First-tier Tribunal Reviews Reasonableness of Service Charges

OUTCOME: Dismissed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

Case Reference

:

CHI/00HE/LSC/2019/0038

Property

:

[ADDRESS] [POSTCODE]

Applicant: [redacted]

:

[APPELLANT], solicitors

Respondent: [redacted]

:

[RESPONDENT] of Application

:

Service Charges

Tribunal Member(s)

:

Judge R. Cohen

Date and venue of Hearing

:

29 July 2019 Paper determination

Date of Determination

:

20 August 2019

DECISION

1 The Respondent is and has since 10 February 2017 been the owner and landlord of a property at and known as [ADDRESS], Camborne (“the Building”). The Building comprises a ground floor

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shop and, on each of the first and second floors, a flat let on a long lease. 2 The first floor is let by virtue of a lease dated 12 August 2005 for the balance of a term of 250 years from 12 August 2005 (“[NAME]”). The tenant is and has been, at all times material to this decision, the Applicant. [NAME] reserves a ground rent and the tenant is liable to pay service charges as are referred to in more detail below. 3 On 10 April 2017 [COMPANY] (“[NAME]”) were appointed as managing agents to collect rents and administer the service charge in accordance with the first floor lease. 4 On 15 March 2019 the Applicant applied to the Tribunal for a determination of its liability to pay and the reasonableness of service charges under section 27A of the Landlord and Tenant Act 1985. Directions were issued by the Tribunal to the parties on 24 April 2019. The directions recorded at paragraph 2 that the Tribunal had identified the following issues to be determined: • whether management charges are recoverable by the landlord under [NAME] and, if so, whether they are reasonable; • whether the quarterly litter pick charge is reasonable; • whether demands for payment comply with sections 47 and 48 of the Landlord and Tenant Act 1987. The Applicant also applies under Paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 for an order of the Tribunal which reduces or extinguishes the tenant’s liability to pay an administration charge in respect of litigation costs. 5 The Applicant makes its application in relation to the service charge years which ended on 31 December 2017 and 31 December 2018 and also in relation to the current service charge year which ends on 31 December 2019. Management charges and quarterly litter pick charge 6 [NAME] recites in its Fourth Schedule the services which the landlord has covenanted to use all reasonable endeavours to perform. These services are divided into 3 categories within 3 parts of the Fourth Schedule, being items for the benefit of (Part 1) the Building, (Part 2) the Common Parts; and (Part 3) Incidental Costs. [NAME] provides for the tenant to pay the Service Charge meaning the Service Charge Fraction of the Annual Expenditure. The Annual Expenditure includes all costs expenses and outgoings whatever reasonably and properly incurred by the Landlord (whether directly or by way of contribution or reimbursement) during a Financial Year in or incidental to providing all or any of the Services.

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7 The Service Charge Fraction means: (a) in relation to those Services listed in part 1 and part 3 of the Fourth Schedule, 40%; and (b) in relation to those Services listed in part 2 of the Fourth Schedule, 50%. 8 The Financial Year means the period from 1 January to 31 December in each year. 9 The services to be provided for the benefit of the Building include maintenance of the Building and external decoration including any other items of cost or expenditure properly attributable to the maintenance or proper management of the Building. The management and administration of the Building (including legal accountancy and other professional services) is expressly provided for. Items for the benefit of the common parts include maintaining and keeping in good and substantial repair the internal common parts and any other items of cost or expenditure properly attributable to the maintenance or proper management of the internal common parts and any other services provided for the benefit of the Property or the tenants or occupiers thereof. The Tribunal finds that [NAME] provides for the tenant to pay service charges in respect of the charges of managing agents which are properly attributable to the proper management of the building as stated in [NAME]. If there are such charges, they must be reasonable within the meaning of the Landlord and Tenant Act 1985 10 [APPELLANT] presented to the Tribunal service charge budgets and other information split into Schedule 1 and Schedule 2 amounts. Schedule 1 comprised items in category (a) of the Service Charge Fraction and Schedule 2 comprised items in category (b). The service charges claimed by the Respondent through [RESPONDENT] for the year ended 31 December 2017 were as follows in respect of the Building:

Schedule 1 £ Management fees

1,965.82 Independent accountant’s fees

250.00 Fabric repairs and maintenance

137.00 Schedule 1 total 2,352.82 Schedule 2

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Internal repairs and maintenance

1,003.39 Total (before VAT) 3,356.21 The amounts apportioned to the Applicant by the Respondent were:

Schedule 1 40% of £2,352.82

£941.13 Schedule 2 50% of £1,003.39

£501.70 TOTAL £1,442.83 11 The management fees for this year (£1,965.82) were 59.5% of the service charge total for the Property (£3,356.21). By reference to the budget for the year, management fees were charged for “budgeting, collection, administration of s/charges, procurement of services, contractor and utility payments, etc.” 12 The service charges claimed by the Respondent through [RESPONDENT] for the year ended 31 December 2018 were as follows in respect of the Building:

Schedule 1

£ Management fees 2,000.00 Independent accountant’s fees

550.00 LL risk assessments audits review

276.00 Schedule 1 total 2,826.00 Schedule 2

Management fees

700.00 Total (before VAT) 3,526.00 The amounts apportioned to the Applicant by the Respondent were:

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Schedule 1 40% of £2,826 £1,130.40 Schedule 2 50% of £ 700

£350.00 TOTAL £1,480.40 13 The management fees for this year (£2,700) were 76.6% of the service charge total for the Property (£3,526).By reference to the budget for the year, management fees were charged for the same class of activities as in the year ended 31 December 2017. 14 The service charge claimed and invoiced by [RESPONDENT] on behalf of the Respondent for the current service charge year, to 31 December 2019, is £1,850 (VAT exempt). 15 In response to correspondence from [APPELLANT], the solicitors for the Applicant, [APPELLANT] provided, in a letter dated 14 February 2019, a breakdown of the time spent in 2018 in managing the Property . No such information was provided for the 2017 service charge year, nor have such details been provided to the Tribunal in relation to any part of 2019 to date. The breakdown for 2018 was as follows: • Reading Leases

2 hours • Drafting & approving the Service Charge Budget

2 hours • Raising/authorising Service Charge invoices

1.5 hours • Inspection of Building with Health & Safety contractors 2 hours • Review of Health & Safety legislation

1 hour • Inspections of roof

2 hours • Asbestos Register update

2 hours • Communication to tenants concerning Fire Safety

1 hour • Liaising with Insurance Brokers regarding Building Insurance 1hr • Recovery of Insurance Premium from tenants

0.5 hours • Discussions with Accountants to obtain quotes

2 hours

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• Appointment of Accountants and provision of invoices etc 2 hours • Reconciliation of year end accounts

1 hour • Dealing with Service charge enquiries

20 hours • Discussions with residential occupier

0.25 hours • Discussions with Residential Managing Agents

0.25 hours • Checking of leases

0.5 hours • Appointment of contractor to investigate leak

0.5 hours • Discussions with contractor over solution to leak

0.5 hours [NAME] stated in that letter that their management fees were agreed with the client (the Respondent) at a flat rate as per the recommendations of the RICS. 16 Section 19 Landlord and Tenant Act 1985 provides that “(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period –

(a) only to the extent that they are reasonably incurred, and (b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;

and the amount payable shall be limited accordingly. (2) where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.”

17 In [NAME] v Hounslow London Borough Council [2017] 1 W.L.R. 2817, the Court of Appeal made the following points:

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17.1 where a contract, in this case a lease, empowers one party to it to make discretionary decisions which affect the rights of both parties, the law recognises that the exercise of that discretion gives rise to a potential conflict of interest. That is all the more so where the discretionary decision of one party to the contract imposes a financial liability on the other. The solution which the law has devised in those circumstances is to restrict the exercise of the discretion to what is rational; 17.2 the exercise of a contractual discretion is constrained by an implied term that the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose; and that the result is not so outrageous that no reasonable decision-maker could have reached it; 17.3 this does not suggest that the function of the Tribunal is simply to review the landlord's decision-making process. The interests of the tenants are to be taken into account in “weighing up” the relevant factors. 18 I refer also to Service Charges and Management 4th edition by [NAME] which states at paragraph 14-14, page 190 “In the absence of a contractual price for management, the usual principles for determining the reasonableness of the relevant costs apply. It will, therefore, be appropriate to compare the management fees with those being charged by other managing agents for similar blocks or to have reference to alternative quotes for the provision of the service to the subject property.” 19 The total amount of time spent during the period 1 January to 31 December 2018 was said by [NAME] to be 42 hours. Given a charge for management fees of £2,700, this suggests a blended or average rate per hour of about £64 per hour. [NAME] do not say whether this, or some other rate, was the flat rate agreed with the client. 20 In relation to the service charges for 2018, the 14 February 2019 letter from [NAME] provided neither a print out of time sheets recording the work performed nor did it identify who performed what items of work, when, how long each item took and at what hourly rates. 21 The Respondent seeks to explain the amount of time spent on management of the service charges by referring to having to deal with correspondence from [COMPANY]. However, there were only 3 letters written by [NAME] to [NAME] and no letters in reply in the year to 31 December 2018. The Tribunal finds that no material time was spent by [NAME] in the year to 31 December 2018 dealing with correspondence from the Applicant’s solicitors.

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22 The Applicant’s case is that the amount charged by the Respondent is not reasonable, particularly the time spent by the managing agent in “dealing with service charge enquiries” which is unreasonable due to the nature and size of the building. The Tribunal notes that the Building comprises a terraced property with retail on the ground floor which is contiguous with another retail unit, as one looks to the left from the street. To the right there is a gated yard which forms part of the Building at ground floor level with residential accommodation above first and second floor levels. Adjacent to the yard to the right as one looks is another ground floor retail unit with first and second floor adjoining premises above. Thus the Building does not seem to the Tribunal to present any complexities in terms of management. 23 The Applicant produced a letter from [NAME] (a trading name of [NAME]) dated 11 January 2019. The content of this letter was not verified by a statement of truth but in it the branch manager of that firm stated, in relation to the Applicant ‘s flat: “a service charge at a level of £1,850 per annum for a property of this type would be unusual and somewhat prohibitive for potential buyers, therefore the purchase price would need to reflect this.” This letter is of limited assistance for the following reasons. First, it suggests a figure of £1,850 would be excessive, but that figure is greater than anything that could be justified for 2017, given the absence of evidence. Secondly, £1,850 is greater than anything that could be justified for 2018 by reference to the breakdown of time for that year. Thirdly, the letter does not assist as to what amount might reasonably be expected. 24 There is no evidence of comparators or any other material with which to approach the weighing up exercise as to how much is reasonable and what might be so outrageous that no reasonable decision –maker could have reasonably sanctioned expenditure at that level. Given the limitations of the evidence available to the Tribunal, the Tribunal does not find it necessary to decide whether or not the service charge expenditure was proper. It can simply address whether the amouts were or are reasonable 25 Given the paucity of the evidence the Tribunal has sought to come to an evidence-based,reasoned decision in accordance with the guidance summarised in Service Charges and Management 4th edition by [NAME] at paragraph 14-09,pages 187-8. 26 It is the breakdown of time by [NAME] which causes the greatest concern. In the service charge year ended 31 December 2018, the managing agents obtained an independent accountant’s report of one page at a fee £550 and undertook a landlord’s risk assessment audit review at a fee of £276. For those two items of work the management fees amounted to £2,700. The Applicant characterises management fees as disproportionate and, in the Tribunal’s judgment, it is correct

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to do so. Having regard to the detail of time claimed, the following items might especially challenge: Reading leases - 2 hours – there is no explanation as to why this reading time is required in what was the second service charge year of [NAME] engagement. Review of health and safety legislation - 1 hour – there is no explanation as to why research time should be for the account of the tenants. Discussions with accountants to obtain quotes - 2 hours – there is no evidence as to how many accountants were approached or what quotations were obtained. Dealing with service charge enquiries - 20 hours – there is great concern that so much time was attributed to enquiries without any further details being provided. The number of hours said by [NAME] to have been recorded in 2018 is very substantial having regard to the nature of the building and the services commissioned in that service charge year. The Tribunal has concluded that this number of hours should be the baseline for assessing what is reasonable, in the absence of any other evidence. In 2017, [NAME] were retained 3.5 months into the 2017 service charge year. So they would have had only 8.5 months to work on the engagement, rather than 12 months in 2018. Against that, one might expect the new managing agent to spend some time getting up to speed, inspecting the Building, making enquiries and putting appropriate measures in place for the proper provision of services. However, the evidence of 2018 is that the time claimed is excessive. Further, there is no evidence of any thought being given to what would be a proportionate fee having regard to the level of expenditure on the Building itself. The decision to appoint a managing agent is proper. The Respondent was an absentee but entitled to appoint a local agent. However, there has to be some balance between the fees charged and the cost of services paid to third parties. It is to be expected that the percentage of management fees will be higher where there is little work to perform than where the work required by more flats is greater and economies of scale apply. However, the percentage of the total costs consumed by the management of the Building is unreasonable. 27 Taking all of these considerations into account, the Tribunal decides that the reasonable service charges for 2017 and 2018 ought to be reduced as follows to £900.00 for each year. This provides a discount which reflects the excessive hours in 2018 and the uncertainty as to the applicable rate for professional time. It produces the outcomes below which are, on balance, proportionate.

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2017 Schedule 1 £ Management fees

900.00 Independent accountant’s fees

250.00 Fabric repairs and maintenance

137.00 Schedule 1 total

1287 Schedule 2

Internal repairs and maintenance

1,003.39 Total (before VAT) 3,356.21 The amounts apportioned to the Applicant by the Respondent will now be:

Schedule 1 40% of £1287

£ 514.80 Schedule 2 50% of £1,003.39

£ 501.70 TOTAL

£ 1016.50 2018 Schedule 1

£ Management fees

667.00 Independent accountant’s fees

550.00 LL risk assessments audits review

276.00 Schedule 1 total 1,493.00 Schedule 2

Management fees

233.00

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Total (before VAT) 1,726 The amounts apportioned to the Applicant by the Respondent were:

Schedule 1 40% of £1,493

£597.20 Schedule 2 50% of £ 233

£116.50 TOTAL

£713.70 As to the current year, the Tribunal considers that a reasonable “on account” or interim service charge would equal the final charge for 2018, being £1726 for the Building and £ 713.70 for the Applicant in respect of [NAME]. It is to be hoped that the balancing service charge will be proportionate in the sense the word is used in this decision. If there is a concern, that can be tested in an application to this Tribunal once the landlord’s figures for the current year are finalised. Nothing more should be said about 2019 at this stage. Quarterly litter pick and sweep 28 The budget prepared by [NAME] for both the years to 31 December 2017 and 31 December 2018 provided for a quarterly litter pick and sweep, at a £400 of Schedule 1 cost. However, neither the Service Charge Reconciliation Report for 2017 nor that for 2018 included an amount for this item. The case for the Respondent is that no such litter pick was undertaken. The Applicant says that as the report does not go into fine detail the litter pick up may not have been recorded. 29 On the documents, the Tribunal finds as a fact that no litter pick took place and so there is no service charge claim for that item and no issue as reasonableness arises . Compliance with Section 47 & 48 of the Landlord and Tenant Act 1987 30 The Applicant complains that demands for payment of service charges did not comply with Sections 47 and 48 of the Landlord and Tenant Act 1987, in that they did not state the name and address, and address for service, of the Respondent. In its Statement of Case the Respondent accepts that demands to that date did not comply but stated that replacement invoices had been sent to all of the tenants including the Applicant and [APPELLANT] computer system had been amended so that all future demands would comply with the Act. In its Statement of Case in reply, the Applicant says only that “the Respondent’s position is noted”.

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31 The Tribunal notes an invoice dated 25 June 2019 from [APPELLANT] to the Applicant which states that [APPELLANT] are acting as agents for the Respondent. The invoice has a box which is headed “Address for Notices” : and there there follows an address in Poole, Dorset. The Tribunal was shown an email exhibited to the Respondent’s Statement of Case from the Respondent to [RESPONDENT] [[RESPONDENT]] of [NAME] dated 28 May 2019 in which the Respondent stated: “I am in the USA, so all correspondence and management will be handled by [NAME]”. 32 Section 47 of the 1987 Act reads, so far as relevant, as follows: “(1) Where any written demand is given to a tenant of premises to which this Part applies, the demand must contain the following information, namely – (a) the name and address of the landlord, and (b) if that address is not in England and Wales, an address in England and Wales at which notices (including notices in proceedings) may be served on the landlord by the tenant. (2) Where – (a) a tenant of any such premises is given such a demand, but (b) it does not contain any information required to be contained in it by virtue of subsection (1), then (subject) to subsection (3)) any part of the amount demanded which consists of a service charge or an administration charge (“the relevant amount”) shall be treated for all purposes as not being due from the tenant to the landlord at any time before that information is furnished by the landlord by notice given to the tenant. …. (4) In this section “demand” means a demand for rent or other sums payable to the landlord under the terms of the tenancy”. 33 An address for the landlord must be given. The 25 June 2019 invoice number 33992 is deficient in that it gives the name of the Respondent and an address for notices but not an address for the Respondent as required by section 47 (1)(a). This means that unless or until a fresh demand is served containing the landlord’s address, the amounts found to be payable in this decision will not actually be payable by the Applicant. Litigation Costs 34 The Respondent’s case is that he will not seek to recover any costs through the service charge, payable by any of the tenants in the building including the Applicant and will not seek to recover any

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administration charge in relation to his litigation costs.

Accordingly, no order in this regard is required. Had it been, the Tribunal would have granted the Applicant the relief it seeks. 35 The jurisdiction of this Tribunal to make an Order for one party to pay costs to another applies only in the circumstances which do not apply in this case and therefore no Order for costs will be made, save for an Order which extinguishes the Applicant’s liability to an administration charge in respect of litigation costs in relation to these proceedings.

Judge R. Cohen

Rights of Appeal 1 A person wishing to appeal this decision to the Upper Tribunal (Lands Chamber) must seek permission to do so by making written application to the First-tier Tribunal at the Regional office which has been dealing with the case. 2 The application must arrive at the Tribunal within 28 days after the Tribunal sends to the person making the application written reasons for the decision. 3 If the person wishing to appeal does not comply with the 28 day time limit, the person shall include with the application for permission to appeal a request for an extension of time and the reason for not complying with the 28 day time limit; the Tribunal will then decide whether to extend time or not to allow the application for permission to appeal to proceed. 4 The application for permission to appeal must identify the decision of the Tribunal to which it relates, state the grounds of appeal, and state the result the party making the application is seeking.