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Service Charges & Estate Management Update – September & October 2014

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1st October 2014

Sugarman v CJS Investments LLP [2014] EWCA Civ 1239

On the proper construction of an article in a management company’s articles of association, each member of the company had one vote at company meetings regardless of the number of shares he holds (rather than one vote for each share held).

Facts

Lawrence House Management Company (“the RMC”), is the management company of a residential development called New Lawrence House, consisting of 104 flats. The original developer granted 104 leases of 125 years each of flats in New Lawrence House. The RMC is a party to each lease. A large number of the leases (some 66) are now held by the first respondent, 6 are held by a company owned by the second, fifth and sixth respondents and one each by the third and fourth respondent (collectively “R”). The vast majority of the remainder (all except one) are held by individuals, including the three claimants/appellants (“S”). Each flat is held on the basis that a member owns one share in the company.

Issue

In 2014, an issue arose as to members’ voting rights at company meetings. Article 13(a) of the RMC’s articles of association stated that each member present or by proxy had one vote (“the main voting provision”). It also contained a proviso making special provision for the case where a dwelling had no dwelling holder. It was S’s case that each member had one vote, but R contended for one vote per share on the grounds that if the 66 flats owned by R1 entitled them to only one vote, they could be routinely outvoted by the remaining flat owners, even though R1 held the majority of shares in the RMC.

First Instance

The judge agreed with R and construed art.13(a) as conferring one vote per share. S submitted that the language of the main voting provision of art.13(a) was clear and meant that, however the vote was cast, each member had one vote. S claimed that that argument was supported by the fact that the Companies (Tables A to F) Regulations 1985, Table A Regulation 54, which expressly provided for a different method of counting on a show of hands and on a poll, had been expressly disapplied by art.13(b). R submitted that a reader of the main voting provision in art.13(a) would conclude that it was dealing only with a vote by a show of hands; the right to a poll was enshrined in statute, and the taking of a poll was not dealt with by art.13(a). Accordingly, the Companies Act 2006 s.284(3) applied on such a poll and each member had one vote per share.

On Appeal

Allowing the appeal, the Court of Appeal held: (1) When looking at how the reasonable person would understand the language used in art.13(a), it was legitimate to rely, as part of the background, on the fact that reg.54 of Table A was disapplied. The effect of R’s argument was that the main voting provisions of reg.54 continued to apply under the bespoke provisions, but art.13(a) had other differences from reg.54, in particular the proviso. The instant case was not one where it could seriously be suggested that the reasonable person seeking to understand the words used in the main voting provision would react by saying “it cannot mean what it says”. It meant exactly what it said insofar as it related to a vote on a show of hands. So far as a poll was concerned, given that s.284(3) could by s.284(4) be disapplied by a provision in the articles, there was nothing inherently implausible in it being disapplied in art.13(a). Accordingly, the language of the voting provision in art.13(a) was clear and unambiguous and the court was bound to apply it. (2) Whilst one might express a preference for a mechanism which allowed greater control for those who owned more than one flat, a system based on one member one vote fell well short of commercial absurdity. It was common ground that it applied on a show of hands. It ensured the right of every member to participate in the management of the flats, whilst at the same time securing that, on a change of ownership, a successor in title acquired that right. The owner of multiple flats would moreover not necessarily have the same direct interest in the affairs of L as the owner of a single flat. Whilst it was true that the articles did not distinguish between resident and non-resident owners, a distinction between single and multiple owners was not an absurd or irrational one. R had not made out a case of commercial absurdity.

Nogueira v Westminster City Council [2014] UKUT 327 (LC)

The FTT could not accept undertakings from a landlord to carry out remedial works as opposed to making a finding that the works were not of a reasonable standard.

Facts

Westminster were the freehold owner of a six blocks of residential flats. Ms Nogueira was a leaseholder who represented 35 other leaseholders who owned flats within those blocks. Westminster carried out major works to the six blocks and sought to recover the costs through the service charge. The leaseholders sought to challenge the amount of the service on the basis that they had not been consulted or, alternatively, some of the work was not of a reasonable standard.

First Instance

The FTT found that the consultation requirements had not been complied with but granted Westminster dispensation. No conditions, such as paying the leaseholders’ legal or surveyor’s costs, were attached to the grant of dispensation. The FTT also held that the works were carried out properly, at a reasonable price and to a reasonable standard despite also finding that the standard of the installation in the flats they had viewed was not good. The basis for this decision was that Westminster had given undertakings promising to investigate certain defects and to carry out additional repairs arising from any such defects. The FTT held that as there were 35 leaseholders all raising separate complaints it was unable to decide what reduction should be made to the service charge bill and to whom and this was the only practical way of disposing of the application. Ms Nogueira appealed to the Upper Tribunal.

On Appeal

The Upper Tribunal (HHJ Huskinson) allowed the appeal. The Tribunal was being asked to determine whether the works carried out were to a reasonable standard. It was evident from its decision that it was not satisfied that this was the case and it was not open to Tribunal to hold that the works had been carried out to a reasonable standard on the basis of an assumption that further works would be undertaken. The Tribunal was required to give a decision and reasons in respect of each allegation of works that were alleged not to be of a reasonable standard. It was not open to the Tribunal to duck the issue because the task was too difficult; in applications that concerned a large number of leaseholders the Tribunal was able to make a global reduction rather than considering each leaseholder’s case separately. While it was not necessary to determine the appeal, the Upper Tribunal also held that the FTT was unable to accept undertakings because it had no way of enforcing them.

The FTT had also been wrong not to impose conditions to its grant of dispensation. The leaseholders had incurred the costs of a surveyor. These costs, limited to the work concerning the application for dispensation, were therefore recoverable as a term of dispensation.

Daejan Properties Ltd v Griffin [2014] UKUT 0206 (LC) (Addendum Judgment on s.20C)

It was necessary to first determine the extent to which any of the respondents were liable as a matter of contract (i.e. as a matter of construction of the leases) to contribute towards the landlord’s costs before considering whether to make a s.20C order.

Facts

The LVT decided that the delay in carrying out works had increased the costs of the works and that, to that extent, the tenants were not liable to pay the additional costs. It then made a s.20C order. The UT allowed the landlord’s appeal and held that the costs claimed were reasonable and recoverable through the service charge. (For a summary of the substantive decision on historic neglect see the July 2014 Update.) The landlord then applied to set aside the s.20C order. It argued that there were no grounds for the UT to consider its contractual right to recover the costs it had incurred in these appeal proceedings via the service charge provisions in the (various) leases. No such service charge had yet been raised and the issues of construction of the individual leases had not been a matter for consideration by the LVT.

Decision

It was necessary to first determine the extent to which any of the respondents were liable as a matter of contract (i.e. as a matter of construction of the leases) to contribute towards the landlord’s costs before considering whether to make a s.20C order. If the landlord had no contractual entitlement to recover the costs of proceedings through the service charge that would render the s.20C application, and the appeal on that issue, entirely redundant, and there would be no need to spend further time considering it. Further, the contractual position between each individual leaseholder and the landlord is part of the circumstances which ought to be taken into account in considering the just and equitable outcome. It was also relevant to consider the extent of the landlord’s entitlement to recover its costs and the shortfall which it may sustain if some but not others of the leaseholders were liable to contribute.

Comment

This is an important decision that has gone largely unnoticed because it is in the form of an addendum judgment. The UT did not go as far as saying that, in every application for a s.20C order, it is first necessary to determine if a tenant is liable to contribute towards the costs of proceedings through the service charge provisions of his lease but this case will undoubtedly be cited as authority for that proposition. Arguments on s.20C must now address the proper construction of the lease (if that issue is disputed). This is likely to increase the cost of s.20C applications for the parties and will involve a greater use of the FTT’s resources. This approach is, however, more cost effective and a more efficient use of resources than separate proceedings to determine such issues.

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