United Kingdom Upper Tribunal (Lands Chamber)

 

UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2013] UKUT 501 (LC)

UTLC Case Number: LRX/117/2012

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

 

LANDLORD AND TENANT – service charges – interpretation of lease - whether contribution towards overheads and management costs payable where no services provided other than insurance – appeal dismissed - whether charge for administering insurance arrangements payable in addition to premium – appeal allowed

 

 

IN THE MATTER OF AN APPEAL AGAINST A DECISION

OF A LEASEHOLD VALUATION TRIBUNAL FOR THE

SOUTHERN RENT ASSESSMENT PANEL

 

BETWEEN

WAVERLEY BOROUGH COUNCIL  Applicant

and

KAMAL ARYA Respondent

 

Re: 10 Barnett Close

Wonersh

Guildford

Surrey

GU5 OSB

 

Before: Martin Rodger QC, Deputy President

Sitting at The Upper Tribunal, (Lands Chamber),43-45 Bedford Square,

London WC1B 3DN

on 4 October 2013

 

William Webster, instructed by the Borough Solicitor to Waverley Borough Council, for the Appellant

The Respondent in person

 

© CROWN COPYRIGHT 2013

 

 

The following cases are referred to in this decision:

 

London Borough of Brent v Hamilton (2006) LRX/51/2005

Wembley National Stadium Ltd v Wembley (London) Ltd [2007] EWHC 756 (Ch); [2008] 1 P&CR 3

Norwich City Council v Marshall (2008) LRX/114/2007

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

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

London Borough of Southwark v Paul [2013] UKUT 375 (LC)

 

 

DECISION

Introduction

1.          This is an appeal, brought by way of review with the permission of the Tribunal (George Bartlett QC, President) against a decision of the Leasehold Valuation Tribunal for the Southern Rent Assessment Panel (“the LVT”) given on 26 March 2012. 

2.          The appellant, Waverley Borough Council, is the owner of a residential estate at Wonersh, near Guildford in Surrey which includes a maisonette at 10 Barnett Close (“the Property”) which is let to the respondent, Mr Kamal Arya, on a long lease granted on 9 December 1985 (“the Lease”).  The Lease is for a term of 125 years at a ground rent of £10 per annum and was granted to predecessors of the respondent pursuant to the right to buy conferred by the Housing Act 1980.  The Lease was assigned to the respondent in 1990.

3.          On 29 October 2011 the respondent applied to the LVT under section 27A, Landlord and Tenant Act 1985 (“the 1985 Act”) for a determination whether certain charges levied by the appellant in each of the years since 1 April 2004, were payable under the terms of the Lease.  The disputed charges are of two types.  The first is a standard charge for administration of the appellant’s leasehold services levied at a flat rate of £30 a year from 2004 to 2007, and then at the rate of £35 a year until 2010.  The second disputed charge was added to the administration charge in 2010 and comprises a flat rate addition of £17.50 reflecting costs incurred by the appellant in connection with managing and administering the insurance of the Property.  The respondent objected to paying these charges on the grounds that there was no justification for them in the Lease.  The appellant insists that the charges are a modest contribution towards its central costs of management and administration of its borough-wide estate of approximately 408 leasehold residential properties. 

4.          The particular feature of this case which distinguishes it from other disputes over service charges for administration or management is that, apart from insurance, no other charges were made for services provided during the service charge years in question because, with a few minor exceptions, no services had been provided to the Property.

The issues

5.          The LVT held that the appellant was not entitled to collect a proportion of its central management, administration and overheads cost from the respondent where, insurance apart, it provided him with no services.  The employment of staff and the incurring of overhead expenses could not in themselves be regarded as services provided to the respondent.  The main issue in the appeal is whether the LVT was correct to come to that conclusion.  The LVT also decided that the appellant was not entitled to add an administration charge to the cost of the insurance premium.  That conclusion is also challenged by the appellant.

The Lease

6.          The Lease is in a standard form used by the appellant for all of its leases granted under the right to buy.  The parties are referred to as “the Council” and “the tenant” and the Property as “the flat”.

7.          By clause 8(b) the Council covenants to insure the Property, and by clause 8(e) it agrees to observe and perform the covenants implied by paragraph 13 of the second schedule to the Housing Act 1980, which include a covenant to keep the structure and exterior of the Property and the Building in which it is situated in repair. 

8.          The tenant covenants to perform the obligations in the fourth schedule to the Lease, paragraphs (3) and (4) of which contain obligations to contribute towards the costs of services provided by the Council by means of an additional rent.  Those paragraphs are important and I will set them out in full:

“(3) To pay to the Council by way of additional rent a yearly sum equal to a proportionate part (calculated as mentioned below) of the costs, expenses and outgoings which the Council have incurred in the period of 12 months up to the preceding 1 April in each year in the repair, maintenance and renewal of the building of which the flat forms part and the provision of services undertaken by the Council (whether or not the tenant actually utilises those services) and of insuring the building subject to the following terms:

(a) The additional rent will be determined by a certificate (referred to below as “the certificate”) signed by an officer of the Council appointed for this purpose acting as an expert and not as an arbitrator each year as soon after the end of the Council’s financial year as is practicable

(b) A copy of the certificate for each financial year will be supplied by the Council to the tenant on written request and without charge

(c) The certificate will contain a summary of the expenditure incurred by the Council during the 12 months up to the preceding 1 April in the year to which it relates together with a summary of the relevant details forming the basis of the additional rent and the certificate (or a certified copy of the certificate) will be conclusive evidence for the purposes of this Lease of the matters to which it refers

(d) The yearly amount of the additional rent payable by the tenant will be calculated by dividing the total of the certified expenditure incurred by the Council in the year to which the certificate relates by the number of flats in the building on which the expenditure has been incurred

(e) The amount of the service charge payable by way of additional rent in respect of the period from the date of this Lease to 31^st arch next will be a proportionate part of the service charge for the whole year

(4) To pay to the Council annually on demand a share of the insurance premium paid by the Council under clause 8(b) of this lease which is proportionate to the ratio which the sum insured in respect of the flat bears to the total sum insured in respect of this and other properties under the same policy”

9.          The Lease must obviously be considered as a whole and it is relevant to note certain other opportunities which it provides for the appellant to charge its leaseholders directly for services which require it to incur administrative and other costs.

10.       By clause 8(d) the Council covenants that, at the request of its tenant, it will enforce the covenants and obligations of the owners or occupiers of other flats in the building (which would include, for example, the covenant against causing nuisance or annoyance which is standard in all of the appellant’s leases).  The Council’s covenant is subject to a proviso requiring the tenant making the request for enforcement to deposit a sum sufficient to meet the costs and expenses involved in taking the necessary steps.  If a greater sum is expended by the Council in taking those steps, the same proviso entitles the Council to recover the excess from the tenant as if it were rent in arrear. 

11.       The second schedule to the Lease comprises rights granted by the Council to the tenant.  These include two rights of way over routes providing access to the Property.  The grant in each case is subject to the tenant paying an equal proportion with others entitled to the use of the route of the costs of maintaining and repairing the route in accordance with the Council’s requirements.  

12.       The fourth schedule includes several standard covenants which require payments to be made by the tenant to the Council.  At paragraph (7) he covenants to pay a registration fee of £10 after every assignment, transfer, assent or charge of the Property.  Paragraph (9) obliges him to pay all expenses (including solicitors and surveyors fees) incurred by the Council in connection with notices under section 146 of the Law and Property Act 1925 or in connection with the preparation and service of a schedule of dilapidations on termination of the Lease.  Finally, paragraph (13) is a covenant by the tenant that he will not make any alteration to the Property or the building of which it forms part without the Council’s previous written permission.  Such a covenant is qualified by statute (section 19(2), Landlord and Tenant Act 1927) so that the consent of the Council is not to be unreasonably withheld, but that qualification permits the Council to charge a reasonable sum to cover any legal or other expenses properly incurred in connection with the grant of its permission.

 

 

The facts

13.       From a statement of facts agreed by the parties, supplemented by the LVT’s decision and the documents in evidence before the LVT, I take the following facts as the basis of my consideration of the appeal.

14.       The Property is one of 4 self-contained flats or maisonettes in a block.  It is on the upper floor of the building and includes a self-contained staircase leading from the ground floor for its exclusive use.  The Property also includes its own a garden which is shown edged in red on the Lease Plan.  Each of the other flats also has its own separate entrance and garden so that no part of the building is in common use, with the exception of the main structure and the routes over which the respondent and others enjoy rights of way.

15.       The Property is one of approximately 1,500 dwellings which comprise the appellants’ residential estate.  Most of those dwellings are of similar design to the Property, in small blocks of self-contained flats with their own individual gardens.  Since 1980 about 410 of the flats have been sold on long leases to former tenants.  The majority of the blocks of flats include at least one flat which has been sold in this way, and there are thought to be seven or eight blocks in which all of the flats are now occupied on long leases acquired under the right to buy.  Each of the long leases is in substantially the same form and imposes the same obligations on the parties as those in the Lease. 

16.       Until the service charge year 2003-04 it had been the practice of the appellant to secure a contribution towards its costs of administration through the service charge by adding an additional 15% to the costs it incurred in connection with repairs to its estate.  In 2004, after consulting its lessees on a number of alternative approaches to the cost of administration, the appellant introduced a new annual flat rate charge of £30 per property, which was increased to £35 per property in 2007-08.

17.       The charges of £30 and £35 per property are intended to cover the appellant’s costs of administration of its leasehold estate generally.  Evidence was given to the LVT in a witness statement by Mr Douglas Hamilton, a home ownership officer employed by the appellant, in which he identified management issues which require staff to be employed and overheads to be incurred, to which the flat rate management fee is intended as a contribution.  These management issues include: dealing with requests from leaseholders who wish to sell their leases, including providing information on boundaries, fencing responsibilities, service charge arrears and prospective service charge expenditure; dealing with requests from leaseholders for consent to improve or alter their flats; dealing with disputes between occupiers.  In addition Mr Hamilton mentions the basic core services of record keeping, calculating service charges, sending out invoices and dealing with queries.  The appellant has chosen to limit the sums recovered from its lessees, and the actual cost to the appellant of the staff time and other resources devoted to managing the leasehold estate is considerably greater than the sum collected through the flat rate management charge, which I was told amounted to about £21,000 a year.

18.       The appellant insures its leasehold estate under a single block policy, separate from that which covers its tenanted estate.  The premium for the leasehold estate is re-charged to leaseholders under paragraph (4) of the fourth schedule to the Lease.  In 2011 the cost to the respondent of insurance was £120, made up of a premium of £96.90, an administration charge of £17.50 and the balance in tax.

19.       The appellant administers the block insurance policy on behalf of the insurer.  It maintains the records of properties insured, collects the premiums, issues policy booklets and other documents, replies to requests from prospective mortgagees and others concerning the level of cover, notes the interest of leaseholders on the policy and performs all of the administrative tasks ordinarily performed by the insurer in the case of individual insurance policies.  The appellant had formerly negotiated with its insurer and received a fee or rebate on the insurance premium to cover its costs of performing these administrative tasks.  Until 2010 the appellant retained this fee when apportioning the premium amongst all of its leaseholders, but after that year, and after consulting its lessees, the appellant introduced a more transparent approach.  It retendered its block insurance policy on the basis that it would continue to administer the policy but would not expect a rebate or management fee from the insurer.  Instead the premium would be lower and the appellant proposed to charge each of its lessees the fixed annual fee of £17.50 as a contribution towards the costs of administering the insurance arrangements. 

20.       The appellant was heavily involved in reinstating the property using the proceeds of insurance following a fire in June 2001. It also constructed a soak away to improve garden drainage.  After the fire the respondent refused to contribute to the expenditure on the soak away contending that it should be treated as part of the cost of reinstatement and should be covered by insurance. 

21.       Because of the design of the Property, insurance apart, the services provided by the appellant to the respondent and his immediate neighbours in more recent times have been sporadic and limited.  For example, in 2009 the appellant liaised between the respondent and a neighbour to resolve a dispute over unsightly satellite dishes. In October 2010 the respondent wished to re-mortgage the Property and his proposed mortgagee sought confirmation from the appellant that there were no arrears on the respondent’s service charge account.  The appellant explained that his contribution towards the cost of the soakaway installed in 2001 remained unpaid, nor had he paid the annual management fee since its introduction in 2004.  The respondent then paid the sum of £447.52 required to discharge the service charge arrears and the appellant provided the necessary confirmation to the mortgagee.

22.       The absence of substantial services provided to the respondent is reflected in the fact that from 2004 to 2010 the only charge claimed by the appellant under paragraph (3) of schedule 4 to the Lease has been the annual £30 or £35 charge for administration.   The annual contribution towards the insurance premium was claimed under paragraph (4) of the fourth schedule, and from 2010 the appellant also sought to add the additional £17.50 insurance administration fee.  Since the payment he made in October 2010 to secure confirmation that he was not in arrears, the appellant has refused to pay any of the sums demanded of him other than the insurance premium.

Relevant authorities

23.       The question whether a local authority is entitled to recoup part of its management and administration expenses through a service charge, where its standard form of lease makes no separate mention of those expenses, has often been considered in decisions of the Tribunal and the courts.  Although it is always necessary to have regard to the specific terms of the lease in question, and the particular costs sought to be recovered, the correct approach is now well settled.

24.       London Borough of Brent v Hamilton (2006) LRX/51/2005 was a decision of the Lands Tribunal (George Bartlett QC, President) regarding the entitlement of the local authority landlord to add a management fee of 15% to the cost of the services it provided to its lessees.  Brent’s standard lease entitled it to recover the expenditure which it incurred “in fulfilling the obligations and functions” listed in clause 6 of the lease.  At paragraph 11 of its decision the Tribunal held:

“To be recoverable the expenditure must be incurred by the council in fulfilling the obligations and functions set out in clause 6.  There is, in my judgment, no ambiguity in this. To the extent that expenditure is so incurred it is recoverable, and whether it is so incurred is a question of fact.  … If repairs are to be carried out or windows painted or staircases cleaned 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.”

As the Tribunal concluded in paragraph 13 of its decision, the cost of employing agents to carry out any of the functions under clause 6, both for managerial and other tasks, would be within the service charge provided that it was reasonable.

25.       The same issue has arisen in relation to commercial service charges, as it did in  Wembley National Stadium Ltd v Wembley (London) Ltd [2008] 1 P&CR 3.  Subsequent decisions of the Tribunal have placed reliance on the authoritative judgment of Sir Andrew Morritt C in that case.  The lease of Wembley Stadium required the defendant, as lessor, to carry out certain works and provide services in respect of which it was entitled to employ staff and contractors.  A service charge was payable in respect of “Expenditure” to include “all costs fees expenses and outgoings whatsoever properly incurred by the Lessor in complying with its obligations in respect of the Lessor’s Services”.  It was argued by the claimant lessee that the defendant was not entitled to charge for in-house management of its own employees through whom it chose to deliver some of the services.  Rejecting this argument the Chancellor said (at paragraph 44):

“I can find nothing in the wording of this Lease in general and the definition 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 to be excluded.  In my judgment the wording of the definition embraces both.”

The Chancellor rejected the suggestion that the costs of office accommodation, training, medical insurance and pensions could not be said to have been “properly incurred by the Lessor in complying with its obligations.” At paragraph 46 of his judgment he said:

“The further from actual compliance with the Lessor’s obligations the incurring of the cost of 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.”

26.       In Norwich City Council v Marshall (2008) LRX/114/2007 the lessee of a flat in a block belonging to the local authority disputed his liability to pay a management fee of £40 a year not expressly referred to in his lease.  The relevant service charge covenant required the lessee to contribute towards the reasonable expenditure of the council in complying with its obligations under clauses 6(1), (2) and (9) of the lease, all of which related to repair and maintenance .  The management fee was intended by the council to be a modest contribution to the costs of its home ownership team so far as they related to leasehold management issues, the provision of a call centre to deal with enquiries, and computers, telephones and payroll functions for its staff engaged in leasehold management.  The Lands Tribunal (George Bartlett QC, President) concluded that as a matter of construction of the lease, without the need to imply any term, the council was entitled to recover its management costs incurred in complying with clauses 6(1), (2) and (9).  The limits of that entitlement were emphasised in paragraph 17 of the decision:

“In my judgment, therefore, the council is entitled to include in the service charge the costs of management reasonably incurred for the specific services referred to in clause 6(1)(2) and (9).  Those, however, are the only management costs that  it is entitled to include, and its appears from the explanation given in Mr Sutton’s statement that the costs included in the Management Costs document go well beyond this.  Thus they include all such costs of the home ownership team as relate to “pure leasehold issues”, and the four leasehold officers, whose salaries are included, are said to deal with the breaches of covenants in leases, enforcement action, repair orders and permission applications, which are plainly outside the scope of the Council’s clause 6(1)(2) and (9) obligations, as well as consultation on major works and service charge statements, which appear to be within the scope of those obligations.  I can see no justification for implying in the entitlement on the part of the Council to charge for management costs other than those related to clause 6(1)(2) and (9).”

27.       In Palley v London Borough of Camden [2010] UKUT 469 (LC) the Tribunal (His Honour Judge Mole QC) returned to the issue.  Camden’s standard lease entitled it to recover all costs and expenses incurred by it “in connection with the management and maintenance of the estate and the carrying out of the landlord’s obligations and duties and providing all such services as are required to be provided by the landlord under the terms of the Lease.”  The Tribunal concluded that the plain and natural meaning of those words entitled Camden to include in the service charge all its direct and indirect costs and overheads, including management costs, incurred in carrying out its obligations.

28.       Most recently, in London Borough of Southwark v Paul [2013] UKUT 375 (LC), the Tribunal (Her Honour Judge Karen Walden-Smith and Mr Andrew Trott FRICS) reviewed the authorities I have already mentioned, and others. Southwark’s standard form of lease entitled it to recover a fair proportion of the costs and expenses of or incidental to the carrying out of various categories of covenanted works, and the dispute concerned the treatment of overhead charges.  At paragraph 37 the Tribunal said this:

“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…”…. 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.”

29.       At paragraph 38 of its decision the Tribunal dealt with staff and accommodation costs and other indirect costs of providing the covenanted services:

“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.”

30.       It is clear from these authorities that, in principle, the costs incurred by a local authority (or by any other landlord) in arranging for the provision of services, and managing their delivery, is properly regarded as part of the cost of providing the service which may be recovered from its tenants through an appropriately framed service charge covenant.  The same is true of the overhead costs incurred in connection with the management and provision of services.  In both cases it is necessary to respect any limits which the parties may have imposed on the categories of expenditure to which the service charge may relate (as in Norwich). 

31.       In relation to overheads and indirect costs it will also be necessary to consider, as a question of fact, whether the relationship between the costs sought to be recovered and the services to which they are said to relate is sufficiently close to fall within the terms of the lease.  The further from actual compliance with the landlord’s obligations the incurring of the cost or expense lies, the more difficult it may be to treat it as part of the cost of compliance.  The language of some leases may permit a more generous attribution of indirect costs to the service charge than that of others. 

32.       The cases also show that different approaches are possible to the calculation and apportionment of charges for management and indirect costs. 

33.       In some cases a fixed percentage has been added to the direct cost of the service (15% in the Brent case); in others the expenditure of an authority’s relevant departments has first been analysed to identify the proportion referable to the management of its residential leasehold estate, and that proportion has been divided by the number of leaseholders to produce a contribution which all are required to pay (as in Norwich); a third approach has been annually to identify the percentage of all expenditure on the leasehold estate represented by administration and overheads, and then to apply that percentage to the cost of the services provided to the particular estate, block or dwelling (as in Southwark).

34.       In South Tyneside Council v Hudson [2012] UKUT 247 (LC) the Tribunal (His Honour Judge Huskinson) allowed an appeal by the council in relation to the apportionment of the costs incurred by the arms length management company (“STH”) responsible for managing the whole of its tenanted and leasehold housing stock.  The council’s approach had been to attribute to its leasehold properties a proportion of the total management fee which it paid to STH for managing its entire estate; it then deducted a percentage for costs incurred in respect of specific properties (for example in dealing with requests for consent) which were recoverable from individual lessees; finally, it divided the resulting sum equally amongst all its leaseholders to arrive at a cost per flat.  The council’s standard lease expressly permitted it to recover the costs of managing the building of which the demised premises formed part, whereas its approach to apportionment made each leaseholder responsible for an equal share in the cost of managing every building in its residential portfolio.  The Tribunal found nothing impermissible in that approach, and explained its reasons at paragraphs 40 and 41, as follows:

“40. The cost to the appellant of paying STH to manage the appellant’s leasehold properties (as opposed to the more numerous properties the subject of tenancies) is a part of the global amount paid to STH for managing the entire housing stock.  This part needs to be calculated.  It was open to the appellant and STH to agree that this part should be calculated by a reasonable and carefully worked apportionment of STH’s global costs for the relevant year, here 2008/09.

41. Such an apportionment has in fact been made…  This apportionment has resulted in a conclusion that for a building such as the first respondent’s, where there are two flats each the subject of a long lease, the amount to be taken as paid by the appellant to STH for managing that building during 2008/09 was twice £134.13 (which is the cost per flat), namely £268.26.  I conclude that this figure of £268.26 properly represents the costs and expenses incurred or to be incurred by the appellant in paying STH for its management services in relation to the building containing 31 Northbourne Road during the service charge year 2008/09.  The first respondent is responsible for paying 50% of this amount, namely £134.13.”

The appellant’s submissions

35.       The appellant was represented before me, as it had been before the LVT by Mr William Webster of counsel.  He made the following submissions:

(1)       The LVT had been wrong to conclude that the appellant had no power to include in the service charge an amount in respect of management costs which were unconnected with physical tasks carried out by the appellant.  Paragraph (3) of the fourth schedule to the Lease was wide enough to embrace properly incurred management costs and was not confined to those overheads which could be linked directly to a physical task or communal service directly affecting the building. 

(2)       The “provision of services undertaken by the Council” referred to in paragraph (3) of the fourth schedule embraced any service which the lessee, in his capacity as lessee, was capable of utilising or from which he might benefit.  It therefore included the service of administering the appellant’s leasehold estate, collecting the service charge, providing information to lessees, assisting in the resolution of neighbour disputes, considering requests for permission to carry out alterations and all the other tasks which the appellant undertook in managing its leasehold estate.  The fact that no work was required to the respondent’s building in a particular year did not mean that the infrastructure required to provide services, as and when they were required, was not itself a service to the respondent in each year.

(3)       When it cam to determining the amount of the charge for management, Mr Webster submitted that it was not covered by the method of calculation set out in sub-paragraphs (a) to (d) of paragraph 3.  One could see from sub-paragraphs (c) and (d) that these only concerned expenditure on the building itself which was to be divided by the number of flats in the building in order to ascertain that element of the service charge.  That method of apportionment was clearly not applicable to central management costs which benefited the whole of the appellant’s leasehold estate.  A purposive interpretation of paragraph (3) was required to enable the appellant to apportion its management costs to its leaseholders rather than to the general body of its council tax payers.

(4)       If necessary, it would be appropriate to imply a term that tenants holding under long leases should pay a reasonable sum towards the costs of management of the leasehold estate.  It could not sensibly have been expected by anyone when the Lease was granted that the tenant, and other tenants who had exercised the right to buy, would have the administration of the services provided to them subsidised by the council tax payer.  The discounted price at which the Lease was granted, the duration of the Lease, the nominal ground rent, and the limited funds available to local authority landlords, all pointed to a reasonable expectation that the delivery of services would not be subsidised.

(5)       The costs incurred by the appellant in administering the insurance arrangements contributed to keeping the insurance premium payable by the lessees under paragraph (4) of the fourth schedule as low as possible.  The flat rate charge of £17.50 was recoverable under paragraph (3) of the fourth schedule because it was part of the costs, expenses and outgoings of insuring the building.

The Respondent’s submissions

36.       Mr Arya made moderate and constructive submissions in support of the decision of the LVT.  He submitted:

(1)       Local authorities were allowed flexibility in drafting the terms of right to buy leases and it was important that they should be clear so that ordinary people who acquired the leases would understand their obligations.  Just because the Tribunal in the Brent and Norwich cases had found that the costs of administration could be added to the costs of services did not mean that his Lease had to be interpreted in the same way.

(2)       For the past ten years, with the exception of insurance, the only service charges which he had been asked to pay had been the contribution towards central management and administration costs.  The fourth schedule to the Lease, and in particular 3(d), demonstrate that only expenses  incurred for the building of which the premises form part may be taken into account in calculating the amount of the additional rent payable as a service charge.

(3)       Paragraph (4) of the fourth schedule obliged the lessee to pay a share of the insurance premium, and made no mention of administration costs which were therefore irrecoverable.

(4)       If the Tribunal decided that, contrary to his case, a charge for central management and administration costs, or in relation to the insurance arrangements, was permissible, Mr Arya accepted that the charges which had actually been claimed of £30, £35 and £17.50, were all reasonable.  He did not favour remitting the case to the LVT for further consideration if, in principle, the appellant was entitled to make some charge.

Discussion

37.       It is not in dispute that, in an appropriately worded lease, the cost of providing services may include the cost of administration and overheads associated with the administrative infrastructure by means of which services are delivered.  The LVT’s decision was that the appellant was not entitled to recover the cost of providing services to its estate as a whole when it provided no services to the building of the individual lessee who was disputing his liability.  That feature arises from the fact that no work to the building has been required in the period under consideration, and from the absence of any communal facilities, and it makes this case unusual.  The issue is whether the costs of administration and management may legitimately be the subject of a charge where no other service is delivered to the lessee in the period covered by that charge. 

38.       The answer to that question must be found in the Lease itself and in particular in the tenant’s service charge covenants at paragraphs (3) and (4) of the fourth schedule. 

39.       I begin by rejecting as obviously unsound Mr Webster’s submission that costs of administration and management can be recovered entirely outside the language and machinery laid down by paragraph 3(a) to (d).  By paragraph (1) of the fourth schedule the tenant covenants to pay “all rents and other payments due under the terms of this lease in accordance with the respective provisions relating to those rents and payments”.  On the face of it the only provision for the tenant’s contribution towards the costs of services are those in paragraph (3).  The additional rent which the tenant there agrees to pay is said by paragraph (3) to be “calculated as mentioned below”.  It is simply not consistent with the express terms of the Lease to contend, as Mr Webster did, that the tenant’s contribution to “direct” services is to be calculated by applying the process described in paragraph (3)(a) to (d), while a separate contribution towards central management and administration costs is payable by some other unspecified route.

40.       I also reject Mr Webster’s suggestion that a term should be implied to the effect that the tenant must make a reasonable contribution towards the appellant’s costs of administering its leasehold estate.  Where the parties have agreed a specific and apparently comprehensive set of provisions governing the calculation of service charges, it is to be assumed that they have included all of the terms by which they propose to be bound, and the limits of liability are to be determined by interpreting the language they have employed in the context of the lease.  Nor is it necessary to read additional words into the Lease, let alone to provide a parallel assessment regime unconnected to paragraph (3), in order to deal with the costs of administration and management.  As a matter of interpretation, a landlord’s costs of providing services will readily be taken to include administrative costs and overheads.  In this Lease, the “costs expenses and outgoings which the Council have incurred” in delivering services in any service charge year already include management and administration costs and overheads, and neither the LVT nor the respondent disputed that.  There is therefore no justification for reading into the Lease some alternative charging mechanism. The tenant’s contribution to the appellant’s costs, including management costs and overheads, is, and is only, the additional rent determined by the process of certification described in paragraphs (3)(a) and (c) and the insurance contribution payable under paragraph (4).

41.       The costs, expenses and outgoings referred to in paragraph (3), relate to three distinct categories of expenditure. These are first, the repair, maintenance and renewal of the building of which the Premises forms part; secondly, the provision of services undertaken by the appellant, (whether or not the respondent actually utilises those services); and thirdly, the insuring of the building.  The first and third of those categories of expenditure relate explicitly to expenditure on the building of which the Premises forms part.  The second category is described in much more general terms.  It is not expressly confined to expenditure on the building alone.   It is not apparently restricted to services which the appellant has covenanted with the respondent to provide.  It is also made clear that the fact that the respondent does not utilise the services is not relevant to his liability to contribute towards their cost.

42.       The fact that the Lease contemplates services being undertaken by the Council and paid for by the tenant, in circumstances where the tenant does not “utilise” those services, might suggest that there is a category of services which are not delivered to the building at all, but which are nonetheless available to be utilised by the tenant as he chooses.  If that is right then it might be suggested that the administration and overhead costs associated with that category of services ought also to be the subject of a charge, whether the service has been utilised or not.  In principle, all of the services provided to the appellant’s leasehold estate are equally available to all of its leaseholders, so it might be argued that an apportioned part of the administration costs and overheads referable to the management of the whole of the estate ought to be included as costs of providing the second category of services.   

43.       One difficulty with that contention may be that the calculation of the tenant’s proportion of the relevant costs expenses and outgoings involves the ascertainment of a sum which is to be divided by the number of flats in the building.  That method of apportionment suggests the need for a connection between expenditure in each of the three relevant categories and the building itself.  As Mr Webster acknowledged, it could not be suggested that the whole of the appellant’s central management and administration costs should be divided amongst the four leaseholders in the respondent’s building.  Some process of prior apportionment or allocation of those costs to each of the buildings on the appellant’s leasehold estate would first be required.  That essential process of apportionment is not referred to expressly in paragraph (3) or elsewhere, an omission which can be contrasted with the express apportionment of other costs required by paragraphs 3(d) and (e) and also with the apportionment of the insurance premium referred to in paragraph (4).  Nonetheless, the Lease is for a term of 125 years and the parties must be taken to have intended some flexibility to cope with changing services and different modes of delivery during the term; some means of apportioning costs incurred in relation to more than one building is therefore likely to have been intended.

44.       Mr Webster did not focus his submissions on the content of the certificate by which the additional rent is to be determined, but I have considered whether the appellant might derive some assistance from the role of the officer of the Council referred to in paragraph 3(a) whose task is clearly not a purely administrative one.  The officer is to acts as an expert, and the certificate is to be conclusive, both of which indicate that there is some element of assessment or expertise in the task of determining the amount of the relevant expenditure.  The certificate referred to in sub-paragraph (c) is to include a “summary of the relevant details forming the basis of the additional rent”.  Bearing in mind the reference to costs of services undertaken by the Council but which the tenant may not utilise, might those details themselves include an apportionment of central management and administration expenses referable to the appellant’s leaseholder services as a whole?  In an appropriate case I believe they could and that, as the Tribunal found in South Tyneside Council v Hudson, there is nothing intrinsically objectionable in a rate per unit apportionment of costs incurred in relation to the leasehold portfolio as a whole. 

45.       Although I am satisfied that paragraph 3 of the fourth schedule is flexible enough to entitle the appellant to require a contribution towards the administrative costs of its leasehold services, it remains to be considered whether the lease permits the levying of such a charge in years when no service is supplied to the building of which the Premises are part.  This is a different issue from the question of apportionment, and relates to the subject matter of the charge itself.  As I have already noted, the second category of service mentioned in paragraph (3) is sandwiched between two other categories each of which relates specifically to services delivered to the building.  One would therefore expect some clear indication if it was the parties’ intention that the second category was to be of wider scope.  The second category comprises the “provision” of services, whether or not the tenant “utilises” them.  That language seems to me to require that the services should be provided to the tenant, whether or not the tenant makes use of them.  It is not clearly apt to relate to services which can only ever be of benefit to other leaseholders, and to which the tenant has no opportunity to utilise: the example given by the respondent in argument was expenditure by the appellant on services provided to one of its housing estates in a completely different part of the borough.  

46.       The reference in paragraph (3) to services undertaken “whether or not the tenant actually utilises those services” seems to me to be capable of a relatively conservative explanation.  In a lease which was drafted to be a standard form, the words in brackets in paragraph (3) are likely to have been included to make it clear that each tenant in a building will be expected to contribute towards the costs of services of benefit to other tenants in the building, or in the immediate neighbourhood, whether or not those services are of any direct benefit to the tenant himself.  It is commonplace for tenants who are not directly affected by the need for some item of repair to dispute their liability to contribute towards it on the grounds that the leaking roof on the upper floor of the building may be an inconvenience to their neighbour but it does not have any impact on their enjoyment of a flat in a different part of the Building on the ground floor.  A liability to contribute to other services may be disputed on a similar basis, and paragraph (3) makes it clear that direct benefit to the paying tenant is not a relevant condition of liability.  That does not require, however, that the tenant be presented with a bill for services which have no connection at all to the Premises or the building in the relevant service charge year.

47.       I have therefore concluded that the only services to which the respondent can be required to contribute under this Lease are those provided for the benefit of the building of which the Premises form part.  If service are provided then the relevant costs can include a contribution towards management and overheads, but if no services are provided, no service charge is payable. 

48.       I am fortified in my conclusion that the Lease does not contemplate a charge for the management and administration of the leasehold estate in years when no other services are provided to the building by noting the opportunities for the appellant to recover directly from the tenant concerned, the cost of services rendered for the benefit of a specific tenant.  Thus, by paragraph (7) of the fourth schedule the registration fee of £10 is payable whenever the tenant notifies the appellant of a transfer or charge of the property.  The fixed fee may now make only a very modest contribution towards the appellant’s administrative costs and overheads associated with the necessary record keeping, but that does not detract from the fact that the parties considered and agreed that a contribution to such costs was appropriate.  Similarly, where a section 146 notice is served, all expenses incurred by the appellant are recoverable directly from the tenant in question under paragraph (9).  Where breaches of covenant are being committed by the owners or occupiers of other flats, clause 8(d) entitles the appellant to collect the cost of taking enforcement action from any tenant who requires that the action be taken.  Finally, where a tenant wishes to carry out alterations to his premises the covenant in paragraph (13) of the fourth schedule which requires the permission of the appellant, also entitles the appellant to levy a reasonable charge for the cost of providing the permission.  I see no reason why the appellant may not include a charge for overheads and administration in the fees it levies for the provision of those services directly to individual leaseholders. 

49.       Although there is no reference to it in the Lease, the expenses which the appellant incurs in dealing with enquiries from prospective mortgagees over the state of a tenant’s service charge account need not fall on the appellant itself or its council tax payers, since there is nothing to stop the appellant from making its responses to such enquiries (which do not relate to its duties as a local authority) conditional on the payment of an administration fee.

50.       I am therefore satisfied that Mr Webster was right to concede that the express provisions of paragraph (3)(a)-(e) do not have room for the levying of a charge for the appellant’s central management and administration costs unrelated to the delivery of a service to the building of which the Premises forms part.  The LVT was correct to refuse to permit recovery of the administration charges of £30 and £35 in years when no other service was provided, and the appeal on this issue is dismissed.

51.       The dispute over the fixed administration fee seems to me to be much less problematic.  The cost of insurance was dealt with in two places in the fourth schedule.  The tenant’s liability to contribute towards the insurance premium is covered by paragraph (4), but there is a separate liability in paragraph (3) to pay a proportionate part of the costs, expenses and outgoings which the appellant has incurred in insuring the building.  The first contribution is payable on demand, the second as part of the additional rent.   Where, as here, a landlord secures a reduced premium on the basis that it will carry out part of the administration associated with the insurance policy, I can see no reason why the costs of doing so cannot be recovered as part of the costs, expenses and outgoings of insuring the Building under paragraph (3) of the fourth schedule. 

52.       In this case the respondent accepts that a charge of £17.50 is a reasonable charge to make for the expenses of administering the insurance arrangements.  I take that figure to include all of the relevant costs associated with insurance which are recoverable under paragraph (3).  In other years an apportionment of the total overhead costs associated with the administration of the insurance arrangements will be required in order to arrive at the sum to be divided by four to ascertain the respondent’s contribution.  The draftsman was aware that the policy might relate to properties other than those contained in the building so must have contemplated when referring to costs incurred in insuring the Building in paragraph (3) that some wider apportionment might be required than that dealt with my sub-paragraph (d).  I see no reason why the officer of the appellant who compiles the certificate identifying the additional rent should not include within it a calculation showing the apportionment of part of those expenses to the building, which portion may then be added to the cost of any other services provided to the building (including any associated overheads and administration costs) to arrive at the total sum which paragraph 3(d) requires should be divided by the number of flat in the building.

53.       For these reasons I allow the appeal so far as it relates to the administration charge associated with insurance, but otherwise I dismiss the appeal.

Dated: 15 October 2013

 

 

Martin Rodger QC

Deputy President