Tanfield members James Fieldsend and Amanda Gourlay acted for the respondent on this case.
A local authority was required to give credit to leaseholders for funds received from third-parties when recovering a contribution to the cost of major works.
Ms Oliver was a long-leaseholder of a flat located on a large Council-owned estate. Major works were conducted on the whole estate, funded in part by N Power, as the Council’s commercial partner under the government’s Community Energy Savings Program (CESP). Although a certain amount of the CESP funds were attributable to works on Ms Oliver’s property, the Council did not allow for this in her bill for the major works. One difficulty for the Council in this regard was that the CESP funding was not applicable to the whole estate, and only related to certain works to certain properties in the areas where it did apply.
The relevant covenant to pay service charges was a follows:
“Subject (so far as applicable) to the provisions of paragraphs 16A to 16D and 18 of Schedule VI of the 1985 Act to pay to the Council from time to time as part of the Service Charge a reasonable part of the costs and expenses which the Council may from time to time incur or estimate to be incurred in carrying out repairs and improvements to the structure and exterior of the demised premises and the Building …”
Whether, when quantifying the service charge payable by a lessee under a long lease of residential property, credit must be given by the lessor in respect of a third party contribution towards the cost of carrying out repairs and improvements to the property, so as to avoid any element of double recovery by the lessor.
Ms Oliver had challenged the recoverability of the major works charges on numerous grounds and had been unsuccessful before the Leasehold Valuation Tribunal. On appeal to the Upper Tribunal she was also largely unsuccessful, but she succeeded in part in relation to the CESP funding. Martin Rodger QC (Deputy President) found that, to the extent that the Council’s expenditure on the cladding works had been funded by Npower under the CESP Scheme, that part of the cost had not been “incurred” by the Council within the meaning either of clause 3(29) of, or paragraph 1 of Part III of the Schedule to, the Lease.
Decision on appeal
The Court of Appeal was essentially faced with two questions. Firstly, was the Upper Tribunal correct to prevent the Council recovering its expenditure subsidised by the CESP scheme form the Leaseholder? Secondly, if the Upper Tribunal was correct, what was the contractual or statutory basis for this position?
In relation to the First Issue, the Court of Appeal unanimously agreed that the Council were not entitled to ‘double recovery’. The Respondent’s submission that the lease should be constructed so as to prevent double recovery and a windfall for the lessor found favour with the Court of Appeal.
In relation with the second issue, the Court of Appeal considered whether and how the lease could be constructed in order to prevent double recovery. The Court considered that it had 3 options in this regard:
- Ascribing a limited meaning to the phrase “cost and expenses which the Council may in time to time incur” (in clause 3(29)) and the phrase “costs, expenses and outgoings incurred … by the Council” in the relevant schedule to the lease; or
- Treating “actual costs, expenses and outgoings” in paragraph 6 of Part III of the Schedule as limited to those which leave the Council out of pocket; or
- Treating the avoidance of double recovery as a matter to be taken into account when determining a “fair proportion” of the Council’s incurred costs, expenses and outgoings to be paid by the Lessee, under paragraph 1 of Part III of the Schedule.
Both Briggs and Longmore LJJ felt that it was artificial to construe the word ‘incur’ so as to limit it to the net costs that fell upon the lessor. They considered that the matter was best approached a question of what was a ‘fair proportion’ of the charges incurred to be paid by the lessee.. Lewison LJ disagreed. For him, the best way to approach the problem was to construct the term ‘actual costs, expenses and outgoings’ as the costs that ultimately leave the lessor out of pocket.
Although this case focussed on the construction of particular service charge provisions in the lease at hand, it has potentially wider implications. The primary submission from the Respondent, that the service charge provisions should be constructed so as not to permit double recovery by the lessor, is likely to apply to the vast majority of residential leases, in the absence of a clear indication otherwise.
The construction favoured by Briggs and Longmore LJJ also necessitated a review of the authorities relating to the tribunals’ and the courts’ jurisdiction to interfere with decisions made by the lessor as to the apportionment of service charges between the lessees, where the lease clearly provides leaves a discretion to the lessor. In this regard, Briggs LJ approved the decisions of the Upper Tribunal in Gater v Wellington Real Estate Limited  UKUT 0561(LC) and Windermere Marina Village Limited v Wild  UKUT 0163(LC) that it is permissible for the appropriate tribunal to determine whether the lessor’s apportionment of service charges is fair, and that any provision that attempts to exclude the jurisdiction of the tribunal by making the lessor’s decision in this regard ‘final and binding’ or by other similar words will be of no effect. Therefore, in this case it would have been permissible for the Upper Tribunal to ask, was the lessor’s approach to apportionment fair and to conclude that any apportionment that allowed for double recovery was not. Thus ‘fair apportionment’ constituted the ‘peg’ upon which Briggs and Longmore LJJ felt it best to hang the principle that a Landlord should not be entitled to double recovery.
Finally, as pointed out by Briggs LJ in his judgment, the principle has a wider application than just the CESP scheme. Double recovery scenarios could easily arise in circumstances where costs of works were recovered under the lessor’s or a third party’s insurance or where work was carried out under a builder’s guarantee. Tenants and landlords would be well advised to be alert to potential double recovery scenarios when considering service charge recovery.