DECISION
Introduction
1.
These are appeals from decisions of the Leasehold Valuation Tribunal
Midland Rent Assessment Panel (“LVT”) dated 6 June 2011 and 27 July
2011 whereby the LVT determined to what extent service charges payable in
respect of flats known as Priory Place, Fairfax Street, Coventry CV1 5SA (“the
Flats”) were reasonably incurred for the purpose of s.19(1)(a) of the Landlord
and Tenant Act 1985 (“the 1985 Act”) and whether an order should be made under
s.20C of the 1985 Act. There are in fact 3 appeals, an appeal by the
Appellants on the grounds that the LVT should have made a further deduction
from the service charges on 8 grounds, a cross appeal by the Respondents that
the LVT wrongly made a deduction from the service charges on 2 grounds and a
separate appeal by the Respondents against the LVT’s decision to make an order
that none of the Respondents costs of the LVT proceedings were to be regarded
as relevant costs recoverable as service charges. Leave to appeal was granted
in each case by the Upper Tribunal (Lands Chamber) on the basis that the
appeals are to be heard by way of review.
2.
Priory Place is a mixed use development comprising 85 residential flats
in two blocks - Abbey Court (59 flats) and Benedictine Court (26 flats) and on
the ground floor commercial units. The buildings are arranged around a piazza
to which the public have access. There is a car park at basement level. The
development was completed in about late 2003.
3.
The First Appellant is the lessee of 27 Abbey Court, Priory Place
pursuant to a sub-underlease dated 19th December 2003 for a term of
150 years less 4 days from 22nd October 2003. The Second Appellant
is the Residents Association representing other lessees of the Flats. I shall
refer to them collectively as the Tenants. The Respondents are themselves a
sub-lessee of the Flats by virtue of a lease granted by the freeholder Coventry
City Council on 21st October 2003 for a term of 150 years less three
days from 31st January 2002. The demise is of the 85 flats and the
common areas on the third to sixth floors of the buildings with access to the
car park. Subsequently Coventry City Council granted a lease of the reversion
to CDP Priory Place Limited of the whole of the site. The Respondents are
entitled to the reversion immediately expectant on the term of years granted to
the individual sub-underlessees and I shall refer to them as the Landlords.
Facts
4.
I was referred to an example of the sub-underleases which are apparently
all in the same terms for present purposes, that relating to 25 Abbey Court dated 30th October 2003. It was common ground at the hearing that
in the document the phrases “Sub-Lessor” and “Lessor” meant the same thing
namely the Landlords. The Term is defined as 150 years less four days from the
Commencement Date, 22 October 2003. Clause 3 which contains the demise provides
for the payment of rent subject to review and “by way of further or additional
rent the Sub-Lessees Proportion” which is 1.161% of “the Maintenance Expenses.”
Clause 1 defines “the Maintenance Expenses” as
“the monies actually expended or reserved for periodical
expenditure by or on behalf of the Sub-Lessor at all times during the Term in
carrying out the obligations specified in the Sixth Schedule.”
5.
It is necessary to refer to the following provisions of the Sixth
Schedule:
“2. Repairing maintaining inspecting and as necessary
reinstating or renewing the Service Installations forming part of the Accessways
of the Maintained Property
8. Inspecting rebuilding repointing renewing redecorating
or otherwise treating as necessary and keeping the Maintained Property and
every part thereof in good and substantial repair order and condition and
renewing and replacing all worn or damaged parts thereof
12. Inspecting maintaining renting renewing reinstating
replacing and insuring the fire alarm and fire fighting appliances electronic
door and gate entry system(s) security and surveillance systems…
21. Generally managing and administering the Maintained
Property and protecting the amenities of the Maintained Property and for that
purpose if necessary employing a firm of managing agents (Provided Always that
the payment of such managing agents shall be met exclusively from the fees more
particularly detailed in paragraph 2 hereto) or consultants or similar and the
payment of all costs and expenses incurred by the Lessor:
22 in the running and management of the Development and
the collection of the rents (if any) and service charges and in the enforcement
of the covenants and conditions and regulations contained in the Sub-Underlease
of the Dwellings and any Estate Regulations
23 in making such applications and representations and
taking such action as the Sub-Lessor shall reasonably think necessary in
respect of any notice or order or proposal for a notice or order served under
any statute order regulation or bye-law on the Sub-Lessee or any Under
Sub-Lessee of the Properties in the Development or on the Sub-Lessor in respect
of the Development or the curtilages thereof or all or any of the flats or
parking spaces therein and
24 in the valuation of the Building from time to time for
insurance purposes
25 in the preparation for audit of the service charge
accounts
30. The reasonable and proper fees of the Sub-Lessor or
his agent for the general management of the Development
33. All other expenses (if any)
incurred by the Sub-Lessor in and about the maintenance and proper and
convenient management and running of the Development including in particular
but without prejudice to the generality of the foregoing any expense incurred
in rectifying or making good any inherent structural defect… any interest paid…
any costs imposed on the Sub-Lessor… any legal or other costs….”
6.
The Tenants applied to the LVT for a determination as to whether the
services charges were reasonably incurred for the purposes of s.19(1)(a) of the
1985 Act for the years 2003/04, 2004/05, 2005/06, 2006/07, 2007/08, 2008/09 and
2009/10. In accordance with directions given by the LVT a Scott Schedule was
prepared which lists all the service charges challenged by the Tenants and sets
out the parties’ respective contentions on each item. The structure of the
Scott Schedule is chronological; for each service charge year in turn the items
complained about are listed and comments made. In its decision dated 6 June
2011 the LVT dealt with the issues not by year but by 12 topics listed in
paragraph 29 of the decision. Although this approach was suggested by the LVT
at the hearing and the parties agreed to it, the Tenants complain that as a
result of it the LVT has overlooked some items in the Scott Schedule.
7.
The LVT’s conclusions are summarised in paragraph 67 which sets out a
list of those items where a deduction was made by the LVT on the ground that
the sum claimed was not reasonably incurred. In summary the LVT made a £12,500
deduction for cleaning in 2006/07, a 10% deduction in management fees for all
years and reduced the charge to nil for lift maintenance in all years and legal
fees in 2008/09.
8.
The Tenants appeal on the following grounds and assert that further deductions
should have been made from the service charges:
(1)
The LVT failed to have regard to 2003/04 where the Landlords had failed
to provide invoices for all of these charges and sub-underleases were not
granted until part way through the service charge year so the Tenants should
not be liable for the whole of the year’s charges.
(2)
The LVT failed to give sufficient weight to criticisms of the managing
agents and a greater than 10% reduction should be made for their fees.
(3)
The LVT failed to have regard to the fact that no managing agents fees
were recoverable by virtue of the terms of the sub-underleases and the fact
that there was no contract between the Landlords and the Managing Agents.
(4)
When concluding that there was no evidence that doors were inadequate or
defective the LVT had failed to have regard to evidence to that effect.
(5)
The LVT had erred in its approach by having regard to an irrelevant
consideration, namely that the Tenants had not obtained alternative quotes for
insurance and by wrongly concluding that the Tenants questions about insurance
had been answered by the Landlords.
(6)
The LVT had failed to have regard to the Tenants case that the Landlords
were making a profit out of selling door entry fobs.
(7) The LVT failed to have
regard to the fact that invoices had not been disclosed to cover electricity
bills and wrongly concluded that it was reasonable to provide 24 hour lighting.
(8) The LVT wrongly concluded
that issues relating to the water pump were agreed.
9.
The grounds of the Landlords’ cross appeal are that
(1)
The LVT failed to have regard to evidence that the Benedictine Court
lift was not causing problems in the same way as the Abbey Court lift and as a
result wrongly deducted all costs relating to lifts instead of just the Abbey Court lift costs.
(2) The LVT decided that legal
fees were not owed on a ground never relied upon by the Tenants, namely that
the invoice was addressed to another company not the Landlords, and it was a
breach of the rules of natural justice for the LVT to decide the issue on this
ground without first giving the Landlords an opportunity to call evidence about
it.
10.
I will deal with each of these issues in turn and then deal with the
Landlords appeal against the LVT’s decision on s.20C in the light of my
conclusions on the service charge issues.
Law
11.
Section 19(1) of the 1985 Act provides:
“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.”
12.
In Forcelux v Sweetman [2001] 2 EGLR 173 the Tribunal (Mr P R
Francis FRICS) held that in determining whether costs are reasonably incurred
for the purpose of s.19(1)(a) two questions must be asked. First, whether the
action taken in incurring the costs was reasonable. Second, whether the amount
of those costs was reasonable.
13.
Section 27A(1) of the 1985 Act provides:
“An application may be made to a leasehold valuation
tribunal for a determination whether a service charge is payable and, if it is,
as to—
(a) the person by whom it is payable,
(b) the person to whom it is payable,
(c) the amount which is payable,
(d) the date at or by which it is
payable, and
(e) the
manner in which it is payable.”
14.
On an application under s.27A it is for the tenant to establish a prima
facie case that the service charge expenditure has not been reasonably incurred
after which it will be for the landlord to meet those allegations, see Yorkbrook
Investments Ltd v Batten (1986) 18 HLR 25 at p.35.
15.
It is common ground that in paragraph 5 of its decision the LVT
correctly identified the 3 questions which should be asked:
“(1) Whether the costs to which the service charges relate
have been incurred.
(2) The extent to which they have been reasonably
incurred.
(3) Whether the services or works to which the charges
relate were of a reasonable standard.”
It is also clear from s.27A of the 1985 Act that the LVT also
has jurisdiction to determine the extent to which a particular cost is
recoverable as a matter of contract under a lease.
The appeal
(1) Service charge year 2003/04
16.
The accounts for this year show a total service charge cost of £25,108.
The Scott Schedule identifies 6 items in the accounts with which issue was
taken in 2003/04: management fees, insurance, cleaning, door entry, car park
passes/maintenance and electricity. As already indicated, these were considered
by the LVT under those subject headings rather than specifically by reference
to the year 2003/04.
17.
It was submitted by Mr David Warner, counsel for the Tenants, that the
LVT decision does not deal with the arguments raised by the Tenants in the
Scott Schedule and there were no invoices for many items. The service charge
year runs from 1 July to 30 June and therefore not all charges in 2003/04 were
recoverable from the Tenants whose sub-underleases were granted later in the
year and only entitle the Landlords to recover service charges incurred during
the currency of the demise. The amount of the charges for management fees,
insurance and electricity strongly suggested that they covered the whole year. Further
the LVT did not deal with the Tenants arguments about the other items: the
standard of cleaning was poor and should have been carried out by the builders,
the cost of providing door fobs on the grant of the sub-underleases is not recoverable
and the builders should be responsible for maintenance as the development had
barely been completed.
18.
Finally it was submitted that the managing agents had already stated
that the deficit for that service charge year of £25,108 was the landlord’s responsibility
in a letter dated 16 September 2004. However, the full amount had been carried
forward into the next service charge year as a deficit.
19.
Counsel on behalf of the Landlords, Mr Patrick Darby, submitted that
this ground was based in effect on a misunderstanding. The service charge
accounts for 2003/04 did indeed cover the whole of that service charge year. However,
he informed the LVT at the hearing that each tenant had only been charged the
relevant percentage contribution relating to the period of their sub-underlease.
He asked the LVT and counsel then acting for the Tenants if either of them
wished the Landlords to call their solicitor to confirm this fact and both
declined. Further, it would have been open to any of the Tenants to give evidence
that their service charge bill included a proportion of expenditure incurred
before the term of the sub-underlease but none of them did so. Therefore it
was not open to the Tenants to complain now that there was no such evidence. The
LVT dealt with the Tenants arguments about cleaning in paragraphs 40 to 45 of
the decision. As to entry fobs, he submitted that Mr Winstanley, a Senior
Property Manager with Curry & Partners, the Landlords managing agents, had
given evidence that the cost related not to the provision of initial fobs but to
buying a pool of fobs for future use which when sold to a tenant would be
reimbursed to the service charge account, an argument which the LVT dealt with
in paragraph 57. As to maintenance, the argument that a new building should
not need any maintenance was not pursued at the hearing, there was no cross
examination of Mr Winstanley about it nor were submissions made on the subject.
20.
As to the £25,108 service expenditure for 2003/04 being carried forward,
Mr Darby submitted that this issue had never been raised at the LVT hearing, a
point which was conceded by Mr Warner although he argued that it was inherent
in the Tenants case.
21.
More generally Mr Darby submitted that it was not open to the Tenants to
now complain about the lack of invoices because they had not challenged the
service charge accounts i.e. had not argued that the costs had not actually
been incurred. He drew attention to paragraphs 5, 6 and 68 of the LVT
decision. Paragraph 5 refers to s.27A of the 1985 Act and indicates that the
LVT was required to consider three questions the first of which was:
“(1) Whether the costs to which
the service charges relate have been incurred.”
22.
Paragraphs 6 and 68 state as follows:
“6. In this case, the [Tenants] did not at first suggest
that the costs which the [Landlords] sought to recover under the service charge
provisions in the lease had not been incurred, that is to say question
(1) did not arise. When they did raise the point for the first time, in the
course of the third day of the hearing, we invited them to consider making a
new or amended application. There was an adjournment of a month between the
third and fourth days of the hearing during which time the [Landlords] provided
further disclosure so that the [Tenants] could consider if they wished to amend
their application. They did not do so. However, on the resumed fourth day of
the hearing the [Tenants] did request an adjournment so they could consider the
issue further. We refused this request for the reasons given at paragraph 68
below.
68. As we explained above on the
fourth day of the hearing the [Tenants] asked for an adjournment to consider
further whether they wished to challenge the service charge account. Disclosure
had been provided on 7th March of the invoices for the 2008/09
service charge year. The [Tenants] had not and did not plan to instruct an
independent expert accountant to review the invoices and the accounts provided
by the [Landlords]. [Counsel for the Tenants] was not able to put forward any
prima facie evidence that his clients had been charged for something that had
not been done. In the circumstances we did not believe that a further
adjournment would achieve anything and we refused the application.”
23.
Accordingly, he submitted, the Tenants had been given an opportunity to
challenge the service charge accounts and argue that some expenditure claimed
had not actually been incurred but did not do so. It was too late for them to
do so now.
24.
In my judgment Mr Darby’s submissions are a complete answer to the
Tenants’ case on the main thrust of this ground, namely as to whether the
Tenants had been charged for costs incurred prior to the term of the
sub-underleases. Although he was not present at the LVT hearing Mr Warner did
not dispute, on instructions, Mr Darby’s account of what had happened at the
hearing. Nor did he point to any evidence that any of the Tenants had in fact
been charged for expenditure incurred prior to the term of the sub-underleases.
Accordingly there was no longer any dispute about that issue for the LVT to
deal with.
25.
The same applies to the complaint that not all invoices were produced by
the Landlords. The Tenants were given the opportunity to challenge the accounts
and chose not to do so until very late in the day and the LVT refused to
adjourn for the purpose. It is too late to raise it now. There is no
challenge to the LVT’s refusal to grant another adjournment to enable the
Tenants to challenge the accounts or the reasons for refusal as described in
paragraphs 6 and 68 of the decision.
26.
Further, the argument relating to treatment of the £25,108 2003/04
service charge expenditure in the accounts was not expressly raised with the
LVT and again it is too late to do so now. If it had been raised, evidence
would need to have been given about it. For example, the service charge
accounts for 2004/05 show £22,185 received as ‘Developer contributions less
void units’ suggesting that the Tenants were not being asked to meet the whole
of the previous year’s deficit. This appeal is being dealt with by way of
review and it is not for me to speculate what evidence could have been given on
this issue or what the LVT’s conclusion about it might have been.
27.
Moreover, the letter dated 16 September 2004 does not have the effect contended
on behalf of the Tenants. After referring to the accounts for 2003/04 the
letter states “…a number of properties were sold during the period and
therefore paid an apportioned service charge sum rather than a full sum which
would have been levied if they had been purchased at the commencement of the
financial year. We believe that the deficit will be made up by [the
Landlords]…” This accords precisely with the Landlords position at the LVT
hearing.
28.
As to the other matters, I consider that the substance of the Tenants complaint
relating to entry fobs in the 2003/04 service charge accounts was the same as that
raised in other years. This was dealt with by the LVT when those issues were
addressed in relation to all years and the Tenants arguments about this item
stand or fall with the sixth ground of appeal.
29.
So far as cleaning is concerned, the complaints made were again the same
as those raised in other years and I accept Mr Darby’s submission that these
issues were dealt with by the LVT. Paragraph 40 of the LVT decision refers to
the Tenants argument that cleaning was inadequate and the LVT then go on to
deal with it in paragraphs 41 to 45. In paragraph 42 the LVT record Mr
Winstanley’s evidence that when the builders made a mess which required cleaning
up there was no extra cost to the Tenants. In paragraph 45 the LVT concludes
that the sums spent on cleaning were reasonable, that by definition cleaning is
not continuous so it will often be the case that some parts of the building
require cleaning and go on to make a deduction for 2006/07 the charge for which
was out of kilter with other years. In my judgment it cannot be said that the
LVT failed to have regard to or deal with the Tenants complaints about
cleaning. It is to be noted that no complaint is made about the way the LVT
dealt with the same issues relating to cleaning in other years.
30.
Finally as to maintenance, in his Skeleton Argument Mr Warner’s point
was that the LVT had failed to deal with an argument that external maintenance
was not justified as the building had only just been completed. However, this
point is not taken in the Scott Schedule and Mr Warner did not dispute that
this argument was not pursued at the LVT hearing. Accordingly in my judgment it cannot be raised now. In his
oral submissions Mr Warner referred to car park maintenance which is raised in
the Scott Schedule. Insofar as the complaint was that the builders were
responsible for any problem, this was the same complaint as was raised in other
years and I will deal with it under the fourth ground of appeal. Insofar as the
complaint was that a new building should not require maintenance, again this
was not pursued at the LVT hearing and it is too late to raise it now.
(2) and (3) Management fees
31.
In relation to management charges the LVT said this:
“46. As we have said, Priory Place is managed by Curry
& Partners on behalf of the [Landlords] and has been since June 2005. The
tenants’ complaints were a failure to investigate and resolve problems, e.g.
the fact that the lifts were out of action for so frequently, a failure to
collect service charges. Mr Schrivjer explained that there were problems with
rough sleepers and vandalism which could have been reduced or avoided with more
intensive management. As an example of a case of poor management he reported a
door handle broke in Abbey Court on 14th December, it was not fixed
20th December, by the third visit it had not been fixed, it was
still loose on 6th January.
47. Mr Winstanley explained that the charge per unit was
currently £180 (+VAT). He accepted that there was no management contract. His
complaints procedure was to acknowledge a complain in 24 hrs and to respond in
7 days. He was hampered by cash flow problems, including the fact that some of
the tenants had not been paying the service charge so the [Landlords] had to
fund the provision of service. step in. He couldn’t personally assess the lift
repairs, relying on trusting a reputable contractor Kone. He made a site
inspection every six weeks but didn’t check repairs unless they were major
works. He described Priory Place as a “high maintenance site” because of its
city centre location next to the bus station a comment with which we agree.
48. In our view the central problem that the tenants cace
is here is that Priory Place is indeed a high maintenance block, in the city
centre, with mixed residential/commercial use, including a lit of flats which
are not owner occupied but let on short term tenancies. We do not consider the
fee of £180 per unit unreasonable from our experience. However, we do consider
having heard the evidence that there are examples of failure to communicate and
inadequate management on the part of Currys. We consider that it is
unfortunate that there is not a signed management agreement and that no budgets
are provided to tenants. In the round we consider that it would be fair to
reduce the management charge by 10% in each year.
49. It is right to say that because of the particular
features of the development Priory Place could do with more intensive
management but this would undoubtedly be significantly more expensive and thus
lead to an increase in the service charge.
50. One matter relating to the management of Priory Place that caused us some concern was the fact that in response to the decision of
some tenants to stop paying their service charges the [Landlords] had decided
to withdraw certain services, notably the security guards. In his skeleton
argument Mr Darby referred to paragraph 1 of the Tenth Schedule (which sets out
the [Landlords] management covenants) of the lease and provides: “Conditional
on the Sub-Lessor having first received payment of the Sub-Lessee’s Proportion
then to carry our the works and do the acts and things set out in the Sixth
Schedule as appropriate to each type of Dwelling…” Mr Darby’s persuasive
submission was this payment of the Sub-Lessee’s proportion was a condition
precedent for the provision of the services.
51. The problem with this
submission however is that the ‘Sub-Lessee’s Proportion’ is defined in the
lease as the payment specific to the demised premises in question. Therefore it
is not, in our view, open to the [Landlords] to withdraw service from all
of the tenants when there is default by a few, or even many. We recognise that
it is impractical for the [Landlords] to provide services only to those tenants
who pay, however, we do not consider that the lease permits the collective to
suffer for the sins of the few.
52. That said, we do not consider
that the withdrawal of service in this case has been so significant as to
require another separate deduction in the management charges and indeed we note
that the service charge budget has in fact been subsidised by the [Landlords]
during the course of this dispute.”
32.
Mr Warner submitted that the Tenants evidence raised very substantial
deficiencies in the performance of the managing agents to which the LVT had not
had proper regard. There had been a very significant failure to comply with
the RICS Service Charge Residential Management Code which put in issue whether
the sums claimed had been reasonably incurred. If the LVT had had proper regard
to that evidence it would have made a deduction of 50% not 10%.
33.
However, Mr Warner also went further than that and submitted that under
the terms of the sub-underleases the Landlords were not entitled to claim any
fees for employing a firm managing agents at all. He accepted that this point
had never been raised at the LVT hearing but submitted that because it was an
error of law relating to the Landlords powers he could raise it now. He
submitted that paragraph 21 of Schedule 6 to the sub-underlease contained a
clear proviso which was intended to limit the amount of managing agents fees
recoverable by stating that they could only be met from certain fees. The
limit was stated to be that “the payment of such managing agents shall be met
exclusively from the fees more particularly detailed in paragraph 2 hereto”. He
acknowledged that this made no sense as paragraph 2 of the Sixth Schedule made
no provision for fees, only for expenditure on maintenance of service
installations. He submitted that the fact that the proviso broke down did not
mean the Landlords could charge an unlimited amount for managing agents. The
clear intention was that the amount to be charged should be limited and
therefore the Landlords were unable to charge anything. This was not unworkable
as paragraph 21 entitled the Landlords to claim management costs provided they
were charged in house and the management duties were carried out by employees
of the Landlords.
34.
Further, Mr Warner submitted that the amounts charged by the managing
agents in addition to the flat fee of £180 per flat per annum could not be
recovered because there was no management contract in place, the amounts had
been charged to a different company not the Landlords and the money was for
services not covered by the sub-underleases.
35.
In response Mr Darby submitted that the Tenants argument amounted to an
assertion that the LVT had given insufficient weight to the Tenants criticisms
of the managing agents. That is not a proper ground on which the LVT’s
decision could be impugned as the weight to be attached to the evidence was a
matter for them.
36.
As to the proper construction of paragraph 21 of the Sixth Schedule to
the sub-underleases, he did not argue that because this had not been raised
before the LVT it could not be raised now. If I thought the point had merit
the proper course was to remit the matter to the LVT so that evidence could be
called and findings made as to the factual matrix within which the construction
issue had to be decided in accordance with the House of Lords decision in Investors
Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. On
the merits, he submitted that the proviso to paragraph 21 was such an obvious
mistake it ought to be corrected by construction. In any event, he submitted
that the cost of managing agents could also be recovered by virtue of
paragraphs 30 and 33 of the sub-underleases. Further, the additional
management costs were recoverable under various other provisions of the Sixth
Schedule.
37.
I accept Mr Darby’s submissions on the question of whether the LVT had
proper regard to the Tenants’ criticisms of the managing agents. The Notice of
Appeal paragraph 2 says in terms that the LVT failed to attach any or
sufficient weight to the factors listed. The weight to be attached to the
evidence is a matter for the LVT and the Lands Chamber will not intervene
unless (so far as relevant for present purposes) it can be shown that the LVT
has erred in law, taken into account an immaterial consideration or failed to
have regard to a material consideration or there was a substantial procedural
defect, see paragraphs 4.2 and 4.3 of the Lands Chamber Practice Direction
dated 29 November 2010. No legal error is identified save that dealt with
below, and, insofar as they were pursued, the criticisms relied on in the
Notice of Appeal were specifically taken into account by the LVT as paragraph 2
of the Notice itself recognises. It was not suggested that the LVT had wholly
failed to have regard to the breaches of the RICS Code.
38.
Turning to the issue as to construction of paragraph 21 of the Sixth
Schedule to the sub-underlease, Mr Darby did not dispute that the reference to
the cost of managing agents being met from fees detailed in “paragraph 2
hereto” made no sense. Paragraph 2 of the Sixth Schedule refers to expenditure
not income or fees and the subject matter of the expenditure (Service
Installations) has nothing in particular to do with the appointment of managing
agents. However, I do not consider it would be appropriate to remit this matter
for rehearing for the LVT to determine the factual matrix against which the
construction issue must be determined. The factual matrix does not include
actual negotiations or subjective intention but comprises the background
knowledge that would reasonably have been available to the parties, see Investors
Compensation Scheme per Lord Hoffman at pages 912-913. The LVT is in no
better position than the Lands Chamber to ascertain the background and, as an
issue of law, if the case were remitted it would always be open to the losing
party to appeal again to the Lands Chamber. This would result in further
expense and delay. In my judgment the sensible course would be for the Lands
Chamber to determine the correct construction of the sub-underlease in this
appeal. Section 175(4) of the Commonhold and Leasehold Reform Act 2002 enables the Lands Chamber
on appeal to exercise any power which was available to the LVT.
39.
The background knowledge that would reasonably have been available to
the parties includes that it would be entirely normal for two blocks containing
85 flats to be managed not by the landlord but by a firm of managing agents on
his behalf and for their costs to be payable as part of the service charge. The
sub-underlease clearly envisages that the Flats could be managed by managing
agents and makes specific provision for payment of the cost of employing them. Paragraph
21 (ignoring the proviso) includes “the payment of all costs and expenses
incurred by the Lessor” of employing “managing agents or consultants or
similar.” However, the proviso purports to provide that the cost of managing
agents should be met from a specific source of funds which, because of the
drafting error, cannot be identified. It is difficult to imagine what that
source of funds might be. Further, the list of jobs in paragraphs 22 to 25
(obviously intended to be sub-paragraphs of paragraph 21) which an agent may be
employed to undertake is difficult to reconcile with an intention to prohibit
recovery of a significant proportion of the cost of doing such work.
40.
In my judgment to accede to the Tenants’ argument that, because the
source of funds cannot be identified therefore no costs of employing managing
agents is recoverable, flies in the face of the clear intention of the
sub-underlease that the cost of managing agents should largely be recoverable. That
is evident not only in paragraph 21 but also in paragraph 30. In the absence of
any discernable means of limiting the costs in the sub-underlease, I consider
that the only sensible meaning which can be given to paragraph 21 is that the
managing agents fees are limited to those which would be reasonable. While I
accept this would mirror the jurisdiction of the LVT of which the parties could
be taken to be well aware, no other construction better accords with “the
meaning which the document would convey to a reasonable person having all the
background knowledge which would reasonably have been available to the parties
in the situation in which they were at the time of the contract”, see Investors
Compensation Scheme page 912 paragraph (1). On this approach LVT’s decision
involves no error of law.
41.
Mr Warner submitted that this would amount to rectification by
construction without the necessary conditions being met and referred to Chartbrook
PLC v Persimmon Homes Ltd [2009] 1 AC 1101. It should be noted that there
is a significant difference between Chartbrook and the present case on
the facts. There the definition of ARP had a clear meaning applying normal
rules of syntax (albeit one which did not accord with commercial sense) whereas
here paragraph 21 cannot be given any sensible meaning consistent with the
ordinary use of language. More importantly, in the leading opinion Lord
Hoffman emphasised (paragraph 23) that the two conditions which must be met to
correct a mistake by construction (a clear mistake and a clear correction) “are
simply aspects of the single task of interpreting the agreement in its context,
in order to get as close as possible to the meaning which the parties
intended”, a quote from the judgment of Carnwath LJ in KPMG LLP v Network
Rail Infrastructure Ltd [2007] Bus LR 1336, paragraph 50. Whether the
interpretation of paragraph 21 as permitting recovery of managing agents fees
that are reasonable is a clear correction or not, the fact remains that the
sub-underlease must be construed in order to get as close as possible to the
meaning the parties intended. For the reasons already given I consider that the
construction which accords with this principle is that the managing agents fees
are recoverable but limited to those which would be reasonable.
42.
The Tenants final point on management fees related to some specific
items the subject of invoices and entries in accounts that it was submitted
were not recoverable for a variety of reasons. However, Mr Warner agreed that
the only ones which had been challenged in the Tenants Scott Schedule before
the LVT were those relating to health and safety inspections. It was said that
these were not recoverable because the Landlords did not have a contract with
the managing agents and they should be covered by the management fees.
43.
In my judgment it is not open to the Tenants to complain that specific
service charge sums were not recoverable when that was never raised before the
LVT. As to the cost of health and safety inspections, it is right to say that
the LVT decision does not deal with this issue separately from the reasonableness
of the managing agents fees generally. However, even if it can properly be
said that the LVT has failed to have regard to this evidence I would not remit
the issue for re-hearing because in my judgment the LVT would be bound to come
to only one conclusion. The invoices refer to the carrying out of inspections,
reviews and assessments as required by various regulations. Quite apart from
paragraph 21 of the Sixth Schedule to the sub-underleases, a number of other
paragraphs would permit recovery of these sums: paragraph 12 (inspecting fire
apparatus) and paragraph 28 (the cost of complying with regulations relating to
the “Development”, which means the whole site (see the First Schedule) so far
as not the responsibility of the sub-underlessees). Whether or not it is in
writing, clearly the Landlords have agreed as a matter of contract that the
managing agents would carry out this work. The fact that they are not the
subject of a written agreement cannot possibly of itself prevent recovery.
(4) Doors
44.
The LVT said this about doors:
“Door repairs
55. There was again no oral evidence or joint experts’
statement on this issue. However, in distinction from the question of the lifts
we are not satisfied that the tenants have raised a prima facie case here. There
is no evidence that doors of wrong type installed, nor that they were
inadequate or defective; we must assume that the repairs were needed and
therefore we allow these sums in full.
Car Park Shutter doors
56. The costs here related to the
repair of the car park gates and again in our view should be paid. Again,
there was no evidence to suggest that these works were unnecessary or could
have been done for less.”
45.
In his Skeleton Argument Mr Warner argued that the LVT’s conclusion in
paragraph 55 of its decision that there was no evidence the doors were
defective was incorrect because there was evidence that the LVT had failed to
take into account. In oral argument he accepted that, so far as the pedestrian
entrance doors were concerned, the LVT was correct because the Tenants’
surveyor had agreed that the doors complied with regulations when they were
constructed. However, he maintained his argument in relation to the car park
shutter doors. It was submitted that the original installation was defective
and the doors had been damaged by builders so that a claim should have been
made against the building contractor rather than charging the Tenants via the
service charge. Mr Warner relied on Continental Property Ventures Inc v
White [2007] L&TR 38, a decision of the Lands Tribunal (Judge Michael
Rich QC) which upheld an LVT decision disallowing the cost of repairs on the
grounds that they could have been carried out under a guarantee at no charge. He
submitted that no proper consideration had been given to whether to recover the
cost of repairing the car park shutter doors from others and that where there
was an alternative remedy at lower (or no) cost, the costs of carrying out
works were not reasonably incurred for the purpose of s.19(1)(a) of the 1985 Act.
46.
Mr Darby submitted that the only fault identified by the Tenants’ expert
in the experts’ schedule (p.910-911 of the bundle) was that the access panel
had been sited in such a way as to allow unauthorised access and it should be
relocated. The expert stated “In addition, we understand but have only
witnessed on one occasion that the security shutters continually fail” and
recommended a regular maintenance regime. The LVT’s conclusion in paragraph 56
that “there was no evidence to suggest that [the repair] works were unnecessary
or could have been done for less” was therefore correct.
47.
In my judgment the LVT’s conclusion on this issue was one that was open
to it. The Tenants’ expert evidence did not support their assertion that the
car park shutter doors were continually breaking down. Moreover, insofar as the
Tenants’ were suggesting that others should be liable for the cost of repairs,
there is no evidence that the Tenants cited the Continental Property
Ventures case to the LVT or otherwise made clear the basis on which others
were said to be liable for the cost of repairs. There was no evidence of any
guarantee which covered the doors nor any evidence as to from whom and on what
basis the Landlords could recover for the cost of damage to the doors.
(5) Insurance
48.
As to insurance the LVT said this:
“33. In the Scott Schedule the tenants raised the
following concerns in relation to the cost of insurance: Was the charge for
2004 for the whole year, if so they should not be liable for all of it; the
absence of invoices to prove the cost of insurance; how the premium had been
calculated; why was the premium so high. The tenants were also understandably
concerned about whether the fact that claims had been made would increase the
premiums in the future.
34. Mr Winstanley explained that Curry’s managed 7,000
flats over 400 blocks and that initially they placed insurance under a block
policy with AXA. However, since February 2008 insurance has been arranged by
CDP via brokers H.W. Wood for the building as a whole.
35. He explained that in January 2010 because of the
number of claims made the policy excess had been raised to £5,000, or 10% of
the loss for malicious damage/escape of water. However, the premium itself has
not been affected by the claims history of the building.
36. The [Tenants] approach to the
question of insurance has been to challenge and/or seek clarification of the
way that insurance had been obtained. However, they have not obtained
alternative quotations.
37. In the circumstances, now that the [Tenants] questions
have been answered by the [Landlords], we are not in a position to say that the
landlord’s claim for repayment of the cost of insuring the building via the
service charge is unreasonable and we determined the amount payable as the cost
incurred by the [Landlords] that is set out in the service charge account.
38. For the records, we note that a situation may arise in
future years when, if the excess is significantly higher, the costs of these
repairs charged as service charges will be higher. Whether in this event the
tenants would be entitled to a reduction in the cost of repairs vis a vis the
landlord is a matter we must leave open.”
The LVT then went on to deal with an issue relating to VAT
which is not relevant to this appeal.
49.
It was submitted that the LVT had dealt with the Tenants arguments about
insurance in too brief and superficial a manner. Contrary to what was said in
paragraph 37 of the LVT decision, the Tenants questions had not been answered. Insurance
premiums had increased considerably over the years and multiple claims had been
made. The Landlords had given no consideration to alternative courses of
action such as pursuing the original builder for defects in construction of the
building. Mr Warner again relied upon Continental Property Ventures in
support of the proposition that where there was an alternative remedy at lower
(or no) cost, the costs of carrying out works were not reasonably incurred for
the purpose of s.19(1)(a) of the 1985 Act. Further, the Tenants had not been
in a position to obtain alternative insurance quotations because the Landlords
had failed to provide information about the level of claims.
50.
In addition, Mr Warner belatedly sought to rely on a subsequent LVT
decision dated 24th April 2012 which considered the reasonableness
of service charges for the Flats in the year 2011/12. In it the LVT found that
insurance premiums had risen owing to, amongst other things, the high level of
claims, see paragraph 106.
51.
Mr Darby submitted that the Tenants had failed to establish a prima
facie case that the insurance costs were unreasonable. In the Scott Schedule
the Tenants suggested alternative lower figures for insurance but when Ms
Kullar was cross examined about those figures she was unable to support them or
explain where they had come from. The Landlords evidence was that the cost of
insurance premiums had not risen as a result of claims though the excess had
increased. Further, the Landlords relied on evidence from Mr Hands, a
Chartered Building Surveyor, as to the causes of leaking water (in respect of
which insurance claims had been made) which showed they were not caused by
defective construction. Therefore the Landlords did not have an alternative
remedy to pursing insurance claims.
52.
As to the later LVT decision, Mr Darby submitted the Lands Chamber did
not have the evidence which was before the LVT when considering the issue and
in any event it related to a different service charge year namely 2011/12. The
Landlords conceded that the premium in that year may have been affected by the
claims.
53.
Ms Kullar’s witness statement says in relation to insurance that the
Tenants do now have most of the information, paragraph 46. She then refers to
some omissions and concludes “All we want to see is proof of the cost of
insurance for the residential parts for each year” (paragraph 52). She also
goes on to refer to the claims history. What Ms Kullar was seeking was proof
the money claimed as service charge had been spent on insurance. However, as I
have already said in paragraph 25 above, the Tenants did not challenge the
service charge accounts despite having an opportunity to do so until it was too
late and they cannot now complain that the service charge costs relating to
insurance have not been incurred.
54.
In the light of the evidence of Mr Winstanley of the Landlords managing
agents that the insurance premiums had not been affected by previous claims and
the lack of any evidence from the Tenants to show that the amount of the
premiums was unreasonable the LVT had no alternative but to allow the cost. As
the LVT put it in paragraph 37:
“we are not in a position to say
that the landlord’s claim for repayment of the cost of insuring the building
via the service charge is unreasonable”
55.
I do not accept that the Tenants could not have obtained alternative
insurance quotations. The insurance certificates produced by the Landlords show
the risks covered, the excesses and sums insured which would have enabled
quotes to be obtained. Further, as already stated, the Tenants had information
about the claims history. If alternative quotes were less than the service
charge costs the onus would have then fallen on the Landlords to justify the
difference. The LVT specifically left open for future years the implications of
the fact that the excess had gone up because of claims, see paragraph 38.
56.
Further, there is again no evidence that the Tenants cited the Continental
Property Ventures case to the LVT or otherwise made clear the basis on
which it is said that the cost of remedying damage in respect of which
insurance claims had been made could be recovered from others. The effect of
Mr Hands evidence that damage caused by leaking water was not the result of
defective construction was that the Landlords did not have an alternative
remedy against the building contractor.
57.
Without knowing anything about the background to the later LVT decision,
in particular the evidence before the LVT, it is impossible to place any weight
on it. Further, as the decision related to a different and later service
charge year there is not necessarily any inconsistency between the two LVT
decisions. The later decision does not assist the Tenants challenge to this
decision.
(6) Entry fobs
58.
As to entry fobs the LVT said this:
“The tenants’ concern here appears
to be that Currys might be making a profit on the resale of fobs to tenants who
have lost theirs. The position appears to be that Currys obtain a stock of
fobs which is charged to the service charge account which is reimbursed when
they are sold to tenants. We accept that the situation appears rather opaque
but we cannot identify a loss to the service charge account here and do not
consider it unreasonable for Currys to impose an administration charge on the
individual tenant who requires a new fob.”
59.
Mr Warner submitted that the evidence showed the Landlords were making a
profit out of the sale to sub-underlessees of fobs used to gain access to the
building and car park as the cost of them appeared to increase in the Landlords
figures. It is well established that a landlord cannot make a profit out of a
service charge accounts, see Jollybird Ltd v Fairzone Ltd [1990] 2 EGLR
55. The LVT failed to properly address this issue.
60.
Mr Darby submitted that Mr Winstanley was cross examined about the entry
fobs and stated that a stock of fobs was purchased which was charged to the
service charge account. As and when a tenant lost theirs and asked for a
replacement they were charged for it together with an administration fee and
both those sums were then credited to the service charge account. The LVT were
entitled to accept his evidence.
61.
I accept the submissions on behalf of the Landlords. The LVT was plainly
aware of the Tenants case on this issue which is set out in the first sentence
of paragraph 57 of the decision. The LVT were entitled to accept the Landlords
evidence and the Tenants were unable to demonstrate either that the Landlords
were making a profit or that there was a loss to the service charge account.
(7) Electricity
62.
As to electricity the LVT said this:
“The sums charged here are in
respect of the supply of electricity to the common parts. It was suggested by
the tenants that the charge for electricity could be reduced with time switches
but in our view since the building has little natural light it is not
unreasonable to have 24 hour lighting in the common parts. Further there was
evidence of vandalism or misuse of the light boxes so there was a concern that
if timing was used then not work.”
63.
The Tenants complained that electricity charges were too high, very few
invoices had been provided and no electricity saving measures were in place as
the lights in the common parts were on 24 hours a day. It was submitted that
the LVT had failed to deal with the argument about lack of invoices and had wrongly
concluded that it was not unreasonable to have 24 hour lighting in the common
parts.
64.
The challenge to electricity related only to 2005/06 and 2009/10. It was
submitted on behalf of the Landlords that the complaint about lack of invoices
could not be sustained against the background of failure to challenge the
accounts. The challenge to the LVT’s decision relating to 24 hour lighting in
the common parts does not appear in the Notice of Appeal.
65.
The substance of the Tenants complaint is that the Landlords did not
produce invoices to cover all of the electricity charges. Again however, in
the absence of a challenge to the accounts there was no issue before the LVT as
to whether the costs to which the service charges relate have been incurred. So
far as lighting of the common parts is concerned, this is not raised in the
Notice of Appeal but in any event the argument does not raise any issue on
which the decision may be challenged and is simply as disagreement with the
LVT’s decision on the facts. The LVT was entitled to reach the reasoned
conclusion that it was not unreasonable to have 24 hour lighting in the common
parts and that because of evidence of vandalism, timers might not work.
(8) Water pump
66.
During the hearing before me Mr Warner accepted that at the LVT hearing this
item had been agreed and the Tenants were no longer pursuing this ground of
appeal.
The cross appeal
(1) Lift
67.
As to the lift the LVT said this:
“53. This is a matter on which we
would have benefitted from oral evidence a joint statement from the experts. It
was common ground that the lift in Abbey Court had been out of action for
several lengthy periods (twice three months; once two months) causing the
tenants immense inconvenience. We are unable to say for certain what caused
the lifts to break down but water ingress into the building certainly played a
significant part.
54. In respect of this particular
issue, the tenants having raised a prima facie case that there was a problem,
it was for the landlord to respond to the allegations. We are not satisfied in
this instance that the landlord has explained why the lifts required frequent
and expensive repair and why the root causes of the lift breakdown were not
investigated and resolved at an earlier stage (and indeed they still have not
been resolved). This being the case we have decided that none of the costs
incurred in respect of this item should be paid by the tenants for the years in
question.”
68.
It was submitted by Mr Darby that it was common ground that there were
significant problems with the lift in Abbey Court. However, the same was not
the case with the Benedictine Court lift and the Tenants accepted in the Scott
Schedule that it was reasonable for the Landlords to charge for some of the
lift works. Further, a number of items in the experts’ schedule were agreed to
be maintenance items for which the Landlords should be able to charge and
insofar as they were original installation defects they were minor. The LVT
erred by addressing the lifts as one problem and not considering the costs
relating to each lift separately. This wrongly led the LVT to disallow all the
service charges relating to the lifts.
69.
Mr Warner submitted that Tenants Scott Schedule referred to both lifts
and the experts’ schedule also identified problems with both lifts. This gave
rise to a case which the Landlords were required to answer but they failed to
do so and the LVT was entitled to disallow all the costs.
70.
It is correct that the Tenants’ Scott Schedule refers to ‘lifts’ plural
in the sections complaining about the cost of lift maintenance. In the
experts’ schedule the Tenants’ expert starts by observing that “The standard of
maintenance to the lift installations in both Abbey Court and Benedictine Court was found to be poor” (bundle page 907). Further, 6 of the 8 specific
defects identified relating to the Benedictine Court lift were agreed by the
experts to relate to the original construction. The fact that these may not
have prevented operation of the lift is nothing to the point; there is no reason
why the Tenants should have to pay for them to be remedied via the service
charge. The LVT rightly found in paragraph 54 that the Tenants had raised a
prima facie case that there was a problem and it was for the Landlords to
respond. In my judgment in the light of the evidence to which I have referred
the LVT was entitled to conclude “We are not satisfied in this instance that
the landlord has explained why the lifts required frequent and expensive
repair…” This specifically refers to ‘lifts’ plural and is supported by the
Tenant’s experts comment in the schedule quoted above. The fact that the
standard of maintenance had been poor was a matter which went to whether it was
reasonable for the Tenants to pay for the maintenance costs, quite apart from
the cost of remedying original defects.
(2) Legal fees
71.
In paragraph 62 the LVT stated:
“This item related to solicitors’
costs for the 2008-09 service charge year at which time solicitors instructed
by the [Landlords], not Wood Glaister, were threatening proceedings for unpaid
service charges. At our request Mr Darby reassured us that the fees were not
incurred in relation to this application. However, on consideration we note
that the disclosed invoices are not addressed to the [Landlords] but to another
company, Barratts, and therefore we do not think they can be properly recovered
as a Maintenance Expense under the lease.”
72.
It was common ground that this was not a point which had been raised by
the Tenants. The Scott Schedule asserts that the Tenants should not have to pay
because the only reason they were withholding service charges was because the
Landlords had failed to deal with the problem of water leaks. There was also
no dispute that the LVT did not raise at the hearing the issue of to whom the
invoices were addressed. It was submitted on behalf of the Landlords that as a
matter of basic procedural fairness, if the tribunal is considering deciding a
point on a ground not raised by the opposing party or tribunal it should inform
the parties and give an opportunity for evidence/submissions to be put forward.
If the point had been raised the Landlords would have adduced evidence that
the Landlords are part of the Barratt Group of companies and the identity of
the addressee was irrelevant.
73.
It was submitted on behalf of the Tenants that this was an obvious point
that should have been addressed by the Landlords and they could not now
complain they had not been able to deal with it.
74.
Although no authorities in support of this ground were cited at the
hearing before me, a few days later the Landlords solicitors forwarded a copy
of the recent decision in Thinc Group Ltd v Armstrong [2012] EWCA Civ 1227. In that case Thinc appealed against a decision of the judge at first
instance who found that a collateral warranty existed which prevented Thinc
from recovering payment made under a service contract. The grounds of appeal
included that this was unfair because the collateral warranty had not been
pleaded and had not been the subject of evidence or submission. The Court of
Appeal rejected that argument on the facts. However, as to the principle, Rix
LJ who gave the judgment of the court said this:
“50.
…Thus Thinc’s skeleton submits:
“26. It is clear on the authorities that for a court or
tribunal to determine a dispute on the basis of a case not put forward by a
party or not raised by the court or tribunal is unfair and not permissible.”
51.
That proposition probably needs no citation of authority, but nevertheless the
authorities cited by Thinc's skeleton are instructive. We were referred first to The Vimeira
[1984] 2 Lloyd's Rep 66 (CA), where a shipowner claimed damages from
his charterer because of damage suffered by his ship as a result of being
ordered to an unsafe port. The unsafety was alleged to consist in insufficient
depth of water. However the arbitrators, while rejecting that case, instead
fastened upon an entirely different factual case, unpleaded and unargued, and
one which the arbitrators had not even raised with the parties. Robert Goff LJ
said this:
“but the fact remains that the award was made on the
basis of a point which was never raised as an issue or argued before the
arbitrators. There is plain authority that for arbitrators so to decide a
case, without giving a party any warning that the point is one which they have
in mind and so giving the party no opportunity of dealing with it, amounts to
technical misconduct and renders the award liable to be set aside or remitted…
[at 74 rhc]
In
truth, we are simply talking about fairness. It is not fair to decide a case
against a party on an issue which has never been raised in the case without
drawing the point to his attention so that he may have an opportunity of
dealing with it, either by calling further evidence or by addressing argument
on the facts or the law to the tribunal. In my judgment, the arbitrators in
the present case failed to give that opportunity to the charterers in respect
of an issue not raised in the arbitration that the turning space at the
entrance to the dock was insufficiently wide” [at 75 lhc].
52. We
were also referred to Zermalt Holdings
SA v. Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14 , another
case from arbitration. The arbitrator there was appointed to determine rent
under a rent review clause and had relied on matters of his own expertise which
had never been the subject of reliance or comment at the arbitration. Bingham J
said (at 15 rhc):
“Nevertheless, the rules of natural
justice do require, even in an arbitration conducted by an expert, that matters
which are likely to form the subject of decision, in so far as they are
specific matters, should be exposed for the comments and submissions of the
parties. If an arbitrator is impressed by a point that has never been raised
by either side then it is his duty to put it to them so that they have an
opportunity to comment. If he feels that the proper approach is one that has
not been explored or advanced in evidence or submission then again it is his duty
to give the parties a chance to comment. If he is to any extent relying on his
own personal experience in a specific way then that again is something that he
should mention so that it can be explored. It is not right that a decision
should be based on specific matters which the parties have never had a chance
to deal with, nor is it right that a party should first learn of adverse points
in the decision against him. That is contrary both to the substance of justice
and to its appearance…”
75.
The Tenants argument before the LVT was that they should not have to pay
the legal fees because the only reason they were withholding service charges
was because the Landlords had failed to deal with the problem of water leaks. In
my judgment it is far from obvious that the Landlords should have anticipated
that the LVT might be concerned that the invoice for the fees had been sent to
another company and was therefore not money expended by the Landlords which
could be recovered as Maintenance Expenses pursuant to the sub-underleases.
76.
That is particularly so in the context of this case. In the application
to the LVT for a certificate recognising the Second Appellant as a tenant’s
association, the name of the landlord given by it was Barrett Homes West
Midlands. That certificate was granted on 19 April 2010 by Mr J De Waal, the
Chairman of the LVT whose decisions are challenged in this appeal, a matter of
days after he gave directions in this case. Further, although in this appeal
Mr Warner sought to challenge the LVT’s decision relating to management charges
on the ground that some invoices were addressed to Barrett Homes, that was not
a point taken by the Tenants before the LVT either. Indeed the Tenants appear
to have regarded Barrett Homes and Kingsoak as interchangeable, see Ms Kullar’s
witness statement paragraph 53 which states:
“We understand that all [insurance] claims should have
been reported to Kings Oak or Barrett Homes West Midlands, who as our landlord
should have….”
77.
In my judgment the ground on which the LVT disallowed the legal fees was
a ‘specific matter’ (see the quote from Bingham J above) which the rules of
natural justice required should have been raised for the parties to comment and
call evidence upon. Not to do so was unfair and unlawful.
78.
Accordingly the Landlords cross appeal is allowed in part and the LVT’s
decision on the s.27A application will be remitted for redetermination but
limited to the issue relating to the £10,541.53 legal fees in 2008/09. The
Tenants appeal is dismissed.
Section 20C – the costs appeal
79.
After determining the s.27A applications, the LVT gave directions for
the exchange of draft and then final written submissions on the issue of costs
and whether an order should be made under s.20C of the 1985 Act. So far as
relevant this provides:
“(1)
A tenant may make an application for an order that all or any of the costs
incurred, or to be incurred, by the landlord in connection with proceedings
before a court, residential property tribunal or leasehold valuation tribunal,
or the Upper Tribunal, or in connection with arbitration proceedings,
are not to be regarded as relevant costs to be taken into account in
determining the amount of any service charge payable by the tenant or any other
person or persons specified in the application.
(3) The court or tribunal to which the application
is made may make such order on the application as it considers just and
equitable in the circumstances.”
80.
In their written submissions the Landlords argued that no order should
be made in respect of costs relating to 3 specific matters and that as to the
balance, only 10% of their costs should not be regarded as relevant costs and
recoverable as service charges. The Landlords had succeeded wholly on 8 out of
12 issues and they had recovered about 90% of the service charges, thus the
Tenants had substantially failed. The submissions go on to make detailed
points about the issues on which the Tenants succeeded.
81.
In their written submissions the Tenants pointed out that they had
reduced the service charge bill by around £127,000 which was a notable success
and covered a lengthy period of time. The Tenants were justified in bringing
the applications and had not conducted the proceedings in an unreasonable or
improper way. They submitted that the Landlords should pay all of their own
costs and they should not be permitted to recover them through the service
charge. Finally, the submissions state that the Landlords incurred excessive
costs by having several fee earners present during the entirely of the hearing.
82.
In its decision dated 27 July 2011 the LVT began by deciding that the
Landlords costs of the s.27A applications were recoverable as service charges
as a matter of contract pursuant to the terms of the sub-underlease. There is
no challenge to that conclusion. Then after referring to a passage in Iperion
Investments v Broadwalk House Residents (1995) 27 HLR 196 the decision
continued:
“6. In this case the [Tenants] were partially but not
wholly successful in their Application in that they obtained a decision which
will lead to a reduction or re-assessment of the service charge they have had
to pay in respect of the costs of cleaning, management fees, the lift and legal
fees. Cleaning and management charges were of course two of the three
principal items of service charge which were discussed at the hearing, the
third being insurance. It is fair to say that the [Tenants] did not obtain a
reduction in respect of the cost of insurance nor some of the other smaller
items.
7. If ‘success’ were the only criterion then a broad brush
approach might suggest that both [Tenants] and [Landlords] had done equally
well out of the hearing. However, we consider that the phrase in s.20C(3)
‘just and equitable’ requires us to look beyond just the outcome of the
Application to the conduct of the parties and the process itself.
8. In our view, subject to the caveat set out in paragraph
9 below, we consider that it would be unjust and inequitable to require the
tenants to pay the landlords’ costs of the section 27A application. That is for
the following reasons:
(a) It is apparent to us that the [Tenants] found it very
difficult in the early stages at least to get clear information and relevant
disclosure of documents from the [Landlords] managing agents. Effectively the
[Tenants] were ‘flying blind’ for a long time and the true facts and issues
only found shape at the hearing.
(b) The column in the [Landlords] Statement of Case as set
out in the Scott Schedule ‘if wrong, what would be reasonable’ was not
completed.
(c ) The experts’ reports and the experts’ Scott Schedule
were almost entirely irrelevant to the issues we had to decide, focussing as
they did on a different debate which was who was liable for design defects in
the building. It would be unfair to make the tenants pay for the landlords
reports as well as their own.
(d) Overall the striking feature
of this Application was the fact that despite three preliminary directions
hearings and indeed and ‘pre-hearing review’, it only became apparent that the
principal matters which divided the parties (i.e. the plumbing and water
ingress) were not in fact relevant to the s.27A application as the hearing
progressed.”
83.
In paragraphs 9 and 10 the LVT went on to agree with the Landlords
submissions that no order should be made in respect of the costs of 3 specific
items. The LVT stated in paragraph 11 that, save for those, the Landlords
costs of the s.27A applications are not to be regarded as relevant costs to be
taken into account in determining the amount of any service charge payable by
the Tenants. Finally the LVT said this:
“12. We have some sympathy with
[counsel for the Tenants] point that on occasion the [Landlords] seemed to be
(our phrase) ‘over-lawyered’ at the hearing. In our view it should only be
necessary for a party to an application such as this to be represented by one
lawyer, whether counsel or solicitor, and it would not be fair to re-charge the
tenants for attendance by both.”
84.
The short point at the heart of Mr Darby’s submissions in support of
this appeal is that the reasons given by the LVT in paragraph 8 of its decision
were not arguments ever put forward by the Tenants as to why a s.20C order
should be made and, because the issue was dealt with in writing, there was no
hearing at which the LVT itself could put these points to the Landlord. Therefore,
it was unfair for the LVT to make the s.20C order on grounds the Landlords had
never had an opportunity to deal with. Thus the same point is taken here as in
relation to the second ground of appeal relating to legal fees in the cross
appeal against s.27A decision. Mr Darby also went on to make various points as
to why the Landlords considered the reasons given in paragraph 8 did not
justify making a s.20C order. He submitted that the LVT’s approach was
contrary to the guidance given by the Lands Tribunal in Tenants of Langford Court (Sherbani) v Doren Ltd [2001] EWLands LRX-37-2000, in particular
paragraphs 28, 31 and 32.
85.
On behalf of the Tenants, Mr Warner submitted that s.20C confers a very
wide discretion and the LVT was entitled to go beyond simply consideration of
which side was successful. The Landlords could have addressed such matters in
its representations and the reasons given in paragraph 8 were pre-eminently
matters for the LVT to assess. The LVT was not required to give the parties
advance notice of the grounds on which it proposed to exercise its discretion.
86.
There is no dispute that in deciding what was just and equitable in the
circumstances, the LVT was entitled to consider not only the outcome of the
proceedings but also the conduct and circumstances of the parties, see Tenants
of Langford Court paragraph 28. Even though neither party cited the case to
the LVT, I do not consider the decision is at odds with the principles set out
in Tenants of Langford Court. The matters set out in paragraph 8 relate
to the reasonableness of the Landlords conduct and, irrespective of the
reasonableness of their conduct, whether it would be unjust that the Tenants
should have to pay the Landlords costs, see Tenants of Langford Court
paragraph 31. Further, the LVT was well aware that it was depriving the
Landlords of a property right because it formed the clear view in paragraph 4
of its decision that the Landlords were entitled to recover their costs through
the service charge pursuant to the terms of the sub-underlease, see Tenants
of Langford Court paragraph 32.
87.
In my judgment, a cautious approach should be adopted towards the
application of the principles set out in Thinc Group Ltd v Armstrong to
a decision about costs. Such a decision involves the exercise of a very broad
discretion having regard to all the circumstances and is not circumscribed by
pleadings or grounds of appeal. This is no less true of the exercise of the
discretion in s.20C even though, as was pointed out in Tenants of Langford
Court paragraph 24, it is not the same as the courts power to award costs
in civil actions. There may be a wide range of factors a LVT would wish to
consider when exercising its discretion, whether raised by the parties or not,
and it would be inappropriate to require the LVT to revert to the parties on
every point that it may wish to rely upon in reaching a decision. This would
be tantamount to giving the parties an opportunity to comment on the substance
of a draft decision. On the other hand, the discretion must be exercised
judicially and that includes fairly, having regard to the way in which the
parties put their cases.
88.
In their written submissions on costs both parties focussed almost
exclusively on the merits and outcome of the case rather than the conduct and
circumstances of the parties. The exceptions relate to two discrete topics:
(1) the 3 specific issues which were addressed in paragraphs 9 and 10 of the
LVT decision and (2) the Tenants complaint about excessive legal representation
dealt with in paragraph 12 of the LVT decision. No criticism is made of the
LVT on these matters. The Tenants case, as set out in paragraphs 6 and 13 of
the written submissions, was that it had been substantially successful and
therefore it would be inappropriate to allow the Landlords to recover their
costs through the service charge. Reference was made to the reasonableness of
the Tenants actions but in the context of there being no unreasonable conduct
such as to justify a s.20C order being withheld. There was no suggestion
anywhere in the Tenants submissions that the Landlords conduct had been
unreasonable (save in relation to excessive legal representation) or that there
was some other reason (apart from the outcome of the case) why it would be
unjust for the Tenants to pay the Landlords costs through the service charge.
89.
In that context it was not surprising that the Landlords written
submissions focussed on the outcome of the case and I do not consider that they
could reasonably have anticipated the possibility that the LVT would make a
s.20C order in respect of all of their costs (save as to the 3 specific issues)
on grounds unrelated to the outcome of the case. Further, the LVT have quite
properly given reasons which are very specific rather than e.g. a general
comment about the reasonableness of the Landlord’s approach. In all the
circumstances I consider that it unfair of the LVT to make the order it did
without giving the parties an opportunity to comment on the matters set out in
paragraph 8 of the decision.
90.
My view should not be taken as in any way circumscribing the ambit of
the LVT’s discretion under s.20C. Nor should it be seen as any reason for such
issues not to be determined in writing which plainly will often be an entirely
appropriate way of dealing with a s.20C application. As I have already said,
there is no obligation on the part of the LVT to in effect invite comment on a
draft decision and it will not normally be necessary for it to refer a point
back to the parties unless the matter lies wholly outside the scope of any
representations made.
91.
Finally, although the case will be remitted to the LVT for redetermination
it is necessary to deal with the Landlord’s argument that the reasons given by
the LVT could not justify the order they made, even if the Landlords had been
given notice of them.
92.
Criticism was made of paragraph 7 of the LVT decision and Mr Darby
submitted that overall the Landlords had succeeded, it was not a case where the
parties had done equally well. In my view the LVT was entitled to reach the
view that it did. Success may be measured in a number of ways: by reference to
the proportion of service charge which was found not to be reasonably incurred,
by reference to the number of items of service charge challenged on which the
Tenants won or lost, or by reference to the time taken up with issues which
were won or lost. The LVT appear to have placed more emphasis on the latter and
Mr Darby did not suggest that paragraph 6 of the decision is factually
incorrect. Assessment of such matters is pre-eminently for the LVT and in my
judgment its decision was well within the ambit of the extensive discretion
open to the LVT.
93.
As to paragraph 8(a), Mr Darby did not dispute the statement that “the
[Tenants] found it very difficult in the early stages at least to get clear
information and relevant disclosure of documents”. His point was that the
Tenants had the documents by the time of the hearing which is quite different.
Ms Kullar’s witness statement refers repeatedly to difficulties obtaining
information. Further, whether the facts and issues only found shape at the
hearing is pre-eminently a matter for the LVT and is a point repeated in its
reasons for refusing permission to appeal.
94.
As to paragraph 8(b), Mr Darby submitted that the Landlords case was
that all the charges were reasonable so no alternatives figures were put
forward. However, the whole point of the Scott Schedule was to elicit
alternative figures without prejudice to the Landlords’ case. He also
submitted that that it would have made no difference if figures had been
inserted. That may or may not be correct but it could potentially have
assisted in the resolution of some issues and the conduct which may be taken
into account for the purposes of s.20C is not confined to that which can be
demonstrated to have increased costs.
95.
As to paragraphs 8(c ) and 8(d), Mr Darby submitted that the expert
evidence was produced in response to the Tenants arguments that they were being
required to pay to remedy a defective building. As the Tenants had raised this
point the Landlords could be expected to respond to it. I note from paragraph
27 of the LVT decision on the s.27A application that some experts’ reports were
not prepared for the LVT proceedings. Further, it would have been open to the
Landlords to simply rely on the point which in the event led the LVT to say
that the issues were irrelevant, namely that as set out in paragraph 30 of the
LVT’s decision:
“…the problems in the flats have been or are being
remedied at the developer’s expense and not the tenants’ and the problems in
the common parts have been or are being remedied by the Landlords’ insurers.”
This should have been a simple matter to prove by reference to
the service charge accounts and supporting documentation without the need for
extensive expert evidence as to the building, plumbing and electrical
installations.
96.
In my judgment the LVT were perfectly entitled to make the findings that
it did and rely upon them in support of the order made. Whether the LVT remains
of that view when it has had an opportunity to consider the Landlords’
representations on the redetermination of this issue is a matter for it.
97.
For all these reasons the s.20C decision will be remitted to the LVT for
redetermination having regard to (1) any comments which the parties wish to
make on the matters set out in paragraph 8 of the LVT’s s.20C decision and (2)
the decision it makes on the redetermination of the s.27A application relating
to legal fees in 2008/09.
98.
As agreed at the hearing, the
parties are now invited to make any submissions as to costs and a letter
concerning costs accompanies this decision. This decision will become final
when the question of costs has been determined.
Dated:
17 January 2013
Her
Honour Judge Alice Robinson
Addendum on costs
99. “The Tenants made no
application for costs or for an order under s.20C of the 1985 Act. The
Landlords made submissions on 3 costs issues: (1) an application for costs
relating to fees paid pursuant to rule 10(6) of the Tribunal Procedure (Upper
Tribunal)(Lands Chamber) Rules 2010 (2010 SI No. 2600), (2) an application for
the costs of the appeal and cross appeal pursuant to rule 10(7)(c ) of the 2010
Rules on the grounds of unreasonable behaviour limited in accordance with rule
10(8) to £500 and (3) they sought to resist any application the Tenants might
make for an order under s.20C in respect of the costs of the Lands Chamber
proceedings. I deal with each of these in turn.
100. In relation to fees, the
Tenants accepted the Landlords’ submission that the Lands Chamber should
exercise its power to order reimbursement of fees in the same manner as a court
would exercise its costs discretion. However, they went to on to argue that it
is far from obvious that a court would exercise its discretion in the way
contended for. It is pointed out that the Landlords lost on the more valuable
aspect of the cross appeal and all that was achieved in relation to the other
aspect of the cross appeal and the s.20C appeal was remission to the LVT so
that costs would not normally be awarded.
101. A court will normally
order the losing party to pay the winning party’s costs. The Landlords cross
appeal and s.20C appeal both succeeded. The fact that they have been remitted
to the LVT for reconsideration rather than the decision being retaken by the
Lands Chamber does not detract from that success. Further, I do not consider
that the fact that the cross appeal was only successful on one point justifies
depriving the Landlords of the fees which would have had to be incurred in any
event even if the unsuccessful point were not taken. Accordingly the Tenants
shall pay the Landlords the sum of £950 in respect of the fees paid in the
proceedings.
102. In relation to costs more
generally, these may only be ordered to be paid if the Tribunal considers that
the Tenants acted unreasonably in bringing, defending or conducting the
proceedings. The Landlords submit that it was unreasonable of the Tenants to
bring the appeal having regard to the complete lack of merit in the various
grounds, unreasonable to resist the cross appeal and s.20C appeal on the ground
which succeeded which was said to be ‘incontestable’ and that, notwithstanding
the Landlords lost the other ground of the cross appeal, the overall balance of
unreasonableness lies decisively with the landlord.
103. It goes without saying
that success is insufficient to justify an award of costs under rule 10(7)(c ).
Some of the grounds of the Tenants appeal had more merit than others but I do
not consider any of them can properly be described as so lacking in merit that
to pursue them was unreasonable such as to justify an award of costs. In this
context I note the considerable complexity of the LVT proceedings and the fact
that some of the issues raised in the appeal were not straightforward at all,
particularly those relating to management fees. No evidence has been drawn to
my attention to the effect that the inclusion of ground 8, which was not
pursued at the hearing before me, resulted in any overall increase in costs.
Moreover, far from it being unreasonable to resist the s.20C appeal, in my
judgment this raised a difficult question which so far as I am aware had not
previously been considered, namely the ambit of the principle outlined in the Thinc
case to costs decisions. Further, save for the issue of unfairness, I held that
the Landlords’ criticism of the LVT’s s.20C decision were unfounded. As for the
cross appeal, one ground succeeded and one failed. Even though the Landlords
case on the ground which succeeded was strong, in all the circumstances I do
not consider it was unreasonable of the Tenants to resist the cross appeal.
104. Finally, no application was made by the Tenants
for a s.20C order in relation to the costs of the Lands Chamber proceedings
nor, in the light of their outcome, is that surprising. I have some sympathy
with the submission that the Landlords should not be able to recover their
costs of resisting an application which was never made. In fact, the only aspect
of the Landlords costs submissions which has succeeded is the request for
reimbursement of fees, an application which could have been easily made in a
solicitors’ letter without the involvement of counsel. In my judgment, having
regard to the conduct and circumstances of the parties as well as the outcome
on the question of costs, it would be unjust for the Landlords to be able to
recover counsel’s costs of settling the Respondents’ Costs Submissions through
the service charge and I order that those costs are not to be regarded as
relevant costs to be taken into account in determining
the amount of any service charge payable by the Tenants.”
Dated
26 February 2013
Her
Honour Judge Alice Robinson
