cost element.

79.        For example, in the year 2004/05 the borough-wide cost of ground maintenance was £1,535,090.  The overheads percentage for that year was 5.753% so the borough-wide overhead for this cost element was £88,312.  The bed weighting factor for Chalfont House was 141/241,765.  Applying this to the borough-wide overhead gave an overhead for the block of £51.50.  The overhead for 3 Chalfont House (Mr Paul’s property) was calculated by a further bed weighting adjustment of 7/141 to give an overhead for the leaseholder of £2.56. (It would have been possible to go directly from the borough-wide overhead to the unit level by using a bed weighting factor of 7/241,765.)         

80.        In 2004/05 information about the cost element known as “unitemised repairs” was available at both the estate and block level and it was not necessary to apportion these costs by reference to the borough-wide figures.  The SAP printout showed estate costs for the St Crispins Estate of £5,135.  This was allocated at block level to Chalfont House by using a bed weighting factor of 141/750, giving a total for the block of £965.  A further £3,817 of expenditure on unitemised repairs was identified at the block (Chalfont House) level. The total block figure for unitemised repairs was therefore £4,782.  Overheads were added at 5% to give a block figure of £237.06.  The apportioned cost of overheads for Flat No. 3 was therefore £11.77 for unitemised repairs.

81.        Mr Rainey explained that the bed weighting factor varied depending upon which cost element was being examined.  Thus the factor was higher for the cost of ground maintenance because the street properties did not receive this service and were excluded from the calculation. 

82.        For the years 2008/09 and 2009/10 Mr Dudhia allocated overheads directly to the cost elements to which they related instead of using a single percentage for all cost elements. 

83.        Mr Rainey submitted that all of the methods used by Mr Dudhia to apportion overheads to individual dwellings were reasonable.  Mr Dudhia had given a full explanation of how the overheads had been calculated and apportioned.  He had explained how and why the methods had changed over time in response to audit requests that LBS should recover all of the costs and expenses that were due to it.  LBS had considerable flexibility under the lease as to how it apportioned such costs and it could not be challenged either under paragraph 6(2) of the Third Schedule to the leases or under section 19 of the 1985 Act.

84.        The respondents had not been charged for work that had not been done and LBS was not suggesting that it could charge for a service when it was not provided to a block.  Costs, such as ground maintenance, which were incurred under contract at a borough-wide level, had been allocated to estates and blocks by a fair means of apportionment.  The principle should not be “you cannot charge for anything which is contracted at the borough-wide level”.  Such costs had to be, and had been, apportioned reasonably.

The case for the respondents

85.        Both Mr Paul and Mr Benz submitted that paragraph 7(6) of the Third Schedule to the leases provided only for the recovery by LBS of the costs and expenses of the “maintenance and management of the building and the estate”.  That excluded consideration of costs incurred at the borough-wide level.  Mr Paul said that as a result of LBS’s reliance on borough-wide costs the respondents’ properties had been treated the same as older and neglected properties which required more expenditure due to their age and neglect.  The respondents were being unfairly asked to subsidise and pay for such older properties.  They were also being asked to pay for other cost elements, identified by Mr Kokkinos as cleaning variations, the unblocking of chutes, graffiti removal and the management costs of neighbourhood offices, which LBS had not shown were actually incurred on their estate and/or block.  These were borough-wide costs that had no bearing on the respondent leaseholders who lived on small, low-storey, easy to clean blocks with no problems of anti-social behaviour.

86.        In support of their argument the respondents relied upon the decision of the LVT in Taylor v London Borough of Southwark LON/00BE/LSC/2006/0152 (known as “Mandeville”), a case which involved similar leases, and the same landlord, as those in the present appeals.  At paragraph 59 of its decision the LVT said:

“The Tribunal agreed with the submission made by Miss Cafferkey [for the leaseholder applicants].  The Applicants’ contractual liability to pay a service charge contribution under clause 4 and Part I of the Third Schedule of the leases is only in relation to the costs incurred by the Respondent [the London Borough of Southwark] for the building and the estate.  There is no mention anywhere in the leases that a service charge contribution should be made in relation to borough wide costs.  The discretion provided by paragraph 6(2) of the Third Schedule only allows the Respondent to adopt a reasonable method to apportion the service charge costs in relation to the building and the estate and nothing else.  In the absence of any evidence of what the correct costs might be for this item, it is not safe to rely on the amounts claimed by the Respondent and the Tribunal, therefore, disallows all of these costs in relation to all of the years in issue.”  

87.        Grant Thornton’s audit report had identified a high risk in using the type of formula approach adopted by LBS.  That was a damning report and had highlighted the deficiencies of LBS’s calculations.  Items were included that should not be there and staff salaries had been included even where the work on communal services had been done for tenants and not for leaseholders.  The whole rationale of the apportionment was flawed and the overheads that the leaseholders were required to pay had not been properly identified or apportioned.

Conclusion

88.        This issue is only concerned with how the overheads are apportioned to individual leaseholder properties and whether that apportionment is fair for the purposes of the Third Schedule to the leases.

89.        LBS apportion the overheads by multiplying the overhead for each cost element involving communal services by a bed weighting fraction.  The numerator of the fraction is the bed factor for the block (or unit) in question and the denominator of the fraction is the borough-wide (or block) bed factor for that cost element.  The denominator varies according to how many properties receive the benefit of the service concerned.

90.        In our opinion this is a reasonable method of ascertaining a fair proportion of the overheads to charge each leaseholder.  It is logical and objective.  The respondents’ criticism goes to (i) the assessment of the direct costs to which a percentage is then applied to obtain the overheads; and (ii) the method for calculating the overheads percentage.  The former is not in dispute in the first and second appeals which are only concerned with the amount and apportionment of the overheads.  The latter has been discussed under issue (ii) above.  The respondents have not shown to our satisfaction any reason why the appellant’s method of apportioning the overheads to individual properties is not reasonable, fair and proportionate to the amounts of money involved.  For the reasons that we give in our discussion of issue (i) of the cross-appeal below we consider that it is wrong to rely upon the LVT’s decision in Mandeville as an authority for disallowing apportioned costs that have been calculated from borough-wide figures.

The cross appeal:  issue (i) – whether the LVT was wrong to allow an allocation for the CCC that was based upon borough-wide costs.

The case for the cross-appellant (Mr Benz)

91.        Mr Benz submitted that the LVT had mistakenly allowed the sum of £5,572.81 as a block allocation for the CCC in 2007/08, given that LBS admitted that this charge was calculated on a borough-wide basis.  The LVT said at paragraph 9 of its decision that it was “very doubtful that the incorporation of Borough-wide costs within this calculation was in fact sustainable under the provisions of the lease…”  Despite its reservations the LVT allowed these costs as part of the service charge because it considered the sum claimed to be “perfectly reasonable” and because the applicant (Mr Benz) had made no complaints about the quality of the service (a matter that was not in dispute in any event).  In reaching this decision the LVT had not only ignored its strong doubts about whether borough-wide costs could be used it also ignored the decision in Mandeville in which the LVT disallowed an apportionment taken from borough-wide costs as being unsafe.  Nor had the LVT considered whether the CCC took cleaning variations into account, meaning that other, less well maintained blocks in the borough might have required more cleaning than the Denesmead block.

The case for the respondent (LBS)

92.        Mr Rainey submitted that Mr Benz was wrong to contend that the LVT’s doubts about the recoverability of borough-wide costs should have been translated into a finding that such costs were irrecoverable.  There was no principle of law and no sustainable argument on the construction of the lease which prohibited the recovery from a leaseholder of a proportion of costs that had been incurred on a borough-wide basis.  If anything the LVT had been wrong to have entertained any doubts about the point.

93.        The respondent relied upon Mandeville but that decision was not a ruling in principle that LBS could not recover any cleaning costs if the cleaning service was performed under a borough-wide contract.  Rather the LVT in that case concluded that there was an absence of evidence upon which it could determine the cost in dispute.  In the present appeal there was no suggestion that cleaning etc had not been carried out or that the quality of the work was unsatisfactory.  The LVT was aware that the services had been provided under a borough-wide contract and it had taken this into account.  On the facts of the case the LVT determined that the sum claimed, amounting to less than £5 per week for cleaning the block and the estate, was “perfectly reasonable”.  This was a finding on the facts that it was entitled to make.  In any event Mandeville was not binding on the LVT in this appeal.

94.        Alternatively, Mr Rainey said that if he was wrong and Mandeville had decided a principle of law then it had done so incorrectly.  In the later case of London Borough of Southwark v Owolabi LON/00BE/LSC/2009/0487 the LVT, under the same chairman as that in Mandeville, held that the apportionment on a bed weighting basis of care/upkeep and ground maintenance costs that had been incurred on a borough-wide basis was reasonable.  Mr Rainey said that permission for the leaseholder to appeal had been refused by the then President of the Lands Chamber (LRX/48/2010) on the basis that this part of the decision was “beyond challenge”.  Mr Rainey also relied upon the decision in Pottle and the Tribunal’s decision in Ciarlo to support his argument that borough-wide costs, reasonably apportioned, could be used to calculate service charges.

95.        The nature of the CCC and whether it included cleaning variations was not in issue before the LVT and it was right not to refer to such variations in its decision.

Conclusion

96.        The cross-appeal is an appeal by way of review and we not concerned with any fresh evidence but must determine whether the LVT has gone wrong in principle, or has overlooked any material factors or has reached a decision which was clearly wrong, based upon the evidence that was before it.

97.        Mr Benz argued that the LVT had gone wrong in principle by not following the decision in Mandeville.  We disagree for the reasons submitted by Mr Rainey.  Mandeville is not binding upon the LVT and has not been followed in more recent cases, including the Tribunal’s decision in Ciarlo.  No binding principle emerged from Mandeville and, in our opinion, the LVT was not obliged to follow it.  Insofar as the decision of the LVT in Mandeville is relied upon to establish that costs and/or overheads may not be calculated on a borough-wide basis or that LBS is not entitled to include within the service charge the overheads incurred as an incidental cost to the carrying out of the works, then that decision is wrong.

98.        The LVT’s position on Mandeville is unknown because it did not refer to it in terms in its decision.  But the view that the LVT expresses about the use of borough-wide costs in paragraph 9 of its decision suggests that it was minded to reach a similar conclusion to that in Mandeville, a point to which we return below.      

99.        Mr Benz said that the LVT had overlooked a material factor by failing to consider whether the CCC took cleaning variations into account.  But this was not an issue before the LVT and there was no evidence on the point.  The LVT cannot be said to have overlooked an issue that was not in dispute.

100.    Mr Benz argued that it was wrong for the LVT to allow the apportionment of borough-wide costs having said in terms that it was “very doubtful” that such an approach was sustainable under the provisions of the lease.  The LVT did not explore its doubts “simply because notwithstanding the method adopted, it seems to the Tribunal that the sum claimed is in itself perfectly reasonable.”  By not doing so it seems to us that the LVT failed to answer to its own satisfaction the first question that should be asked whenever an element of a service charge is disputed, namely whether it is payable under the contractual terms of the lease.  It is only if this question is answered in the affirmative that it becomes necessary to consider whether the reasonableness provisions contained in section 19 of the 1985 Act prevent the amount being claimed in whole or in part.  If the answer to the question is negative then it does not matter how reasonable the costs were, they cannot be recovered as a service charge. 

101.    The LVT, correctly in our opinion, recognised that care and upkeep costs formed part of the costs and expenses for which a service charge was payable under paragraph 6 of the Third Schedule to the lease.  The LVT’s reservations were directed at the method by which those costs were calculated.  Its conclusion was that it was very doubtful that the apportionment of borough-wide costs was “sustainable” under the provisions of the lease.  It did not give its reasons for reaching this conclusion, saying that “It is not proposed to go into a detailed analysis in this regard...”  By going on to consider the reasonableness of the amount of the charge the LVT have implicitly answered the preliminary question in the affirmative despite its strong doubts and without giving any explanation for those doubts or any reason why they should be ignored.  In our opinion that is a contradictory position and one which the LVT was wrong to adopt. 

102.    We note that the LVT adopted the same approach to the service charge in respect of grounds maintenance which was also apportioned from borough-wide costs.  But Mr Benz did not refer to this cost in the first ground of his cross-appeal and it appears not to be in dispute.    

The cross-appeal:  issue (ii) – whether the LVT was wrong to have allowed costs in respect of certain major works where LBS had not consulted its leaseholders

The case for the cross-appellant

103.    Mr Benz submitted that LBS had failed to comply with the consultation requirements of section 20 of the 1985 Act in respect of two cost items incurred at an estate level: (i) the sum of £11,229.83 for raising a road surface (2007/08), and (ii) the sum of £23,000 for drainage work (2008/09).  LBS had accepted its failure to consult in both cases and had given (or offered) credits to the leaseholders that would limit their contribution to £250 each, this being the appropriate amount for the purposes of section 20(7) of the 1985 Act. 

104.    Mr Benz argued that these items should be disallowed for two reasons.  Firstly, the LVT implied that LBS had not complied with the spirit or the letter of the 1985 Act.  Secondly, the LVT had not insisted on seeing the invoices that supported these items of expenditure.  LBS said that paper invoices did not exist since they used a computer based accounting system, but the LVT had not even demanded to see screen-shots or printouts of the relevant expenditure.  Mr Benz said that he had asked LBS to produce any evidence upon which their costs were based.  It could have been an email from a contractor with details of work done and a payment request but nothing was presented to, or requested by, the LVT.  Something had to trigger a payment by LBS but it had produced no evidence of any costs and yet insisted on payment by the leaseholders.  It was especially important for the LVT to see such supporting documents given that some cost items were suspiciously precise; for instance a sum of exactly £2,000 in respect of the road works and an exact total of £23,000 for the drainage works.  In Mandeville the LVT had disallowed costs in full where there was no evidence that they had been incurred.

The case for the respondent

105.    Mr Rainey submitted that Mr Benz’s first point was misconceived.  A landlord who fails to comply with the consultation requirements under section 20 of the 1985 Act is not prohibited from recovering any costs but is limited to recovering £250 from any one leaseholder.  LBS had acknowledged this limit and had given credits to leaseholders accordingly.  The LVT had been right to find that the service charge was capped by law at £250.  Mr Benz’s submission that nothing should be allowed went beyond the statutory scheme and had no basis in law.

106.    Mr Rainey acknowledged that LBS did not supply paper invoices to Mr Benz and also that the LVT had not insisted on seeing them.  That was because such invoices did not exist in paper form.  LBS used electronic property management and accounting systems which did not generate paper invoices.  LBS raised a large number of works orders every month which were communicated to contractors electronically.  Each area office received a monthly list of repairs that had been ordered within its area.  That office then checked the repairs and verified their completion, following which the details of the completed repairs were entered on the SAP accounting system, reviewed by a separate department and authorised for payment.  A summary of this process was before the LVT in LBS’s statement in reply.  Mr Dudhia gave evidence before the LVT and explained the appellant’s computer systems and the printouts in his oral evidence.  He was questioned by Mr Benz.  The LVT was made aware that more detailed information was stored on the computer and could be extracted if required, but the LVT did not request to see it.  Examples of this additional information had been presented by Mr Dudhia in the current appeals.

107.    Mr Benz’s contention that the LVT should not have allowed any element of the service charge that was not supported by a paper invoice was wrong in law.  The evidence presented to the LVT by LBS clearly met the civil standard of proof and LBS had satisfied the LVT that the charges it had raised related to costs that it had incurred.

108.    Mr Benz had submitted that the LVT had “failed to follow” his argument that the list of 10 items relating to the road works had included a single entry for the precise sum of £2,000.  But Mr Benz produced no evidence to suggest that the road surfacing works had not been carried out or that the charges had not been incurred.  All that Mr Benz presented to the LVT was his view that the sum of £2,000 was suspiciously precise.  The LVT were entitled, in the light of the evidence of the amounts incurred by LBS, to ignore this suspicion.  Besides LBS had explained to the LVT that the work had been undertaken according to a tendered schedule of rates and that several works orders may have been involved for different processes priced on the schedule.  It was therefore not unlikely that the end cost would be a round figure.

109.    Mr Benz relied on similar arguments with regard to the cost of £23,000 for drainage works in 2008/09.  Mr Rainey said that the issue of the roundness of this sum was not in issue before the LVT and Mr Benz had not challenged the amount of the invoice.  The amount charged was supported by two SAP entries a printout of which was before the LVT.

110.    Mr Rainey submitted that on the evidence the LVT, by allowing these charges, took the only decision that it could have reached.  Alternatively it was a decision that it was fully entitled to take.  In either event there was no basis for the LVT’s findings of fact on these charges to be upset on a review.

Conclusion

111.    We accept Mr Rainey’s submission that, as a matter of law, LBS was not prohibited from recovering any service charge where it did not satisfy the requirements of the consultation regulations.  Under these circumstances the recovery of costs that it reasonably incurred is limited to £250 per leaseholder.  But it is still necessary, under section 19 of the 1985 Act, for LBS to show that the costs were reasonably incurred and had been undertaken to a reasonable standard.

112.    There is no dispute about the standard of the works.  Mr Benz’s argument is directed to whether LBS has proved that the costs were reasonably incurred and he relies upon (i) a lack of paper invoices; and (ii) the fact that in two instances the cost of the relevant item is a precisely rounded figure.  In our opinion neither of these points is persuasive.  LBS use computerised management and accounting programmes which are, in effect, paperless systems.  The use of such systems is common, especially with local authority landlords responsible for the management of very large residential property portfolios.  LBS produced printouts from its SAP accounting system for the LVT and Mr Dudhia explained how that system worked as well as the I-World property management system.  There is no statutory requirement for the production of paper invoices.  In our opinion LBS produced adequate evidence to enable the LVT to understand the nature of the charges raised and for them to properly determine that they were reasonably incurred.

113.    The existence of three precisely rounded figures (the drainage works figure of £23,000 appears to comprise two rounded amounts: £18,000 and £5,000) was explained as being the result of the application of a tendered schedule of rates.  The LVT did not refer in terms in its decision to the roundness of the road surfacing works or the drainage charge as being significant; rather they focused upon the issue of what the leaseholder should be charged in the absence of prior consultation.  Mr Benz was expressing a suspicion which he said arose from the “very conspicuous and doubtful” precision of the £2,000 charge for road surfacing (Mr Benz did not query the precision of the drainage payments in his statement in response before the LVT).  But that suspicion is not sufficient, in our opinion, to show that the LVT were wrong to reach the conclusion that it did.  It reached that decision based upon the evidence before it and it was entitled to do so.

114.    We also note from paragraph 12 of the LVT’s decision that Mr Benz’s case regarding the road resurfacing works was directed to the lack of consultation.  The LVT said that his argument had been that he “was not consulted and therefore argued that the statutory cap of £250 should apply.”  He did not suggest to the LVT that there should be no charge in respect of these works and it is not reasonable for Mr Benz to argue before us on review that the LVT were wrong not to grant him a remedy for which he had not asked.

The cross-appeal:  issue (iii) – whether the LVT was wrong to allow costs that were not supported by invoices and in so doing had taken an indulgent stance towards LBS

The case for the cross-appellant

115.    The third ground of Mr Benz’s cross-appeal was centred on a charge of £418.44 regarding repair works to the drainage system in 2009/10.  (In fact that figure related to all of the unitemised repairs and not just the drainage works.)  But his essential argument was directed to the LVT’s admission, as he saw it, that it had been indulgent to LBS in the lack of detailed information that it provided to its leaseholders about the works that it had undertaken. 

116.    Mr Benz argued before the LVT that major works to the drains (£23,000) had only been undertaken in July 2008 and that the works undertaken in January 2010 should probably have been done under warranty.  But the LVT did not ask for any evidence from LBS.  The total amount charged (£3,965.59) was too large to be for a responsive repair and should have been tendered for.

117.    The LVT had expressed itself in paragraph 25 of its decision to be “not unsympathetic” to Mr Benz on this and other charges for unitemised repairs for 2009/10.  It said it would be “much more helpful” if LBS provided leaseholders with “something very much more specific” by way of reassurance that the work had been legitimately and satisfactorily carried out.  Despite these reservations the LVT “on this occasion” did not propose to interfere with the charges, but went on to suggest that LBS might wish to think whether or not a subsequent tribunal “would take a similarly indulgent stance”, particularly in the light of section 21 of the 1985 Act.  Mr Benz submitted that the LVT had “insinuated” that it had applied an over-indulgent stance towards LBS.  Under those circumstances, and by its own admission, the LVT had been wrong to accept charges for which inadequate supporting evidence had been produced.

The case for the respondent

118.    Mr Rainey said that the charge of £23,000 for works to drains in 2008/09 was in respect of the whole of the Herne Hill Estate whereas the charge in 2009/10 related just to the Denesmead block.  There was no evidence that the works related to the same area of drainage.  Nor was there any evidence that the earlier works had been covered by a warranty, or about the length or conditions of a warranty or indeed whether such works were routinely covered by a warranty.  The later works took place some 18 months after the first works and the LVT’s decision not to ask for further evidence on the point was one that it was fully entitled to make.

119.    When paragraph 25 of the LVT’s decision was read in context it was clear that the LVT was expressing the view that this was a case that was near the borderline of the balance of probabilities.  But there was sufficient evidence to conclude that the costs had been reasonably incurred.  The LVT’s comments had been a warning to LBS’s witnesses that it was necessary to provide the leaseholders with adequate information for them to understand the nature of the work for which a service charge was being raised.  The LVT had not forgotten the judicial oath and had not been biased in reaching its decision.

Conclusion

120.    In our view the final sentence of paragraph 25 of the LVT’s decision is an admission by the LVT that it took an “indulgent” stance towards LBS.  That word, and the approach that it implies, is not compatible with the LVT’s overriding objective to deal with the application fairly and justly.  An “indulgent” stance in this context suggests that the LVT readily indulged LBS (namely allowed LBS to have what it wanted) or overlooked the faults or shortcomings of its evidence.

121.     Mr Rainey submits that, read in context, the LVT should be taken to have reached a decision based upon a balance of probabilities that was narrowly decided and which might have gone the other way.  The implication is that the LVT was casual and careless in its use of language and that it did not mean what it said in terms.  But earlier in paragraph 25 the LVT said that it was “not unsympathetic” to Mr Benz and went on to express reservations about LBS’s evidence.  Notwithstanding these reservations the LVT proceeded to allow the costs claimed by LBS.  Under these circumstances the LVT needed to explain carefully and precisely the reasons for its decision.  There is no reason why we should ignore the actual language in which it then expressed itself.  If Mr Rainey’s interpretation is correct we would have expected the LVT to have said in the last sentence of paragraph 25:

“The Respondent [LBS] may wish to think carefully about whether or not a subsequent Tribunal would take a similar stance…”

But the LVT added the adjective “indulgent”.  It presumably did so for the reason that it reflected the views of the tribunal.  In our opinion the word “indulgent” is inimical to a fair hearing and suggests a partisan approach.  An indulgent stance is not an objective stance.   

122.    We consider that the LVT’s decision on this issue was not within the scope of its powers, based as it was on an approach that was contrary to the tribunal’s overriding objective. 

Determination                     

123.    The first and second appeals are allowed.

124.    The cross-appeal is allowed on issue (iii) and dismissed on issue (ii).

125.    On issue (i) of the cross-appeal we have found that the LVT failed to give a reasoned answer to the question of whether borough-wide costs could form the basis of a reasonable apportionment.  By implication the LVT answered this question affirmatively but it did so contrary to the indication it had given that it was very doubtful that the incorporation of such costs was sustainable under the terms of the leases.  Were we to remit this issue to the LVT it would then have to give detailed reasons why its doubts had been overlooked.  But given our conclusion, based upon a review of the relevant authorities, that the decision in Mandeville is not binding and that borough-wide costs can properly form the basis of a reasonable apportionment in this appeal, it would, in our opinion, be nugatory to remit this issue to the LVT.  The LVT’s decision that the CCC costs were reasonably incurred shall therefore stand. 

126.    The cross-appeal shall be remitted to the First-tier Tribunal (Property Chamber) on issue (iii) only. 

Dated 18 September 2013

Her Honour Judge Walden-Smith

 

 

A J Trott FRICS

 

APPENDIX 1:  RESPONDENTS IN THE FIRST APPEAL

1.      Naomi Cole,

14 Prestwood House,

St Crispins Estate,

Drummond Road,

London SE16 4BX

2.      Wayne Gibbons,

7 Chalfont House,

Keetons Road,

London SE16 4 BZ

3.      Leonard Jarman,

18 Chalfont House,

Keetons Road,

London SE16 4BZ

4.      Paolo Valenziano,

4 Penryn Road,

London SE16

5.      Gary Paul,

3 Chalfont House,

Keetons Road,

London SE16 4BZ

6.      B E Smith,

2 Perry Road,

London SE16 4BZ

7.      B. Martin,

18 Prestwood House,

Drummond Road,

London,

SE16 4BX