UPPER TRIBUNAL
(LANDS CHAMBER)
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UT Neutral citation number: [2013] UKUT 14 (LC)
UTLC
Case Number: LRX/32/2011
TRIBUNALS, COURTS AND
ENFORCEMENT ACT 2007
LANDLORD AND TENANT – service
charges – disputed on-costs and management fee under PFI contract – whether
costs reasonably incurred – whether preliminaries should be reduced by ratio of
leasehold to tenanted dwellings – whether allowance for contractor’s profit
reasonable – whether duplication of management charge – whether 10% reasonable
management fee – whether management fee should be charged on on-costs – appeal
allowed in part
IN
THE MATTER OF AN APPEAL AGAINST A DECISION
OF
A LEASEHOLD VALUATION TRIBUNAL FOR THE
LONDON RENT ASSESSMENT PANEL
BETWEEN LONDON BOROUGH OF LEWISHAM Appellant
and
LUIS
REY-ORDIERES AND OTHERS Respondents
Re: Various properties in Brockley
Lewisham
London SE4
Before:
George Bartlett QC and A J Trott FRICS
Sitting
at: 43-45 Bedford Square, London WC1B 3AS
on
28-29 November and 5 and 10 December 2012
Christopher Heather,
instructed by Greenwoods Solicitors LLP, for the appellant
Mr Steven Mills and Mr Richard
Carey for themselves and the other respondents
The following cases are
referred to in this decision:
Auger v London Borough of Camden (2008) LRX/81/2007
(unreported)
Veena SA v Cheong [2003] 1 EGLR 175
The following further cases
were referred to in argument:
Birmingham City Council v Keddie [2012] UKUT 323 (LC)
Regent Management Ltd v Jones [2010] UKUT 369 (LC)
Arrowdell Ltd v Coniston Court (North) Hove Ltd
[2007] RVR 39
Country Trade Ltd v Noakes [2011] UKUT 407 (LC)
Schilling v Canary Riverside Development PTD Ltd LRX/26/2005
(unreported)
Yorkbrook Investments Ltd v Batten [1985] 2 EGLR 100
Daejan Investments Ltd v Benson and others [2011] 1 WLR 2330
DECISION
Introduction
1.
This is an appeal by the London Borough of Lewisham (“LBL” or “the
appellant”) against a decision of the Leasehold Valuation Tribunal for the
London Rent Assessment Panel dated 7 February 2011, as amended by a correction
certificate dated 10 March 2011, on an application made under Section 27A of
the Landlord and Tenant Act 1985 (the 1985 Act) on 16 December 2009.
2.
The applicants (who are the respondents in this appeal) were 24
leaseholders of various properties on the Brockley Estate in Lewisham, all of
whom held long leasehold interests granted by LBL pursuant to the right to buy
legislation under the Housing Act 1985. A list of the respondents and their
addresses is attached as Appendix 1. The application to the LVT was for a
determination of the amount of service charge payable in respect of the years
2007-2009. The applicants also questioned whether the landlord had complied
with the consultation requirements under Section 20 of the 1985 Act.
3.
On 4 June 2007 LBL had entered into a management agreement under the
Private Finance Initiative (“the project agreement”) with Regenter B3 Limited
(“Regenter”) to refurbish, manage and maintain the appellant’s housing stock in
Brockley which comprised approximately 500 properties held on long leases,
including those held by the respondents, and some 1,300 tenanted properties.
4.
At a directions hearing on 13 October 2010 the LVT recorded that the
applicants were no longer challenging the consultation procedure and ordered
that three matters should be heard as preliminary issues:
(i)
The reasonableness of the “professional fees” charged under the PFI
contract (26%);
(ii)
The reasonableness of the management fees charged in relation to the
works (10%); and
(iii) Whether
the costs of scaffolding were reasonable.
5.
The LVT heard these preliminary issues on 19 January 2011 and determined
as follows:
(i)
The “professional fees” (or “on-costs”) of 26% could be broken down into
“fees” of 3.48%; “preliminaries” of 10.52% and “refurbishment sub-contractors”
of 12%. The fees were considered reasonable; the preliminaries were reduced to
3.5% “to take account of the fact that the majority of the preliminary costs
related to the rented properties and not leaseholders”; and overheads (5%) and
profit (7%), which together made up the refurbishment sub-contractors’ costs of
12%, were reduced to a total of 10%. In respect of the applicant’s leasehold
properties the amount of professional fees was therefore reduced by the LVT
from 26% to 16.98%.
(ii)
The management fee of 10% was disallowed because the LVT considered that
management charges were already included in the (amended) figure for on-costs.
(iii)
The overall costs of the scaffolding were held to be reasonable.
6.
LBL sought permission to appeal against the LVT’s decision regarding
preliminaries, the refurbishment sub-contractor’s costs and the management
fee. The LVT refused permission to appeal on 10 March 2011. Upon application
to the Upper Tribunal (Lands Chamber) the President granted permission to
appeal on 24 June 2011. The appeal was to be by way of review with an
immediate rehearing if successful.
7.
The principal hearing of the leaseholders’ application was held before
an LVT in July 2011, and in its decision of 20 September 2011 the LVT made
determinations on whether particular works, including window replacement,
general roof repairs and other external works, electrical works and
redecoration, were reasonably necessary and carried out to a reasonable
standard and whether the costs of them were reasonable. There was no appeal
against this decision.
8.
The matters in dispute, both at the preliminary issues hearing and the
principal hearing, related to works carried out under the project agreement.
Although, therefore, the agreement extended to matters, in particular the
management of the properties, that were not exclusively related to the carrying
out of these works, it was only the cost of these works, including the
associated management costs, that were in dispute.
9.
At the hearing before us Mr Christopher Heather of counsel appeared for
the appellant and called Mr Steven Bonvini, the Operations Director of Regenter
and Mr Adrian Kelly, the Surveying Team Leader of Higgins Construction Plc, the
refurbishment sub-contractor under the PFI contract, as witnesses of fact; and
Mr Duncan Grimshaw BSc MRICS, a Chartered Quantity Surveyor of Gardiner &
Theobald (and formally of Davis Langdon LLP), as an expert witness.
10.
Mr Steven Mills, Chair of the Brockley Leaseholders Association and a
respondent; and Mr Richard Carey, Vice-President of the Brockley Leaseholders
Association and a respondent, appeared on behalf of the respondents. They
called Mr Zac Crawley and Mr Luis Rey-Ordieres as witnesses of fact.
Facts
(i) The Leases
11.
The respondents’ leases are in substantially the same form having been
granted under the right to buy provisions of Part V of the Housing Act 1985. A
specimen lease (relating to 8 Aldham House) was provided. Under clause 5(1) of
the lease the lessee covenants to pay to the lessor such sum or sums in respect
of the matters described in Parts I and II of the Tenth Schedule as are
demanded in writing from the lessor. Part I of the schedule deals with service
charges and provides for the estimation of the proportion of the lessor’s costs
and payments made, expended or incurred in complying with or performing its
covenants as may be properly attributable to the lessee (the lessee’s
contribution). The lessee’s contribution is calculated by summating the
expenditure incurred on a number of elements of works and services that are set
out in paragraph 5 of the schedule. Paragraph 5(xvi) deals with the element of
management costs which are defined as:
“The costs of managing the
Building or Estate including the costs of managing agents if appointed.”
12.
The lessor covenants under clause 6 of the lease to perform, observe and
carry out the obligations set out in the Ninth Schedule to the lease.
Paragraph 8 of that schedule provides that the lessor shall:
“manage and conduct the management of the Estate and
Building in a proper manner.”
13.
Part II of the Ninth Schedule provides for an “improvement contribution”
(as is properly attributable to the lessee) to the paid by the lessee to the
lessor in respect of the lessor’s expenditure on any works subject to certain excepted
items as set out in paragraph 2 of the Ninth Schedule.
14.
Clause 8 of the lease provides that:
“(1) The Lessor shall be
entitled
(a)
To appoint if the Lessor so desires competent and reputable managing
agents for the purpose of fulfilling the obligations of the Lessor under [clause]
6 hereof and of managing and conducting the management of the Estate and
Building and to remunerate them for their services.
(b)
To employ competent and reputable architects, surveyors, solicitors,
accountants, contractors, builders, gardeners and any other person, firm…
properly required to be employed in connection with or for the purpose [or in]
relation to the Estate or the Building or any part thereof and pay them…proper
fees charges salaries wages costs expenses and outgoings.”
(ii) The
project agreement
Introduction
15.
On 5 December 2012, following discussion in the course of the hearing, we
ordered that the appellant should disclose, for the purposes only of this
appeal: the project agreement (including relevant annexes and schedules); the
agreement between Regenter and Higgins Construction Plc (“the refurbishment
contract”); and Schedule 4 to the refurbishment contract.
16.
LBL advertised in the Official Journal of the European Communities on 16
March 2002, in accordance with the Government’s Private Finance Initiative
(PFI), seeking bids from appropriately qualified contractors for the
refurbishment, management and maintenance of LBL’s housing in the area of
Brockley. Following a competitive tender Regenter was approved by the
Secretary of State under section 27 of the Housing Act 1985 and was appointed
as the contractor for a 20 year term under the project agreement on 4 June
2007. The project agreement provides for Regenter to undertake and perform (i)
a major refurbishment works programme (the works), and (ii) housing management
services (the services) in accordance with the output specification contained
in Schedule 1.
17.
Regenter was authorised to appoint sub-contractors to exercise the
functions exercisable by the contractor under the project agreement. Regenter
entered into three such sub-contracts. Firstly, it entered into the
refurbishment contract with Higgins Construction Plc (Higgins) on 4 June 2007 for
the provision of the works. Secondly, it entered into a housing management agreement
with Pinnacle Housing Limited (Pinnacle) to provide estate management services
(a copy of this agreement was not disclosed). Thirdly, it entered into a
sub-contract with Equipe Regeneration Limited (Equipe) for responsive repairs
and cyclical maintenance and renewals. This sub-contract, which was not
disclosed, did not affect the issues in this appeal (other than the management
fee). Together the sub-contracts with Pinnacle and Equipe provided for all of
the services.
Major works
18.
The work undertaken by Higgins under the refurbishment contract was
concerned with major works of refurbishment on both tenanted and leasehold
properties. In relation to tenanted properties the works were part of the
Government’s Decent Homes Programme. The contract sum under the refurbishment
contract (for works to both tenanted and leasehold properties) was £73.6m. In
undertaking the refurbishment works Higgins were required to comply with and
meet defined availability (physical) standards, the achievement of which was
certified by an independent certifier. These availability standards were set
out in Annex 1 to Schedule 1 to the project agreement. The contractor was
required to maintain the structure and fabric of leasehold dwellings to ensure
compliance with (i) the leases, and (ii) the initial availability standards
and, when the relevant refurbishment works were completed, the full
availability standards.
19.
Rented dwellings, unlike leasehold dwellings, had availability standards
in respect of their internal parts, such as the heating system, water supply
system, kitchen and bathroom facilities, electrical and gas installations,
ventilation and energy efficiency. Consequently, whereas a total of 73
availability standards applied to rented dwellings only 32 of them applied to
leasehold dwellings.
20.
Part 5 of and Schedule 4 to the refurbishment contract contained the
payment provisions. These comprised an initial mobilisation payment to Higgins
of some £1.3m paid at the commencement of the contract and thereafter a series
of monthly interim payments ending on 31 December 2010. The monthly payments
included an amount for the “Existing Leasehold Works Cost” (ELWC). A
proportion of the total ELWC of some £7.9m was allocated to each leasehold
dwelling (484 in total) shown in Table B of Schedule 4 to the refurbishment
contract (which mirrored similar provisions in Table A of Part X of Schedule 4
to the project agreement). This amount could be claimed by Higgins in respect
of each leasehold dwelling in the contract month following certification of the
relevant works to that dwelling.
21.
In addition to the ELWC the refurbishment contract provided for an
additional payment in respect of provisional sums (details of which were not
disclosed) and in respect of specified changes to the works. Regenter could
deduct a retention of 5%.
22.
Payment was directly linked to the achievement of the availability
standards and the general performance requirements set out in the output
specification. Schedule 4 contained provisions for financial deductions where
the contractor failed to meet these standards and requirements.
Leasehold management
23.
Part 4 of the project agreement deals with the provision of the services
in respect of LBL’s housing management functions as set out in Schedule 16. Paragraph
7 of the output specification in Schedule 1 to the project agreement deals with
the repairs and maintenance for which Equipe is responsible. Paragraph 9 contains
details of a comprehensive range of services that Pinnacle is to provide to
leaseholders under its sub-contract with Regenter. The required outputs
include: ensuring that LBL complies with its landlord’s covenants under the
leases and dealing with any breaches; setting and recording charges to allow
for day-to-day and major works service charge recovery; compliance with
legislation; establishing and maintaining records to generate timely service
charge estimates and final invoices; recovering service charges; assisting LBL
in dealing with landlord’s consent and approvals; and encouraging leaseholder
comment and involvement on management issues.
24.
The contractor is not to exercise LBL’s rent or service charge setting
policies which are reserved to LBL. Pinnacle shall seek to maximise the
recovery of service charges from leaseholders but leaseholders must pay those
service charges directly to LBL (paragraph 4 of Schedule 17 to the project
agreement).
25.
Schedule 4 to the project agreement specifies the mechanism for the monthly
payment due to the contractor for the scheduled services undertaken in respect
of the existing leasehold dwellings (“Existing Leasehold Services Costs” or
ELSC). The ELSC forms one part of a complex formula to determine the “Net
Monthly Unitary Payment for each Contract Month”. The ELSC for the previous
contract month is determined by reference to the sum shown in the fourth column
of the Table at Part XI to Schedule 4. That column shows the ELSC per
leasehold dwelling per annum for each year of the contract (subject to
indexation), starting in the year ending 31 March 2008 and ending in the year
ending 31 March 2028. The total ELSC per leasehold dwelling over the 20 year
contract period (subject to indexation) is £17,234.
(iii) Consultation and notices of intention
26.
Regulation 7(3) of the Service Charges (Consultation Requirements)
(England) Regulations 2003 provides that the consultation requirements for the
purposes of section 20 of the 1985 Act shall be those specified in Schedule 3 to
those regulations where under a qualifying long term agreement (QLTA)
qualifying works for which public notice has been given before 31 October 2003
are carried out at any time on or after that date. Public notice of the
proposed PFI (project agreement) was given in OJEC on 16 March 2002 (see
paragraph 16 above) and the qualifying works under that agreement were carried
out after 31 October 2003. Therefore the relevant consultation requirements in
this appeal were those specified in Schedule 3 to the consultation
regulations. The consultation requirements under Schedule 3 are abbreviated given
that once a QLTA has been entered into the contractor, as in this case, will
usually have the exclusive right to carry out the proposed works.
27.
Notices of intention were served on the lessees during 2007 and 2008.
Copies of the notices served on the respondents (and three other lessees) were
included in the evidence. Four of the respondents received notices of
intention dated 23 July 2007 which only gave a single figure for their
proportion of the estimated cost of the works. In each case this figure was
the same as that shown in respect of that property in Schedule 4 to the
refurbishment contract. The remainder of the respondents received notices of
intention dated between July 2007 and June 2008 which gave a breakdown of the
estimated costs both at “block” and “lessee” level. Only one of the four
lessees (Miss Goulbourne at 10 Alban House) who had received the earlier form
of notice appears to have received the second, more detailed, form of notice.
28.
With one exception (10 Alban House) the figure for the estimated
proportion of the cost for each lessee shown in the detailed notices of
intention did not coincide with the corresponding figure shown in Schedule 4 to
the refurbishment contract. In some cases the differences were very
significant, e.g. at 8 Hazel House the detailed notice estimated a contribution
of £7,374.00 or 43% of the Schedule 4 figure, while at 10 Columba House the
detailed notice estimate of £23,074.00 was 87% higher than the Schedule 4
figure.
29.
Apart from the details of the cost of the works that were specific to
each block/lessee, the detailed form of notice also gave figures in respect of
“variations, increase[d] scope of works and miscellaneous costs” and
“professional fees”. No separate figure was shown for management fees. The
estimate for professional fees, expressed as a percentage of the base costs,
varied from 24.6% to 49.4%. No details were given of how the professional fees
were estimated.
(iv) Actual costs
30.
Details of the actual costs incurred in respect of each respondent were
provided in the evidence. With two exceptions (Flat 3, 158B Lewisham Way and 30B Tressillian Road) the actual cost was less than the corresponding figure
shown in Schedule 4 to the refurbishment contract. The actual costs (excluding
the 10% management fee) were less than the estimated costs shown in the notices
of intention in the case of 20 respondents with the remaining 4 respondents
having actual costs that were higher than the estimated costs. Four of the
properties had a variance of over 10% including 30B Tressillian Road where the
actual cost was double the estimated cost.
31.
For each respondent the actual cost of professional fees (also known as
“on-costs”) represented 26.1% of the base costs, including variations. A
management fee of 10% was then charged on the total costs, including
professional fees.
32.
The 26.1% allowance for professional fees (on-costs) was made up as
follows:
(i) Fees
|
|
%
|
|
|
Planning
|
1.005
|
|
|
Building
control
|
0.037
|
|
|
Waste management
|
0.445
|
|
|
Building surveyors
|
0.270
|
|
|
M & E
Engineers
|
0.610
|
|
|
Energy
ratings
|
0.319
|
|
|
Planning
supervisors
|
0.098
|
|
|
Insurances
|
0.704
|
|
|
|
|
3.488
|
(ii)
Preliminaries
|
|
%
|
|
|
Site set up
at 6 Mantle Road including satellite site set ups (temporary welfare
facilities for works)
|
3.982
|
|
|
Resident liaison
officers
|
0.737
|
|
|
Site
management
|
2.970
|
|
|
Quantity
surveyors
|
1.029
|
|
|
Administrators
|
0.328
|
|
|
Attendant
labour and transport
|
1.498
|
|
|
PPE and
small tools/consumables
|
0.073
|
|
|
|
|
10.617
|
(iii)
Refurbishment sub-contractors
|
|
|
|
|
%
|
|
|
Overheads
|
5.000
|
|
|
Profit
|
7.000
|
|
|
|
|
12.000
|
|
|
|
26.105%
|
Although the actual on-costs
charged to the respondents was 26.1% the appellant is only claiming the rounded
amount of 26%; comprising fees of 3.48%, preliminaries of 10.52% and overheads
and profit of 12%.
Issues
33.
There are four issues in this appeal:
(i)
Whether any reduction in professional fees (on-costs) or management fees
is permissible under section 19(1)(a) of the 1985 Act;
(ii)
Whether the LVT was wrong to reduce the “preliminaries” element of
professional fees from 10.52% to 3.5%;
(iii)
Whether the LVT was wrong to reduce the “refurbishment sub-contractors”
element of professional fees from 12% to 10%; and
(iv)
Whether the LVT was wrong to disallow management fees of 10%.
There is no appeal against the LVT’s decision to adopt the
“fees” element of professional fees at 3.48%.
Procedure
34.
On the first day of the hearing we said that we were satisfied that the
appeal should proceed by way of re-hearing, and we proceeded to hear evidence
on behalf of the parties. We consider below, so far as it is appropriate to do
so, the reasons of the LVT for reaching the conclusions that it did.
Issue (i): whether any
reduction in costs is permissible under section 19(1)(a) of the 1985 Act
35.
Section 19(1) of the 1985 Act states:
“19 Limitation of service
charges: reasonableness
(1)
Relevant costs shall be taken into account in determining the amount of
a service charge payable for a period –
(a)
only to the extent that they are reasonably incurred, and
(b)
where they are incurred on the provision of services or the carrying out
of works, only if the services are works of a reasonable standard;
and the amount payable shall be limited
accordingly.”
36.
Mr Heather submitted that neither the LVT nor this Tribunal was entitled
under section 19(1)(a) to go behind the contractual sums which had been agreed
between LBL and Regenter and were incorporated into Schedule 4 to the project
agreement (and mirrored in the refurbishment contract). He argued that the
decision of the Lands Tribunal in Auger v London Borough of Camden (2008) LRX/81/2007 (unreported) stood clearly in point and was binding. In that
appeal His Honour Judge Huskinson said at [47]:
“If
works which are reasonably necessary and are done to a reasonable standard are
carried out under a Partnering Agreement Camden will be able to meet criticism
regarding the level of expense by pointing out that Camden is already
contractually bound to the Partner and had to place the works with the Partner
at the contract rate provided for in the Partnering Agreement, and therefore
the costs were indeed reasonably incurred because, even if the works could
reasonably have been expected to have been done significantly cheaper by other
competent contractors, Camden would be in breach of contract by giving the
works to anyone other than the Partner.”
37.
Mr Heather said that the questions of whether the works were reasonably
necessary or were carried out to a reasonable standard had been considered by
the LVT at a separate hearing in July 2011 and in its decision dated 20
September 2011. The issue in this appeal was whether the costs of the works
were reasonably incurred and the decision in Auger showed that they
were. The LVT had therefore been wrong to embark upon a process of analysing
the individual elements of the on-costs (professional fees) and the Lands
Chamber should not repeat the mistake.
38.
This conclusion made sense because the appointment of Regenter as the
contractor was based on criteria that were fixed by legislation giving effect
to EU public procurement procedures. This procurement process ensured (or was
deemed to ensure) the appropriate market-testing of prices.
39.
Mr Heather said that he advanced this argument as a principle of law not
derived from the words of any statute but from the contractual relationship
that had been created between LBL and Regenter under the project agreement. A
20 year agreement had been properly entered into under which LBL were bound to
give the work to Regenter at rates that were incorporated into the contract; it
was not open to the respondents then to argue that the individual cost elements
that were behind the total price had been unreasonably incurred.
40.
The respondents rejected Mr Heather’s submissions on this point. They said
that if the PFI contract had dealt solely with the major (leaseholder) works
that were the subject of the appeal “then the claim may have some grounds”, but
in fact the contract described a much larger project of which those major works
only comprised a (minority) part. The LVT had properly recognised that the on-costs
should be reduced to reflect the appellant’s failure to distinguish the costs
legitimately to be charged to leaseholders from those associated with the more
extensive internal works done to tenanted homes as part of the Decent Homes
Programme. Tenanted properties formed the majority of dwellings subject to the
PFI and the work done to them was more labour intensive and required greater project
management, survey and sign off (e.g. for replacement boilers and electric
cables) than the works done to the leaseholders’ dwellings. The LVT were
entitled to distinguish between the types of property subject to the PFI and
had fairly determined that the on-costs were too high in respect of the leaseholders’
dwellings.
41.
There was no breakdown of the 26% on-costs in the project agreement or
in the refurbishment contract and it was not clear when or by whom the level of
such costs to be charged to the leaseholders had been determined.
Issue (i): conclusions
42.
The meaning of “reasonably incurred” in section 19(1)(a) of the 1985 Act
was considered by the Lands Tribunal in Veena SA v Cheong [2003] 1 EGLR 175 in which the member, Mr P H Clarke FRICS, said at [103]:
“The question is not solely
whether the costs are ‘reasonable’ but whether they were ‘reasonably incurred’,
that is to say whether the action taken in incurring the costs and the amount
of those costs were both reasonable.”
43.
In our opinion, when considering LBL’s action in incurring the disputed
costs, there are two criteria that must be satisfied before the relevant costs
can be said to have been reasonably incurred:
(i) the works to which the costs relate must have
been reasonably necessary; and
(ii) the
costs incurred in carrying out the works must have been reasonable in amount.
44.
Mr Heather submitted that the question whether the works were reasonably
necessary (as well as the question whether they were carried out to a
reasonable standard) was concluded by the LVT’s decision of 20 September 2011.
We accept this. We do not, however, accept Mr Heather’s submission that the
reasonableness of the amount of the costs that are in dispute in this appeal
was established as a matter of law by the provisions of the project agreement,
and we do not think that such a proposition is to be derived from what Judge
Huskinson said in Auger. We respectfully agree with the view expressed
by Judge Huskinson in the passage relied on by Mr Heather, but the terms
of an agreement such as the one relied on here can only be strongly persuasive
as to reasonableness. They are not conclusive for the purposes of the
application of section 19(1)(a).
45.
In any event, however, the provisions of the project agreement do not
prescribe or establish the items that are in dispute in this appeal. These are
expressed as percentages, being on-costs that are added to the base costs. The
total of these on-costs is 26% (including the “fees” element, which is not in
dispute). This is not a figure that is identified either in the project
agreement or the refurbishment contract. The figures included in those
contracts were expressed as a total lump sum which comprised amounts fixed for
individual properties (as per Schedule 4 to the refurbishment contract). The
figure for professional fees that appeared on the actual service charge invoices
was consistently applied at the rate of 26% (actually 26.1%) of base costs in
respect of the respondent leaseholders’ properties, although the notices of
intention gave varying percentages for these on-costs. LBL were obliged to pay
Regenter the total sums set out in the project agreement for each leasehold
property, subject to the satisfactory achievement of performance standards by
the contractor. They were apparently not obliged to pay any separately
identified sum for on-costs; such costs being subsumed within the total amounts
shown in the relevant schedule of the contract. There is nothing to show that
if the amount that has been charged as the on-costs were to be reduced the
amount payable in respect of each leasehold property would be less that that
which LBL are liable to pay under the project agreement. The on-costs were
levied against the leaseholders by LBL via Pinnacle and it is therefore for LBL
to show that they were reasonably incurred, which in this context means that
they were identified as a reasonable percentage of the base costs. The point
is significant because LBL then charge a 10% management fee on top of the sum
of the base costs and the 26% on-costs. If the 26% has not been fairly and
reasonably quantified then the management costs will be too high. We do not
accept that the pre-existence of an OJEC public notice prevents, as a matter of
law, the respondents from challenging these on-costs and their constituent
parts.
46.
The management fee of 10% can be distinguished from the other on-costs.
The level of the management fee was not fixed by the project agreement and the
contractor exercised no control over the amount invoiced to the leaseholders as
part of the service charge. The right to set the management fee was reserved by
LBL under clause 22.1.1(a) of the project agreement. Pinnacle was instructed
by LBL as to what management fee to include as part of the service charge
invoice. It cannot therefore be argued that this management fee must have been
reasonably incurred by LBL on the grounds that it was a contractual payment
that they were obliged to pay Regenter under the project agreement to which EU
procurement legislation applied. LBL was obliged to make payments to Regenter
in respect of ELSC under Part XI of Schedule 4 to the project agreement (see
paragraph 25 above), but those payments do not (or do not necessarily)
correspond to the 10% that LBL charged on the total costs, including the 26%
on-costs, to the leaseholders.
Issue (ii): preliminaries
47.
The LVT reduced the service charge in respect of the preliminaries by
two thirds, from 10.52% to 3.5% of the base costs. The largest item under the
heading “preliminaries” (3.89%) was in respect of the site set up at 6 Mantle Road. In his evidence to the LVT Mr Bonvini is reported by the LVT to have said
that:
“the customer liaison set up costs were apportioned on the
basis of the occupational area of each part of the consortium in the property
at 6 Mantle Road, which had been purchased specifically to enable better
liaison with residents. We are of the view that as the leasehold properties
comprise 1/3rd of the stock affected by the Decent Homes work that
it would be fair for the leaseholders to pay the same proportion of the
overheads for this office. Our view is influenced by the fact that much of the
works involved internal refitting works for rental tenants, new kitchens etc.,
that did not affect leaseholders.”
The LVT extended this reasoning to all of the items under the
heading of preliminaries and apparently assumed that all such costs related to
expenditure which should be apportioned in approximately the same ratio as the
number of leasehold dwellings bore to the number of tenanted dwellings.
48.
For the appellant Mr Kelly explained that Higgins took the view that it
would be impractical on a project of this scale, where leaseholders might have
different types and amount of work done, to try and apportion the on-costs
specifically or to try and calculate a fixed charge per property. Instead
Higgins considered that the fairest approach was to calculate what percentage
the on-costs represented of the total contract price and to apply that
percentage to any charges made to individual leaseholders. The 26% for
on-costs was “part and parcel” of the costs of undertaking the major works and
would have been reflected in the costs of any contractor undertaking those
works; it was not an arbitrary amount.
49.
Mr Kelly said that there was no distinction in the on-costs between
works done on the Decent Homes Programme (on tenanted properties) and that done
as major works on the leasehold properties. If anything the works to the
leasehold properties required more management since it necessitated compliance
with the section 20 consultation requirements. This involved considering and
responding to the leaseholders’ observations, a process that was not required
in connection with the work to the tenanted properties. The internal works
that were carried out as part of the Decent Homes Programme were
straightforward, usually requiring the involvement of only two trades. There
were many more trades involved with the external works. It generally needed
more people to deal with the leasehold works and works to the communal areas
required more supervision.
50.
Mr Grimshaw considered that the allowance for preliminaries of 10.52%
was reasonable. He had undertaken a benchmarking exercise that suggested an
appropriate allowance might be between 11.53% and 13.5%. He agreed with Mr
Kelly that it would be impractical to calculate individual on-costs for each leaseholder
and that the application of a percentage uplift was a fair method of
apportioning such costs.
51.
Mr Grimshaw was unable to base his benchmarking exercise on other PFI
projects because of the complexity of their financial arrangements, the
commercial sensitivity and confidentiality of such contracts and the tendency
for fees and other on-costs to be expressed as lump sums within the overall
bid. Instead he relied upon Spons Architects and Builders Price Book, data
provided by Davis Langdon’s Cost Research Department, and analyses taken from
the RICS Building Cost Information Service (BCIS). Mr Grimshaw analysed data
from 14 live projects for which Davis Langdon (by whom he was then employed)
were providing cost or project management services. These projects reflected
three types of procurement: design and build; construction management; and
traditional. The average percentage on-cost was 11.53%, having been adjusted
to exclude mechanical plant and insurance items that did not feature in the
Brockley PFI, and which, if included, would have artificially inflated the
figures. He supported this analysis by reference to six estate housing
projects contained in the BCIS data for the period October 2004 to March 2005.
The projects varied in type and scale but were all very much smaller than the
Brockley PFI. Mr Grimshaw nevertheless considered that they provided useful
information because the Brockley PFI was implemented at the level of individual
blocks and dwellings and it could reasonably be considered as a series of small
discrete projects. The BCIS data showed a range of preliminaries from 4% to
26% with a mean of 13.5%. The average figure for preliminaries, taken from Mr
Grimshaw’s two analyses was 12.52%.
52.
Mr Grimshaw said that there should not be any significant difference
between the amount of management and administrative work required for leasehold
and tenanted dwellings. The Decent Homes Programme required more extensive
(internal) work but works to leasehold properties required the section 20
consultation requirements to be met and for on-going liaison with the leaseholders.
53.
Mr Heather submitted that the respondents’ contention that they had been
charged for Decent Homes work was fundamentally misconceived. The evidence
showed that there was no distinction to be made between the on-costs for
tenanted properties and those for leasehold properties. The on-costs of 26%
(of which preliminaries comprised 10.52%) could not sensibly be divided between
the two types of work according to the ratio of the number of properties to
which each type of work applied. On-costs applied equally to all types of
work. Those on-costs were, as with any building contract, factored into the
total price charged for the work. Although the relative amount of the on-costs
was the same as between the two types of work, their absolute amount would
differ depending upon the base cost of the work involved. If Decent Homes work
was more expensive because of the greater amount of (internal) work done on
each property and the larger number of properties affected, then the total
amount of the on-costs would be higher. But that did not justify the LVT’s
decision to reduce the percentage charged for preliminaries on work done on
leasehold properties by two thirds, or at all.
54.
For the respondents both Mr Crawley and Mr Rey-Ordieres said that their
leasehold properties had not been individually inspected or surveyed. Mr
Crawley said that the notice of intention was very vague and that the allowance
for on-costs was quite high. He had telephoned Pinnacle several times and
requested more details of the proposed works but they were never provided. Mr
Rey-Ordieres had raised several concerns about the notice of intention. He
knew the problems with his own property and considered that works such as
window replacement were not necessary. He said the fees (on-costs) were
“incredibly high”. Both Mr Crawley and Mr Rey-Ordieres said that the
contractor had suggested that the proposed works were necessary under the
Decent Homes standard, but that standard did not apply to leasehold
properties. The contractor did not listen to Mr Rey-Ordieres’ concerns and,
said Mr Rey-Ordieres, the process was unfair to him, both economically and
personally.
55.
In their closing submissions the respondents emphasised that the most
important document was not the PFI contract but the lease. Only those costs
which related to the leasehold properties and the common parts could be
properly charged to the leaseholders and not any cost that related to the tenanted
properties. The LVT had fairly determined that the costs attributable to
leaseholders and those attributable to tenants had not been properly separated
by the appellant. The LVT was correct to decide that the Decent Homes work to
tenanted properties formed the majority of the work and that by its nature it
was more labour intensive and required greater project management. In the
light of this conclusion the LVT’s reduction in the allowance for preliminaries
from 10.52% to 3.5% was reasonable.
Issue (ii): conclusions
56.
In our opinion the LVT were wrong to reduce the allowance for
preliminaries from 10.52% to 3.5%.
57.
Mr Bonvini explained that the office costs associated with the property
at 6 Mantle Road were identifiable as rent, rates and utilities. These costs
were allocated to each sub-contractor (Higgins, Pinnacle and Equipe) according
to usage and were reflected in the charges for their work. All three
sub-contractors worked on both tenanted and leasehold dwellings. In our
opinion there is no justification for allocating such costs according to the
ratio of the number of tenanted to the number of leasehold properties and then
to extend that process across all of the items under the heading of
preliminaries. The expert evidence from Mr Kelly and Mr Grimshaw explained
that although there were differences between the type of work undertaken in
respect of these two types of property it was not possible when considering the
on-costs to draw a meaningful distinction between them.
58.
The effect of the LVT’s decision is to reduce arbitrarily the
preliminaries recoverable on major leasehold works by two thirds and there is,
in our opinion, no evidence to support such a reduction. The on-costs arose in
connection with both types of work and the evidence shows that there was no
reason to distinguish between them. Preliminaries are a recognised cost for
any building project such as that covered by the Brockley PFI and, based upon
the evidence of Mr Kelly and Mr Grimshaw, the rate of 10.52% is reasonable in
respect of both Decent Homes and leasehold work. Having said this we do not
accept the results of Mr Grimshaw’s analysis of the data from BCIS. There were
only 6 pieces of data and we do not think that it is a valid exercise to take
the average of such few data points (i) where there is a very large variance in
the results (between 4% and 26%) and (ii) where it is assumed that the PFI
project is a series of minor works rather than a single major project (a point
to which we return below in relation to profit). Nevertheless we are satisfied
that the evidence of 14 current (large) projects taken from Davis Langdon’s own
database does support an allowance for preliminaries of 10.52%.
59.
The relevant costs incurred by LBL in respect of preliminaries are
contained (but not separately identified) in the figure of ELWC for each
leasehold dwelling as set out in Part X of Schedule 4 to the project
agreement. In the case of 22 out of the 24 respondents the actual cost of the
leasehold works, and consequently the amount charged for preliminaries, is less
than the amount shown for the corresponding property in Schedule 4. This is
because Higgins sub-contracted the leasehold work and benefitted from any
difference between the fixed lump sum it received for each property from LBL
and the (generally lower) price that it paid to its sub-contractors. Those
benefits were passed on to the leaseholder in the majority of cases. The
opposite applies in the case of the two respondents where the actual costs were
higher than the corresponding contract figure for ELWC (Flat 3, 158B Lewisham Way and 30B Tressillian Road). In those cases, and subject to the LVT’s reduction
in the service charge payable by those two leaseholders in its subsequent
decision dated 20 September 2011, it appears that the charge for preliminaries
is greater than the cost incurred by LBL under the project agreement. In our
opinion the amount that was reasonably incurred by LBL as landlord for
preliminaries cannot exceed the amount, based upon the relevant ELWC contained
in Schedule 4 to the project agreement, that was paid by LBL to Regenter. The
amount charged in respect of those two respondents should therefore not exceed
9.52% (ie 1- (1/1.1052) x 100%) of the ELWC.
Issue (iii): refurbishment sub-contractor’s overheads and
profit
60.
In its decision the LVT stated:
“16. With respect to the
profit and overhead fees, these would be normal in any building contract, but
we consider that 12% would be excessive given that other fees are being charged
and consider that 10% would be a more reasonable sum for the risk to the
contractor under this type of scheme.”
61.
Mr Bonvini said that overheads and profit were on-costs that would be
included in any quotation provided by a contractor bidding on a one-off basis
and reflected the actual costs that LBL incurred by appointing a contractor to
undertake the project.
62.
Mr Grimshaw relied upon extracts from Spons 2005 and the BCIS Building
Maintenance Price Book 2008 when considering the issue of overheads and
profit. The former contained the following comment:
“The general overheads of the Contractor’s business, the
head office overheads and any profit sought on capital and turnover employed,
is usually covered under a general item of overheads and profit which is
applied either to all measured rates as a percentage, or alternatively added to
the tender summary or included within Preliminaries (site specific overhead
costs). At the present time, we are including an allowance of 2% for profit
and 5.5% for overheads on Major Works measured rates and 7.5% for profit and 5%
for overheads on Minor Works measured rates to reflect the current market.”
Mr Grimshaw said that that he
thought the percentages for “Minor Works” were the correct ones to apply:
“since from Higgins’ perspective
each property would effectively have constituted an individual project of less
than £100,000 in value, which is the criterion used by Spons to define a Minor
Works scheme.”
63. In cross-examination Mr
Grimshaw said that he was not aware that before the LVT the appellant’s case
was that scaffold contractors had been asked to price for the works on a “whole
contract basis”. He accepted that, if considered at the block level (rather
than the level of individual leasehold dwellings) much of the work to
leaseholder’s property should be classified as “major works” by his definition
of more than £100,000 in value.
64.
The BCIS Building Price Book said the following about overheads and
profit:
“Additions of 20% on labour all-in hourly rates and 10% on
material prices have been made for overheads and profit. These amounts are
thought to be reasonable rates that a prudent contractor would allow to cover
the actual overhead costs involved and to allow for a reasonable profit.”
Mr Grimshaw considered that these percentages probably represented
the peak of any additions before the impact of any downward pressure on prices
after 2008. But he thought that the 12% allowance for overheads and profit
applied by LBL was reasonable in this context.
65. Mr Grimshaw took an
allowance of 13.75% for overheads and profit, being the average of the figures
from Spons (12.5%) and BCIS (taken at 15%).
66. Mr Heather submitted that it
was not the function of the LVT under section 19(1)(a) of the 1985 Act to
retrospectively analyse the invisible elements of the contract price and to
reduce the allowance for overheads and profit when the same had not been the
subject of evidence. He noted that the various sub-contractors appointed by
Higgins charged them a price that itself included overheads and profit (and preliminaries)
to which Higgins would not be privy. The sub-contractors’ prices formed the
base costs to which on-costs of 26.1% was added to produce the leaseholders’
invoices. But it had not been suggested by the respondents (or by the LVT)
that each sub-contractor price should have similarly been analysed in terms of
on-costs.
67.
Mr Grimshaw’s acceptance that some of the works under the project
agreement would not qualify as minor works under the Spons definition
(£100,000) meant that the first part of his averaging process would need to be
modified to the extent that there was a major works element. But even if all
of the works were major works then the appropriate figure for overheads and
profits according to Spons would be 7.5% and the average between that and the
equivalent figure of 15% taken from BCIS would be 11.25%. But it was not the
case that all the works were major works so defined and therefore the average
must be at least 11.25%.
68.
The respondents submitted that it was appropriate for the LVT to have
considered the level of risk to the contractor under the PFI arrangement. Mr
Grimshaw had drawn attention to the lower profit percentage expected in the
case of major works. It was incorrect to argue that the leasehold works were a
series of minor works to which a higher profit level should apply. This was
not the approach that the appellants had taken before the LVT in respect of
scaffolding costs and nor should it be adopted in respect of on-costs. Mr
Grimshaw had emphasised the benefit of the economies of scale that were
inherent in the PFI and yet sought to deny those same economies when
considering the overheads and profit. That was a contradiction. The LVT’s
reduction of the profit percentage from 7% to 5% was therefore reasonable.
Issue (iii): conclusions
69.
It is not clear from their decision whether the LVT reduced this item
from 12% to 10% in respect of overheads, profit or both. Their decision refers
to “other fees…being charged”, which suggests a reference to overheads, and
also refers to the “risk to the contractors” which suggests a reference to
profit. We assume that the LVT considered this item in the round and made a
general and unspecified deduction of 2% in the figure adopted by the appellant.
70.
We do not consider that there is any evidence of duplication of
overheads between the item for preliminaries and that contained in this item.
The former relates to site specific expenses and the latter to general
overheads such as head office expenses. We are satisfied on the evidence that
a 5% allowance for general overheads is reasonable.
71.
Mr Grimshaw’s evidence about the appropriate level of profit was
predicated upon the assumption that in making their bid Higgins would have
treated the works as a series of minor projects. We do not accept that
argument. The respondents correctly pointed out, and Mr Grimshaw accepted,
that in many of the breakdowns of actual cost (21 out of a total of 27 that
were adduced in evidence) the works were analysed at block level and the cost
of the works exceeded the £100,000 cut off point for minor works. In our
opinion Higgins would have approached the PFI as a single project rather than a
series of individual projects. The refurbishment sub-contract was awarded for
all of the works and there was no evidence to support Mr Grimshaw’s assumption
that when making their bid Higgins increased their profit allowance as though they
were taking on a multiplicity of minor works. That assumption does not reflect
the reality of a competitive tender on a major PFI project. There were some
1,800 dwellings subject to the PFI and whereas at an individual level the
contractor may have had to accept a high level of uncertainty on costs, the
number of properties involved would have assisted in diversifying any risk. We
acknowledge the possibility that Higgins, knowing that they intended to
sub-contract the works, would have assumed that their sub-contractors would
treat the sub-contracts as minor works and allow for profit accordingly.
Higgins might therefore have allowed a higher profit rate in their bid to
reflect what their sub-contractors were likely to charge them. But there was
no evidence about Higgins’ sub-contracting strategy and, as Mr Heather pointed
out (see paragraph 66 above), Higgins were not privy to the breakdown of their
sub-contractors’ bids. In the event it would appear that in the significant
majority of cases (22 out of 24 respondents) the actual cost of the works (as
sub-contracted by Higgins) was significantly less than the amount payable to
Higgins by LBL (via Regenter) under the PFI.
72.
In our opinion the appropriate allowance for overheads and profit should
be that applicable to major works. According to the 2005 edition of Spons on
which Mr Grimshaw relies the profit on major works should be taken at 2% (but
with a slightly higher allowance for overheads compared with minor works of
5.5%). The total for overheads and profit is 7.5%. Mr Grimshaw also relies
upon the 2008 edition of the BCIS Building Maintenance Price Book. This
distinguishes differences in overheads and profit on measured rates between
labour (20%) and materials (10%). It does not breakdown these figures between
the component parts of overheads and profit or, apparently, between major and
minor works. Mr Heather in his closing submissions argues that even if one
takes the lower Spons rate of profit appropriate to major works on all of the
works the subject of this appeal the average, taken with the BCIS figures, will
be 11.25%. This analysis depends upon the assumption that it is correct to
take the average of the overheads and profit allowance for labour and materials
at 15%, but there is no reason to suppose that the labour and materials costs
will be the same in the case of the work done to each of the respondents’
leasehold properties. It is only if those costs are the same that it is
appropriate to use the average of the two rates. If the cost of labour exceeds
that of materials then the average will be weighted towards labour (a higher
percentage) and if the cost of materials exceeds that of labour then the
average will be weighted towards materials (a lower percentage).
73.
Mr Grimshaw did not explain why he used the 2005 edition of Spons but
the 2008 edition of the BCIS book. He said that he had adopted Quarter 1 of
2005 as being the mid-point of the period March 2002 (the date of the OJEC)
advertisement to June 2007 (the date the project agreement was signed), but it
is not clear to us why he used a later edition of the BCIS book.
74.
We place more weight on Spons than we do on BCIS. Spons gives a more
precise breakdown of the component parts of the figure for overheads and profit
as between major and minor works and the use of the 2005 edition is explained.
Furthermore Spons was edited by Davis Langdon, Mr Grimshaw’s employer at the
time he wrote his expert report. Mr Grimshaw also acknowledges that the BCIS
2008 figures “probably reflect the peak of any additions before the impact of
any downward pressure on prices”.
75.
In our opinion the profit rate of 7% is too high and, given the evidence
before us (adduced by the appellant), we consider that the reduction of 2% that
was made, but not fully explained, by the LVT is justified. We are satisfied
that a profit rate of 5% recognises the major nature of the refurbishment contract
as a whole while allowing for the possibility of sub-contractors seeking a
higher profit on the works awarded to them. We determine that a reasonable
allowance for overheads and profit should be 10%.
Issue (iv): management fee
76.
The LVT said that:
“With respect to the additional
10% management fee levied by the respondents, we determine that it would not be
reasonable for the respondent to add 10% onto the PFI contract charges to
account for the landlord’s management of the contract, as this function is
undertaken by the liaison officers in 6 Mantle Road, the costs of which are
covered in the 16.98% above [3.48% professional fees plus 10% overheads and
profit plus 3.5% preliminaries]”
77.
Mr Bonvini said the work for which a management fee was charged included
the preparation and service of the requisite notices under the 1985 Act, the
administration of bills and payments, queries and complaints and matters of
general liaison; all of which were matters that LBL were obliged to undertake
and for which a service charge was payable under the leases. Under the PFI
this work was sub-contracted to Pinnacle who employed directly a team
responsible only for the leaseholders. Lewisham Homes, the arms length
management organisation (ALMO) that was responsible for the management of other
leasehold properties in the borough, charged a flat 10% management fee for
providing this one to one service. The fees charged to leaseholders under the
PFI were therefore the same as those charged to other leaseholders outside of
the PFI. There was no double-counting of fees as suggested by the LVT; 10% was
the standard charge made by LBL for this type of management work and it did not
represent “profit on profit” as suggested by the respondents. The LVT had
previously accepted this management fee in its consideration of another
application at 3 Cherry Tree House, Shardeloes Road, New Cross, Lewisham.
78.
Mr Bonvini said that Pinnacle prepared the costs invoices having been
given the data by Higgins. Pinnacle scrutinised this before sending out the
service charge demand. All monies were paid directly by the leaseholders to
LBL. No money was paid to Pinnacle.
79.
Mr Grimshaw said that the 10% management fee represented the costs of
management that, in the absence of the PFI, would have been incurred by LBL.
In other parts of the borough leaseholders were charged a 10% management fee by
Lewisham Homes. The management fee in this appeal was separate and distinct
from any of the component parts of the 26% on-costs charged by Higgins and there
was no duplication between them.
80.
Mr Heather submitted that the right to charge a management fee was
derived from the lease and extended to the use of a managing agent. The lease
envisaged a management contract on commercial terms including a profit element
for the managing agent.
81.
Mr Heather reviewed the terms of the project agreement as they applied
to the provision of management services (which we have outlined at paragraphs 23
to 25 above). In short, he submitted that LBL paid Regenter an indexed total
of £17,234 per leasehold property over the course of the contract (20 years)
which is directly referable to the management of that property. That sum
included charges for both day to day and major works services. Mr Heather referred
to the table of annual ELSC that is contained in Part XI of Schedule 4 (from
which the total of £17,234 was obtained) and argued that the amounts of ELSC
per annum shown there were too high to be related solely to day to day service
charges. He referred to an example of such day to day charges (in respect of
158B Lewisham Way for the year 2010/2011) the total of which was £319.92 before
a management fee of £67.23. He concluded that the said table was:
“a payment plan for the cost of
management of the properties, including major works, spread over the full term
of the contracts.”
82.
Mr Heather said that LBL were contractually obliged to pay Regenter the
amounts shown in Part XI of Schedule 4; an obligation that arose after an EU
procurement exercise. A management fee would have been payable to someone even
if LBL had directly placed the contract and employed a managing agent. The
lease provided for a management fee to be charged for this work. The fee
incurred under the project agreement was reasonably incurred for the purposes
of section 19(1)(a) of the 1985 Act.
83.
The work referable to the management fee was set out in the output specification
in the project agreement and there was no duplication in charges between that
fee and the on-costs of 26%. The charges in respect of Higgins and Pinnacle in
respect of the property at 6 Mantle Road were separate and distinct and
Higgins’ site costs did not include those of Pinnacle. The fact that on
occasion Higgins’ staff responded to leaseholder correspondence did not
establish duplication of effort; Pinnacle passed such correspondence to Higgins
as being the appropriate party to deal with the particular issues.
84.
The respondents submitted that the management fee was unreasonably
incurred on top of the fee charged by Higgins and that there was evidence of
Higgins having duplicated some of the work for which the management fee was
raised. Mr Bonvini had been unable to explain in detail the role played by
Pinnacle and Ms Jones, who had given evidence on behalf of Pinnacle before the
LVT, did not give evidence to this Tribunal. The LVT correctly understood Ms
Jones’ evidence as indicating duplication in costs between Higgins and
Pinnacle.
Issue (iv): conclusions
85.
It appears to us that the LVT disallowed the management fee of 10%
because it considered that LBL’s management function was undertaken by the
liaison officers based in 6 Mantle Road. We believe they were wrong to do so.
The position became clear once the PFI documents had been disclosed: Higgins were
responsible for the major works and Decent Homes Programme while Pinnacle were
(and are) responsible for the leasehold management function, the numerous outputs
of which are described in section 9 of Schedule 1 to the project agreement.
Higgins compiled cost figures based upon the amounts charged for the
leaseholder works by their sub-contractors. They passed these figures on to
Pinnacle who were responsible, inter alia, for preparing section 20 notices and
service charge invoices. On occasion Higgins, where it was more appropriate for
them to answer, were asked to respond to leaseholder correspondence. But there
is no justification, in our opinion, for the LVT to disallow the whole of the
management fee on the effective grounds that the entirety of Pinnacle’s work
was duplicated by Higgins, for which they were already reimbursed under the
heading of preliminaries. That is manifestly incorrect. Pinnacle’s
responsibilities under its sub-contract with Regenter are distinguishable from
those of Higgins under its refurbishment sub-contract; the two are not
duplicated and it was reasonable for LBL to incur costs on both. But that does
not mean that the amount of the management fee charged to the leaseholders was
reasonably incurred.
86.
Although the lease provides that LBL may charge for the cost of
management it does not specify an amount. Nor does the project agreement refer
to a percentage management fee; the amount charged in respect of leasehold
management is given in the project agreement as a fixed amount per annum per
leasehold property and covers management of major works and day to day repair
and maintenance. The latter work is the responsibility of Equipe under a
sub-contract that was neither disclosed nor referred to at the hearing. LBL
reserved to itself the policy for setting the level of service charge. It
appears that LBL set the level of management fee at 10% as this is apparently
the figure adopted by Lewisham Homes in relation to the management of other
leasehold properties owned by LBL outside the Brockley PFI.
87.
We understand that the service charges which are in dispute in this
appeal relate solely to the major works undertaken by Higgins and not to day to
day management work undertaken by Equipe. The evidence before us related to
Higgins’ costs and not Equipe’s. Paragraph 4.3 of Schedule 17 (“Leaseholder
Service Charges”) to the project agreement refers to separate invoices for day
to day works and major works.
88.
It appears that in the case of 21 out of 24 respondents the amount of
management fee raised in the service charge for major works exceeds the amount
of the ELSC for the relevant year, which we assume in each case is one of the
years ending 31 March 2008 to 2010 (the copy service charge invoices in the
bundles do not state the year that the actual expenditure was incurred; the
evidence only gives the date of the section 20 notice). The costs incurred by LBL
were those which they were liable to pay under Schedule 4 of the project
agreement. As a matter of fact those costs were not the same as the amounts
LBL demanded from the leaseholders.
89.
Furthermore the 10% management fee in dispute is in respect of major
works only whereas the ELSC figures shown in Part XI of Schedule 4 are in
respect of both major works and day to day works. Any comparison is further
complicated by the fact that LBL appears to have retained management
responsibility for banking all of the service charge payments itself. Pinnacle
do not receive any of the monies for which they send out service charge
invoices. The 10% management fee will therefore reflect this retained
responsibility.
90.
However we do not consider that the ELSC can be taken as the appropriate
allowance for the management fee that is chargeable under the lease. ELSC
represents an average cost per leasehold dwelling per annum and is spread over
the life of the PFI. The ELSC do not reflect the particular circumstances of
individual properties. The service charge invoices take account of the nature
and condition of each leasehold dwelling and the actual cost of the major works
(subject to the decision of the LVT on 20 September 2011 as to whether the
expenditure shown on those invoices was reasonably incurred). There is a
significant variation in the cost of the major works as between the
respondents’ properties.
91.
In our opinion an allowance of 10% of total costs for management is a fair
reflection of the costs reasonably incurred by LBL. It is consistent with the
management fee charged by the ALMO that is responsible for other leasehold
properties in the borough and is the amount that was accepted by the LVT in the
3 Cherry Tree House case. (We were surprised to note that in the one example
of actual day to day service charges in evidence, referred to in closing by Mr
Heather, the management fee – Mr Heather’s expression – for leasehold
management was 21% of the base cost. But that is not an invoice that is in
dispute in this appeal.)
92.
We consider that the 10% management fee should be charged on the total
of the base costs plus the on-costs. Such on-costs form a normal part of any quotation
for building works, albeit that they are not usually separately identified, and
we would not expect the management fee to be limited to the base costs.
Determination
93.
The appeal is allowed in part and we determine that the on-costs should
be taken as 24% of the base costs. This figure comprises 3.48% fees, 10.52%
preliminaries and 10% overheads and profit. The management fee is determined
at 10% of total costs including on-costs.
94.
In reaching our decision we also took account of the respondent’s
reference to benchmarking the on-costs against a similar PFI in Islington; the
expert evidence of Mr Steven Way before the LVT; and Mr Carey’s analysis of the
financial implications to the landlord once allowance was made for the cap of
£10,000 on each leaseholder’s contribution (due to PFI funding). In our
opinion none of these points justified any departure from our determination.
Dated
28 January 2013
George
Bartlett QC
A J Trott FRICS
APPENDIX 1
LIST OF
RESPONDENTS
ESTATE/BLOCK
HOUSEHOLDS:
ASAPH
HOUSE
1. Natasha Figaro:
10
Asaph House, Brindley Street, Brockley, London SE14 6PJ
BEDE
HOUSE
2. Isabelle Jean Gilles
23
Bede House, Clare Road, Brockley, London SE1 6PW
ALBAN
HOUSE
3. Yvonne Goulbourne
10 Alban House, 19 Shardeloes Road, Brockley, London SE14 6PH
4. Thomas Johnson
3 Alban House, 19 Shardeloes Road, Brockley, London SE14 6PH
5. Julie Ball
9
Alban House, 19 Shardeloes Road, Brockley, London SE14 6PH
LILAC
HOUSE
6. Anna Irvin/Kate Davies
7
Lilac House, Breakspears Road, Brockley, London SE4 1TU
ACACIA
HOUSE
7. Wolfgang Konstabel
7 Acacia House,
Brockley, London SE4 1TZ
8. Richard Carey
8 Acacia House,
Brockley, London SE4 1TZ
9. Zac Crawley
9
Acacia House, Brockley, London SE4 1TZ
HAZEL HOUSE
10.
Anastasia Maximova
8 Hazel House, Wickham House, Brockley, London SE4 1NA
DUNSTAN HOUSE
11. Kathleen O’Brien
2 Dunstan House, St Donatts Road, London SE4 1DW
12. Rita Hunte
10
Dunstan House, St Donatts Road, London SE4 1DW
ALDHAM
HOUSE
13. Anna Addington
17 Aldham House, 79 Malpas Road, London SE4 1DP
14. Greta Washington-Levy
18 Aldham House, 79 Malpas Road, London SE4 1DP
15. Bukky Garnett
9 Aldham House, 79 Malpas Road, London SE4 1DP
16. Uriah Cousins and Esket Cousins
2 Aldham House, 79 Malpas Road, London SE4 1DP
17. Luis Rey-Ordieres and Carmen Naranjo-Marquez
8 Aldham
House, 79 Malpas Road, London SE4 1DP
COLUMBA HOUSE
18. Jaya Patel
10
Columba House, 23 Shardeloes Road, Brockley, London SE14 6PG
FOSTER HOUSE
19. Veronica Oluwatope
16
Foster House, Brockley, London SE14 6NX
STREET
PROPERTIES/OTHER
20. Steven David Mills
Flat 3, 158B Lewisham Way, London SE4 1UU
21. Dawn Bennet
64 Lewisham Way, Brockley, London SE14 6NY
22. Patrick McGinley
65B Breakspears Road, Brockley, London SE4 1TS
23. Nigel Coleman
154B Algernon Road, Brockley, London SE13 7BU
24. Kraig Donald
30B Tressillian Road, London SE4 1YB