Service Charges & Estate Management - September 2012 update

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SERVICE CHARGES AND ESTATE MANAGEMENT

SEPTEMBER 2012 UPDATE

Peverel Properties Limited, Peverel OM Limited v Hughes [2012] UKUT 258 (LC)

Summary: (1) A stage 2 consultation notice which notified the tenants of the landlord's intention to instruct its preferred contractor was merely notice of a provisional intention so that the lessees were not put off from making observations.  In the circumstances, the consultation process had not been curtailed.  (2) It is not essential to specify the date on which the relevant consultation period ends, it is sufficient if the date is made clear (in this case by specifying the number of days from the notice by which the lessees had to respond).

Facts: The LVT held that the landlord has failed to comply with the consultation process in four material respects.  Permission to appeal was limited to two issues so that it was necessary for the landlord to obtain dispensation even if the appeal succeeded.  The issues before the Upper Tribunal were whether the LVT was correct in concluding that the landlord failed to comply with the consultation procedures by:

(1) failing properly to give notice to the lessees inviting them to make observations, in writing, in relation to the estimates, and

(2) failing to specify a precise date as the end of the consultation period.

Decision: Issue 1

Paragraph 3 of the stage 2 notice dated 13 February 2007 provided: “Should you wish to make observations in relation to any of the estimates please do so in writing to us.”  The principal matter that concerned the LVT is the phraseology of the paragraph which commenced: “It is now our intention to enter into an agreement with HH Smith [a contractor] … on the recommendation of SP Projects, after the expiry date of this second consultation notice.”  The LVT's decision was that the message carried to a reasonable lessee by the notice, coupled with the accompanying documents (and especially a demand for payment based on the HH Smith estimate), was that it was in effect pointless (or perhaps merely of little value) for such lessee to trouble to make any observations.  The LVT concluded that the opportunity to comment on the estimates was “rendered nugatory to a significant degree so as to invalidate the consultation”.  It was not suggested, however, that in fact the consultation period after 13 February 2007 was pointless, such as would be the case in hypothetical circumstances where a landlord had already committed itself either contractually (or perhaps in principle) to a particular contractor. Nor did the LVT find that the landlord had jumped the gun in any such manner. There was no evidence from anyone that they were in fact misled about their ability to make observations or that there were some observations they wished to make but which they refrained from making in the light of the phraseology in the notice.

In the Upper Tribunal, HHJ Huskinson held that given the notice expressly stated that the lessee could, should the lessee wish to do so, make written observations in relation to any of the estimates to the landlord, substantial reasons would be required for concluding that what the landlord was expressly giving with one hand (namely the right to make written observations) was being taken away by the other hand such that in substance no proper invitation was being made to the lessees to make observations in writing in relation to the estimates.  In allowing the appeal, he decided that the landlord's intention to instruct HH Smith was no more than a provisional intention capable of being changed and that it depended upon the consultation exercise.  It was regrettable that the wording of the notice did not make this clear and suggested the following would have more accurately reflected the landlord's position: “It is at present our provisional intention (subject always to further consideration in the light of any observations received in accordance with paragraph 3 above) to enter into an agreement with HH Smith”.

Decision: Issue 2

As regards the question of whether the notice specified the date on which the relevant consultation period ended, the notice provided: “Observations must be made within the consultation period of 35 days from the date of this notice”.  The LVT held that it failed to “specify … the date on which the relevant period ends.”  HHJ Huskinson accepted that the notice did not specify a date of the calendar year by name and there is the potential for ambiguity in that it is not entirely unknown for persons to be uncertain as to whether a period of 35 days from 13 February 2007 means a period of 35 days commencing on 13 February or a period of 35 days commencing on 14 February.  He considered that the former is correct and accepted counsel's argument based upon Sheffield City Council v Graingers Wines and Lower Street Properties v Jones that it is not essential that the notice specify a date of the calendar year by name. It was sufficient if the date was made clear. In my judgment it was made clear.

Comment: Landlord's should be encouraged to communicate with lessees as much as possible at all stages of the consultation process and this includes notifying the lessees of any preferred contractor (subject to further consultation).  Such information may assist a lessee who wishes to research the preferred contractor and make observations.  The UT's guidance to landlords wishing to communicate a provisional intention is welcome.   

Green v 180 Archway Road Management Co Ltd [2012] UKUT 245 (LC)

Summary: the lessee was not required to contribute to the cost of insurance because the landlord had failed to take out insurance in the joint names of the landlord and lessee in accordance with the terms of the lease.

Facts: Clause 4 (ii) of the lease contained a covenant by the lessor in the following terms: “To insure and keep insured with a reputable insurance company in the joint names of the Lessor and the Lessee each and every part of the Building…"  In the LVT the lessee argued that she was entitled to have a specific interest in the insurance policy noted on the Certificate of Insurance as this was a clause in her lease and she believed a necessity in order for the insurance to be valid.  The landlord's response was that the general interest noted on the Certificate of Insurance was sufficient, that it would be impractical to note all specific interests, and that the only explanation for some specific noting of interests was historical.  The LVT accepted the landlord's argument and held "the noting of the general interest was sufficient and therefore determined that the failure to note [the lessee's] specific interest was not such as to invalidate the insurance. It therefore does not provide sufficient reason for [the lessee] to refuse to pay her contribution to the building insurance."

Decision: On appeal, HJ Huskinson held that the question was not whether insurance had been placed which, on the balance of probabilities, would have been sufficient for the appellant if she had made a claim. The question instead is whether the respondent complied with its obligation under clause 4(ii) of the lease. The appellant's covenant is a covenant to pay one quarter of the sum expended for insuring the building “in accordance with Clause 4(ii) hereof”. Accordingly in order to be entitled to seek payment from the appellant under her covenant the respondent must show that it has placed insurance in accordance with clause 4(ii). This clause requires the respondent to insure the building “in the joint names of the Lessor and Lessee”.  The Tribunal did not hear any expert evidence in relation to the practice of the insurance market in relation to property insurance such as this and HHJ Huskinson did not accept that it would have been impossible or impractical for the respondent to have placed insurance in terms where the appellant's name and property were expressly shown so as to make clear that the appellant's interest was a specific interest which was expressly covered by the insurance.  Accordingly, the lessee was only required to contribute towards the insurance in the years that she had specifically been named on the certificate of insurance.

Comment:  Landlords and managing agents often fail to name specific interests on the certificate of insurance.   This case highlights that in such cases the cost of insurance will not be recoverable from the lessee if the lease requires the insurance certificate to be in joint names.

South Tyneside Council v Ciarlo [2012] UKUT 247 (LC)

Facts:  The local authority landlord paid an Arms Length Management Organisation ("ALMO") a management fee to manage its housing stock.  The housing stock included both secure tenancies and long leaseholds.  The ALMO established a specific Leasehold Team to manage the leasehold properties.  As a result of the way the ALMO was structured and paid by the local authority, it was difficult to precisely calculate the specific cost of managing individual buildings.  The landlord devised a way to identify the cost of the Leasehold Team and then to apportion the general costs of management of the leasehold properties.  The LVT decided that the landlord was not entitled to recover management charges calculated in this manner and instead determined what it considered to be a reasonable management fee for each block.

Decision: Allowing the landlord's appeal, the Upper Tribunal held that it was open to the landlord and the ALMO to agree that the cost to the landlord of paying the ALMO to manage the landlord's leasehold properties (as opposed to the more numerous properties the subject of tenancies), which is part of the global amount paid to the ALMO  for managing the entire housing stock, should be calculated by a reasonable and carefully worked apportionment of the ALMO's global costs for the relevant year.  This is what the landlord had done so that the management charges were reasonable and recoverable.

JONATHAN UPTON

TANFIELD CHAMBERS

SEPTEMBER 2012