Cost of Replacing Heat Interface Units as Service Charge Allowed

OUTCOME: Allowed

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00BA/LSC/2022/0046 Property : [ADDRESS], Windmill Trading Estate, 302 - 310 Commonside East, Mitcham, [POSTCODE] Applicant : [redacted] : [COUNSEL] (Counsel) [COMPANY] (Solicitors) Respondents : [redacted] properties listed in Schedule 1 hereto [NAME] : Determination of payability of service charges under section 27A of the Landlord and Tenant Act 1985 Tribunal : Judge [NAME] of Hearing : 20 October 2022

DECISION

Decision of the tribunal

The Tribunal determines that the cost of replacement of each individual Heat Interface Unit (“HIU”) would be recoverable as service charges payable by the [NAME] to the [NAME] under the terms of the lease.

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The Hearing The hearing was conducted at [ADDRESS] as a hybrid hearing.

REASONS FOR THE DECISION

The Property 1. This [NAME] relates to an estate comprising nine separate blocks consisting of 212 flats and seven townhouses, together with one retail unit.

2. The Applicant is the freehold owner of the estate. The Respondents are the leasehold owners of 102 of the residential units on the estate. The [NAME]

3. The [NAME] has applied to this Tribunal under section 27A of the Landlord and Tenant Act 1985 for a determination of the [NAME]’ liability to pay service charges.

4. In this case, there is no [NAME] relating to the reasonableness of the amount of any service charge, nor the reasonableness or standard of any particular set of proposed or completed works. As at the date of the [NAME] and the hearing, no sum had been demanded by way of service charge and (as far as we are aware) no costs had been incurred. No estimated figure appears in the [NAME].

5. Instead, the Applicant seeks a determination under subsection 27A(3) as to whether a particular item of expenditure would be recoverable in the 2022 service charge year under the service charge provisions of the leases in question.

6. The wording of the subsection is important in this case, because there is an issue concerning the Tribunal’s jurisdiction. Subsection 27A(3) reads as follows: (3) An [NAME] may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to— (a) the person by whom it would be payable, (b) the person to whom it would be payable,

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(c) the amount which would be payable, (d) the date at or by which it would be payable, and (e) the manner in which it would be payable.

7. The relevant part of the [NAME] form reads as follows: “Cost of replacement of individual heat interface units in each individual flat – value TBC. The Applicants seek a determination as to whether the above proposed works are the responsibility of the Applicant under the terms of the Respondents’ Leases and, if so, whether the costs of these proposed works would be recoverable as service charge from the Respondents. In particular, the Applicants seek a determination as to whether the repair/replacement of the heat interface units is the responsibility of the Applicant or the Respondents pursuant to the clauses of the Respondents’ Leases.” 8. This [NAME] therefore seeks only a determination under (i) the main body of subsection 27A(3) (as to whether a service charge would be payable for costs incurred of a specified description) and (ii) under (3)(a) and (b) as to the persons by whom and to whom it is payable. There is no [NAME] relating to the amount which would be payable. The jurisdiction issue 9. It is common ground between the parties that in order for us to make the determination requested, the Tribunal needs to construe relevant terms of the lease.

10. The [NAME] claim that the First-tier Tribunal does not have jurisdiction to interpret the lease in respect of service charges (as opposed to determining the reasonableness of service charges) and that this [NAME] should have been made in the county court.

11. If this [NAME] had been made before the coming into force of the Commonhold and Leasehold Reform Act 2002 in 2003, the Respondents may have been right. But the 2002 Act added section 27A to the 1985 Act for the stated purpose of conferring on the Tribunal the jurisdiction to decide service charge issues which would require the construing of the lease. In Southend on Sea BC v Skiggs [2006] 2

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EGLR 87, the Lands Tribunal (as it then was) confirmed that that was indeed the effect of section 27A.

12. We therefore reject the [NAME]’ jurisdiction point. This Tribunal does have jurisdiction to interpret the lease for the purposes of [NAME] the determination sought by the [NAME]. Parties 13. At the beginning of the hearing, preliminary points were raised about whether certain Respondents should be removed as parties. We made no orders removing parties. Mr [COUNSEL] appeared as representative of some of the Respondents. All other Respondents had the opportunity to appear at the hearing and make any submissions. No other Respondents chose to address us at the hearing.

14. The Applicant chose to make this [NAME] against a specified list of Respondents. This determination is therefore binding on all the named Respondents, whether or not they were represented by Mr [NAME], whether or not they consent to the [NAME] and whether or not they chose to attend the [NAME] and make representations of their own. Factual background 15. The factual background to the issues is as follows. There is a communal heating system which supplies heating to each of the Respondents’ dwellings. There are centralised boilers which are connected to communal pipework. Each dwelling has its own heat interface unit (“HIU”). The communal pipework supplies hot water to each HIU where it exchanges hot water to the dedicated heating pipework for each individual dwelling. None of the dwellings have their own boilers. They are all served by the [NAME].

16. According to the Applicant, there is a fault in the system. Permanent uncontrolled flow rates of water through the [NAME] have resulted in overheating in the dwellings and in the communal areas. This is also damaging the entire [NAME] and reduces the working life of the equipment. The fault is in the individual [NAME], all of which need to be replaced. We have set out the alleged fault in the [NAME] as part of the factual background only. We make no findings at to whether there are any faults or what works may be required (if any) for the reasons set out above.

17. The sole issue which we need to determine is whether the cost of the replacement of the [NAME] are costs for which a service charge would be payable by the [NAME] to the [NAME].

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The relevant covenants in the leases 18. We have been supplied with some sample leases. One of them is dated 14 September 2012: it is a lease of [ADDRESS] demised by [COMPANY] to [NAME] for a term of 99 years from 12 September 2012. It is common ground between the parties that the relevant terms of all the leases in question are virtually identical for the purposes of this determination.

19. The primary issue is whether the costs of HIU replacement can be recovered as service charge. So the first step is to establish the service charge liability under the leases.

20. The lessee covenants in clause 7.1 to pay the “Service Charge” to the landlord. The “Service Charge” is defined in Schedule 5 (Schedule 9 in some leases) as “the Specified Proportion of the Service Provision plus the Estate Proportion of the Estate Provision”. We are not concerned here with the proportion. The “Service Provision” is defined in Schedule 5 (Schedule 9 in some leases) as the sum calculated in accordance with clauses 7.3-7.5 inclusive. Clause 7.4 defines the “Service Provision” as: “all expenditure reasonably incurred by the Landlord in connection with the repair, management, maintenance and provision of services for the Building and shall include…: (a) the costs of an incidental to the performance of the Landlord’s covenants contained in … clause 5.3 … (m) the cost of supplying heating and hot water services and the cost of repairing maintaining and renewing the heating and hot water systems…” 21. Clause 5.3 contains the landlord’s repair covenant. It requires the Landlord to: “maintain, repair, redecorate, renew and (in the event in the Landlord’s reasonable opinion such works are required) improve: … (b) the Service Media, cisterns and tanks and other gas, electrical, drainage, ventilation and water apparatus and machinery in under and upon the Building (except as serve exclusively an individual flat in the Building…) (emphasis added)

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22. “Service Media” is defined by Schedule 5 (Schedule 9 in some leases) to mean “drains, sewers, conduits, flues, gutters, gullies, channels, ducts, shafts, watercourses, pipes, cables, wires, mains, electrical risers, aerials and any other conducting media”.

23. The “Estate Provision” is defined in similar terms to the “Service Provision” save that the expenditure there relates to the “Estate” rather than the “Building”. It is not suggested by either party that the issue for determination relates to the Estate Provision, because the [NAME] are all in the Building.

24. At clause 6.5 of the sample lease, there is a landlord’s covenant relating to the provision of heating. It requires the landlord at all times to “use its best endeavours - to maintain a reasonable and adequate constant supply of hot water” and “to keep the Premise adequately heated between reasonable dates and hours”.

25. Other relevant parts of the leases are as follows: (i) The lessee’s repair covenant. There is a lessee’s covenant at clause 3.4 to repair “the Premises” (excluding damage caused by insured risks). “The Premises” is defined by para 2(g) of Schedule 1 to include “the Service Media within and exclusively serving the Premises” and – by para 3(c) to exclude “Service Media and machinery and plant within (but not exclusively serving) the Premises”. So if the [NAME] falls within the definition of service media which is within the demised premises and exclusively serves the demised premises, then repairing/replacing each HIU will be the responsibility of each individual Respondent lessee. (ii) Schedule 3 contains an easement allowing the [NAME] (and their contractors) to enter into the Building or the Estate to repair Service Media. (iii) Schedule 4 contains an easement reserved for the landlord (and its contractors) to enter into the Premises for the purposes of carrying out its lease obligations. The Issues 26. It is clear from the lease provisions that the issue for determination depends on: (a) whether the [NAME] which need repair/replacement are “service media” or any other of the items listed in clause 5,3(b); and

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(b) whether each HIU serves exclusively an individual flat in the Building; and/or (c) whether the replacement of the [NAME] is part of the cost of supplying heating and hot water services 27. It is common ground that the [NAME] are inside the demised premises. It is also common ground that the [NAME] are “service media” within the meaning of the leases. The only factual issue for us to resolve is whether each HIU exclusively serves the dwelling in which it is situated or whether it serves some function which extends beyond serving the individual dwelling in which it is situated. Discussion of the Applicant’s Case 28. The Applicant’s case is that each HIU does not exclusively serve the individual dwelling in which it is situated. They say that while each HIU provides heating and hot water only for that dwelling, it serves another function of regulating the overall operation of the entire system. The Applicant claims that even a single malfunctioning HIU can have an impact on the overall operation of the [NAME].

29. The Applicant explains the working of the system as follows. The HIU heats the water in the pipes of the individual dwelling to the desired temperature for heating and hot water provision for that individual dwelling. The HIU is then responsible for setting the temperature of its water for the purposes of its release back into the [NAME].

30. The Applicant relies for evidence on a report dated 13 April 2021 from [COMPANY] (“[NAME]”) who are certified [NAME] of the Chartered Institution of Building Services Engineers. The author of the report, [NAME], is a commercial gas manager at [NAME]. It is based on an inspection of the system and is accompanied by photographs.

31. In the introduction the report states that [NAME]: “form a significant part of heat networks and serve a fundamental part in distributing the energy from plant rooms to the end users.” 32. This demonstrates (as both sides agree) that each HIU serves its individual demised dwelling. But the introduction continues: “When HIU’s are incorrectly specified or perform outside the required parameters it can have a damaging effect on the entire system. This may encompass mechanical

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reliability, life span of the system and plant room, as well as energy efficiency and heating hot water costs.” 33. In the remainder of the report, Mr [NAME] provides the detail of how this works. In broad terms, it is clear that each HIU fulfils at least two functions. The first is to provide heat to the individual piping system within the dwelling through heat exchange. It is important to understand that the HIU does not supply water to the piping inside the dwelling. It is the heat from the [NAME] water in the HIU which heats up the water in the individual piping system of the dwelling. It is heat which is exchanged, rather than water. The second function of the HIU is to return [NAME] water back into the [NAME]. This has to happen within a specific range of temperature in order for the system as a whole to function properly. An HIU which is not in proper working order does not properly regulate the return temperature of water back to the system.

34. Mr [NAME] conclusion includes the following: “Although each HIU plays only a small part in a [NAME] when multiplied many times incorrect servicing or no servicing of these units can lead to a large number of deficiencies within any system or heat network, including: • Poor reliability of the system • Shortened life span of plant room appliances • High energy bills for all residents connected on the same network” 35. Mr [NAME] also remarks that it is important for a single contractor to be responsible for the servicing and repair of all of the [NAME] in a [NAME]. This is necessary so that the system as a whole can be regulated. The question of whether one or more contractors might maintain the [NAME] is not of itself a criteria in our decision, but it seems to us that this is an additional support for the Claimant’s contention that the [NAME] are an intrinsic part of the effective operation of the whole system and therefore do not exclusively serve the individual dwelling.

36. Mr [NAME] was not called to give oral evidence, but the truth of the contents of his report were not challenged by the Respondents. We took the view that it was safe to give weight to Mr [NAME] report. It made logical sense and accorded with what we could see (from photographs and other documents) of how the system operated.

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Discussion of the Respondents’ case 37. The [NAME]’ case is essentially that the [NAME] had, until shortly before the issue of this [NAME], taken the opposite position to its current position on whether the repair and replacement of [NAME] can be recovered as service charges. In particular: (a) The [NAME] has previously argued in correspondence (for example in a letter to [NAME] dated 27 March 2021) and that the [NAME] exclusively serve the demised premises and that each [NAME] is responsible to repair and service their own HIU. (b) In 2015, the [NAME] informed the Respondents that any costs associated with latent defects in the communal heating and [NAME] (on the basis of a 2015 report) would not be recovered through the service charges. (c) In 2021, the [NAME] stated an intention to seek a variation of the leases to allow the [NAME] to repair/replace the [NAME], thereby implying that they did not currently have the power or obligation to do so.

38. In our judgment, the fact that the [NAME] has previously argued the opposite of its current position is not of itself a bar to the success of its current [NAME]. The question whether the [NAME] can charge the cost of replacing/repairing [NAME] to the [NAME] as a matter of principle is solely a question of interpretation of the lease. Either it is or it is not. The fact that a party has changed its mind on the issue does not affect our determination, which is based on an [NAME] of our interpretation of the lease to the physical reality of the building and the premises. The question of what (if anything) has been said in relation to latent defects is not relevant here, because we are not being asked to consider any particular scope of works or their cause. There is no allegation by the [NAME], nor any evidence, that the [NAME] is prevented by any form of estoppel from putting its current argument in this [NAME].

39. On the factual question of the physical operation of the [NAME], the [NAME] attempted to demonstrate that the [NAME] do exclusively serve each individual dwelling by referring to a schematic plan which had been disclosed by the [NAME]. The difficulty with proving anything from this schematic was that it did not come with a key to enable interpretation of the symbols and shapes used in it. The [NAME]’ representatives nevertheless urged us to make certain assumptions and inferences about what the various symbols, shapes and descriptions on the schematic were intended to represent. To that end, Mr [NAME] attempted to produce,

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during the hearing, some material he had gathered from research on the internet. The material not been previously disclosed to the other side and they did not have the opportunity to take instructions on it. In any event, Mr [NAME] had no way of demonstrating the truth of the content of any of the material he found on the internet. It would have been unjust and unfair for us to rely on that material, so we decided not to admit it into evidence.

40. The [NAME] submitted that the phrase “isolation valve” on the schematic meant that each HIU could be isolated from the communal heating system and that therefore each HIU did exclusively serve its individual dwelling. But we were not satisfied that we could draw conclusions about the operation of the system from assumptions about what certain symbols and words might mean on the schematic. In addition, the fact that a part of a system could be isolated from another part does not mean that it exclusively serves one part of the system in the ordinary course of its operation. We therefore reject the [NAME]’ submission that the isolation valves shown on the schematic prove that the [NAME] exclusively serve each dwelling.

41. The Respondents further argued that even if this decision were to go against them, its effect would be restricted to the service charge year 2022, because that is the year which was specified on the section 27A [NAME] form.

42. We disagree. It is true that the [NAME] was made in respect of the service charge year 2022, but this is a decision as to the interpretation of the lease as it applies to the physical construction and operation of the [NAME]. It will be binding on all parties for as long as the lease terms and the physical design of the communal heating system remain the same.

43. The [NAME] in their skeleton argument have raised the question whether the [NAME] have reached their operational life. That issue is outside the jurisdiction of this Tribunal under this [NAME]. The only question under this [NAME] is whether works to replace the [NAME] would be payable as service charges as a matter of principle. There is no issue upon which we would be able or required to make a finding of fact about the current condition of the [NAME].

44. The [NAME] in the same skeleton argument seek a variety of determinations, findings, orders and remedies which are not the subject of this [NAME] and many of which are not within our jurisdiction. We are not able to consider any of those. We will consider only the issue defined above.

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Conclusion 45. For all the reasons set out above, we accept the evidence of [APPELLANT] and the substance of the Applicant’s case. And we reject the Respondents’ case. We therefore make the following findings: (a) Each HIU which is located within the demised premises of each of the Respondents does not exclusively serve the demised premises in which it is situated;

(b) Under the terms of the leases, the landlord’s repair covenant in the leases therefore extends to the [NAME];

(c) it follows that the Applicant’s costs of complying with the landlord’s repair covenant in relation to the [NAME] are payable as service charges (in accordance with the terms of the lease and any other relevant statutory provisions) by the Respondents to the Applicant.

46. We have therefore made the order set out at the outset of this decision.

47. We repeat that this decision relates solely to the limited issue which the [NAME] raised in its [NAME]. Nothing we have said in this decision relates to the reasonableness of the costs of any works to the [NAME] or the standard or necessity of any particular works.

Name: Judge T [NAME]: 6 February 2023

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Rights of appeal

By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, the tribunal is required to notify the parties about any right of appeal they may have. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber), then a written [NAME] for permission must be made to the First-tier Tribunal at the regional office which has been dealing with the case. The [NAME] for permission to appeal must arrive at the regional office within 28 days after the tribunal sends written reasons for the decision to the [NAME]. If the [NAME] is not made within the 28 day time limit, such [NAME] must include a request for an extension of time and the reason for not complying with the 28 day time limit; the tribunal will then look at such reason(s) and decide whether to allow the [NAME] for permission to appeal to proceed, despite not being within the time limit. The [NAME] for permission to appeal must identify the decision of the tribunal to which it relates (i.e. give the date, the property and the case number), state the grounds of appeal and state the result the party [NAME] the [NAME] is seeking. If the tribunal refuses to grant permission to appeal, a further [NAME] for permission may be made to the Upper Tribunal (Lands Chamber).

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