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Tanfield’s Michael Walsh and Jonathan Upton represent both parties in important Upper Tribunal decision

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19th December 2019

The Upper Tribunal gives important decision on the meaning of service charges and the powers of Tribunal appointed Managers

Jonathan Upton acted for the Appellants and Michael Walsh acted the Respondents in Oung Lin Chaun-Hui & Others v K Group Holdings Inc & Others [2019] UKUT 0371 (LC).  This case answers some important questions concerning the meaning of service charges and the powers of managers appointed by the First-tier Tribunal under the powers in the Landlord and Tenant Act 1987.

Dismissing the appeal, Judge McGrath held:

1. Payments to a Tribunal appointed manager by tenants are service charges within the meaning of the Landlord and Tenant Act 1985 and are not payments in a self-contained regime under the 1987 Act;
2. The assignment by the manager to the new maintenance trustee of the debts of the lessees that accrued during the manager’s appointment was not void but was unnecessary because those debts automatically vest into the person entitled to receive payment of the service charge at the end of the manager’s appointment.

The Upper Tribunal also gave some important and welcome guidance to the FTT on how it should treat late amendments of fact and law to statements of case.

Case Summary

Facts

Alford House, Park Lane (the “Property”), was a mixed-use block managed by way of a tripartite lease, whereby the First Respondent was the head lessor, the Second Respondent was the Maintenance Trustee  and the Appellants were some of the lessees of flats at the Property. The Property was in a state of disrepair, with disputes over its management and service charges dating back around 20 years.

In 2011 a manager was appointed pursuant to section 24 of the Landlord and Tenant Act 1987 (the “1987 Act”) to manage the Property.  The management order ended on 30 June 2013. During the period of the manager’s appointment, large sums of service charge arrears accumulated as a result of continued non-payment by the lessees. Upon termination of his appointment, the manager assigned the arrears to the Maintenance Trustee by way of a Deed of Assignment, so that the Maintenance Trustee could pursue the lessees for the arrears.

In October 2016, the Respondents issued a claim for maintenance charge and ground rent arrears in the sum of £1,030,337.31, which included the assigned arrears accrued during the manager’s appointment.  This was transferred by the County Court to the First-tier Tribunal (“FTT”).

Issues

At the trial in September 2018, the lessees sought to argue that the Deed of Assignment was of no effect and the Maintenance Trustee was not entitled to recover sums owing to the manager during the management order.  The Maintenance Trustee argued that the point had not been properly pleaded.  The FTT agreed and declined to determine the issue. The lessees were granted permission to appeal on the basis that the case raised “a point of general significance regarding the powers of tribunal appointed managers and the status of sums claimed by them but not paid by the end of their appointment” [19].

The issues on appeal for the Upper Tribunal were:

• Whether it was possible to assign service charge arrears which had been accrued under a management order; and
• Whether the FTT had erred in its finding that the matter had not been pleaded in the first instance.

Argument

Jonathan Upton, on behalf of the Appellants, argued that the appointment of a manager is a self-contained regime, whereby in exercising his functions, a tribunal appointed manager carries them out in his own right. Essentially, it was the Management Order which formed the entire basis of the manager’s functions and powers, (see Maunder Taylor v Blaquiere [2003] 1 WLR 379). This meant that the monies paid under a Management Order are not “service charges” within the meaning of section 18 and therefore the protections under sections 18-30 of the 1985 Act do not apply to sums payable under a Management Order [22] – [23].

It was further submitted that the 2011 and 2012 Management Orders did not make adequate provision about what should have happened following the termination of the manager’s appointment. The manager should have applied for further directions from the tribunal as to how arrears should be collected, but since he did not do so, the Deed of Assignment was of no effect [26] – [27].

Michael Walsh, acting for the Respondents, submitted that the rights and liabilities incidental to the appointment of a manager are vested in him personally, subject to the supervisory jurisdiction of the Tribunal. This means, as the debts were legally vested in him, the manager was entitled to assign them [29].

It was further argued that Mr Watson had acted consistently with the decision in Kol v Bowring [2015] UKUT 530, which stated that accounting processes should be as straightforward as possible under Management Orders [30]. Additionally, in accordance with the 2011 Management Order, the underleases would prevail in the event of any ambiguity. This meant that the maintenance fund was to be held on trust by the Maintenance Trustee.

Decision

The Appeal was dismissed on both grounds.

Judge McGrath (President of the First-tier Tribunal, Property Chamber, sitting as a Judge of the Upper Tribunal (Lands Chamber)) held at [52] – [53] that “payments made [under a management order] by reference to the lease” are service charges falling within sections 18-30 of the 1985 Act.  In so doing she rejected the contention that when “sums are recovered… by a tribunal appointed Manager, they are of a different nature than when they are recovered under the terms of the lease”. Rather, “whilst charges are recovered under the Management Order, they are paid under the lease.”

She continued at [53], applying Maunder Taylor v Blaquiere in her finding that the imposition of a Management Order does not displace the lease covenants and the lessees remain bound by them. Judge McGrath further found that whilst a Management Order may make provisions for matters outside of the lease, the basic position requiring payment for services under the lease was not altered [54].

She further relied on section 24(11) of the 1987 Act, which provides a broad definition of management of a premises, noting that section 24(4) only allows the Manager to apply for directions for the variation or discharge of an order under section 24(9). Such an application would not be suitable to deal with service charges [55] – [57].

Determining whether the Manager can assign the debts accrued during his appointment, Judge McGrath found that it was unnecessary [63]: “The ability of the Maintenance Trustee for the time being, to recover payments due under the leases was suspended by the Order and not extinguished. In those circumstances, there was no need for a Deed of Assignment, although given the entrenched position of the parties in this case, it is understandable why it was executed.”

To not have continuity over the recoverability of service charges without additional orders being made would be impractical and confusing [61]. However, if there are arrears of payments other than service charges, then an application to the FTT would need to be made for directions or for variation of the other [64].

With regard to the second issue, Judge McGrath held that the matter had not been pleaded. Citing the FTT decision at length at [67], she upheld the view that late amendments at that point in the case would only be subject to a proportionality test, as well as one of how prejudiced a party would be if the issue was not considered. [69] – [70]. In the present case, there were insufficient reasons to justify such an amendment.

Giving important guidance on the procedure to be followed where the FTT was considering a late amendment or alteration to their pleaded case, she said at [68] to [70]:

“68. Where a case has reached the stage of final hearing, the Tribunal will usually be reluctant to allow one party to significantly alter their position without good notice having been given to the other party and without permission to depart from the statements of case.

69. If the issue is one of fact, then it will be necessary for the Tribunal to take a view of its importance to the overall determination of the case. This might include questions of proportionality and how much of the case might be affected by the new evidence. The Tribunal will also take into account the possible prejudice to the other side and the reason why the new material was not previously available. Although the FTT is less formal than the court, it is still necessary to impose order and discipline on the way in which cases are conducted in preparation for a hearing and at the hearing itself.

70. If the issue is one of law, then the Tribunal will need to conduct a slightly different approach. Although factors such as proportionality and prejudice will be important, an issue of law can often be dealt with without extending the time for hearing as long as parties have the opportunity to consider the point and if appropriate to seek advice.”

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