Service Charges & Estate Management - September 2011 updates

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SERVICE CHARGES AND ESTATE MANAGEMENT

SEPTEMBER 2011 UPDATE

Akorita v Marina Heights (St. Leonards) Limited [2011] UKUT 255 (LC)

Summary: This case is a useful reminder to that the service charge is not payable unless it is demanded in accordance with the terms of the lease.

Held: The provision of a certificate by the Lessor's surveyor was a condition precedent to the arising of any liability to make payment either of the final service charge or of the on account payment for service charge.  A certificate from chartered accountants was insufficient.  HHJ Huskinson rejected the possible difficulty under s.20B in serving fresh demands based upon belated surveyor's certificates as a reason for justifying a construction of a clause which is contrary to its obvious and natural meaning.  Accordingly, in respect of each of the service charge years subject to the application, the amount payable by the Appellant was found to be, at present, nothing because the condition precedent to liability has not been fulfilled.

Greening v Castelnau Mansions Limited [2011] UKUT 326 (LC)

Facts: The appeal was restricted to the discrete issue of whether the legal costs of the LVT proceedings were recoverable by the management company.  The lease defined the service charge as the total expenditure in carrying out the obligations under clause 5(5) of the lease.  Clause 5(5)(j) of the lease provided:

To employ at the Third Company's discretion a firm of Managing Agents to manage the Building and discharge all proper fees salaries charges and expenses payable to such agents or such other person who may be managing the Building including the cost of computing and collecting the rents in respect of the Building or any parts thereof.

  1. To employ all such surveyors builders architects engineers tradesmen accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building.”

The LVT held: “It is the Tribunal’s view that the terms of the lease are just sufficient to enable the applicant to recover the costs of these proceedings through the service charge regime. The phraseology to include the administration of the building in our finding does enable them to recover the costs of solicitors in advising.”

On appeal the Respondent tenant relied on the Court of Appeal decision in Sella House Ltd v Mears [1989] 1 EGLR 65 , which concerned tenant's covenants identical to those in clause 5(5)(j)(i) and (ii) except that (j)(i) included the words “and Chartered Accountants” after “Managing Agents”.   In that case, Dillon LJ said at 68E “I have come to the conclusion that the judge was right in his view that the fees of solicitors and counsel are outside the contemplation of either limb of [the relevant clause] of the lease.”

Held: (The President) “Mr Greening's appeal is without any apparent merit. It is obviously desirable, where the landlord is a company owned by the tenants, that such legal fees as these, if not chargeable to the tenant himself, should be recoverable through the service charge. I cannot accept, however, that events occurring after the date of the lease – here the collective enfranchisement – can be taken into account so as to change the meaning that is given to its provisions. The conclusion that the terms of the lease do not cover legal fees is inescapable in the light of the decision in Sella House, and the appeal must be allowed.”

Comment: Costs are not recoverable in the LVT unless they are recoverable under the terms of the lease.  Ordinary contractual principles apply.  The court’s have adopted a restrictive approach to the recovery of legal costs.  Many leases fail to make adequate provision for the tenant’s liability to pay legal fees.  This case highlights the importance of good drafting.

Tingdene Holiday Parks Ltd v Cox [2011] UKUT 310 (LC)

Summary: s.21B requires a summary of tenant’s rights to be sent with the demand.  A summary sent separately a few days later will not suffice.

Facts: The LVT determined liability to pay the balance of service charges demanded for 2008 and the estimated service charge for 2009 payable by the lessees of 65 holiday chalets.

The main issues in the appeal were:

  1. Whether demands complying with section 21B of the LTA 1985 were served on the respondents in relation to the 2008 and 2009 service charges and, if so, when.
  2. Whether the service charges are payable by the respondents annually or quarterly.
  3. Whether the LVT erred in its conclusion that the full sum of £11,116.36 is not payable by the lessees in relation to the refurbishment of the children's play areas within the park.

The s.21B Issue

It was disputed that demands sent to lessees on 4 April 2008 and 1 July 2009 complied with s.21B.  The appellant's contended that both demands were accompanied by the required summary of rights.  The appellant accepted that no summary was enclosed with the letter on 4 April 2008 but argued that a summary sent 11 days later (once it had been pointed out to the landlord that the demand did not comply with s.21B) was sufficient.  Counsel submitted that the word "accompanied" does not imply a requirement that the two documents must be sent together and the combination of the letters dated 4 April 2008 and 15 April 2008 was sufficient to comply with section 21B.  It was also submitted that, if the documents are contained in separate envelopes, the requirement is nonetheless complied with.  The President rejected this submission: “I do not see how a summary sent some 11 days after the demand to which it was intended to relate could be said to have accompanied the demand. It manifestly did not accompany it, and I can see no basis for an argument that there was compliance with section 21B.”

The demand sent on 1 July 2009 was accompanied by a photocopy of the Queen's Printer's form of the Service Charges (Summary of Rights and Obligations, and Transitional Provision) (England) Regulations 2007 (which, inter alia, contain the information to be included in the summary) but without any further reference or explanation.  The President held that simply sending a copy of the statutory instrument did not constitute compliance with s.21B.  What was required to be sent was a document with a specific title - "Service Charges - Summary of tenants' rights and obligations" - and a specific text.

Whether the service charges are payable by the respondents annually or quarterly

This issue only concerned future payments of service charges.  The President rejected the LVT’s finding that the reference to interim payment(s) (plural) in a separate clause in the lease supported the lessees’ contention that the service charge was payable on a quarterly basis.  The lease clearly provided that the lessee was required to pay the service charge in advance and on account on 31 January (or the date upon which a request is made) each year.  He also rejected the LVT’s finding that an estoppel by convention prevented the landlord who had previously sent quarterly demands from denying that that the lease allowed for quarterly payments, relying on the judgement of Lord Donaldson of Lymington MR in Hiscox v Outhwaite (No1) [1991] 3 All ER 124: "once a common assumption is revealed to be erroneous, the estoppel will not apply to future dealings."  The LVT's reliance on estoppel as the basis for a conclusion that the tenants would be entitled in future to make payments on a quarterly basis was misconceived.

  The children's play areas

The relevant clause of the lease provided for "Maintenance repair decoration (if appropriate) cleansing and when necessary renewal of the structure exterior and interior of the Amenity Areas"; and "Amenity Areas" is defined to include the "parts of the Holiday Site the use or enjoyment of which is common to some or all of the residents of the Estate and all equipment aerials and apparatus fixed thereon".  The LVT found that the play area, following the installation of new equipment, was of a wholly different character to what was there before.  In the light of this finding, the President held it was entitled to conclude that none of the £11,116.46 expenditure claimed was for the maintenance, repair and renewal of the existing play area but that all of the expenditure was in the nature of an improvement.  Any arguments advanced in the LVT concerning whether planning permission had been obtained were therefore immaterial.

Per curiam: The LVT was not bound by an admission in a defence to county court proceedings for unpaid service charges: “County court pleadings in a matter transferred to the LVT are undoubtedly material to the LVT's determination, and weight may appropriately be accorded to any admission that is made in them. But the pleadings themselves have no formal status in the LVT, and the LVT was not compelled to give effect to the admission.”

Comment: The rejection of one of counsel’s more imaginative submissions on the s.21B issue is hardly surprising.  If the summary of rights is not served with the demand, the landlord must re-serve the demand with the summary.

Mehra v Citywest Homes Limited [2010] UKUT 311 (LC)

Summary: converting a flat from 3 bedrooms to 2 bedrooms did not affect the tenant’s liability to pay the fair and reasonable proportion of the total cost incurred.

Facts: The appellant is the long leaseholder of a flat (flat 5C) in a building consisting of two houses converted into nine flats. Three of the flats are let to secure tenants and the remaining six are let on long leases.  The appellant's flat is the largest one in the building.  The flat originally had three bedrooms but the council granted the appellant a licence to carry out certain works to the flat, as a result of the works the flat in its present configuration has only two bedrooms.  The licence contained the following provisions:

“4. Nothing herein contained shall be deemed to authorise any other or further alterations or works to the Premises or any part thereof or in any way affect the liability of the Lessee to the Corporation under the terms of the Lease

 

6. As and when the Works shall have been completed all the Lessee's covenants conditions and agreements contained in the Lease as varied by the provisions of Clause 2 hereof shall be applicable to the Premises in the same manner and as fully and extensively as if the Premises had continued in the same state as the same were in prior to the carrying out of the Works”.

The relevant clause regarding the appellant’s contribution to the service charge provided the lessee will pay “such annual sum…as representing a fair and reasonable proportion of the reasonably estimated amount”.  The corresponding clause in the other long leaseholders’ leases provided that the tenant was liable to pay “such annual sum…as representing the due proportion of the reasonably estimated amount” required to cover the service charge expenditure incurred by the landlord; and in each case the “due proportion” was defined as a fixed percentage. The percentages had been defined by reference to the number of bed spaces in each flat, on the basis that there were 20 bed spaces in the building. All the flats other than the appellant’s had either one bed space or two bed spaces, and the percentages fixed for these was therefore either 5% or 10%. The appellant had been charged 30% of the expenditure, although, unlike the other flats, this was not a percentage fixed by his lease.

The respondent ALMO (Citywest) decided to revise the total number of bed spaces in the building down to 19, with the number allocated to the appellant's flat being reduced from 6 to 5, and his contribution being reduced from 30% to 5/19ths or 26.316% of the total. The effect of this reduction would be that the total of the service charge contributions made by all the flats was only 96.316% of the expenditure. In view of this Citywest made two applications to the LVT, seeking to bring the total contributions up to 100%. It proposed to do this by increasing the fixed percentage of the flats with one bed space to 5.263% and that of those with two bed spaces to 10.526%. The first application was made under s.27A(1) and (2) of the Landlord and Tenant Act 1985 and sought a determination that “in respect of service charges demanded and to be demanded” a calculation in relation to flat 5C was fair and reasonable if calculated on the basis that the service charge represented 5/19ths of the total expenditure on the building. The second application was made under s.35 of the Landlord and Tenant Act 1987 and sought variations of the leases of the other five long leasehold flats by substituting fixed percentages of, as appropriate, 5.263% or 10.526%.

The appellant’s case was that the bed space method of apportionment was wrong. He argued that it was impossible to differentiate between a bedroom and a living room as people could configure their flats in different ways. His flat was less than a quarter of the building and yet it was proposed to charge him 26.316% of the total expenditure. The cut-off point between single bedroom and a double bedroom (110 sq ft) was arbitrary, and there were anomalies where a studio was used as both living and sleeping accommodation. He pointed out that, following the alterations that had been made to it, his flat had two bedrooms and thus 4 bed spaces rather than 5. His proposal was that the contributions should be based on the total living space of each flat.

The LVT found that “the method adopted falls within the parameters of a fair and reasonable method of apportionment, even though it may not be the only one. The tribunal can see no reason to alter a method that it considers to be fair and has been used throughout Westminster for many years…”

As regards the s.35 application, the LVT determined that each of the five leases should be varied so as to provide that the service charge payable should be “a fair and reasonable proportion (as determined by the lessor)” of the total expenditure on the building.

On appeal an agreed statement of facts provided:

  1. The appellant, under licence from the landlord dated 14th October 2008 reconfigured his property so that it is a 2-bedroom flat with a bed space weighting of 4.
  2. The appellant's flat from the commencement of the lease until 14th October 2008 was a 3-bedroom flat with a bed space weighting of 5.
  3. For the purpose of the service charge computation the landlord has at all times and continues to apportion a bed space weighting of 5 for the appellant's flat.

On that basis, the appellant argued that the LVT ought to have concluded that his contribution should be 4/18ths.

Held (The President): The effect of the provisions in the licence was that the council was not only free to ignore the works carried out pursuant to the licence in calculating the fair and reasonable proportion of the annual service charge expenditure payable by the appellant, the council must determine the “fair and reasonable proportion” that the appellant is required to pay by reference to the state that the flat was in prior to the carrying out of the works.

In any event, the President held that under s.27A(1) an application may be made to an LVT “for a determination whether a service charge is payable”; and s.18 defines “service charge” is to mean “an amount payable by a tenant…”.   Thus an application under s.27A(1) can only be made in respect of an amount of money. Under s.27A(3) an application may be made to an LVT for a determination whether “if costs were incurred for services…a service charge would be payable for the costs”. So an application under subsection (3) can only be made in relation to costs and for the purpose of gaining a determination as to whether a service charge would be payable for those costs. The purported s.27A application in the instant case did not relate to an amount of money payable as a service charge; nor did it relate to costs for which a service charge might be payable.  As the LVT expressed the determination in terms that the method of assessing the service charges by applying an allocation of bed spaces was fair and reasonable and that the method resulted in a proper and fair allocation of the service charges between the respondents, the decision can have no effect for the purposes of s.27A since it did not determine anything that it had power to determine under that section!

Comment: It is not uncommon for a landlord to seek a determination that the method of calculating the service charge complies with the terms of the lease.  This case is a timely reminder that the LVT has no jurisdiction to determine such issues unless they relate to an amount of money payable as a service charge or to costs for which a service charge might be payable.  Landlords and managing agents are well advised to have this in mind before incurring costs in pointless litigation.

JONATHAN UPTON

TANFIELD CHAMBERS

SEPTEMBER 2011