Service Charges & Estate Management update - March 2014

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RTMs, SERVICE CHARGES AND ESTATE MANAGEMENT

MARCH 2014 UPDATE

Di Marco v Morshead Mansions Ltd [2014] EWCA Civ 96

Summary: There is no civil remedy available in respect of ensuring compliance with ss.21 and 22 of the Landlord and Tenant Act 1985 (“the 1985 Act”).  Accordingly, a tenant was not entitled to a mandatory injunction compelling the landlord to supply him with a written statement of costs which form part of the service charge (s.21) or to provide him with reasonable facilities for inspecting the documents which support the summary (s.22).

Facts: The tenant (T) was one of 104 long-lease tenants of a block of flats. The landlord (L) was the freehold owner of the building. Each of the leases contained service charge provisions. Article 16 of L's articles of association contained a provision entitling L to levy charges. L raised funds purely through art.16 demands rather than through the service charge.

In previous proceedings, T had unsuccessfully resisted L’s claim based on an art.16 demand on the ground that it was an attempt to recover service charges, which could be subject to challenge under the 1985 Act.  The Court of Appeal dismissed T’s appeal (Morshead Mansions Ltd v Di Marco [2008] EWCA Civ 1371, [2009] 1 B.C.L.C. 559).

The instant proceedings were two actions brought by L, claiming rent and two art.16 demands.  T challenged the validity and propriety of using art.16 to deal with service charge matters and the use of money raised without compliance with the 1985 Act.  T counterclaimed for an order for information to be provided pursuant to s.21 and s.22 of the 1985 Act

First Instance: The judge (HHJ Hand QC) ordered summary judgment in respect of rent and interest and struck out part of T's defence relating to art.16.  As regards T’s counterclaim, the judge considered the statutory provisions and held that on their true construction they did not give rise to a duty which could be enforced in a civil suit because the statute provided for a criminal sanction and because the instant case was not one where the legislation was for the benefit of a class of individuals.  Accordingly, T had not shown that he had a cause of action.  On appeal, Mann J disagreed (see [2013] EWHC 1068 (Ch); [2013] L&TR 27 and the summary in the June 2013 update).  L appealed to the Court of Appeal.

Issue: Is a tenant entitled to ask a civil court to grant a mandatory injunction to compel the landlord to comply with the obligations in ss.21 and 22 of the 1985 Act?

Decision on Appeal: Lewison LJ (with whom Patten and Sharp LJJ agreed) held that no civil remedy is available to enforce compliance with ss.21 and 22.  His principal reasons were as follows.  First, the only sanction that the 1985 Act provides for a failure to comply with s.21 or 22 is a criminal sanction. Thus, if another remedy exists it must be by way of necessary implication. Second, ss.21 and 22 (or their predecessors) have been on the statute book for over thirty years, and apart from increases in the maximum fine from time to time, no change of substance has ever been made to them. Third, during that same period Parliament has made many changes to the overall statutory regime for the regulation of residential service charges, so it cannot be said that the topic has been neglected. Fourth, during that same period Parliament has introduced a variety of civil remedies for tenants whose landlords fail to comply with statutory requirements but (until the recent amendments which are not yet in force) has not done so directly in relation to a failure to comply with s.21 or 22. Fifth, although it has been created piecemeal, there is now a statutory code. Sixth, Parliament has explicitly provided for the making of a mandatory order in the circumstances to which s.84 of the Housing Act 1996 and s.81 of the Leasehold Reform, Housing and Urban Development Act 1993 apply. The circumstances of the present case fall outside those sections. If Parliament has chosen to create a remedy in specific circumstances, it is very unlikely that it intended that same remedy to be available in different circumstances. Seventh, the 1985 Act itself demonstrates a variety of techniques for imposing civil liability (e.g. implied conditions, implied undertakings and implied obligations), none of which apply to ss.21 or 22. Eighth, in revisiting this area of the law most recently, Parliament has provided the tenant with a civil remedy, namely a right to withhold service charge. But what it has not done is to give the tenant either a right to sue in damages or the right to a mandatory injunction.  Lewison LJ also gave a number of other reasons which he described as ‘more minor’.

Comment: In many leases, the tenant will have the benefit of a covenant by which, within a reasonable period after the end of the accounting period, the landlord must provide a certified summary of expenses incurred.  A tenant may be entitled to enforce compliance with such an obligation by a claim for specific performance or injunctive relief.  Moreover, compliance with such a clause is often a condition precedent to the tenant’s liability to pay the service charge.

Philip Rainey QC of Tanfield Chambers appeared for the successful appellant landlord.

PAS Property Services Ltd v Hayes [2014] UKUT 26

Summary: The Landlord was not entitled to recover by way of service charges the cost of gas supplied to a common heating system which heated individual apartments.

Facts: White Croft Works comprises the refurbishment of an existing building to provide 26 apartments and a new building comprising 44 apartments.  Heating and hot water is provided to apartments in the refurbished building in a conventional manner through boilers in each individual apartment pursuant to contractual arrangements between individual occupiers and a third party utility supplier. Heating and hot water is provided to apartments in the new building through a common heating system (“CHS”). There is a boiler in the basement of the new building to which gas is supplied pursuant to a contract between the Landlord and a third party gas supplier. Water heated by that boiler is then pumped around the new building on a continuous loop through individual apartments. The pipes feed hot water into radiators in the apartments which provide air heating. The hot water also passes through a coil pipe in individual water tanks in each apartment in order to heat water. The hot water from the CHS then passes out of the apartment and continues around the new building.  Each apartment contains a thermostat and timer which enables the occupier to stop hot water from the CHS coming into the flat when it reaches a certain air temperature. The timer enables the occupier to choose when hot water from the CHS is to be supplied or to turn it off completely.

The structure of the service charge regime (which was set out in the Eighth Sch to the lease) requires the cost of providing services to the whole of White Croft Works to be aggregated and the lessees obligation is to pay a fixed percentage of those total costs. Thus the service charge provisions do not differentiate in any way between the cost of services provided for the benefit of apartments in the new building and those provided for the benefit of apartments in the refurbished building.

Initially, bills for service charges did not include any item for gas supplied to the CHS. After the Landlord acquired the freehold it sought to claim by way of service charge from all lessees in the new building and refurbished building for the cost of gas supplied to the CHS in the new building.

At first instance: The LVT held that the landlord was not entitled to recover the cost of the gas through the service charge.

Issue: The landlord argued that it was entitled to recover the cost of gas supplied to the CHS pursuant to three separate provisions (the second and third of which are part of the service charge).  First, by cl 2.3 of the Fourth Sch, by which the lessee covenanted to pay and discharge the cost of all water electricity gas and telephone (including all meter rents) used or consumed in the Apartment. Second, by para 1.1.3.12 of the Eighth Sch, which provided that the lessee was liable to contribute towards the cost of “any other services relating to the Building and the Common Parts or any part of them reasonably provided by the Landlord from time to time during the Term and not expressly mentioned”.  Third, by para 1.1.5.6 of the Eighth Sch which provided that the lessee was liable to contribute towards the cost of “the supply of electricity gas oil or other fuel and water for the provision of the Services and for all purposes in connection with the Estate and/or the Building and/or the Common Parts or any part thereof.”

Decision on appeal: The Upper Tribunal (HHJ Alice Robinson), dismissing the landlord’s appeal, held that the purpose of a service charge is to enable a lessor to recover the cost of works and services supplied for the benefit of more than one lessee where buildings (or estates) are in multiple occupation. When construing the service charge provisions, she held that the lessee would not normally expect to pay for the costs of services supplied to individual occupiers as opposed to services supplied for the benefit of more than one lessee. Accordingly, the Services in the Eight Sch were not intended to include services provided within individual flats.  In that context “Building” in para 1.1.3.12 and 1.1.5.6 did not include the provision of heat to individual apartments through the CHS.  The phrase “for all purposes in connection with the Estate and/or the Building” in para 1.1.5.6 meant in connection with the management of the Building.  It did not include a service supplied to individual apartments.

The landlord was entitled to recover from the lessees the cost of supplying gas from the CHS in order to heat the common parts under para 1.1.3.12 but the service charge demands do not purport to identify the cost of providing such heating and it would be impossible to identify a proper or fair proportion of the cost of supplying heat to the common parts.

Although the costs of the gas could be recovered through cl 2.3, at the moment there is no means of calculating a fair and proper proportion other than by monitoring consumption through meters.  Simply apportioning the cost by floor area would not be a fair and proper proportion because it would not necessarily bear any relation to the amount of gas used or consumed in an individual apartment. Accordingly, the landlord would have to pay an annual charge to a company to monitor the meters and recover this additional cost from the lessees through the service charge.

Comment: By applying the well-known principles of construction, the UT reached what appears to be a common sense, ‘fair’ conclusion.  The decision is, however, somewhat of a pyrrhic victory for the lessees who will now have to contribute towards the additional cost of monitoring the individual consumption by apartments in the building.

OM Property Management Ltd [2014] UKUT 9

Summary: Two breaches of the consultation requirements had not caused lessees to suffer any relevant prejudice in respect of the scope or cost of the major works.  Accordingly, dispensation was granted on condition that (i) the landlord pays the cost of instructing counsel incurred by the leaseholders who participated in the proceedings before the LVT on the landlord’s application for dispensation; and (ii) the landlord shall not include in the service charge its costs of the appeal or its application for dispensation.

Facts:  The landlord failed to comply with the consultation requirements by (i) failing to provide access to all of the estimates which had been received, rather than simply the two lowest estimates and (ii) failing to summarise in the paragraph (b) statement the responses of the leaseholders who had written in reply to the initial notice of consultation and the landlord's responses to them.  Most of the responses were concerned with the means by which the major works were to be paid for.  These were not “”observations … made in response relation to the proposed works.”  One leaseholder, however, asked two further questions.  First, whether work was to be carried out to the internal common parts of the buildings and whether this would increase the estimated cost of the project. The response which he received was that such works were intended and that they would not increase the estimated cost. Second, whether a panel of leaseholders could participate in the assessment of tenders and the awarding of the contracts.  The landlord’s managing agent said that they could not because there was no formal residents' association.

The landlord applied for dispensation. The LVT refused dispensation on 6 February 2013.  On 6 March 2013 the Supreme Court handed down its decision in Daejan Investments Ltd v Benson [2013] UKSC 14, which swept away the jurisprudence on which the LVT's decision was based.  The leaseholders decided not to take any part in the landlord’s appeal.

At first instance: Applying the law as it was understood before Benson, the LVT held that although there was no evidence of actual prejudice from the failure to provide access to the two highest estimates, it regarded the departure from the consultation requirements in that regard to be sufficiently serious to enable prejudice to be inferred.  In contrast, the Tribunal did not make a positive finding of actual prejudice in relation to the failure to summarise observations and responses.

On appeal: The Upper Tribunal (Martin Rodger QC, Deputy President) granted dispensation on terms.  As regards the first failure to comply, there is no evidence before me that any leaseholder took the opportunity to inspect the material which was made available and none requested copies of the tender documents.   It would be ironic if, because the landlord obtained more than the required minimum number of tenders (2), but failed to make them all available in full to leaseholders, it should be penalised by being unable to recover a six figure sum.  There was therefore no evidence that the failure to provide full access to the third and fourth tenders contributed in any way to the leaseholders paying for inappropriate works or paying more than would be appropriate for the works which were undertaken. Echoing the language of Lord Neuberger in paragraph 45 of Benson there was no evidence that the extent, quality and cost of the works were in any way affected by this defect in consultation.  As regards the second failure to comply, the statutory objective of the consultation requirements is not the promotion of confidence amongst tenants that their views are being listened to.  Nor is it part of the statutory purpose to encourage the formation of recognised tenants’ associations or to stimulate communication between tenants.  There was no basis for the conclusion that the failure to summarise the leaseholders’ responses and the landlord’s response to it had any impact on the scope of the works or their cost.

Dispensation was granted on terms that: (i) the landlord pays the sum of £6,891 (plus VAT if applicable) in respect of the cost of instructing counsel incurred by the leaseholders who participated in the proceedings before the LVT on the landlord’s application for dispensation, such payment to be made within 21 days of the date of this decision; and (ii) the landlord shall not include in the service charge its costs of this appeal or its application for dispensation made to the LVT.  It was ordered that dispensation shall take effect once condition (i) has been satisfied.

Comment:  This case illustrates, if it were needed, the different approach to applications for dispensation following Benson.  It was inevitable that dispensation would be granted given the leaseholders’ failure to take part or to adduce any evidence of relevant prejudice suffered caused by the failures to strictly follow the consultation requirements.  Importantly, however, even in a case where the leaseholders failed to take part in the appeal, the UT granted dispensation on terms.  It is questionable whether it is correct in principle to order that dispensation would take effect when only one of the conditions have been satisfied.

Albion Residential Ltd v Albion Riverside Residents RTM Company Ltd [2014] UKUT 6

Summary: A building was not structurally detached as it was joined to another building at subterranean level by a car park. The submission that building means “a built structure above ground” was rejected. The tribunal also rejected the submission that that it is incumbent on the recipient of a claim notice given under section 79(6) of the 2002 Act to raise in its counter-notice every challenge to the claim which it wants the LVT to consider (Fairhold (Yorkshire) Limited v Trinity Wharf (SE16) RTM Co Ltd [2013] UKUT 0503 (LC) applied).

 

JONATHAN UPTON

TANFIELD CHAMBERS

MARCH 2014