Service Charges & Estate Management Update – November 2011
1st November 2011
Garside v RFYC Limited & B R Maunder Taylor  UKUT 367 (LC)
This is an important case which decides that the financial impact of major works on lessees can be a material consideration when considering whether the costs are “reasonably incurred”.
In this case an LVT-appointed Manager added a figure of £100,000 to the service charge in 2009 and when a detailed specification had been prepared and costed a further £538,012 was added to the proposed service charge for 2010. A number of the lessees were concerned about the very significant increase in service charges and their ability to pay the sums demanded. There was no dispute that the works for which service charges had been demanded were necessary and that that the cost of them was a reasonable amount. The issue was whether the action taken by the Manager in requiring them to be carried out in one contract and paid for in the 2009 and 2010 service charge years was a reasonable decision.
The LVT did not accept the lessees’ argument that “consideration of the reasonableness of costs requires consideration of the ability of individual leaseholders to pay those costs”.
On Appeal the appellant lessees argued that reasonableness should be given a broad, common sense meaning and that there is nothing which prohibits consideration of the financial impact of the service charge costs on lessees being taken into account when deciding whether it is reasonable to carry out the repair works in one major contract or to phase them over a period of time to spread the cost. The landlords argued that if a lessee’s ability to pay were relevant to the reasonableness of what work should be undertaken and when, it would introduce an unworkable duty on the lessor (or manager) to make enquiry as to the means of lessees. It would also give rise to the need to make difficult and potentially controversial judgments as to what level of hardship would or would not be acceptable. Where some lessees want the repair work to go ahead in full immediately, the lessor or manager would be preferring the interests of one group of lessees over others. This would introduce unfairness and be contrary to the Manager’s duty in paragraph 9 of the LVT order appointing him to act fairly and impartially in his dealings with the lessees.
Decision: The question is not solely whether costs are ‘reasonable’ but whether they were ‘reasonably incurred’, that is to say whether the action taken in incurring the costs and the amount of those costs were both reasonable (see Forcelux v Sweetman  2 EGLR 173 and Veena SA v Cheong  1 EGLR 175).
As to the meaning of reasonable in this context, it was common ground that no guidance is given in the 1985 Act. HHJ Robinson referred to Ashworth Frazer Ltd v Gloucester City Council  1 WLR 2180 (a case concerned with whether a landlord had unreasonably withheld consent to assign a lease) in which Lord Bingham said: “There are few expressions more routinely used by British lawyers than ‘reasonable’, and the expression should be given a broad, common sense meaning in this context as in others.” Lord Rodger said: “The test of reasonableness is to be found in many areas of the law and the concept has been found useful precisely because it prevents the law becoming unduly rigid. In effect, it allows the law to respond appropriately to different situations as they arise…” He went on to say that “it is in each case a question of fact, depending upon all the circumstances”.
HHJ Robinson said at : “In my judgment, giving the expression “reasonable” a broad, common sense meaning in accordance with Ashworth Frazer, the financial impact of major works on lessees through service charges and whether as a consequence works should be phased is capable of being a material consideration when considering whether the costs are reasonably incurred for the purpose of section 19(1)(a).” The case was remitted to the LVT.
HHJ Robinson gave the following guidance:
- In many cases financial impact could no doubt be considered in broad terms by reference to the amount of service charge being demanded having regard to the nature and location of the property and as compared with the amount demanded in previous years.
- If a lessee wishes to put forward a case of particular hardship by reference to their personal circumstances they may do so, though the weight to be attached to such an argument would depend on the cogency of the evidence to support it.
- However, other considerations will no doubt be relevant and will need to be weighed in the balance when deciding whether major works should be phased and the cost spread over a longer period of time.
- Where the lessees do not all agree and some wish the works to be carried out in one contract as soon as possible that should be taken into account; it is inevitable that the final decision is likely to please some and not others. That does not mean one lessee or some lessees’ views have been unfairly preferred over others, rather they all have been taken into account with all other relevant considerations when reaching a decision.
- The degree of disrepair and the urgency of the work or the extent to which it can wait are likely to be relevant (for example, there may be a history of neglect, some work at least may be urgently required, the local housing authority may have served notices requiring work to be carried out and insurance cover may have been reduced because of the poor condition of the Estate).
- Another relevant consideration may be the extent of any increase in the total cost of the works if carried out in phases as opposed to in one contract.Comment: The landlord’s submission on what level of hardship will suffice has some merit. Satellite litigation on this issue should be expected. HHJ Robinson disagreed that this decision would “impose an unworkable burden on landlords” but it cannot be denied that landlords will have to listen to lessees’ concerns about the financial impact of the works. Such concerns are frequently expressed by lessees during the consultation process. The consultation regulations require the landlord to “have regard” to the lessees’ observations but that provision has no teeth. It does now, albeit by a different means. This case also makes clear that liability to pay service charges cannot be avoided simply on the grounds of hardship, even if extreme (see Southend-on-Sea Borough Council v Skiggs LRX/110/2005). The LVT cannot alter a tenant’s contractual liability to pay but that is a different matter from deciding whether a decision to carry out works and charge for them in a particular service charge year rather than to spread the cost over several years is a reasonable decision and thus the costs reasonably incurred for the purpose of section 19(1)(a).
The Mayor & Burgesses of the London Borough of Newham v Hannan & Nessa  UKUT 406 (LC)
The local authority consulted in relation to three qualifying long term agreements (“QLTAs”). At some stage it realised that the regulations had been breached because the Notice of Intention had been served after notice of the contract had been published in the Official Journal whereas it should have been the other way around (as required by paragraph 1(2)(d) of Schedule 2 to the regulations). The consultation requirements had been complied with in all other respects.
The OJ advert having pre-dated the Notice of Intention had not caused the lessees to suffer any prejudice: not one tenant raised any question relating to the Official Journal advert or at any time made any observation on or expressed any desire in being involved in selection of the contractors. The local authority was granted dispensation pursuant to s.20ZA. (Daejan Investments Ltd v Benson  EWCA Civ 38 applied.)