First-tier Tribunal recalculates service charges for mixed-use development

OUTCOME: Allowed

© CROWN COPYRIGHT 2013

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case Reference : LON/00BJ/LSC/2017/0268

Property : [ADDRESS] [POSTCODE] Applicants : [redacted] (1) [COMPANY] (2) [COMPANY] (3) Representative : [NAME] [COUNSEL] of Counsel Respondents : [redacted] : [NAME] [COUNSEL] appeared in person and [NAME] [COUNSEL] appeared on behalf of the certain of the Respondents Type of [NAME] :

The determination of the recalculated service charge percentages Tribunal Members : Judge N [NAME] [NAME] and venue of Hearing : 26 [ADDRESS] [POSTCODE] Date of Decision : 22 July 2019

DECISION

Decisions of the Tribunal

2 (1) Pursuant to paragraph 5 of the order of His Honour Judge Gerald dated 10 January 2019, the Tribunal determines that the re-calculated service charge percentages are the percentages which are set out in under the heading “New” in the tables which are annexed to this decision. (2) The Tribunal makes an order under section 20C of the Landlord and Tenant Act 1985 that 80% of the costs incurred by the Applicants in connection with these proceedings before the First-tier Tribunal for the determination of the recalculated service charge percentages are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by [NAME] [NAME]. (3) The Tribunal does not make an order under section 20C of the Landlord and Tenant Act 1985 in favour of any of the remaining Respondents. The background 1. By a decision dated 8 March 2018, this Tribunal made a determination concerning the service charge provisions relating to Ivory House and [NAME]. Ivory House and [NAME] form part of the development known as [ADDRESS] which is situate at [ADDRESS] [POSTCODE], between Battersea and Wandsworth Bridges on the River Thames. [NAME] [NAME] and [NAME] [NAME] are the long-lessees of flats at Ivory House.

2. An appeal against the decision of 8 March 2018 was determined on 8 January 2019 by His Honour Judge Gerald sitting in the Upper Tribunal (Lands Chamber). The appeal was dismissed for the reasons which are set out in the Upper Tribunal’s judgement.

3. Paragraphs 2 to 13 of the judgement of the Upper Tribunal provide as follows: 2. [ADDRESS] is a large mixed-use development comprising 13 blocks of residential and commercial units, some high rise, some not, with external communal land developed by the predecessor-in-title to the present freeholder [NAME] ([ADDRESS]) [RESPONDENT], the First Respondent, long common-form leases of the residential units having been granted to which the management company [RESPONDENT], the Second Respondent, was a party.

3. As originally developed, [NAME] comprised residential units on the upper floors with commercial units on the lower floors all of which contributed to the service charge provisions under their respective leases, the commercial units of Ivory House occupying 52% of the floor area yet contributing some 82% of the service charge and [NAME] occupying 49.3% yet contributing to some 78% of the service charge of which approximately two-thirds was accounted for

3 by “the Estate Costs”, being estate-wide service charge costs associated with [ADDRESS] rather than block-specific costs.

4. In 2015/16, the freeholder accepted a surrender of some of the leases of the commercial units which were then re-developed, or re- configured, to provide new residential units with additional internal communal areas exclusively serving, I am told, those new units. Ivory House originally comprised 14 commercial and 14 residential units but now comprises 41 residential and 1 commercial units, the original 13 commercial units having been converted into 27 new flats with associated new communal areas. [NAME] comprised 14 commercial and 12 residential units but now comprises 19 residential and 10 commercial units, the original 4 commercial units having been converted into 7 new flats with associated new communal areas. There has been no change to the area of either building.

5. The freeholder granted a long lease of the whole area comprising the new residential units to [COMPANY] (as trustee of [COMPANY]) which granted an underlease of that area to [RESPONDENT], the [NAME] Respondent, which then granted or is to grant long leases of the new residential units to [NAME] parties, but nothing turns upon the legal structure adopted as all new leases are on the same terms as the previous ones. For brevity, I shall simply refer to “the new leases” and “the original leases” so far as the residential units are concerned and to “the landlord” being the [NAME].

6. In broad terms, the service charge contributions under the original leases was apportioned by measured floor area of the respective units which was adopted in relation to the new leases and are stated as a fixed percentage in the leases. This resulted in service charge shortfalls of some 29% in respect of Ivory House and 9% in respect of [NAME] because the service charge in respect of the commercial units had not been apportioned by measured floor area but weighted on a basis which, as already stated, resulted in them bearing a higher share of the overall service charges than the residential units, which is referred to in the Decision as the “lost commercial Payment”.

7. Despite extensive researches, it has not been possible to divine the basis upon which the commercial units’ service charge contributions were weighted or apportioned or the reason why, save to say that it was not by measured floor area and that it is not uncommon for commercial units to bear a higher share of the service charge than residential units or precisely why such a high proportion of the Estate Costs were attributed to [NAME]. The minute a different basis of service charge apportionment is used in relation to the same space, it will inevitably result in, in this case, a shortfall which will in that sense disproportionately affect the other units because it will have to be spread across those other units if the landlord is to recover

4 100% of service charge costs, consistent with the usual way in which service charge provisions operate or are intended to operate.

8. It was in those circumstances, which were to some extent of its own [NAME] because the landlord could simply have apportioned the former commercial units’ service charge share amongst the new residential leases, although that would have resulted in their service charge contributions being out of kilter with those of the original residential leases, that the landlord sought to exercise its right to re-calculate the service charge apportionments contained in paragraph (9) of Part I of the Second Schedule to the leases: “(9) If in the opinion of the Lessor it should at any time become necessary or reasonable to do so by reason of any new buildings being constructed and brought within the Estate whether or not on land now forming part of the Estate or by reason of any of the premises in the Building or the Estate being added to ceasing to exist or to be habitable or being compulsorily acquired or requisitioned or ceasing to form part of the Estate or for any other reason the Lessor or its surveyor shall re-calculate the Service Charge percentage proportions either as appropriate to the remaining Units within the Building (but in the same ratio as the existing proportions) or to the Building in relation to the Estate (as the case may be)…”.

9. The words in brackets have been referred to throughout as “the ratio requirement”. The “Building” is defined by clause 1.1.4 as meaning “the building or buildings of which the Demised Premises form part [Ivory House and [NAME]] including all additions and alterations and improvements thereto and … which forms part of the Estate [[ADDRESS]]”. The “Units” are also defined, which I shall refer to later.

10. That power is common to all original and new leases, save that two flats, 19 Ivory House and 15 [NAME], have the benefit of a proviso preventing any increase in service charge percentages which provides as follows: “Provided always that any re-calculation of the Service Charge percentage proportions shall not result in an increase in the Service Charge percentages referred to in this Lease”. It is unclear why those two flats, which I shall refer to as “the two excepted units”, were granted that exception, it being possible that it might have been by reason of those leases being granted at a time when the then freeholder was in administration, but nothing turns on this.

11. In the absence of agreement of all affected lessees as to the re- calculation proposed by the landlord, the Respondents, being the

5 Applicants to the [NAME], sought determination by the [NAME] as to the proposed new service charge percentages which had been calculated upon the expert advice of surveyors [NAME] [NAME] [NAME] and [NAME] [RESPONDENT] who had been engaged by the landlord in respect of which the Respondents before the [NAME], being the [NAME] before this Tribunal, engaged the services of [NAME], MAE.

12. The question to the [NAME] was framed as a determination, rather than an approval, because it was conceded and is common ground that the effect of section 27A(6) of the Landlord and Tenant Act 1985 is that to the extent that paragraph (9) ousted the jurisdiction of the [NAME] it was void and falls to be determined or exercised by the [NAME], not the Lessor or its Surveyor, by reason of [COMPANY] v Wild [2014] UKUT 163 (LC); [2014] L&TR 30 and [NAME] v [NAME] [COMPANY] [2015] [2014] UKUT 0561; [2015] L&TR 19) as approved by the Court of Appeal in [NAME] v Sheffield City Council [2017] EWCA Civ 225; [2017] 1 WLR 4473.

13. The upshot of the Decision is that the [NAME] determined that the service charge apportionments be adjusted by apportioning the service charge shortfalls across the original and new residential units and also the remaining commercial units of each block so preserving the ratio of the existing proportions of the existing units, save for the two excepted flats whose service charge percentages remained unaltered as they were protected by the cap. In so doing, the [NAME] adopted the same approach as that proposed by the landlord except that it determined that the shortfalls should be apportioned across all units so rejecting the landlord’s proposal that the remaining commercial units be omitted from apportionment of the shortfalls, in respect of which there is no appeal.

4. By an order dated 10 January 2019, the Upper Tribunal gave the following directions: … 2. By 4 pm on 14th January 2019 the Respondents shall serve upon the [NAME] and [NAME] [NAME] a schedule re-calculating the service charge percentages as provided by the decision of the [NAME] which shall show on a unit-by-unit basis the service charge percentage as stated in the original or existing leases and associated ratios and the new or re- calculated service charge percentages and ratios.

3. By 4 pm on 25th January 2019, the [NAME] shall respond thereto stating what they agree with or do not agree with and stating their counter-calculations and the reasons therefor, failing which the Respondents’ figures shall stand.

4. By 4 pm on 15th February 2019 the Respondents shall respond thereto, failing which the [NAME]’ figures shall stand.

6 5. In the event that the re-calculated service charge percentages have not been agreed, the same shall be remitted to the [NAME] (as originally constituted, if possible) for further directions and determination.

5. The re-calculated service charge percentages were not agreed and, accordingly, the matter was remitted to the First-tier Tribunal.

6. Directions were given by the First-tier Tribunal on 14 March 2019 and 29 May 2019 leading up to an oral hearing before the Tribunal, as originally constituted. The hearing 7. The hearing of this matter took place on 26 June 2019. The Applicants were represented by [NAME] [COUNSEL] of Counsel at the hearing, seventeen of the Respondents were represented by [NAME] [NAME], and [NAME] [NAME] represented himself.

8. The Tribunal heard oral evidence from [NAME] [NAME], an Accounts Manager employed by [COMPANY] (“[NAME]”). The Tribunal was informed that [NAME] is the managing agent. [NAME] [NAME] was cross-examined by both [NAME] [NAME] and [NAME] [NAME]. The issues 9. [NAME] [NAME] sought to argue that there is in fact no service charge shortfall which is payable by the residential lessees. [NAME] [NAME] adopted this as his first point but he did not seek to add to [NAME] [NAME] submissions.

10. If the first argument which was advanced were to succeed, the lessees’ service charge percentages would remain unchanged. [NAME] [NAME] initially put forward two alternative proposed service charge re-calculations. [NAME] [NAME] proposed first re-calculation resulted in a slightly lower shortfall to be apportioned. His second proposed re-calculation was almost identical to that of the Applicants (the differences were generally in the order of only a few pence per year). 11. [NAME] [NAME] maintained that his figures are correct and that his proposed methods of re-calculating the service charge percentages are preferable to those which have been adopted by the Applicants.

12. However, during the course of the hearing, [NAME] [NAME] agreed not to pursue his case concerning his two proposed detailed service charge re- calculations. He stated “for the sake of moving things forward I will concede that, on the Applicants’ case, their figures can be relied upon in

7 terms of mechanics despite the very slight difference between them and my figures”. [NAME] [NAME] stressed that he was [NAME] these concessions solely on his own behalf and that he does not represent any of the other lessees.

13. The Tribunal recognises that, in [NAME] these concessions, [NAME] [NAME] was simply seeking to find a practical and proportionate way forward which would save both time and resources having regard to the [COMPANY] nature of the differences between his figures and those of the Applicants (if the Tribunal did not accept the submissions made by [NAME] [NAME]). This is not withstanding that [NAME] [NAME] had accepted in oral evidence that the method of calculation adopted by [NAME] [NAME] was “legitimate”. The recalculated service charge percentages 14. [NAME] [NAME] submissions concerned the long lease to [COMPANY] as trustee of [COMPANY] (see paragraph 5 of the judgement of the Upper Tribunal which is set out above). This lease was referred to throughout the hearing as “the [NAME] lease”. 15. [NAME] [NAME] believes that, by virtue of sums payable under the [NAME] lease, the freeholder has not suffered any shortfall. He submits that there is therefore no shortfall to be apportioned across the residential units. He stressed that this issue is of enormous significance to the residential leaseholders. 16. [NAME] [NAME] submitted that [NAME] [NAME] is seeking to mount a collateral attack on the decision of the Upper Tribunal because he is in effect arguing that in paragraph (9) of Part I of the Second Schedule to the leases is not in fact engaged. 17. [NAME] [NAME] explained that he is instructed that no service charge is currently payable under the [NAME] lease because the entirety of the relevant area has been sublet.

18. In response to [NAME] [NAME] complaint that the relevant documents have not been disclosed, [NAME] [NAME] argued that evidence concerning the [NAME] lease is not material to the [COMPANY] matter which had been remitted back to the First-tier Tribunal. Further, [NAME] [NAME] noted that [COMPANY] as trustee of the [COMPANY] is not a party to these proceedings. 19. [NAME] [NAME] invited the Tribunal to find that the new service charge percentages in schedules supplied by the Applicants meet the ratio requirement. He submitted that the Tribunal can take solace from the fact that [NAME] [NAME] reached an almost identical result when carrying out his second set of re-calculations.

8 20. The Tribunal accepts [NAME] [NAME] submission that [NAME] [NAME] is effectively seeking to challenge the judgement of the Upper Tribunal. On the Tribunal noting that [NAME] [NAME] submissions were inconsistent with the Upper Tribunal’s determination, [NAME] [NAME] sought to make various criticisms of the Upper Tribunal’s decision. Whilst the Tribunal does not agree [NAME] contentions, it has no jurisdiction to hear them. If [NAME] [NAME] wishes to take issue with the decision of the Upper Tribunal, his remedy is not in a lower court.

21. The Tribunal accepts [NAME] [NAME] evidence and finds that the figures set out in the Applicants’ tables meet the ratio requirement.

Accordingly, the Tribunal determines that the re-calculated service charge percentages are the percentages which are set out in under the heading “New” in the tables which are annexed to this decision. Applications under s.20C of the Landlord and Tenant Act 1985 22. Section 20C of the Landlord and Tenant Act 1985 (“the 1985 Act”) provides that a tenant may make an [NAME] for an order that all or any of the costs incurred, or to be incurred, by the landlord in connection with proceedings before a Residential Property Tribunal are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or persons specified in the [NAME]. 23. [NAME] [NAME] and [NAME] [NAME] made applications for orders under section 20C of the 1985 Act and [NAME] [NAME] [NAME] was made on behalf of all of the lessees. 24. [NAME] [NAME] opposed these applications. In the alternative, he stated that if the Tribunal were minded to make an order under section 20C a distinction should be made between [NAME] [NAME], who has engaged and who has thought very hard about the numbers, and [NAME] [NAME] who [NAME] [NAME] submits was seeking to launch a collateral attack on the judgement of the Upper Tribunal.

25. The question for the Tribunal under section 20C is what is “just and equitable”. This provision provides the Tribunal with a wide discretion to exercise having regard to all the circumstances of the case (see Tenants of [ADDRESS] v [COMPANY] (LRX/37/2000) and [NAME] v [NAME] (LRX/26/2005)). 26. [NAME] [NAME] was unsuccessful in his challenge to the Applicants’ re- calculations and his submissions included assertions which were inconsistent the decision of the Upper Tribunal and outside the scope of the [COMPANY] matter which has been remitted back to this Tribunal.

9 27. Whilst he put his case in a number of different ways, [NAME] [NAME] effectively maintained that there is no shortfall to be apportioned across the residential units. The Tribunal is not satisfied that, in all the circumstances, it is just and equitable to make an order under section 20C of the 1985 Act in favour of [NAME] [NAME]. 28. [NAME] [NAME] adopted but did not press the argument which was raised by [NAME] [NAME]. The primary area of dispute between the Applicants and [NAME] [NAME] concerned the detail of the re-calculations. As stated above, [NAME] [NAME] expressed the opinion that the alternative approach adopted by [NAME] [NAME] is “legitimate”. [NAME] [NAME] maintains that his approach is in fact preferable but he ultimately did not pursue the matter for purely pragmatic reasons. The Tribunal considers this to be to his credit.

29. Both the Tribunal and the Applicants recognise that [NAME] [NAME] has carried out a considerable amount of work in connection with the issue which is currently before the Tribunal. The Applicants submitted that [NAME]’s figures provide a useful check when considering those put forward by the Applicants.

30. Further, [NAME] [NAME] was clearly open to engaging in discussions with a view to reaching an agreement up until and even during the hearing. Having regard to the way in which he presented his case, the Tribunal considers that it is unlikely that [NAME] [NAME] would have continued to pursue the case that there was no shortfall to be apportioned across the residential units had the Applicants agreed either his second or [NAME] set of figures. 31. [NAME] [NAME] referred the Tribunal to an email chain concerning the re- calculations which ended with an email from [NAME] [NAME] dated 4 April 2019. Whilst matters then progressed to the service of Statements of Case, it would have been open to the Applicants to continue to engage with [NAME] [NAME] by email. However, the Tribunal accepts a submission made by [NAME] [NAME] that the Applicants would have incurred some costs in re- calculating the service charge percentages whether or not an agreement was reached with [NAME] [NAME].

32.

In all the circumstances, the Tribunal finds that it is just and equitable to makes an order under section 20C of the 1985 Act that 80% of the costs incurred by the Applicants in connection with these proceedings before the First-tier Tribunal for the determination of the recalculated service charge percentages are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by [NAME] [NAME]. 33. [NAME] [NAME] made his [NAME] for an order under section 20C of the 1985 Act on behalf of all lessees. However, the matters set out above in relation to [NAME] [NAME] do not apply to any of the other lessees.

Accordingly, the Tribunal does not make an order under section 20C of the Landlord and Tenant Act 1985 in favour of any of the remaining Respondents.

10

Name: Judge Hawkes Date: 22 July 2019

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).

© CROWN COPYRIGHT 2013

© CROWN COPYRIGHT 2013

© CROWN COPYRIGHT 2013

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67