Service Charges & Estate Management Update – July 2014
1st July 2014
Daejan Properties Ltd v Griffin  UKUT 0206 (LC)
An allegation of historic neglect may provide a defence to a claim for service charges if it can be shown that, but for a failure by the landlord to make good a defect at the time required by its covenant, part of the cost eventually incurred in remedying that defect, or the whole of the cost of remedying consequential defects, would have been avoided. In those circumstances the tenant to whom the repairing obligation was owed has a claim in damages for breach of covenant, and that claim may be set off against the same tenant’s liability to contribute through the service charge to the cost of the remedial work.
Daejan acquired Crown Terrace, a three storey building containing 18 upper floor flats, in 1973. The flats were occupied by leaseholders under long leases, the earliest of which dated back to 1983. Access to the flats was by a walled walkway supported by concealed steel beams which had corroded, unobserved and unrepaired until one of them failed in 2008. Emergency repairs were carried out and investigations revealed that the remaining beams required replacement. Daejan sought to recover the costs of the repair works of over £300,000 through the service charge. The leaseholders applied to the LVT for a determination of their liability to contribute. The LVT found that the steel beams should have been replaced in the 1960s, that if they had been then the costs of the work would have been less and that whilst the cost of replacing the beams was in principle recoverable, the costs were irrecoverable to the extent that they had been increased by the work being carried out as emergency work. It consequently reduced the recoverable sum by 13 per cent. Daejan appealed by way of a rehearing at which the Upper Tribunal heard expert evidence.
Whether the work would have cost less (i) if completed earlier; and (ii) if it had been tendered and contracted as a single programme.
Decision on Appeal
The UT (Martin Rodger QC, Deputy President and P D McCrea FRICS) allowed Daejan’s appeal. The tribunal’s focus on the condition of the beams in the 1960s was inappropriate. Any failure to carry out remedial work prior to 1973 when Daejan purchased the property was not Daejan’s responsibility. Further, a historic neglect allegation did not address the question in s.19(1)(a) of the 1985 Act, namely whether the costs of remedial work had been reasonably incurred and so were capable of forming part of the relevant costs to be included in a service charge. Reasonableness could not depend on how the need for a remedy arose. A historic neglect allegation could only provide a defence to a service charge claim where, but for a failure by the landlord to make good a defect at the time required by its covenant, part of the cost eventually incurred in remedying that defect, or the whole of the cost of remedying consequential defects, would have been avoided. In those circumstances the tenant to whom the repairing obligation was owed has a claim in damages for breach of covenant, and that claim may be set off against the same tenant’s liability to contribute through the service charge to the cost of the remedial work. The damages which the tenant could claim, and the corresponding set off available in such a case, is comprised of two elements: first, the amount by which the cost of remedial work has increased as a result of the landlord’s failure to carry out the work at the earliest time it was obliged to do so; and, secondly, any sum which the tenant is entitled to receive in general damages for inconvenience or discomfort if the demised premises themselves were affected by the landlord’s breach of covenant. In the instant case, Daejan had been in breach of its repairing covenant from when it acquired the property in 1973 as the beams had deteriorated significantly. The risk of undetected deterioration fell on the landlord whether or not it had, or could have had, knowledge of the condition of that part: British Telecommunications Plc v Sun Life Assurance Society Plc  Ch. 69. The principle issue was therefore whether the remedial works could have been carried out at a lower cost if done earlier. The expert evidence did not support the conclusion that a lesser amount of work might have been sufficient if the corrosion had been addressed after 1980. By 1983, the date of the earliest current leasehold interest, a decision to replace all of the beams would have been inevitable had they been inspected and the work would have been required as emergency remedial work. Accordingly, no real savings would have been made had the beams been inspected and work carried out in the 30 years preceding commencement of the works in 2008. It was unlikely that there would have been any significant savings had the work been completed as one project rather than in phases. The argument for savings fell away when the need for emergency work was appreciated. Consequently, the costs claimed by Daejan were reasonable and recoverable through the service charge.
Qdime Ltd v Bath Building (Swindon) Management Company Ltd  UKUT 0261 (LC)
A covenant to keep the building insured against “the usual comprehensive risks” obliged the landlord to insure against terrorism.
A landlord covenanted “To keep the Building including the Demised Premises insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in accordance with the CML recommendations in that respect from time to time and such other risks as the Landlord may in its reasonable discretion think fit to insure against…”. The LVT held that the covenant did not extend to insuring against terrorism. If that was wrong, it was not a reasonable exercise of discretion to insure against terrorism given that there was no evidence that the Building is vulnerable to terrorism as defined in the Pool Re scheme; or that the area in which the Building is situated is vulnerable to terrorism; or that Swindon in general is vulnerable to terrorism. The landlord appealed.
Decision on Appeal
Allowing the appeal, the UT (Judge Edward Cousins) held that, although the words “terrorism” or “terrorist activities” are not listed in the CML guidance, the ordinary meaning of “explosion” (which was listed in the guidance) includes explosions caused by terrorism. Alternatively, the RICS Code provides that “serious consideration should be given to the taking out of terrorism insurance”. Accordingly, it was a reasonable exercise of discretion to insure for terrorism.
Chowdhury v Bramerton Management Co Ltd  UKUT 260 (LC)
This case turns on its facts but at  Martin Rodger QC’s obiter comments on the possible consequences of late service of a demand for payment of an interim service charge payable on account are worth noting. In that case, the lease provided that the interim service charge was payable on the usual quarter days. The effect of late service of a demand was either: (i) the arrears might not become due and payable until the next quarter day (by analogy with the reasoning in South Tottenham Land Securities Ltd v R & A Millet (Shops) Ltd  1WLR 710 (a rent review case); or (ii) the accumulated arrears might not become due until a reasonable time after notification of the sum claimed.
Amanda Gourlay of Tanfield Chambers appeared for the Respondent.