Service Charges & Estate Management - May 2012 update

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SERVICE CHARGES AND ESTATE MANAGEMENT

MAY 2012 UPDATE

Solitaire Property Management Company Limited, Holding & Management (Solitaire) Limited v Holden & Others [2012] UKUT 86 (LC)

Summary: (1) The LVT has no jurisdiction to embark upon a breach of trust inquiry in circumstances where such inquiry was not necessary to decide a question arising under section 27A; (2) where interim payments have been made, section 20B only has effect if (and to the extent) that a subsequent demand exceeds the interim payments.

Facts: The lessees applied to the LVT to determine the service charges payable in a new building and a listed building.

The landlord/managing agents (“the appellants”) accepted that they had made demands for payments on account of service charge years but had not made any final demand for any balancing charge or that, if they had made any such demands, they had not complied with s.20B of the 1985 Act.

In their written representations submitted after the close of the hearing, the lessees informed the LVT that they were merely saying that they would be prepared to pay reasonable service charges for services actually provided to a reasonable standard – they were not seeking to avoid all liability. Also, during the hearing before the LVT the lessees did not seek to raise a point to the effect that the money in the reserve fund had been wrongly spent by the appellants such that the appellants should be ordered to re-pay such monies to the new manager (who had been appointed by the LVT in previous proceedings and who was not a party to these proceedings).

However, during the course of the hearing the LVT itself decided it should be concerned with the question of whether in fact (a) anything at all was payable by way of service charges for any of the years, and (b) the reserve fund had been misapplied by the appellants and should be made good by them by payment to the new manager.

The LVT’s decision included the following:

“A. No service charges are payable by the Applicants who are lessees of flats in the New Building to the Respondents in respect of Service Charge Years 2006/6; 2006/7; 2007/8 and 2008/9.

B. No service charges are payable by Applicants who are lessees of flats in the Listed Building to the Respondents in respect of Service Charge Years 2007/8 and 2008/9.

C. The Respondents are liable to pay forthwith to [the new manager] £67,264.73 service charges missing from the reserve funds.

D. The Respondents are liable to pay forthwith to [the new manager] the amount which has been paid to the Respondents on account of service charges (other than contributions to reserve funds) in respect of 2005/6; 2006/7, 2007/8, 2008/9 (New Building Flats) and 2007/8 and 2008/9 (Listed Building Flats).

So far as concerns paragraphs A and B of its decision, the LVT’s reasoning was as follows.  While there had been demands in respect of each of the service charge years for the payment of service charges on account, there had not been any final demands for the final service charge. In short, although sums had been demanded in advance on account by demands to which no objection was taken as to their validity, no final demand for an adjusted final payment complying with s.20B had been made in respect of any of the service charge years.  The LVT noted that the High Court has decided in Gilje v Charlgrove Securities Limited [2003] EWHC 1284 (Ch) that, where interim payments have been made, s.20B only has effect if (and to the extent) that a subsequent demand exceeds the interim payments.  However the LVT gave detailed consideration to the Gilje case and commenced its analysis by saying: “We say straightaway that we disagree with the judgment in Gilje.”

The LVT’s reasoning as regards paragraphs C and D of its decision was as follows.  The amounts which had been demanded by the appellants for the reserve funds were reasonable. All the money in the reserve funds accounts had been used to fund current expenditure and the parties had agreed that when the new manager took over there was nothing left in the reserve fund accounts. The LVT then considered the terms of the leases as regards the reserve funds and decided that the money in the reserve funds had not been spent to meet a “temporary deficiency” as allowed by the leases.  The LVT then asked itself what should be done and concluded that the answer was clear, namely that the missing amounts should be reimbursed by the appellants. The LVT considered its powers, which it recognised were less extensive than those of the court, and concluded that it did not have power to order reimbursement of the amounts. However the LVT then went on to examine its powers under s.27A. It noted that it has thereunder power to determine the amount of a service charge, the person by whom it is payable and the person to whom it is payable. The LVT noted that the word “tenant” did not appear in s.27A. It therefore concluded that it did not have to limit its determination to the question of whether a service charge was payable by someone who was a tenant. The LVT appears to have concluded that it could treat the monies which had been paid in respect of the reserve fund as a service charge and could conclude under s.27A that the landlords (namely the appellants) were liable to pay this service charge to the new manager. In respect of this analysis the LVT stated as follows:

“Thus, we determine that we have the power (and indeed the duty) to determine the person by whom the missing reserve funds are payable and the person to whom they are payable – although if enforcement was required it would be a matter for the court to decide whether to grant or refuse permission for enforcement … Hence, we determine that the missing reserve funds are payable by the Respondents to [the new manager].”

Decision on appeal: Unsurprisingly, as regards the LVT's analysis of s.20B, the Upper Tribunal held that the LVT was plainly not entitled to disagree with and decline to follow the High Court decision in Gilje v Charlgrove Securities. The LVT was bound by this decision and should have followed it. The comments in Holding & Management (Solitaire) v Sherwin [2010] UKUT 412 (LC) were adopted and repeated.

As to the reserve fund, as the LVT concluded that the amounts which had been demanded by the appellants for the reserve funds were reasonable, the sums demanded as payments towards the reserve funds, i.e. the sums demanded within the demands for the on account payments, were properly payable.  The LVT did not consider the reserve funds position for the purpose of deciding a question arising under s.27A as to how much was payable as service charge in any given year.  The LVT did not purport to suggest that any decision they reached in respect of the reserve funds impinged upon how much was payable by way of service charges in any of the years which were under consideration by them. Instead the LVT's consideration of this reserve funds position was an entirely separate consideration as to whether the trust funds held by the appellants had been wrongly depleted by them and whether the appellants should in consequence make good to the new trustee (i.e. the new manager) any monies wrongly used from the reserve funds. This question was separate from and did not involve consideration of any question arising under s.27A as to how much was payable by any tenant by way of service charges in any particular service charge year.

HHJ Huskinson concluded: “In my judgment the LVT had no jurisdiction to embark upon this breach of trust inquiry in circumstances where such inquiry was not necessary to decide a question arising under s.27A. I further conclude that the LVT was not entitled to find that it had jurisdiction to act in the manner it did by (i) categorising the reserve funds as held by the appellants as a service charge, (ii) finding that the appellants had committed a breach of trust by misusing the reserve funds; and (iii) finding that the appellants' obligation to make good the trust monies which had been wrongly spent could properly be categorised as an obligation to pay a service charge, such that the LVT could find that the appellants as debtors were obliged to pay this money as a service charge to [the new manager] as the creditor.”

Comment:  This is the decision of an LVT off on a frolic of its own.  While it is puzzling as to why the LVT refused to accept that Gilje was binding and why it considered it had jurisdiction to determine a breach of trust dispute that had never actually been raised, it is sadly not surprising to those practitioners who regularly appear in the LVT!

Packamist Ltd v Ghaznavi [2012] UKUT 124 (LC)

The substantive decision is unimportant but the final paragraph reveals:

(1) When the LVT’s functions are transferred to the First-tier Tribunal in 2013 it will have the power to set aside and re-make a decision; and

(2) The LVT will be renamed the “Property Chamber”…

JONATHAN UPTON

TANFIELD CHAMBERS

MAY 2012