UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2015] UKUT 229 (LC)

UTLC Case Number: LRX/93/2013

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charges – whether major works of improvement reasonable or patch repair sufficient – whether cost of re-cladding reasonably incurred – whether CESP Funding to be credited to leaseholders – sufficiency of reasons – appeal allowed in part

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE

Leasehold Valuation Tribunal for the

NORTHERN Rent Assessment Panel

BETWEEN:

HAZEL ST CLARE OLIVER

Appellant

and

 

SHEFFIELD CITY COUNCIL

Respondent

Re:  128 Cliff Street

Lansdowne Estate

Sheffield

S11 8FA

 

Before:

Martin Rodger QC, Deputy President and P D McCrea FRICS

 

Sitting at: Sheffield Employment Tribunal,

on

17-19 February 2015

 

The appellant in person

Christopher Baker, instructed by Sheffield City Council, for the respondent

© CROWN COPYRIGHT 2015

The following cases are referred to in this decision:

Continental Property Ventures Inc v White [2006] LRX/60/2005

Hyde Housing Association v Williams [2000] LRX/53/1999

Sheffield City Council v Oliver (2008) LRX/146/2007

Daejan Properties v Griffin [2014] UKUT 206 (LC)

Waaler v London Borough of Hounslow  [2015] UKUT 17 (LC)

DECISION

Introduction

1.             The Lansdowne and Hanover Estates (“the Estates”) in Sheffield comprise 40 deck access blocks containing 997 flats and maisonettes all constructed between 1968 and 1972 to a design by in-house architects of Sheffield City Council.  80 of the units are held under long leases granted under the statutory right to buy.  One of those units, a maisonette on the ground and first floors of block L13 of the Lansdowne Estate, is the home of the appellant, Miss Oliver, who was granted her lease in 1989.  In 2011 and 2012 the respondent landlord, Sheffield City Council, undertook a programme of major works to the Estates, which included the removal of the original cladding material from the exterior of each of the 40 blocks and its replacement with new cladding material, after structural strengthening. 

2.             This appeal is against a decision of a Leasehold Valuation Tribunal for the Northern Rent Assessment Panel (“the LVT”) made on 30 April 2013 that the costs of the major works had been reasonably incurred by the Council, and that Miss Oliver was required to contribute towards them under the service charge provisions in her lease.

3.             The contribution which the Council seeks to recover from Miss Oliver through the service charge is £9,378.72.  Miss Oliver’s case is that it was unreasonable for the Council to incur expenditure on that scale and that a more modest programme of regular repairs to the original cladding ought to have been undertaken instead.

4.             At the hearing of the appeal Miss Oliver presented her own case (having had a prior assistance from the Bar Pro Bono Unit).  The Council was represented by Mr Christopher Baker of counsel.  We are grateful to them both for the efficient presentation of the appeal.  Evidence was given by Miss Oliver, who relied additionally on the report of a chartered surveyor, Mr Peter Swift, and by four current and former officers of the council, Ms Janet Sharpe, its Interim Director of Housing, Dr Miles Seaton, a structural engineer formally employed by the Council, Ms Carol Cresswell, its Principal Architect, and Mr Michael Raleigh, a quantity surveyor employed in its design and project management department.

5.             We inspected the Estates and the interior of Miss Oliver’s maisonette on the second afternoon of the hearing.

6.             Permission for the appeal was granted by the Tribunal.  At the hearing, after considering submissions on the adequacy of the LVT’s reasons, we indicated to the parties that we would proceed to a re-hear the original applications. 

 

The Lease

7.             The lease of Miss Oliver’s flat, which was granted jointly to her and her mother on 25 September 1989, is for a term of 125 years. It is of flat 128 Cliff Street, Sheffield, which is referred to in the lease as “the demised premises” which is part of a block comprising Number 78 to 130 Cliff Street, referred to as “the Building”.  By Part 1 of the Schedule to the lease the leaseholder was granted the right of access “over all stairs passageways and other parts of the Building giving access to and egress from the demised premises”. 

8.             By clause 4(3) the Council, as landlord, covenanted to:

“Keep in repair … and (if desirable in the opinion of the Council) to improve (a) the structure and exterior of the demised premises and of the Building … and to make good any defect affecting that structure … (b) any other property over or in respect of which the Lessee has any rights by virtue of this Lease and (c) any installation connected with the provision of those services referred to in sub-clause (2) hereof …”

9.             By clause 3(29) of the lease Miss Oliver covenanted:

“…to pay to the Council from time to time as part of the Service Charge a reasonable part of the costs and expenses which the Council may from time to time incur or estimate to be incurred in carrying out repairs and improvements to the structure and exterior of the demised premises and the Building … and making good any defect affecting that structure …”.

10.         The Service Charge itself is described in Part III of the Schedule to the lease as a:

“fair proportion …. of all costs expenses and outgoings incurred or estimated to be incurred by the Council in respect of or for the benefit of the Building …”

That fair proportion is to be determined by the City Treasurer by reference to rateable values or such other formula as the City Treasurer might determine.  The Service Charge includes, by paragraph 2(A), the cost of “keeping in repair and improving the structure and exterior of the demised premises and the Building …”

The facts

11.         The parties agreed a helpful statement of facts, from which, together with the evidence and our site inspection, we make the following findings.

The Estates

12.         The Estates comprise 40 distinct blocks of flats and maisonettes, groups of which are connected by walkways and stair-towers to create a number of “super-blocks”.  They were designed and built between 1968 and 1972 to a non-traditional construction.  They comprise a concrete frame with masonry cross walls.  As originally designed the main elevations were enclosed by infill panels comprising timber studwork hung at alternate levels with clay tile cladding or a composite material of glass reinforced plastic known as Asbestolux.  The timber frames which supported the  cladding panels also formed the window apertures and the studwork was supported on pre-cast concrete gutter beams which span between the load bearing cross walls at the front and rear edge of each concrete floor slab.  No insulation was provided between the timber studs. The gable ends of the buildings are of brick cavity construction.  Each individual flat has a small private balcony.

13.         From the time of their construction until the major works only routine maintenance was carried out to the blocks, except for the installation of cavity insulation in the brick walls at the gable ends of the Lansdowne Estate in 2003, and the re-asphalting of roofs. 

14.         The experience of the Council has been that its non-traditional buildings rarely have a life of more than 20-30 years without further major investment. The cost of routine repairs was considered by the Council to be high; it was agreed that between 2001/2 and 2011/2 a total of £960,189 had been spent on such repairs to the buildings on the Estates.  The Council projected that if similar sums continued to be spent over the following 30 years the cost of such routine repairs would amount to almost £9 million.  Such routine maintenance has not and would not address the consequences of the original design of the blocks which include water ingress and poor thermal insulation.

15.         In 2003, about 30 years in to the life of the Estates, the Council commissioned a structural report into the condition of 3 blocks on the Lansdowne Estate, with a view to extending their service life by a further 30 years.  The report produced by Dr Miles Seaton on 20 September 2003 included the results of tests on the concrete structure and concluded that, although the buildings were generally in a good structural condition, three specific matters were cause for concern.  The main issue was the discovery in the pre-cast concrete floor beams of high alumina cement (HAC); Mr Seaton advised that it was extremely important to prevent water ingress into the concrete floors and roofs to prevent structural degradation of the beams.  In paragraph 3 of his report Dr Seaton identified a number of “durability issues” which, if left unattended could lead to structural problems in the future.  These included brittle sealant in movement joints, missing or disconnected rainwater pipes, blocked gutters and gaps between gutter spouts and brickwork allowing water to penetrate the brickwork. It was also found that differential expansion had caused brick facings to work loose at the joint between the concrete gutter beams, and that in two locations brickwork required crack stitching. 

16.         The 2003 report examined the general structure of the buildings and was not concerned to identify all of the works which might be required, in particular to address the thermal properties of the original cladding.  A reader of the report who did not appreciate its limited focus might have assumed that there was no problem with the cladding itself.  We are satisfied that the report cannot be read as implying a clean bill of health for those parts of the blocks which were not specifically examined.  In particular the emphasis placed on the vital importance of preventing water ingress in the area of the floor slab had obvious implications for the condition of the cladding which were not addressed in detail.

17.         Following the 2003 report the condition of the buildings came under closer scrutiny, and other problems were identified, including areas of broken or missing clay tiles which permitted water ingress and caused damp and instances of vermin infestation.  It became apparent that external disrepair and lack of thermal insulation would either require the demolition of the blocks (a fate which befell many other estates in the city) or necessitate their comprehensive refurbishment.

The proposed works

18.         In 2000 the government instigated its Decent Homes Programme with the objective of improving the standard of all social housing by 2010.  Sources of funding available through the programme provided an opportunity for the Council to improve the poor external condition of the Estates and to modernise the properties which it let to its own tenants.  The opportunity for local authorities to spend significant sums in upgrading their own housing stock had implications for former council tenants who had exercised the right to buy and were now long leaseholders.  Their leases require them to contribute to the cost of work of repair or improvement which their landlords were now given an incentive to undertake, often after years of neglect, yet which individual leaseholders might not regard as a priority or as affordable for them individually. 

19.         In 2006 it was confirmed that the Estates were not to be demolished. Responsibility for the Council’s housing stock had by then been transferred to an arm’s length management organisation, Sheffield Homes, which wrote to all tenants and leaseholders informing them that Decent Homes work would commence in 2007/8 and that there would be consultation about works to repair the exterior of the blocks after internal works had been completed.  The management of the Estates was subsequently resumed by the Council and we do not distinguish in this decision between the Council and Sheffield Homes.

20.         The first phase of the work comprised the replacement of the windows and doors of flats on the Estates.  The original single glazed metal framed windows were to be replaced with double glazed UPVC units which were intended to improve the thermal insulation of the flats.  Miss Oliver objected to the Council’s proposals, and wished to be free to install her own windows at a lower cost.  That dispute was the subject of a previous appeal to the Lands Tribunal (see Sheffield City Council v Oliver (2008) LRX/146/2007) in which it was found that the Council had been entitled to carry out the work to the Estate.  Mrs Oliver subsequently installed her own replacement windows.

21.         When the programme of replacing the windows on the Estates was undertaken in 2006 and 2007 no design solution for the cladding of the buildings had yet been identified.

22.         The Council’s Cabinet approved a refurbishment project in principle in July 2007.  Architects were commissioned to work up designs and a feasibility study produced in November 2007 examined options for the external cladding, which it was hoped would significantly improve the thermal efficiency of the blocks. The vulnerability of the structure caused by the presence of HAC and the need to protect the floors and roof from water penetration was reiterated.  The feasibility study reported on a thermal imaging survey which revealed the extent and location of heat loss through the external walls of the flats.  After examining the benefits and disadvantages of alternative schemes the report recommended in principle the removal of the existing hanging tiles and G.R.P. panels and their replacement with an insulated external render system with elements of timber cladding at higher level to provide a variation in materials.  Formal consultation with tenants and leaseholders on various options commenced in November 2008 and continued until January 2010.

23.         In March 2009 a “Stage D Cost Report” was produced by the Council.  It considered the cost of the proposed works, including cavity wall insulation for the gable ends to maisonettes on the Hanover Estate. Within projected total scheme costs of £12.8m, the cost of the insulated cladding was estimated at £5.2m.

24.         An initial planning application made in June 2009 was rejected by the Council’s planning officers who asked Sheffield Homes to consider alternative options and to undertake more detailed consultation.  As a result, twelve design options were drawn up, and their respective costs, practicality, thermal value, disruption and the views of planning officers were examined. Consultation with tenants and leaseholders continued on these options, a project group comprising tenants and leaseholders was set up, and all leaseholders were invited to meetings and open days and offered the opportunity to have a personal visit to explain the project and canvas their views.

25.         On 29 March 2010 a written briefing on seven options was presented to the Council.  The first of these options was to continue with a programme of annual repair to the structure.  A number of specific drawbacks of that approach were identified, namely: that it would be expensive for the Council and leaseholders over a 30 year period; that it would not achieve higher thermal insulation standards and would be likely to accelerate water ingress problems; that the life expectancy of the buildings would be reduced; and that the appearance created by patch repairs would be unattractive.  The Council was advised that the original clay tiles were no longer available, and when they were replaced with alternatives a poor appearance resulted. The replacement of tiles required expensive scaffolding to be erected and it was anticipated there would be an annual saving of £100 - £150 per flat in repair costs if an alternative cladding system was introduced.

26.         The Council was persuaded by these considerations that it would not be practical or cost-effective to patch the exterior of the buildings.  Its preferred option was the replacement of the tile cladding with a part render and part composite “Werzalit” cladding system. Taken together with the other works proposed it was projected that the new cladding would produce energy savings for each flat of between £200 and £380 per year, which, over a 30 year period, might total £6,000 to £11,400.  The expected improvement in energy efficiency was important not only for the comfort of the residents, but also because Building Regulation approval would not have been available for any scheme of works which did not enhance the standard of thermal insulation in line with modern expectations. 

27.         One consequence of the proposal to re-clad the buildings was that alterations were considered to be required to extend the flues of gas boilers which projected through the walls of the flats.  The Council proposed to take the opportunity to replace the boilers themselves (including those in leaseholders’ flats), rather than alter the flues of the existing installations.

28.         The part render/part composite cladding alternative was supported by 33% of the 29 leaseholders and 138 tenants who participated in the Council’s consultation open days.  In June 2010 Miss Oliver and other leaseholders were notified of the Council’s intention to enter into an agreement for external insulation and cladding works and invited their comments. 18 responses were received: of which five supported the proposal but were concerned about the costs and asked for details of payment options, one objected because of the cost to leaseholders, four specifically preferred the annual repair option, while the remainder sought more information, consultation and leaseholder involvement.

29.         In June 2010 a second planning application was submitted by Sheffield Homes, this time for the preferred system of part render and composite cladding, for which approval was given on 4 October 2010.

The expected cost

30.         A revised version of the Stage D Cost report was prepared immediately after the grant of planning permission.  It now took account of the addition of structural strengthening which was required to replace the existing timber frame which supported the original cladding within the external walls.  The timber frame (of which we have been shown photographs) was insubstantial and subject to movement and it was proposed to install in its place an entirely new steel structure which would support the new cladding. Other changes included the introduction of a high density insulated timber cladding system to the top storey, relining existing concrete gutters with asphalt, and fire stopping works to internal ventilation ducts. The revised cost of works rose from the £12.8m of March 2009 to £15.38m in the October 2010 revision, of which £2.3m was additional expenditure on Decent Homes works (i.e. work to individual tenanted flats).  The projected cost of the insulated cladding had increased only very slightly since the original cost report, from £5.2m to £5.357m, while the cost of other aspects of the work had reduced.

31.         19 expressions of interest were received from contractors interested in undertaking the work, of which six were invited to price a bill of quantities. By letters dated 9 February 2011, Miss Oliver and other leaseholders were informed of the results of the procurement process.  The bids received from the six short-listed contractors were significantly below the level which the Council’s Stage D Cost report had projected, ranging between £9.898m and £13.371m; after evaluation by a senior quantity surveyor the Council now proposed to appoint Apollo Property Services Group Limited, which had submitted the lowest price and had been scored highest on quality criteria.  The letter stated the Council’s reasons for carrying out the work and responded to the representations received from leaseholders after the initial consultation in June 2010.  It also offered payment options to leaseholders, including discretionary financial help in the form of service charge loans for right to buy leaseholders, and a deferred payment option which would be repayable on transfer or sale of the property. 

32.         On 21 April 2011, the Council formally notified leaseholders under s. 20, Landlord and Tenant Act 1985 of the selection of Apollo as the successful contractor and of its intention to carry out the works. 

33.         The total contract price agreed with Apollo was £9,898,491.33, the major elements of which comprised the insulated render-cladding, Decent Homes work to the interior of tenanted flats (including new boilers), and a digital aerial upgrade. The Council has not sought to pass all of these costs on to its leaseholders through the service charge.

34.         Rather than simply informing individual leaseholders of their estimated contribution towards the total cost of the intended works, the letters of 21 April 2011 included a detailed breakdown attempting to show the cost of works to each recipient’s own flat.  In Miss Oliver’s case, for example, she was informed that the estimated cost of the cladding and associated works to her flat would be £8,488.75 comprising:

a)    £149.52 for preparation of the existing building fabric, calculated at the rate of £7.51 per sqm for 19.91sqm;

b)   £393.22 for structural strengthening, calculated at the rate of £19.75 per sqm for 19.91sqm;

c)    £7,642.78 for insulated cladding, calculated at the rate of £235.09 per sqm for 32.51sqm;

d)   £52.73 for balcony asphalt repairs at a unit rate of £35.15 for 1.5 units;

e)    £6.85 for a smoke detector (if required) at a unit rate;

f)    £22.26 for clearing her private balcony (if required) at a unit rate;

g)   £221.39 for modifying her private balcony balustrade at a unit rate.

35.         The same document also estimated that Miss Oliver’s contribution of 1/27^th towards the cost of works to the block as a whole would be £1,577.02 (out of a total of £42,579.59). These works comprised lightning protection, relining gutters, concrete/brickwork repairs, works to rainwater goods and scaffolding.

36.         Finally it was estimated that Miss Oliver’s contribution of 1/202^th of the cost of works to her “superblock” (i.e. the group of blocks, including Miss Oliver’s building, which are connected by communal stair towers and bridge links) would be £249.48 (out of a total of £50,394.19). These works comprised surveys to communal areas, communal lighting and decorating the communal balustrade.

37.         With the addition of a £200 administration fee the aggregated total sum which the Council  estimated would be Miss Oliver’s liability came to £10,515.25.

38.         Work to the Estates commenced in June 2011, with the first phase comprising works on the Lansdowne Estate which includes Miss Oliver’s block.  By the time the work to the whole of the Estates was completed the original tender sum of £9,898,491.33 had increased to a final price of £11,438,801.80.  This was partly owing to other works being added in when their necessity was discovered during the contract, partly owing to delays, and partly owing to some on-site variations. 

39.         Of the final contract price of £11.4 million, the amount sought to be recovered by the Council from leaseholders was £615,323.64.  The leaseholders’ collective contribution would have been higher but £102,131.22 was irrecoverable from certain leaseholders, in whose case the work had fallen within the five year protected period from their exercise of the right to buy. The leaseholders’ contribution excluded the cost of digital aerial upgrades, Decent Homes work and professional fees, none of  which the Council has sought to recharge.

CESP funding

40.         After the consultation was completed the Council became aware that the project may be eligible to receive a contribution from a commercial energy company as part of the Community Energy Savings Programme (“CESP”).  The CESP scheme was created as part of the government's Home Energy Saving Programme and ran from 1 October 2009 to 31 December 2012.  In broad outline, a community energy saving target was set by the Department of Energy and Climate Change which was to be met by requiring commercial gas and electricity suppliers and electricity generators to fund energy saving measures for domestic consumers.  CESP was in targeted at specific low income areas of Britain selected using published indices of multiple deprivation (“IMD”).  In England, the lowest 10 per cent of areas ranked according to IMD qualified for CESP funding.

41.         As part of their obligations under the CESP scheme energy companies were required to achieve a reduction in carbon dioxide production by funding a variety of energy saving and fuel efficiency measures.  Around half of the energy saving measures funded through CESP were forms of home insulation, and almost 40% were replacement boilers or heating controls.  A failure to meet the required targets left energy companies liable to a fine from the regulator, Ofgem.  One method by which the companies could achieve their targets was by partnerships with local authorities or housing providers engaged on major works to improve the quality of social housing in areas of deprivation.  Such a relationship was struck between the Council and NPower.

42.              The Council worked closely with NPower to enable it to meet its targets under the CESP scheme, and in the spring of 2012 an agreement was entered into under which the Council would become entitled to certain payments from NPower in the event that it completed specific qualifying works to an approved standard.  A total of £2.913 million was received from NPower under this agreement of which £1.574 million was referable to the refurbishment of the Estates.  Not all of the work on the Estates was eligible for a CESP contribution, as the later phases of the project did not commence until after the scheme had closed and not all of the Estates were within the relevant IMD zone.  In total 15 of the 25 blocks on the Lansdowne Estate were eligible to receive CESP funding for work completed by December 2012.  A further 15 blocks on the Hanover Estate were also eligible but work was completed by the cut-off date in only four of these.

43.              The view taken by the Council was that the CESP funding would not be passed directly to the leaseholders as a set off against their service charge contributions.  Instead the funds would be used as a contribution towards the cost of aspects of the work which the Council had chosen not to charge to leaseholders.

44.              In further written submissions made after the hearing the Council confirmed that the total amount of CESP funding applicable to block L13, containing Miss Oliver’s property, had been £43,570.44.

The service charge applications

45.         By an application issued on 7 March 2011 Miss Oliver applied to the LVT under s.27A, Landlord and Tenant Act 1985 for a prospective determination of her liability to pay service charges in respect of the proposed works and for an order under s. 20C in relation to the costs of the application.  The main issue which Miss Oliver asked the LVT to determine was whether “the proposed programme of works is unreasonable because it is disproportionate to the maintenance only of the hanging tiles that is needed.”

46.         On 28 July 2011 the Council issued an application of its own to the LVT, naming 17 leaseholders of flats on the Lansdowne Estate as respondents.  The application sought a determination under s. 27A of the sums which would become payable for the programme of major works and specifically to consider whether the works were repairs or improvements and “the amount of cost of each item which should be payable on the basis of reasonableness”.

47.         Having completed the work, on 5 October 2012 the Council sent invoices to Miss Oliver and other leaseholders for their contributions towards the costs incurred.  The Council stated that it would not be seeking to recover any amount until after the conclusion of the LVT proceedings. Miss Oliver’s total contribution was said to be £9,378.72, which was less than the sum estimated by the Council’s letter of 21 April 2011.  The total was made up of a contribution of £371.56 towards the expenditure of £75,054.03 on works to the superblock, £1,582.69 out of a total of £42,732.75 towards the cost of works to her own block, and £7,224.47 described as “costs of work to your property”.  The latter sum was broken down as follows:

a)    £191.98 for preparation of the existing building fabric, calculated at the rate of £9.85 per sqm for 19.49 sqm;

b)   £335.26 for structural strengthening, calculated at a unit rate;

c)    £5,964.14 for insulated cladding, calculated at the rate of £177.61 per sqm for 33.58 sqm;

d)   £511.70 for balcony asphalt repairs at a unit rate;

e)    £nil for a smoke detector;

f)    £nil for clearing private balcony;

g)   £221.39 for modifying the private balcony balustrade at a unit rate.

The LVT’s decision

48.         The main issue before the LVT was whether it had been reasonable for the Council to incur the costs of replacing the cladding on the exterior of the blocks or whether (as Miss Oliver contended) a proper programme of regular repair would have sufficed.  A number of leaseholders who were respondents to the Council’s application attended the three day hearing although only Ms Gill appears to have participated actively, with Miss Oliver, in making submissions.

49.         The LVT’s decision includes a summary of the evidence of the three witnesses who had given evidence on behalf of the Council, Ms Sharpe, Mr Raleigh and Dr Seaton.  No evidence was recorded as having been given by Miss Oliver, whose contributions were treated by the LVT as submissions.

50.         At paragraphs 53 to 55 of its decision the LVT considered whether the works were repairs or improvements, a question raised by the Council in its application.  It accepted that the works were intended to preserve the basic structure of the buildings, in particular those parts affected by HAC, and to extend their life by a significant period.  It found that the overall effect of the works was to preserve the blocks and not to change them into a substantially different structure, and it regarded the work as work of repair.

51.         At paragraphs 56 to 61 the LVT considered the issue of reasonableness.  The key passages dealing with the substantive issue of whether the works as a whole had been reasonable comprised the following:

“57. [The Council] accepts that it did not have an unfettered discretion as to which works to carry out.  Its position is that it reached a rational decision as to the appropriate nature and extent of the works having regard to the desire to preserve the blocks on this estate and to render them usable as dwellings for a further thirty year period.  The case of Ms Oliver is essentially that patch repairing would have sufficed, and she relied on the report of a surveyor who had examined her flat, Mr Swift, in support of this contention.  Mr Swift had suggested that patch repair would be an acceptable way of dealing with the exterior of the dwelling.  He had not considered, and had not been asked to consider, the wider structural issues.

58. The Tribunal found that [the Council’s] approach to preserving and extending the useful existence of these blocks was entirely reasonable and that expenditure in furtherance of this, provided that the works fell within the scope of repair, was reasonably and properly incurred.”

52.         The LVT dealt at paragraphs 59 to 61 with three individual items which had been questioned by Miss Oliver and others.  The resurfacing of her private balcony following the removal of vinyl tiles was accepted by the LVT as having been necessary to check the integrity of the asphalt and replace it where needed; it was found to have been reasonable not to remove gas meter boxes mounted on the walls of the balconies to enable cladding to be applied behind them; and problems experienced by a number of tenants over the inadequate drainage of gutters which had been resurfaced was not considered to be relevant to the issue of reasonableness.  Finally, in light of its conclusions the LVT decided that there were no grounds for acceding to Miss Oliver’s request for an order under s. 20C, Landlord and Tenant Act 1985, limiting the costs which could be recovered through the service charge in respect of the proceedings.

The appeal

53.         Permission to appeal the LVT’s decision was granted by the Tribunal, limited to the issues of whether the costs of the proposed works were reasonably incurred, and whether the cost of those works was properly apportioned.  The main reason for permission having been granted was to enable the Tribunal to consider whether the reasons given by the LVT for its decision were adequate, in view of Miss Oliver’s contention that a number of points which she had made, and the substance of the evidence of Mr Swift, had not been referred to by the LVT.  Having read the decision she said that she could not understand why that material had not been relevant.

54.         Having considered the written material relied on by Miss Oliver, and the evidence which had been presented to the LVT, we sympathised with her complaint that her side of the argument had not been adequately weighed and reflected in the decision.  The Tribunal formed the impression during the hearing that Miss Oliver is a reasonable person with a thorough grasp of the relevant facts and an intelligent appreciation of the issues, yet she was left in state of uncertainty over the LVT’s reasons for its decision.  Although it is not necessary for a first-tier tribunal to review all of the evidence and submissions in detail in its decision, it should deal with the substance of the case presented by each party in sufficient detail for the unsuccessful party in particular to be able to understand why her case has been rejected. 

55.         As we explained in a short oral decision given after hearing submissions at the start of the appeal, we considered that Miss Oliver was entitled to feel concerned that her evidence and submissions had not been recorded with the care devoted to the Council’s nor apparently considered in any detail by the LVT, nor had the report of Mr Swift been addressed substantively.  Although the evidence of Mr Swift was limited to a consideration of the condition of Miss Oliver’s flat and the need for it to be re-clad, the Council’s demand for payment had been presented to her as being in respect of the cost of works to her own flat, and she quite reasonably considered that specific evidence about its condition was therefore relevant.  We do not think it was sufficient for the LVT to leave it to be inferred that Miss Oliver’s observations were rejected because and to the extent that they were inconsistent with the evidence of the Council’s witnesses.  We therefore indicated that we would re-hear the evidence and reach a conclusion of our own on the two applications.

The issues

56.         The appeal raises the following issues

(1)   Whether the cost of the major works was reasonably incurred.

(2)   Whether the standard of the work was reasonable.   

(3)   Whether the cost of the work had been correctly apportioned.

(4)   Whether the costs recoverable through the service charge should be reduced to take account of the CESP funding received by the Council, or whether the Council was entitled to retain that funding exclusively to reduce its own contribution.

(5)   Whether the Tribunal ought to make an order under s. 20C, Landlord and Tenant Act 1985.

Issue 1: Whether the cost of the major works was reasonably incurred

57.         As is well known, the effect of s. 19(1), Landlord and Tenant Act 1985 is that the costs incurred by a landlord in providing services or carrying out works for which a service charge is payable may be taken into account in determining the amount of the service charge only to the extent that they were reasonably incurred, and only if the services or works were of a reasonable standard. 

58.         Miss Oliver submitted that the costs incurred by the Council ought not to be passed on to the leaseholders in full for reasons which were summarised in her skeleton argument.  The Estates had been neglected by the Council over many years; it was undoubtedly the case that works of repair were required but the work which had been undertaken, and in particular the re-cladding, was disproportionate, unnecessary, and amounted to improvements; there had been a lesser repairing option available which would have been less costly, less disruptive, and would have caused less financial hardship to the leaseholders, who were all of limited means; in any event in certain specific regards the work had not been carried out to a reasonable standard.

The decision to carry out the work

59.         The Council’s case was that by 2011, when the work began, it was faced with a choice either of committing to a programme of regular repairs to buildings to keep the structure water tight, or of adopting an alternative solution of re-cladding the building in a modern material which would reduce future maintenance costs and provide much improved thermal insulation.  It had projected that a programme of purely responsive repairs over the following 20 years would cost £8.8 million.  This figure was based upon a 7% annual compound increase in costs, inflation etc, and would have done nothing to improve the loss of heat through the original cladding which contributed to high energy bills for residents.

60.         The evidence of Dr Seaton concerning the construction of the blocks persuaded the Tribunal that a choice had to be made of either managing the decline of the buildings or extending their life by undertaking significant works.  Two major problems had to be considered, namely the durability of the original cladding and the use of HAC in the construction of the floors.

61.         The main facades were clad in clay tiles and GRP, in each case hung on timber studwork fixed to the concrete frame of the buildings.  Dr Seaton considered that both the GRP and (to a lesser extent) the clay tiles had a useful life of around 25 years from construction, after which they were susceptible to deterioration.  Moreover, the timber which supported the cladding was not structural, and in many places had rotted away; when the blocks were built timber had been in short supply, and the studwork was piecemeal.  Photographs taken during the re-cladding works illustrated both these points very clearly.  The original timber framed windows had been part of the structure of the panel and their replacement with modern upvc windows had further weakened the panels, especially those containing two windows or large widows; as a result, excessive movement of the wall panels had become a cause for concern for residents, many of whom reported panels shaking in high winds.  The main walls were insubstantial and deteriorating and not only allowed heat to escape, but also allowed water to enter the buildings.

62.         Dr Seaton explained that the main warning sounded by his 2003 report had concerned the presence of HAC in the floors of the blocks.  HAC was a trial material at the time the Estates were constructed, and the vital importance of protecting concrete containing it from the elements was now better understood.  Although in his 2003 report he had referred to the buildings as being in reasonable structural condition he had not then focussed on the condition of the cladding.  His role had been to indicate whether the buildings were suitable for refurbishment rather than demolition.  The clay tiles and GRP panels were not part of the structure with which he had been concerned; further knowledge of the mode of construction of the panels had been obtained when similar estates in the city were demolished after 2003.  Dr Seaton was satisfied that, because of the risk of water ingress, the retention of the original cladding was not compatible with the presence of HAC in the concrete floors, if it was intended to prolong the life of the Estates.

63.         Dr Seaton explained that after 30 years the point had been reached at which the Council had to decide either to maintain the Estates on a declining basis, with a view to their eventual demolition, or to carry out major refurbishment.  The Estates were close to the city centre and were popular with residents, who formed a stable community; although the presence of HAC was a problem, it was not a threat to the structure of the buildings if they could be kept watertight.  The decision was therefore taken to refurbish them.  The presence of HAC in the concrete floors throughout the Estates meant that the same treatment was required to every block.  Neither the aesthetic appearance of the Estates nor consideration of public safety would have made the treatment of some of the blocks but not others a viable approach.

64.         Miss Oliver considered that an independent and contemporaneous structural survey of the buildings should have been undertaken before the decision to proceed with re-cladding had been approved.  She also questioned whether Dr Seaton’s report, which investigated only 3 of the Estates’ 40 buildings, was a sufficient basis for the refurbishment of them all. We disagree.  We were impressed by the evidence of the Council’s own officers and in-house advisers, and we do not think that it lacked for competent professional advice on the options available to it.  The commissioning of outside consultants to produce a report replicating the investigations carried out by Dr Seaton in 2003 would not, we consider, have put the Council in a better position to make an informed decision.  The buildings on the Estates were designed to a common pattern and no evidence has been adduced to cast doubt on the decision to treat the 3 buildings which were surveyed as representative.

65.         Miss Oliver also relied on the report of Mr Peter Swift FRICS, which cast doubt on the need for re-cladding and suggested that a lesser scheme of regular repairs ought to have been sufficient.  Mr Swift was first instructed by Miss Oliver in March 2011 to report on the condition of the cladding of her flat.  His reports dated 6 September 2011 and 15 August 2014 had been compiled on the basis of an inspection of the external elevations of Miss Oliver’s maisonette, and he had not been asked to inspect the Estates generally or any other specific property.  The report was subject to a number of general limitations and caveats, including that defects not reasonably apparent from a ground level inspection may not have been detected.  Mr Swift’s conclusion from his observation of the condition of the concrete beams, external brickwork, tiled ground floor wall, rendered front first floor panel and two rear tile-hung panels, was that there was no evidence of any major structural or repair issue relating to 128 Cliff Street.  There was only minor disrepair to individual clay tiles, two of which needed to be replaced.  He could see no reason why, with regular maintenance and repair, the original tiling could not last for a further 20 or 30 years.  Mr Swift commented that the use of clay tiles in vertical cladding was common, especially in houses built in the pre-war period, and that he had undertaken many surveys of such houses without finding any major defects which would require total replacement.  He concluded that, subject to the limits of his information, the proposal to replace the vertical cladding by new cladding was unnecessary and therefore unreasonable.

66.         It appears that at least by the time he wrote his second report Mr Swift had seen the report prepared by Dr Seaton in 2003.  In paragraph 8.4 of his August 2014 report Mr Swift suggested that the 2003 report reinforced his conclusions about the general condition of 128 Cliff Street.  We can see why, in general terms, the absence of any specific discussion of the cladding in the 2003 report may have been regarded by Mr Swift as supportive of his view, but the information which the report contained about the presence of HAC in the concrete floors and the emphasis on the need to prevent water reaching the floor slab ought we think to have been worthy of further consideration.  In Mr Swift’s defence there was no reason for him to have been aware of the issues concerning the construction and stability of the timber framework supporting the cladding panels, which only became apparent to Dr Seaton from his observations of the demolition of other similar buildings.

67.         The fact that an exterior inspection of the cladding on Miss Oliver’s maisonette revealed nothing of sufficient concern to justify the wholesale replacement of the cladding on the Estates does not undermine the evidence of Dr Seaton.  Miss Oliver’s property may or may not have been representative of the majority of flats on the Estates, but there is certainly evidence of greater damage to panels on some flats in the photographs we have seen.  More importantly, the tile cladding which Mr Swift was using as his standard of reference was on pre-war houses, not innovative 1970 concrete framed buildings such as these.  The issue was not whether the tiles themselves would last another 20 or 30 years, but whether the timber frames on which they were hung would do so, and whether the concrete structure to which that timber was attached would survive the deterioration and water penetration which was encountered in parts of the Estates.

68.         We are satisfied that the Council’s decision to provide a long term solution to the twin problems of the insubstantial timber framework supporting the panels, and the need to preserve the concrete floors from water ingress, by re-cladding the main facades with an entirely new cladding system supported on new steel frames was a reasonable one.  Not only would the new cladding reduce future maintenance bills, it would improve thermal insulation and reduce energy bills for residents.  The immediate cost for individual leaseholders was high, especially in the context of the limited means of many of them, but we are satisfied that the only alternative which has been suggested, of regular repair and replacement of missing or damaged tiles, would itself have been expensive and would have provided no long term future for the Estates.  Moreover, the availability of alternative payment plans for those leaseholders who had themselves exercised the right to buy was a relevant factor in considering the reasonableness of the Council’s decision to incur the cost.

Neglect

69.         Miss Oliver considered that the maintenance of her building had been neglected by the Council.  She had lived in her flat for over 30 years and during that time she could recall no substantial external maintenance, especially to the tile cladding.  This was not really in dispute.  It was also the evidence of the Council’s own witnesses that, as the LVT had found in paragraph 43 of its decision, “no major repairs had been carried out to the external structure of the blocks since the estate was constructed” 40 years earlier.  The Council relied on this fact in support of its own case that comprehensive work was now required.  Miss Oliver agreed that some routine day-to-day repairs had been done, but was not aware whether the Council had carried out the work suggested in Dr Seaton’s report of 20 September 2003 to address “durability issues” in respect of sealant joints, rainwater pipes, gutters and spouts.

70.         Dr Seaton confirmed that the work highlighted by Miss Oliver in his 2003 report had in fact been carried out.  He also explained that those works were relatively minor compared with the main thrust of his report, which was in respect of HAC within the blocks.  We accept that the items of work described in paragraph 3 of Dr Seaton’s 2003 report were modest.  It was not the case that nothing had been done and, as Ms Sharpe had explained, the Council had spent just over £1.1 million on day to day maintenance between 2001 and 2012, with a further £250,000 between 2012 and 2014.  Although these figures included routine repairs of all types we accept Dr Seaton’s evidence that the sealant joints,  rainwater pipes, gutters and spouts had been attended to as he had recommended.

71.         In Daejan Properties v Griffin [2014] UKUT 206 (LC) the Tribunal considered the circumstances in which a history of neglect of a landlord’s repairing obligations might have the effect of limiting the cost of remedial work which could be recovered through a service charge.  At paragraphs 88 we agreed with the decision of the Lands Tribunal (HH Judge Rich QC) in Continental Ventures v White [2006] 1 EGLR 85 that a history of neglect is not of direct relevance to the question posed by s. 19(1)(a) of the 1985 Act, namely, whether the costs of remedial work have been reasonably incurred and so are capable of forming part of the relevant costs to be included in a service charge.  The need to incur the cost of repairs and the reasonableness of that cost does not depend on whether the repairs ought to have been carried out earlier.  In 2012 it was reasonable to incur the cost of re-cladding the Estates. The circumstances in which a history of neglect may be relevant to a service charge claim, and may provide a defence to all or part of such a claim, will arise if it can be shown that cost would have been avoided or reduced if the landlord had complied with its obligations, and remedied defects, in a timely manner, rather than leaving work to accumulate over a prolonged period.

72.         In this case we are satisfied that even if a much higher standard of routine repairs had been achieved during the first 40 years of the Estates’ existence, by 2011 there would still have been a need for a programme of major works to address the basic problem identified by Dr Seaton in his 2003 report, namely that the use of HAC in the construction of the floor slabs meant that the buildings were extremely vulnerable to any ingress of water.  Many building elements have a limited life and will require periodic replacement.  Although the clay tiles which were used in the original cladding of the buildings had a reasonable life expectancy, the timber frame which supported them and the fixings which held them to that frame were more vulnerable to the effects of age, especially after the introduction of modern windows which had weakened the original framework.  Vandalism or accidental damage also created a need for periodic replacement of missing or damages tiles, especially at lower levels.  We have already accepted that if the buildings on the Estates were to remain standing for a further 30 years or more, the Council faced an important decision whether to commit to a programme regular repairs or to embark on the more radical solution of replacing the cladding with a largely maintenance free alternative.  We are satisfied that it would have faced the same decision at or around the same time even if it had fully complied with its obligations and been more assiduous in carrying out routine repairs in the past.

73.         Accordingly we do not think that the agreed history of a lack of significant repairs has any effect on the liability of leaseholders to contribute towards the cost of the major works.

Improvement

74.         The extent to which the work involved improvement rather than repair was an issue before the LVT, but it featured relatively little in the hearing of the appeal.  Miss Oliver considered that satisfactory repairs could have been achieved without the wholesale replacement of the cladding which amounted to improvements.  Repair would have been equally effective, less costly, intrusive and disruptive, and would not have caused such financial hardship to leaseholders.  She said that had a lesser repairing option been chosen, the level of disruption would have been minimal, and at much less cost.  In support of this she referred to Hyde Housing Association v Williams [2000] LRX/53/1999 in which the Lands Tribunal upheld a decision of an LVT that the replacement of tile cladding in that case had been unnecessary and that periodic repairs would have been sufficient.

75.         Before considering the significance of the often difficult distinction between repair and improvement it is first necessary to have regard to the terms of the lease to see whether the distinction is a relevant one in this case.  By clause 4(3) of Miss Oliver’s lease the Council covenanted to “keep in repair … and (if desirable in the opinion of the Council) to improve (a) the structure and exterior of the demised premises and of the Building … and to make good any defect affecting that structure …”. For her part Miss Oliver had agreed to contribute towards the cost of complying with that obligation.  Since the option of carrying out improvements was something which the parties had agreed would be available to the Council, the repair/improvement distinction in this case is not relevant to Miss Oliver’s contractual obligation.

76.         Although the Council has a contractual entitlement to carry out improvements to the Estates and pass a proportion of the cost on to the leaseholders, it is also necessary to consider the limitation placed on the costs recoverable by s. 19(1)(a) of the Landlord and Tenant Act 1985 which requires that costs must have been reasonably incurred.  As the Tribunal (Judge McGrath) has recently explained in Waaler v LB Hounslow [2015] UKUT 0017 (LC) (at paragraphs 41 to 43) although s. 19 makes no express distinction between the cost of improvements and the cost of repairs, a different approach may be required to the issue of reasonableness when the works in question are repairs which the landlord is contractually obliged to carry out as against works of improvement over which it has a discretion. 

77.         It is clear that where a building is in disrepair and there is a choice of methods by which a defect may be remedied it is for the landlord to make that choice and to decide how to discharge its obligations.  If one available remedy involves doing work which involves a significant improvement the decision whether to carry out that work is still that of the landlord.  Provided it acts reasonably the cost of both repairs and improvements will be recoverable through the service charge, and the leaseholder cannot complain simply because the landlord could have adopted another and cheaper method of dealing with the defect.  Nonetheless, s. 19(1) relieves the leaseholder of liability to contribute towards any costs which have not been reasonably incurred.  In deciding whether it was reasonable for a landlord to incur the cost of improvements going beyond repair it will be relevant to consider whether there were less expensive works which would have been sufficient. 

78.         Where the object of an improvement is not simply to remedy a defect, but rather is to provide some new feature or service which could readily been done without, it will be even more important to have regard to the views of those who will have to pay for the improvement when considering whether the cost was reasonably incurred.  The Lands Tribunal touched on the importance of considering the views of leaseholders before undertaking significant improvements at their expense in paragraph 27 of its decision on the previous appeal between the same parties (Sheffield City Council v Oliver (2008) LRX/146/2007).  At paragraph 27 the President expressed the hope that “the Council would not without the lessee’s approval carry out improvement works to the demised premises for which the lessee is to be charged unless the works are no more than a limited extension of works of repair”.  Where the lease specifically permits improvements I do not consider that consent would be required, but I certainly agree that with any significant improvement, consultation and consideration of the interests of the leaseholders who will be expected to contribute is likely to be a necessary ingredient in demonstrating that the cost has been reasonably incurred. 

79.         On the facts of this appeal we do not consider that the element of improvement involved in the project to re-clad the Estates makes any difference to the reasonableness of the Council’s decision to proceed with the work.  The lesser scheme of regular repairs which Miss Oliver considered to be sufficient would not have provided a solution to the instability of the timber frame, or any comprehensive protection against water ingress.  It would have required regular and significant expenditure in future without improving the energy performance and thermal insulation properties of the buildings.  It would have been consistent only with a decision to allow the buildings to deteriorate until further repair was not possible and demolition would be required.  Although leaseholders would have avoided a significant short term bill, they would not have avoided regular future expenditure, would not have benefitted from the improved energy performance of their homes, and would have suffered a decline in the capital value of their homes.

80.         Miss Oliver also said that there had been no explanation of the necessity of lightning protection, or whether it had been installed to an appropriate standard.  We are satisfied that the programme of works was competently designed and supervised and in the absence of any positive evidence that the new lightning protection was not required, or was not properly installed, we are satisfied that the cost of this item was reasonably incurred. 

81.         We are therefore satisfied that, despite the concerns expressed by Miss Oliver, the decision to incur the cost of re-cladding the Estates and associated work was a reasonable one.

Issue 2: Whether the standard of the work was reasonable

82.         Miss Oliver submitted that in any event the works had not been carried out to a reasonable standard, calling into question the reasonableness of the costs charged.  She raised a number of issues, some of which were of general application while others were specific to her own maisonette.

Common issues

83.         Miss Oliver submitted that during the cladding work, windows that had been installed by the Council’s contractors in 2007 under the Decent Homes programme had had to be removed and replaced because of poor quality products and sub-standard workmanship, and steel reinforcement fitted.  This had had the effect of slowing down progress and increasing the cost of the works.  We did not hear detailed evidence concerning this issue, but further work to the recently installed upvc windows was certainly involved, as Dr Seaton had explained. In particular the addition of a new steel framework was required to replace the former timber studwork which had been disturbed by the fitting of new windows and which was generally in poor condition.  Additionally, when the original window replacement programme had been undertaken some occupiers had refused access resulting in the work not being done; the opportunity was taken to complete the installation in those cases as part of the cladding replacement project.  We heard no evidence which supported Miss Oliver’s understanding that upvc windows themselves had had to be replaced, and we are satisfied that the work for which the leaseholders are to be charged does not include any such replacement. 

84.         Miss Oliver said that during the works, many residents experienced what she described as flooding, and water ingress caused damage to decoration and soft furnishings.  Some level of disruption is likely to be inevitable when the exterior skin of a building is removed and in itself is not evidence that work has not been done to a reasonable standard.  We heard no evidence which persuaded us that this problem was either widespread or of continuing significance.  Making good damage was part of the contractor’s responsibility and there was no suggestion that this had not been attended to as part of the project.  Ms Cresswell explained that the final payments under the contract had not yet been released, but this was because of a concern over the quality of anti-carbonation paint used on gutter spouts, rather than for any other reason. 

85.         When the works were completed residents found that the resurfacing of the gutter channel in the concrete beams outside their flats had obstructed free drainage and caused stagnant water to stand almost daily; in parts of the gutter there was a build-up of bird droppings which it was impossible for the residents to remove because the gutter itself was too narrow to be cleaned out from the balcony using a brush.  We accept Miss Oliver’s evidence that this is a problem, and on our inspection we observed one resident trying to keep the guttering outside her home clear using a long handled brush.  We accept that the resurfacing of the gutter beams was necessary to protect the concrete and to insulate the structure to avoid cold-bridging.  The gutter beams were not designed with a fall and residents were in the habit of clearing standing water using a long handled brush; the change which has come about as a result of the works has been the narrowing of the aperture making it difficult or impossible to fit such a brush into the space now available.  There were formerly drainage at each end of the gutter, whereas now there is a hole at only one end, which may also have exacerbated the previous problem.  These features do not cause us to conclude that the work was not done to a reasonable standard although it may be that periodic cleaning using high pressured water will now be required as part of the Council’s obligation to clean and maintain the building.

86.          Miss Oliver also said that there was no sign of any repairs to the brickwork of her block, of which the only exposed parts were pillars and gable end walls.  The contractors had told her that the gutter spouts had been painted, but nothing more.  However, we were able to observe on our inspection that isolated brick work repairs had been carried out at the intersection of the gutter beams and the brick facing pillars, and we were shown an inspection sheet completed by Dr Seaton identifying the areas where such work was required and confirming that it had been completed.

87.         Miss Oliver was also concerned that, in common with other leaseholders, she had not received a copy of the completion certificates for the work, but only a tenants’ handover pack.  She had no guarantee or warranty for the cladding work, which she said left her exposed in the event of any problems in the future.  Ms Cresswell explained the function of the completion certificates in triggering payment for works, and that they are subject to a 12 month defects and snagging period. The final certificate of making good defects had not yet been issued as she had concerns regarding flaking paint on down-spouts, an issue unconnected to Miss Oliver’s maisonette. We think Miss Oliver’s concern over the certificates is based on a misconception.  Although reference was made in some of the Council’s documents to the provision of completion certificates to residents, this was in connection with work carried out within some of the flats, such as the installation of new boilers, and it was not proposed that every leaseholder or tenant should receive a copy of the completion certificate for the major works as a whole (which had been carried out under a contract to which they were not a party).  Responsibility for the state of repair of the structure of the whole block, including the structure of Miss Oliver’s maisonette, rests with the Council under Miss Oliver’s lease and we do not consider that a copy of the completion certificate would make any difference to her position in the event of problems being experienced in future.  Nonetheless in the course of the hearing Ms Cresswell offered to supply Miss Oliver with a copy of the certificate together with a copy of the warranty for the cladding.

Miss Oliver’s own maisonette

88.         The most serious problem Miss Oliver had encountered in relation to her own maisonette since the completion of the works was that there had been 18 to 20 incidents of water ingress above her sitting room window, usually following heavy rain.  This problem had not previously been experienced in the thirty or more years she has lived in her home and was first observed at the end of 2011; it does not occur in the summer. As the Tribunal was able to observe on its inspection, the net curtains in Miss Oliver’s living room have been stained, as has her carpet.  Representatives of both the Council and Apollo, the contractor, had visited on many occasions but without finding a solution to the problem.

89.         Ms Cresswell gave evidence about the issue of water penetration above the window to Miss Oliver’s sitting room.  There was no doubt that there was a problem but the obvious causes had been investigated and eliminated and she was genuinely puzzled.  Ms Cresswell thought it was possible that the problem was caused by condensation rather than water penetration from outside, although she accepted that she had no proof that this was the case, and from our own observations we think it unlikely.  She also suggested that the cause may lie in the balcony immediately above Miss Oliver’s sitting room, where asphalt was dressed around a corner post which might represent a weak point, but that was no more than a further possibility.  Finally she considered that cold-bridging may be responsible.

90.         As the supervising architect Ms Cresswell said that she did not consider that the problem in Miss Oliver’s property was a defect that would fall under snagging, and did not consider that it would be reasonable to withhold the final certificate as a result of it, as the contractor had done all that it could to remedy the problem. 

91.         There is undoubtedly a problem of damage caused by water in one location in Miss Oliver’s maisonette, which occurs only in winter and which was not experienced before the re-cladding works.  The Council is responsible under its repairing covenant for finding a solution to the problem.  There is no specific evidence that a similar persistent problem has been experienced in other homes on the Estates (although Miss Oliver informed us that other leaseholders were in the same position as she is).  The issue for us is therefore whether it has been established that the work has not been done to a reasonable standard such as to justify a reduction in the contribution which leaseholders are required to make through the service charge.  We do not think the evidence justifies that conclusion, because the problem is localised and its cause is unclear.  In a contract of this magnitude any reduction which could be made for a problem of this scale, even if it could be attributed to an unreasonable standard of work, would be small and would make no practical difference to the contribution of any one individual.  We do not propose to make any such reduction.  We do not underestimate the significance of the issue for Miss Oliver who has made it clear that she is not interested in a reduction in the cost of the cladding or compensation for damage to her curtains, but only in a permanent solution to the water ingress problem. That seems to us to be a sensible focus and in keeping with the laudable moderation with which Miss Oliver has conducted her case.  She is entitled to expect in return that the Council will be equally focussed on permanently solving the problem of water ingress to her flat, and to any others where a similar problem is experienced.

92.         Miss Oliver also said that the cladding to her balcony cross-wall (which separates her private balcony from that of her neighbour) was unfinished and that the render to the walls of the access decks appeared less durable than the former ceramic tiles.  In fact the same approach has been adopted to the treatment of all of the balcony cross walls in the block, in order to avoid the need to remove a meter box from the wall.  The Council was advised that it was not necessary to clad the whole width of the balcony cross wall.  We are satisfied that the manner in which the cladding in that area has been finished is not unreasonable.  We accept that the finish of the walls to the access decks is no longer as hard wearing as it was formerly, but we do not consider this to have been an unreasonable compromise and the expense of adding tiles to the rendered walls has been avoided.

93.         The final issue of specific concern to Miss Oliver related to the vinyl self adhesive tiles which she had laid on her own balcony but which the Council’s contractors had removed without permission in the course of the work.  This she considered was a breach of her lease as she understood that the balcony floor and ceiling are demised to her.  The Council’s explanation for the removal of the tiles was that it had been necessary to do so to inspect the surface of the asphalt underneath and to determine whether the adhesive used to fix the tiles had caused damage to that surface.  We did not find that explanation convincing, since the removal of the tiles would have been likely to cause damage to the surface of the asphalt whatever effect the adhesive had previously had.  Nor do we consider that it is relevant to consider whether the contractor was trespassing by carrying out the work on Miss Oliver’s demised balcony without her consent, and we decline Miss Oliver’s invitation to make a finding that the work was undertaken in breach of covenant. Of greater practical significance, we consider that the Council’s approach to recouping the cost of this work is wrong in principle.

94.         Miss Oliver’s obligation under her lease is to contribute a reasonable proportion of the cost of work to the structure and exterior of the demised premises and of her block.  There can be no serious suggestion that by laying self adhesive tiles on her own balcony Miss Oliver was acting in breach of any covenant in her lease.  We therefore do not understand the basis on which the Council has include the sum of £511.70 for balcony asphalt repairs in the service charge it seeks to collect from Miss Oliver alone. That sum was made necessary because the tiles were removed by the contractors, and a new asphalt surface had to be laid.  If that work was required at all, it was because of the need to protect the concrete structure of the block and not because of the presence of the tiles.  We can see no reason why that sum should reasonably be the sole responsibility of Miss Oliver, and consider that it should properly form part of the total sum apportioned among all units.  We take that apportioned sum to be the £52.73 identified in the original estimate of Miss Oliver’s liability based on balcony asphalt repairs at a unit rate of £35.15 for 1.5 units.  For that reason Miss Oliver’s service charge bill should be reduced by £458.97 (the difference between the two asphalt repair figures).

Conclusion on issues 1 and 2

95.         In summary, we accept the Council’s case that, both in relation to the process followed and in relation to the outcome achieved, the costs to which Miss Oliver and other leaseholder were asked to contribute were reasonably incurred. The buildings required significant works to enable them to endure in the longer term and to avoid the threat of demolition. Although individual parts of the buildings may have been, or may have appeared to be in better condition than others, the risk to the concrete structure of the buildings, the general lack of thermal efficiency and the instability of the wooden frames to external walls, justified the Council’s conclusions that a single remedial scheme for the buildings as a whole was required and that patch repair was not an adequate solution. 

96.         Despite the specific problem of water penetration still being experienced by Miss Oliver we also accept that the work has been done to a reasonable standard.  That judgment does not absolve the Council of the need to remedy the continuing issue of water ingress, nor to adapt its cleaning regime to address the build up of bird waste due to the difficulty of residents cleaning the gutters. 

Issue 3: Whether the cost of the work has been correctly apportioned

97.              It was common ground that of the total contract price of £9,898,491.33, the major elements of which comprised the insulated render-cladding, the Decent Homes work to the interior of tenanted flats, and a digital aerial upgrade, the major cost being charged to the leaseholders as part of the service charge was the cost of the cladding.  The other items for which a charge has been raised include the cost of surveys to communal areas, communal lighting and decorating the communal balustrade, lightning protection, relining gutters, concrete/brickwork repairs, works to rainwater goods and scaffolding. The Decent Homes work is not recoverable as a service charge item, since it involves work to the interior of tenanted flats, and it has never been included by the Council; nor does the Council propose to recover the cost of the aerial upgrade.  The cost of professional fees has also been omitted from the service charge (although the Council would have been entitled to include them).

98.              Miss Oliver suggested that the manner in which the Council chose to apportion the costs of the contract was complex and confusing and gave rise to a number of issues of transparency and apparent inconsistency.  She considered that the leaseholders should not have been charged, for instance, for scaffolding costs related to the digital aerial upgrade or the Decent Homes work, and that the scaffolding costs should have been apportioned between different categories of work.  She also considered that her liability was to contribute to the cost of work to her own block, and not to other parts of the Estates.  Not all of the blocks were in the same condition, and by grouping her block with six others as a “super-block”, she felt that the Council may be charging her for repair work for which she should not be liable.

99.         Miss Oliver submitted that bidders for the contract should have been able to quote a separate price for each item of work, which would have ensured a fair and correct apportionment to leaseholders.  When Mr McAuley, a former leaseholder, had raised issues relating to the methodology used in apportioning costs to his flat the Council had recalculated and reduced the surface area which it had taken into account.  Miss Oliver considered that that there were still inconsistencies in the rates charged to leaseholders of different flats, and that it was difficult to understand why there were different rates for flats with similar numbers of bedrooms.

100.     We have considerable sympathy for Miss Oliver and other leaseholders who have not found it easy to understand the basis on which the cost of works had been apportioned.  Nor, initially at least, did we.  Nonetheless, we have eventually been satisfied by the evidence of Mr Raleigh that the apportionment is appropriate and does not result in Miss Oliver being required to pay more than her lease provides.

101.     Each leaseholder is required by clause 3(29) of the lease to contribute a reasonable part of the costs and expenses which the Council may from time to time incur in carrying out repairs and improvements to the structure and exterior of the demised premises and the Building.  In each case the Building is the individual building in which the leaseholder’s flat is located, which in Miss Oliver’s case is known as block L13.  There is therefore no obligation to contribute to the cost of re-cladding other blocks.

102.     One possible approach which the Council could have taken to the apportionment of costs would have been to identify the total sum spent in re-cladding each building, and then to have allocated that total amongst the number of units in the building, perhaps with a greater contribution being required from larger flats or maisonettes.  Rather than do that it has sought to identify a rate per square metre for the cost of cladding the building, and then to apply that rate to the external surface area of each unit.

103.     Mr Raleigh explained how the apportionment had in fact been carried out.  It had been built up using the rates originally priced by the contractor for individual elements of the work, rather than by apportioning the final account.  The flats are of differing sizes and configurations and an attempt had been made to identify as clearly as possible the cost of works to each flat: 

a)             For preparatory work the total cost for the block was divided by the total elevation area (excluding doors and windows) to produce a cost per sq metre (in the case of block L13, £9.85 per sqm). This was then multiplied by the elevation area of each flat (excluding the deck access walkway) which, in the case of 128 Cliff St, was 19.49 sqm and gave a cost for preparation of £191.98).

b)             For the structural strengthening, the total cost for both Estates was divided by the total number of bays in all of the buildings. The resulting rate per bay was multiplied by the number of bays in each block to produce a block cost, and then divided by the total elevation area of the respective block, as above, to produce a cost per sq metre. This was then multiplied by the elevation area of each flat, as above. In the case of a two storey maisonette such as 128 Cliff St, the resulting figure was £335.26, whereas the cost for a one storey flat in other blocks was £239.41.

c)             For the insulated cladding, the total cost for each super-block was divided by the number of bays. The resulting £/bay was multiplied by the total number of bays and divided by the elevation area in relation to each block as above to produce a cost per sq metre. In the case of block L13, this was £130,336.46; divided by 859.86 sqm to give £177.61 per sqm including preliminaries. This was then multiplied by the elevation area of each flat (including areas such as the elevations on the deck access walkway to which these works also related). In the case of 128 Cliff St, that was 33.58 sqm, giving a cost of £5,964.14. 

104.     The cost of work to the common parts of each block was apportioned equally according to the number of flats in each block.  In the case of 128 Cliff St, the apportionment was 1/27 and resulted in a contribution of £1,582.69. Similarly, the cost of works to each superblock was divided equally according to the number of flats in each.  In the case of 128 Cliff St, that was 1/202 producing a contribution of £371.56.

105.     Mr Raleigh also explained why different rates had been charged to leaseholders in different blocks.  The rates were based on the bill of quantities priced by the contractor.  The rates for the preparation of the existing fabric varied because the proportion of clay tile cladding to GRP panels varied between different blocks and the cost of removal was different for each type.  The rate for structural strengthening was based on the quantity of steel required, which depended on whether the units in the block were single storey flats or two storey maisonettes.  The rate for insulated cladding varied depending upon the ratio of render to the more expensive Werzalit panelling in the block, which was not constant; the Werzalit panelling had been applied to the top two storeys of the five storey blocks, but only to the top storey of four storey blocks.

106.     We accept Mr Raleigh’s explanation and are satisfied that in the case of each method of apportionment the result has been to identify a reasonable rate at which each leaseholder is to contribute towards the cost of works to their own flat or maisonette.  The approach could have been simpler and less precise, but we doubt that any other reasonable method would have made an appreciable difference to the sum payable by individuals.

107.     In respect of scaffolding costs, Mr Raleigh explained that for block L13, less than 2% of the cost of work that required scaffolding was in respect of either digital TV installation or Decent Homes work – which for block L13 was in respect of window installation in four flats only.  An apportionment would be unjustified as the requirement for scaffolding was not prolonged by these minor components.  We accept that evidence and agree that an apportionment of scaffolding costs would not be justified.

108.     Apart from issues of apportionment Miss Oliver questioned the figure of £1,904,241.96 for contract preliminaries which she considered had not been explained. The cost of the insulated cladding panels themselves also appeared to her to be excessive. She referred to the fact that insulated render cladding was said on the website of the Oxford Solar Initiative to be available at a rate of £45-£65/sqm, yet a rate of £177.61/sqm had been used for the 33.58 sqm for which she was being expected to pay for the re-cladding of her own maisonette.  Oxford Solar Initiative’s indicative costing for a typical semi-detached house having walls of 80 sqm was between £3,500-£5,500 in comparison to the figure for Miss Oliver’s flat of £5,964.14 for less than half that surface area.

109.     We are satisfied that no unusual items were included in the contract preliminaries (which are a standard feature of all major building contracts).  We also accept Mr Raleigh’s point that Miss Oliver’s alternative cladding cost was not based on a like for like comparison.  The rate of £177.61 included contributions to timberwork, aluminium flashings, weatherboards, and preliminaries each of which had been the subject of competitive tendering.

110.     The sole exception which we take to the apportionment of costs concerns the cost of resurfacing Miss Oliver’s private balcony, which we have already explained above.  We consider that Miss Oliver’s service charge bill should be reduced in that respect by £458.97.

Issue 4 - The treatment of CESP funding received by the Council

111.     Miss Oliver submitted that the CESP funding which the Council received should have been credited to leaseholders so that final invoices to each leaseholder should reflect a deduction of the applicable amount of CESP to each qualifying leasehold property. The Council was wrong to divert the funding to other, unnamed, city-wide projects.  She considered that the principle applied in Continental Property Ventures was equally applicable here.  In that case the cost of damp-proofing and redecoration works which could have been met by calling on a guarantee given for previous damp-proofing was held not to have been reasonably incurred. 

112.     Miss Oliver was also critical of the Council’s failure to obtain more CESP funding by completing more of the re-cladding works before the scheme closed in December 2012.  She considered that this failure was due to the Council including other works in the tender process.

113.     Ms Sharpe explained how the CESP funding had operated. Money was available for specific items of work on individual buildings and once they had been completed the qualifying works to each building were inspected and approved by an independent Chartered Surveyor.  She confirmed that Miss Oliver’s building was one of those which qualified for CESP and that there was a separate document (which she referred to as an invoice) for each such building.  The leaseholders’ contributions had not been reduced as a result of the funding received.  This was because not all of the blocks on the Estates qualified for funding and the Council considered that it would be unfair to allow some leaseholders an allowance against their contribution, but not others.  It was, Ms Sharpe said, “a political decision” not to attribute the CESP funding only to those blocks which were eligible for it. 

114.     In her written evidence Ms Sharpe said that the Council had reinvested the £1.5 million that it received as CESP funding for the Estates in its city-wide housing stock.  This was consistent with the witness statement of Mr Kemp who said that:

“The £1.574 m of CESP monies that are attributable to the qualifying [Lansdowne and Hanover Estates] properties have been ploughed back in to the wider investment programme to be used on other priority schemes within the city.”

These and similar statements by the Council caused confusion and resentment amongst leaseholders who found it difficult to accept that funds specifically attributable to their Estates were being employed elsewhere.  In her oral evidence, and after further consideration, Ms Sharpe said that the money had in fact been paid by NPower directly into the Council’s account for the Lansdowne and Hanover Estates project and had been used on that project.  This had freed up funds from the Council’s housing revenue account which had originally been allocated to these Estates and meant that the Council was able to spend an equivalent amount elsewhere.  The agreement between the Council and NPower was specific, and had been complied with: the CESP funding could only be spent on the qualifying works on the Estates.  We accept that explanation.

115.     The qualifying work had included not only the cladding, but also the Decent Homes work such as the installation of new windows where they had not previously been done, the replacement of boilers and the provision of thermostatic valves on radiators.  It was very difficult to attribute a particular CESP contribution to individual items of work, because different rates applied where multiple improvements were undertaken.  The Council was nonetheless able to calculate that the total amount of CESP funding applicable to block L13 was £43,570.44.

116.     Ms Sharpe also referred to the fact that the Council had not sought to recover all of the costs which it would otherwise have been entitled to recoup through the service charge.  She mentioned the cost of the replacement of boilers (which may have been difficult to justify as a service charge item), but she might also have mentioned professional fees (as Mr Baker did in his closing submissions).

117.     The Council’s approach to the CESP funding was not always consistent.  Part of the work for which funding was received was in connection with cavity wall insulation on the Hanover Estate.  The cost of this work was not passed on to the leaseholders, because, as Ms Sharpe put it “there was no reason to pass on that cost when we haven’t paid for it ourselves”.  It was difficult to see why, in principle, the same could not be said of the contribution made by the CESP funding to other aspects of the refurbishment project. 

118.     We do not consider that the debate over how the Council has accounted for the CESP funding is significant.  The important question for leaseholders is whether, having received CESP funds for specific items of work to improve the Estates, the costs which the Council is entitled to recoup through the service charge in respect of those works should be reduced by the amount of the CESP contribution.

119.     In his closing submission Mr Baker referred to the definition of the service charge in Part III of the Schedule to the lease as a:

“fair proportion …. of all costs expenses and outgoings incurred or estimated to be incurred by the Council in respect of or for the benefit of the Building …”

The Council had incurred the costs, expenses and outgoings of the re-cladding and other works, because it was the Council which was liable to meet the cost of the building contract.  The fact that the CESP funding had been available to defray part of that cost did not mean that it had not been incurred.  He submitted that the broader question was whether that cost had been fairly apportioned, having regard to the fact that the work in some of the buildings had attracted third party funding.  If the CESP funding had been apportioned to individual flats, leaseholders in some blocks would benefit while those in other blocks, whose circumstances were not obviously different, would lose out.  It was fairer, and permissible under the terms of the lease, for the Council to choose to bear the costs of certain items, such as the £1.08 million of professional fees, and not to pass on the benefit of the CESP funding.

120.     In principle we do not think it is open to the Council to calculate the service charge without reference to the receipt by it from a commercial third party of funds specifically intended to meet the cost of part of the works.  We do not consider that the Council has “incurred” those costs within the meaning of the lease in circumstances where in the course of the contract, it reached agreement with a third party which bound that party to reimburse part of the cost.  The fact that the CESP funding was not limited to properties let to the Council’s own secure tenants, but was equally applicable to work done to those belonging to its long leaseholders, prohibits the Council from treating the funding as if it was part of its general revenue.  If the Council had not carried out the specific items of work which it now seeks to charge to the leaseholders it would not have received the CESP funds.  In those circumstances for it to retain the CESP funding while recovering the leaseholders’ contributions towards the cost of the work in full would amount to double recovery.

121.     We are very conscious, however, that the Council does not seek to recover a contribution from the leaseholders to the full cost of the refurbishment project, and that its treatment of the CESP funding is informed by that decision.  It has adopted a much broader approach to the fair allocation of the CESP funding with a view to all leaseholders on the Estates sharing equally whether or not the work carried out to their block was strictly eligible.  It has not taken the receipt of the funding into account for any block, but it has not pocketed the funding for its own benefit.  It has treated the funding as a contribution to the project as a whole and has balanced that receipt by excluding from the service charge certain costs which could have been included.  The cost of the digital aerial upgrade, and more significantly, the cost of professional fees, were expenses for which the Council would have been entitled to seek a contribution through the service charge but which it chose not to. We have no doubt that that decision was taken in good faith and with a view to limiting the cost for all leaseholders. 

122.     There are two difficulties with the Council’s approach.

123.     First, we do not think it is permissible under the terms of the leases for the Council to share the benefit of the CESP funding in the way it would like to.  The contractual provisions require the leaseholders to contribute to the cost of works of repair or improvement carried out to their own blocks, and not to the Estate as a whole (although in the case of work connected with access the relevant unit is the super-block).  If the Council’s costs of work to one block have been reduced by the availability of CESP funding for that work, it is not open to the Council to share the benefit of that reduction more widely without the agreement of the leaseholders of the block on which the qualifying work has been carried out (agreement which is clearly not available).

124.     Secondly, even if the Tribunal agreed that it was permissible to spread the benefit of the CESP funding widely in return for the removal from the service charge of expenditure such as professional fees which might otherwise have been eligible to be included, we have been provided with very little information to enable us to determine whether that set off results in a balance in favour of the leaseholders or the Council.  Because the Council has never sought to include the cost of fees and other items in the service charge no evidence has been adduced of the quantum of those costs, although Mr Raleigh said that if fees had been included the cost to Miss Oliver would have been increased by £1,105.42, and if the replacement boiler (supplied to obviate the need to extend the flue on Miss Oliver’s existing boiler) was taken into account a further £1,1048.07 would be added.  We were also told that fees were capped at a figure of £1.08 million (which does not seem unreasonable for a contract of almost £10 million), but we do not know the extent to which fees were attributable to the Decent Homes work (very little of which would be recoverable through the service charge in any event).  Despite this evidence we are not in a position confidently to determine whether the sums which the Council has chosen not to recover for work to block L13 exceed the £43,570.44 which we are told was the CESP funding attributable to the works carried out to it.  Nor are we able to say whether the professional fees were reasonably incurred or whether the works done or professional services supplied were of a reasonable standard.  None of those matters have been investigated in evidence because the Council has not sought to include the costs in the service charge. 

125.     We think the Council is likely to be correct in its contention that, looking at the project as a whole, the total sums not taken into account in calculating the service charge exceed the CESP funding which it received, but for the purpose of ascertaining the service charge payable by the leaseholders that is not the appropriate comparison.  Before the Council could justify setting off the whole of the CESP funding against other costs not included in the service charge, it would be necessary for it to show how much of those costs were eligible to be included in the service charge and that individual leaseholders were net beneficiaries of the set off. 

126.     We therefore consider that on the evidence before us it has not been established that the treatment of the CESP funding has been in accordance with the requirements of the lease.  Miss Oliver is entitled to be credited with the sum received by the Council from NPower on account of the works carried out to her flat, to the extent that the Council has included those works in the service charge it seeks to recover from her.  The only eligible work included in Miss Oliver’s service charge is the cost of re-cladding; the cost of a new boiler and thermostatic radiator valves (for which funding was also received) has not been included.  Since the hearing the Council has provided spreadsheets showing the CESP figures for different properties.  From this information it appears to us that for a three bed maisonette, the sum payable by NPower was £1,885.44.  We consider Miss Oliver is entitled to be credited with the appropriate share of the CESP funding received by the Council in respect of the work to her building which is sought to be recovered through the service charge. Having been provided with a draft of this decision the Council has asked for the opportunity to serve further evidence in relation to this calculation and, subject to Miss Oliver having the right to comment on it, we are happy to allow it to do so. 

127.     We are conscious that in making this allowance we are undermining the rough and ready set off on the basis of which the Council has chosen not to seek to recover the full cost of the works through the service charge.  If, in the knowledge that it must give credit for the CESP funding, the Council now wishes to reconsider its decision not to seek recovery of professional fees or other potentially eligible costs it would be necessary for it to raise a revised service charge demand including the items previously omitted.  We express no view on whether that course is open to the Council under the lease (although we note that time is not of the essence of the service charge procedures in Part III of the lease) or, as importantly, under s. 20B of the 1985 Act if notice of such a charge has not previously been given. 

Issue 4: Whether the Tribunal ought to make an order under s. 20C, Landlord and Tenant Act 1985.

128.     Miss Oliver included in her own application to the LVT a request for an order under s. 20C, of the 1985 Act to the effect that no part of the costs incurred by the Council in connection with the proceedings should be recoverable from her through the service charge.  The LVT declined to make such an order.  No submissions were made to us on whether we should make an order in respect of the costs of the appeal, so we will give the parties the opportunity to make further short submissions on that issue in the light of our other conclusions. 

Conclusion

129.     We have identified two credits to which Miss Oliver is, in our judgment, entitled to have taken into account in calculating her service charge. The first is the sum of £458.97 in respect of asphalt repairs to her balcony referred to in paragraph 93 above.  The second (subject to verification of our calculation) is the CESP funding of £1,885.44 referred to in paragraph 126.  Deducting these sums from the sum of £9,378.72 included in the demand issued on 5 October 2012 leaves a reduced total of £7,034.31 which we consider to be the service charge payable by Miss Oliver to the Council in respect of the works included in that demand.

130.     We will permit the Council to provide, within 14 days, a further witness statement dealing with the apportionment of CESP funding, to which Miss Oliver may reply within a further 14 days.  We have received submissions on behalf of the Council in response to Miss Oliver’s application under s. 20C, Landlord and Tenant Act 1985, for an order that no part of the costs of the proceedings before this Tribunal may be taken into account in calculating any service charge payable by her.  If Miss Oliver would like to respond to those submissions we invite her to do so at the same time as she comments on any further evidence on the CESP issue.

 

Martin Rodger QC

Deputy President

 

 

P D McCrea FRICS

12 May 2015