UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2015] UKUT 30 (LC)

LT Case Number: LRX/78/2014

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

 

LANDLORD AND TENANT – service charges – whether lessor entitled to apportion the cost of a city-wide maintenance contract for communal lighting to the lessees’ estate by rateable value – First Tier Tribunal correctly construed the lease as requiring the lessor to identify actual expenditure on the estate – appeal dismissed – sections 19 and 27A Landlord and Tenant Act 1985

 

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE

FIRST TIER TRIBUNAL PROPERTY CHAMBER

(RESIDENTIAL PROPERTY)

 

 

 

BETWEEN NORWICH CITY COUNCIL Appellant

and

SIMON & SUSANNE REDFORD Respondents

 

Re: 33 Bull Close,

Norwich,

Norfolk NR3 1SX

 

Determination by written representations

 

 

The following cases are referred to in this decision:

 

Windermere Marina Village Ltd v Wild, Barton & Others [2014] UKUT 1603 (LC)

Schilling v Canary Riverside Development PTE Ltd LRX/26/2005

Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98, HL

© CROWN COPYRIGHT 2015

 

DECISION

Introduction

1.             This is an appeal from the First-tier Tribunal Property Chamber (Residential Property)

(“F-tT”) dated 15 May 2014 in which it held that the method of charging for lighting costs of common parts was not in accordance with the relevant lease.

2.             The appellant is Norwich City Council (“the Council”), the freehold owner of 33 Bull Close, Norwich, NR3 1SX (“the Property”).  The respondents are Simon and Susanne Redford (“the Lessees”), lessees of the Property pursuant to a lease dated 12 December 1988 for a term of 125 years from that date (“the Lease”).

3.             The Property is located in a building defined in the lease as a block containing flats 27-33 Bull Close (“the Building”).  It forms part of an Estate defined in the lease as comprising 33 flats arranged in five blocks of which the Building forms one (“the Estate”).  The Council claimed service charges from the Lessees for, amongst other things, communal lighting.  The Council have a city-wide contract for the maintenance of communal lighting in all of its blocks of flats not just the Estate.  The sums claimed for communal lighting were calculated by apportioning a cost to the Estate based on the rateable value of the Estate and the rest of the blocks the subject of the contract.

4.             The Lessees are concerned that the apportionment of costs by rateable value does not reflect the costs actually incurred by the Council on communal lighting to the Estate and it is not possible to tell precisely what the Council’s expenditure on communal lighting to the Estate was because the Council failed to provide accounts, receipts or other documents.  Therefore the Lessees applied to the F-tT for a ruling:

“(A) As to whether or not this method of charging without providing details of the actual expenditures on a particular Estate is fair, reasonable and complied with the leases and

(B) What, if any, reasonable cost is payable given there is no actual firm data available to give the true cost of this maintenance.”

In its decision dated 15 May 2014 the F-tT held that the lighting maintenance charges do not comply with the Lease and are not payable and that it is not possible on the information provided by the Council to calculate the true cost payable by the Lessees.

5.             Permission to Appeal was granted by the Tribunal (Martin Rodger QC, Deputy President) on 2 September 2014.  He ordered the appeal to be dealt with by way of review. 

Factual Background

6.             Clause 4(3) of the Lease contains a covenant by the Lessees “to pay such sums of Service Charge as are payable in accordance with the provisions of Schedule C.”  Schedule C defines Service Charge as follows:

“such percentage as shall from time to time be a fair share as determined by the Council’s Housing Manager or such other officer of the Council as shall be appropriate of the Council’s Expenditure attributable to the Property proportionate to the number and/or nature and/or size of the properties from time to time comprised in the Building and/or claiming to exercise or entitled to use the rights specified in Schedule A and/or claiming the benefit of or entitled to use the services specified in Schedule D…..”

7.             The Lessees are entitled to use the services specified in Schedule D paragraph 1 which provides:

“The provision maintenance repair and renewal of the lighting to the communal areas on the Estate and the electricity consumed in respect thereof.”

The ‘Council’s Expenditure’ is defined in Schedule C as follows:

“the reasonable expenditure of the Council (including interest paid on any money borrowed for that purpose): -

(a) in complying with its obligations set out in clause 6(1) (2) and (9)…”

Clause 6(9) contains a covenant by the Council “to ensure as far as practicable that the services to be provided by the Council as specified in Schedule D are maintained at a reasonable level and to keep in repair any installation connected with the provision of such services.”

8.             Although no copies of the lighting contracts applicable to the service charges years in dispute were available to the F-tT, it considered in some detail the evidence available to it as to the method by which the Council was charged for lighting maintenance by the contractor.  It described the fundamental points as to the charging structure of the contracts as follows:

“a. Although unit prices per task or per item may be fixed the annual cost cannot be, as the number of call-outs cannot be known in advance

b. The document at tab 9 refers to the detailed information on specific items of work done which the contractor must provide, enabling an accurate audit of the costs incurred.  This includes precise details of the work and the address where it was undertaken”, paragraph 29

9.             The F-tT continued:

“30. The tribunal must start by seeking to apply the recharging mechanism set out in the lease, which records what (albeit on the council’s standard terms) the parties have agreed.  The lease refers to charging proportionately for certain costs by block or by estate.  There is no reference to paying a proportion of Norwich’s city-wide costs for its entire residential property portfolio.

31. If the contract costs were genuinely fixed, with the contractor running the risk of under-charging for work actually required and Norwich that of over-paying, then apportioning such fixed costs between estates might be an entirely legitimate approach and one which could form the basis of an overall variation in the service charge provisions of all Norwich’s leases.  However, this is not the position.  The contractor is apparently able to charge (at fixed unit costs) for each item of work undertaken, and for call-out charges, and this is all recorded by location, task and cost and supplied to Norwich.  How regularly this is provided and in what format is not stated, but the tribunal presumes that it is held on computer in a database which can be interrogated by date, location, etc.

32. This information could be used to produce annual costs per estate.  If held on a database as described above then the effort involved in obtaining this should not take long in terms of staff time and effort.

33. As Norwich has neither calculated the lighting maintenance element of the service charges levied against the applicants in accordance with the lease nor provided the tribunal with the evidence by which a fresh calculation can be made the tribunal can do no more than say that:

a. The lighting maintenance charges included within the service charges for the years 2005-06 to 2011-12 inclusive do not comply with the lease and are not payable and the total charges shall be reduced by the sums shown in the final column of the table at paragraph 17 above.

b.  It is not possible on the information provided for the tribunal to calculate the true cost payable by the applicants.”

The Appeal

10.         The F-tT has jurisdiction to determine liability to pay service charges by virtue of s.27A of the Landlord and Tenant Act 1985 (“the 1985 Act”), including whether the sum is payable in accordance with the terms of the lease and, if it is, the amount which is payable.  By virtue of s.19 of the 1985 Act, service charges are to be paid only to the extent that they are reasonably incurred and where they are incurred on provision of services and works, only if they are of a reasonable standard, s.19.

11.         The Council submits that it was not expressly prohibited by the terms of the Lease from requiring the Lessees to contribute to costs incurred through the maintenance contracts by apportionment based on rateable values.  As a matter of construction the Council was entitled to cover “the reasonable expenditure … in complying with its obligations … (for) … the provision maintenance repair and renewal of the lighting to the communal areas on the Estate.”  The expenditure incurred through the maintenance contracts was incurred pursuant to the Council’s obligation to provide the services including communal lighting.  The Lease did not limit recoverability to the service actually consumed by the Estate and the sums were no less “incurred” for the purposes of the Lease.

12.         Further, if the F-tT had not misconstrued the Lease, it should have assessed what a reasonable sum or fair share for communal lighting would be, Windermere Marina Village Ltd v Wild, Barton & Others [2014] UKUT 1603 (LC). The burden was on the Lessees to demonstrate what ‘fair share’ ought to have been substituted for the sums claimed, Schilling v Canary Riverside development PTE Ltd LRX/26/2005. They had called no evidence so the T-tT should have adopted the Council’s figures.

13.         The Lessees submit that there is no evidence that the F-tT made any error of law.  They support the F-tT’s interpretation of the Lease as entitling the Council to claim only true costs referable to the Estate.  The only data consists of the overall contract cost, which is city wide, and all the rateable values.  Any work carried out on the Estate is not related to its rateable value but to the tasks carried out including the number of call-outs and type of equipment contained within the Estate, in this case 38 bulbs.  The sums claimed by the Council in the last two service charge years is the subject of the F-tT proceedings amount to £35 and £55 per bulb respectively which are unreasonable.  The Council have failed to produce any accounts, receipts or other documents as required by the Lease and accordingly it is not possible to determine what proportion of the contract costs related to the Estate.

14.         In the absence of any information as to the works done it is not possible for the Lessees to provide any alternative estimate of what a reasonable cost would be nor was there any evidence on which the F-tT could have determined what would be a reasonable cost.

Decision

15.         In my judgment the F-tT decision was correct for the reasons it gave.  The Council is entitled to charge the Lessees a “fair share” of the Council’s Expenditure attributable to the Property in accordance with the definition of Service Charge in Schedule C of the Lease.  However, there is no dispute as between the Council and Lessees that the sum apportioned to the Property was a “fair share” of the sum which the Council had determined was the Estate cost of communal lighting being based on apportionment by rateable values within the Estate.

16.         The critical issue is whether that Estate cost falls within the definition of the ‘Council’s Expenditure’ for the purposes of the Lease.  To fall within this definition the cost must be ‘the reasonable expenditure of the Council in complying with its obligation to provide, maintain etc lighting to the communal areas on the Estate.’  The Estate cost as determined by the Council may be its expenditure in maintaining communal lighting on the Estate or it may not.  The Council has produced no evidence as to the actual costs referable to the Estate so as to enable that issue to be resolved.  In fact, given the nature of the city-wide contract and the limited information available as to its charging structure, if the Lessees assertion that the Estate has a simple lighting system compared to others and little vandalism is correct, the likelihood is that the Council’s method of determining the Estate cost (apportionment by rateable value) does not result in a figure which reflects ‘the reasonable expenditure of the Council in complying with its obligation to provide communal lighting on the Estate.’

17.         It is clear from the document headed “Landlord’s Lighting” that the Council is charged on the basis of both routine maintenance (which may or may not result in a fixed contract cost, that is not clear) and additional call-out charges.  Accordingly the costs are not fixed and will vary every year depending upon the number of call-outs.  Although the contractors are required to keep a record of these which would enable the Council to identify to which block of flats any call-out related, no such evidence is available in these proceedings.  Indeed, the Council do not appear to dispute that the Estate cost it is relying on may well not reflect the actual costs referable to the Estate.  The Council’s case is that the Lease contains no such requirement.

18.         In my judgment the definition of the ‘Council’s Expenditure’ does require that expenditure to relate to the cost of communal lighting to the Estate alone.  In my judgment that is the natural and ordinary meaning of the words “expenditure in complying with its obligation” to provide communal lighting “on the Estate”. The fact that the city-wide contract costs are undoubtedly expenditure incurred by the Council to provide communal lighting does not mean that a portion of it calculated on the basis of rateable value was incurred in complying with the Council’s obligation to provide communal lighting on the Estate. Although the F-tT said in paragraph 31 that fixed sum city-wide contracts might be a legitimate approach, this was on the basis of an overall variation in the service charge provisions of all the Council’s leases. That has not occurred and the issue in this appeal is whether the F-tT correctly construed the Lease as it currently stands.

19.         The respective obligations of the parties to the Lease are carefully described by reference to the Property, the Building and the Estate all of which are defined.  That includes the Council’s obligations in clause 6(1), (2) and (9) and the provisions for calculation of the Service Charge in Schedule C. There is no reference whatsoever to any wider category of property or estate nor any provision for apportionment of costs which might be incurred in relation to a wider area to identify costs deemed to relate to the Estate in marked contrast to the careful provision for apportionment of a share of the Council’s Expenditure attributable to the Property in the definition of Service Charge.

20.          Even accepting that a lessee about to enter into the Lease would have been aware that the Council owned many blocks of flats throughout the city, I consider that he would have expressed considerable surprise if told that, on the proper construction of the definition of the Council’s Expenditure, the Council could include in it money spent providing communal lighting to other flats in the city outside the Estate or vice versa which is the effect of the Council’s construction. I do not consider that is the meaning which the wording of the Lease would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties at the date the Lease was entered into, see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98, HL at p.114.

21.         The Council’s alternative argument, that the F-tT should have determined what would be a fair share for communal lighting, is dependant on the Council succeeding on the issue of the proper construction of the lease.  If the Estate costs determined by the Council fall within the definition of the ‘Council’s Expenditure’ then it is said that the F-tT should have determined whether that was a reasonable sum and if not, what a reasonable sum would be.

22.         In the light of my decision that the F-tT’s construction of the Lease was correct, this does not arise and it is not necessary for me to express any opinion on it.  However, it is important to note that the “fair share” quoted in paragraph 9 of the Grounds of Appeal relates to Schedule C of the Lease which defines the Service Charge as a “fair share” of the Council’s Expenditure attributable to the Property, not a fair share of the city-wide contract sum as should be attributable to the Estate.  This rather underlines the error in the Council’s approach.  There was no provision in the Lease as to how expenditure city-wide should be apportioned to the Estate because the Lease does not envisage that any such apportionment is necessary or appropriate.

23.         For all these reasons this appeal is dismissed.

21. This decision is final in all matters other than costs. The parties may now make submissions on costs and a letter giving directions for the exchange of submissions accompanies this decision. The parties attention is drawn to the restrictions as to the award of costs in rule 10 of The Tribunal Procedure (Upper Tribunal)(Lands Chamber) Rules 2010 as amended by The Tribunal Procedure (Amendment No. 3) Rules 2013.

Dated: 26 January 2015

 

 

Her Honour Judge Alice Robinson