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Service Charges & Estate Management Update – January 2015

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6th January 2015

Francis v Philips [2014] EWCA Civ 1395

The correct approach to the meaning of “qualifying works” in s.20 and s.20ZA of the 1985 Act is to identify whether works are parts of a set of works. The question of what a single set of qualifying works comprised has to be determined in a common sense way, taking into account factors which are likely to include where the items of work are to be carried out, whether they are the subject of the same contract, whether they are to be done at the same time or different times, and whether they are different from or connected with each other.

Facts

The case relates to long leases of chalets on a holiday site. The chalets were held to be dwellings within the meaning of s.38 of the 1985 Act so that ss.18-30 applied. The freehold of the holiday site was purchased by the defendants (“the lessors”). In a letter sent to all lessees in May 2008 the lessors indicated their intention to bring the site up to a first class standard and proceeded to carry out works without consulting in accordance with the Consultation Regulations. The lessees welcomed the plans for improvement but not the increase in service charge liability and sought declarations as to the true construction of the leases and injunctions preventing forfeiture.

Issues

There were two issues in the case. The correct approach to the meaning of “qualifying works” in s.20 and s.20ZA of the 1985 Act is of far greater general importance and wider significance than the other issue concerning the correct construction of the lease.

First Instance

As regards the qualifying works issue, the judge applied the three stage test derived from the judgment of Walker LJ in Martin v Maryland Estates, namely:

1. Which of the works fell within the definition of ‘qualifying works’ contained in s.20ZA(2) ?
2. Did those works constitute one or more ‘sets of qualifying works’?
3. Did any of those sets fall below the triviality threshold set by the limit on the cost of those works?

This has become known as the “sets approach”. The judge rejected the lessees’ submission that that the works were one scheme planned in advance, instead finding that there were many disparate pieces of work. As such, no consultation was required.

On the construction issue, the judge held that the lessors were entitled to recover both £95,000 as wages for the lessors and a management charge of 5% of the total costs of certain items of expenditure (which included the cost of the lessors’ wages).

On Appeal to the Ch D

To the surprise of almost the entire industry, the Chancellor (Sir Andrew Morritt) held that the “sets approach” was wrong. There is no ‘triviality threshold’ in relation to qualifying works: all works that are “qualifying works” should be brought into the account for computing the lessee’s contribution. In other words, a landlord must consult the tenants on any service charge items, however small, once the £250 limit for contributions has been reached. This became known as the “aggregating approach”. The decision was curious given that neither party argued that a landlord was required to consult on a distinct set of qualifying works if a lessee’s contribution to the cost of those particular works would not exceed £250: the lessees’ case was that the qualifying works were all part of the same set of works.

On the construction issue, the Chancellor held that a provision allowing the recovery of the pay and expenses of “staff employed” and “fees paid” to agents did not extend to the non-professional management services provided by the Lessors personally.

On Appeal to the Court of Appeal

The Court of Appeal allowed the appeal on the qualifying works issue but dismissed the appeal on the construction issue. It held that the “aggregating approach” is wrong. To apply that obligation to every item of maintenance and repair gave rise to serious practical and administrative problems and could not have been intended by Parliament. Rather, the correct approach is to identify whether works are parts of a set of works. The question of what a single set of qualifying works comprised has to be determined in a common sense way, taking into account factors which are likely to include where the items of work are to be carried out, whether they are the subject of the same contract, whether they are to be done at the same time or different times, and whether they are different from or connected with each other. Ultimately, it is a question of fact and degree.

The Court of Appeal also held that the trial judge was wrong to find that qualifying works must have a permanent effect modifying what was there before. Qualifying works will often be significant or substantial as opposed to minor and insignificant but they do not have to have a permanent effect modifying what was there before. For example, a substantial programme of redecoration or repair would not have a permanent effect modifying what was there before but such a programme would still be qualifying works.

The appeal on the construction issue was dismissed, albeit for different reasons than those given by the Chancellor.

Comment

This decision will be an enormous relief to landlords and managing agents who did not know on which works they should consult tenants. It should also come as a relief to tenants. Sensible tenants do not want to be bombarded with notices asking for their views on small items of expenditure and they do not want to pay the landlord’s costs of complying with the consultation requirements. In future, as was the case before December 2012, the consultation requirements will only apply to individual sets of works. In most cases, it should be obvious whether works comprise one or more sets.

Assethold Limited v Watts [2014] UKUT 0537 (LC)

(1) The landlord’s legal costs incurred in party wall proceedings were not recoverable under the provision to “maintain or repair” but part of the costs (for taking professional advice prior to deciding what course to take and the cost of obtaining an injunction) were recoverable as the cost of “all works installations acts matters and things as in the reasonable discretion of the Landlord may be considered necessary or desirable for the proper maintenance safety amenity and administration of the Development”.

Comment

The UT (Martin Rodger QC) considered the Court of Appeal’s recent decisions in Arnold v Britton and Philips v Francis on the approach to the construction of service charge provisions: there are no special rules of construction for service charges and previous decisions (e.g. McHale v Earl Cadogan [2010] 1 EGLR 51; Gilje v Charlegrove Securities [2002] 1 EGLR 41 and Sella House Ltd v Mears [1989] 1 EGLR 65) “which might have suggested that there were ought properly to be understood as examples of the application of universal principles of contractual interpretation”. It is significant that legal costs were recoverable notwithstanding that the language of the provision in question was general and made no specific reference to legal costs. The Deputy President held: “It seems to me to be wrong in principle to start from the proposition that, with certain types of expenditure, including the cost of legal services, unless specific words are employed no amount of general language will be sufficient to demonstrate an intention to include that expenditure within the scope of a service charge. Language may be clear, even though it is not specific.” It may be more likely that legal costs can be recovered pursuant to a general or “sweeping-up” clause following this decision.

The Supreme Court will hear the appeal in Arnold v Britton on 27 January 2015.

Solarbeta Management Company Ltd v Akindele [2014] UKUT 0416 (LC)

(1) The lessee of a flat on the ground floor of a building was obliged to contribute to the cost of maintaining a lift in a separate part of the building to which she had no access and could not use; (2) the directors’ fees of the tenant-owned management company were recoverable through the service charge under a provision which obliged the management company to “discharge all proper fees salaries charges and expenses payable to…such persons who may be managing the Estate”.

Comment

This case turns on the contractual interpretation of the specific provisions of the lease but it may be assist tenant-owned management companies to recover some of the costs incurred in running the company (e.g. filing accounts at Companies House).

Garrick Estate Ltd v Balchin [2014] UKUT 407 (LC)

A tenant’s covenant to pay “by way of service charge the due proportion as hereafter defined of the expenditure incurred or to be incurred…” (emphasis added) enabled the appellant landlord to recover service charges on account.

Comment

This case is also turns on the contractual interpretation of the specific provisions of the lease.

Windermere Court Kenley, RTM Company Limited v Sinclair Gardens Investments (Kensington) Limited [2014] UKUT 0420 (LC)

On the proper application of the corresponding date rule as expounded in Dodds v Walker [1981] 2 All ER 609 (HL), the FTT was wrong to hold that a claim notice was invalid by reason of the specified date not satisfying the requirements of s.80(7) of the 2002 Act.

Facts

On 29 August 2013 the appellant RTM company gave a claim notice to the respondent under s.79(6) of the 2002 Act, specifying that the respondent must respond to it by giving a counter-notice by 30 September 2013, that it intended to acquire the right to manage the subject premises on 31 December 2013.

Section 80 of the 2002 Act prescribes the contents of the claim notice. There are two material provisions for these purposes:

“(6) It [the claim notice] must specify a date, at least one month after the relevant date, by which each person who was given the notice under section 79(6) may respond to it by giving a counter-notice under section 84.

(7) It [the claim notice] must specify a date, at least three months after that specified under subsection (6), on which the RTM company intends to acquire the right to manage the premises.”

For these purposes, “the relevant date” is 29 August 2013, when the claim notice was given, and 30 September 2013 is the date specified under s.80(6). The FFT held that the claim notice was invalid and so dismissed the application because 1 January 2014 was the earliest date which could have been specified under s.80(7)

Issue

Whether or not 31 December 2013 satisfied the requirements of s.80(7) or whether the earliest date it could have been was 1 January 2014.

Decision

The UT (HHJ Gerald) allowed the appeal and held that the claim notice was valid and an effectual to exercise of the right to manage. The application of the corresponding date rule in this case requires that the date must be ‘after’ midnight on 30-31 December 2013 from which it follows that specifying the date as being 31 December 2013 (being ‘after’ midnight on 30-31) satisfied the requirements of s.80(7) so that the claim notice complied with the provisions of s.80 of the 2002 Act.

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