First-tier Tribunal Rules on Service Charge Reasonableness for Fire Protection Works

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : BIR/00FY/LSC/2020/0008

Property : [NAME], [ADDRESS] [POSTCODE]

Applicants : [redacted] Representative : Mr A New Respondents : [redacted] [COMPANY] (2)

Representative : Mr [COUNSEL] (Counsel) instructed by [COUNSEL] Solicitors (for the First Respondent)

Type of applications : Application for determination of liability to pay and reasonableness of service charges under sections 27A and 19 of the Landlord and Tenant Act 1985

Application for an order under section 20C of the Landlord and Tenant Act 1985 and for an order under paragraph 5A of Schedule 11 of the Commonhold and Leasehold Reform Act 2002

Tribunal members : Judge C [NAME] Mr [NAME] and place of hearing

: 26 July 2021 by Remote Video Platform Date of decision : 14 September 2021

DECISION

© CROWN COPYRIGHT 2021

2 Background

1. This application concerns the service charge levied to the Applicants as long lessees of [NAME], [ADDRESS] [POSTCODE] (“[NAME]”). On 15 April 2021, the Tribunal issued a decision (“the First Decision”) relating to proposed external [NAME] works to [NAME] in which the First Respondent in this application (“the Respondent”) had sought approval for expenditure and dispensation from consultation. That decision was issued under references BIR/00FY/LDC/2020/0018 and BIR/00FY/LDC/2020/0007. The Second Respondent is the freeholder and it has not participated in this application.

2. This application is made by the Applicants who between them own 39 of the 329 apartments at [NAME]. It also concerns [NAME] works at [NAME]. The Applicants’ concern relates to the cost of internal works required to improve [NAME] compartmentation in the corridors, stairwells and risers.

3. In small part, the issues in this application were considered during the two day hearing that led to the First Decision. However, in order to make this determination, the Tribunal issued further directions, dated 31 March 2021, on this application, at the end of the first hearing.

4. The 31 March 2021 Directions included a Direction that the Respondent: [redacted]

“… disclose all correspondence (whether in written or electronic form), all invoices, all accounts, all contracts, valuation certificates, and all [NAME] relevant documents relating to the carrying out of any of the Works in 2020 which are intended to be collected via the 2020 service charge accounts so as to identify the actual expenditure on the Works in that year…”

5. The Works were defined as:

“… expenditure … on internal works to reduce the fire risk at the Building that were identified as necessary in a report dated 14 January 2018 from [COMPANY] …”

6. The Tribunal convened for a further one day hearing (via Cloud Video Platform) on 26 July 2021. Closing submissions were provided in writing some 14 days later. The Applicants were represented by Mr [NAME] who is not legally qualified but who has experience of property management. The Respondent was represented by Mr [COUNSEL] of counsel.

7. This is the Decision on the application for a determination of the payability of a service charge for the works identified in paragraph 2 above, with the Tribunal’s reasons for its decision.

3 The Building

8. The Building comprises one single structure built in a “U” shape. The southern part of the “U” shape is longer than the northern part, and the extra length is Block 4, which has commercial units on the ground and first floor and then 54 flats on the 4 floors above. Entering then into the “U”, there is a courtyard serving three blocks of flats. Block 1 is on the northern side, and there are 86 flats over six floors. Block 2 is the western end of the “U”, running along the whole of [ADDRESS]. There are 115 flats in this block, over 6 floors. The southern part of the “U” is Block 3 which contains 74 flats. Because there is a slight slope, there are 7 floors in this Block. It abuts a river/stream known as Tinkers Lean.

9. The Building is set on the corner of [ADDRESS] and [ADDRESS] just south of Nottingham City Centre. Its previous use was industrial. It was converted in 2004-5 to residential with two commercial units. The original building was traditional brick built with timber floors over 4 floors. On conversion, the roof was removed, and two additional light weight floors were added prior to replacement of the roof. Block 2 was also added as a new-build element. It is steel frame with concrete floors. Block 4 was substantially changed structurally, as a new steel frame was constructed within the envelope of the existing brick façade. Because it was not possible to install stairwells inside the converted building, new stairwells were added to service Blocks 1, 2 and 3, and affixed to the existing structure.

10. The Building is protected with a monitored fire alarm with 5 monitoring panels, one in each block and the fifth being to the side of Block 2. The main panel is in Block 4. They are all interconnected and there is an emergency lighting system. Blocks 2 and 4 have full smoke shafts. There are between one and two dry risers per block. Two interlinked smoke alarms are installed in each flat, one in the hallway and one in the lounge, but alarm sounders are not, nor are heat detectors installed.

11. The corridor length across all blocks and all floors has been measured as 1.8425km. There are nine stairwells spread through the blocks.

12. The flats comprise a mixture of studio, one bed and two bed apartments.

Law

13. Sections 18 to 30 of the Landlord & Tenant Act 1985 (“the Act”) contain important statutory provisions relating to recovery of service charges in residential leases. Normally, payment of these charges is governed by the terms of the lease – i.e., the contract that has been entered into by the parties. The Act contains additional measures which generally give tenants additional protection in this specific landlord/tenant relationship.

14. Under Section 27A of the Act, the Tribunal has jurisdiction to decide whether a service charge is or would be payable and if it is or would be, the Tribunal may also decide:-

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 The person by whom it is or would be payable  The person to whom it is or would be payable  The amount, which is or would be payable  The date at or by which it is or would be payable; and  The manner in which it is or would be payable

15. Section 19(1) of the Act provides that:

“Relevant costs shall be taken into account in determining the amount of the 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 and the carrying out of works, only if the services or works are of a reasonable standard:

and the amount payable shall be limited accordingly.”

16. The construction of the lease is a matter of law, whilst the reasonableness of the service charge is a matter of fact. On the question of burden of proof, there is no presumption either way in deciding the reasonableness of a service charge. If the tenant gives evidence establishing a prima facie case for a challenge, then it will be for the landlord to meet those allegations and ultimately the court will reach its decisions on the strength of the arguments. Essentially the Tribunal will decide reasonableness on the evidence presented to it ([COMPANY] v Batten [1985] 2EGLR100 / [COMPANY] v Benson [2011] EWCA Civ 38).

17. In relation to the test of establishing whether a cost was reasonably incurred, in Forcelux v Sweetman [2001] 2 EGLR 173, the Lands Tribunal (as it then was) (Mr [NAME]) said:

“39. …The question I have to answer is not whether the expenditure for any particular service charge item was necessarily the cheapest available, but whether the charge that was made was reasonably incurred.

40. But to answer that question, there are, in my judgement, two distinctly separate matters I have to consider. Firstly, the evidence, and from that whether the landlord’s actions were appropriate, and properly effected in accordance with the requirements of the lease, the RICS Code and the 1985 Act. Second, whether the amount charged was reasonable in the light of that evidence. The second point is particularly important as, if that did not have to be considered, it would be open to any landlord to plead justification for any particular figure, on the grounds that the steps it took justified the expense, without properly testing the market.”

5 18. In Veena v Cheong [2003] 1 EGLR 175, the Lands Tribunal ([NAME] [NAME]) said:

“103. …The question is not solely whether costs are ‘reasonable’ but whether they were ‘reasonably incurred’, that is to say whether the action taken in incurring the costs and the amount of those costs were both reasonable.” Yes

19. In The London Borough of Hounslow v Waaler [2017] EWCA Civ 45, the Court of Appeal was considering whether the cost of replacing windows by Hounslow (an improvement) was reasonable where there was also an option of repair. The repair option (replacement of hinges) was substantially less than the cost of replacing the windows. [ADDRESS] said that in applying the statutory test under section 19 to Hounslow’s decision, it was necessary to go further than just consider whether the decision- making process was reasonable; the outcome of that process also needed to be considered (paragraph 37) as did the legal and factual context (at least in consideration of expenditure on improvements) (paragraph 42). The lessees, in that case, were not required to pay the higher costs of improving the windows; just the costs of repair.

The Lease

20. The Tribunal has been provided with a sample lease and assumes that all leases use the same wording except in relation to the individual terms of each letting.

21. All leases are for a term of 125 years commencing on 1 January 2004.

22. The leases are tri-partite, being between the freeholder, a management company, and the individual [NAME].

23. There are no covenants in the lease by the Management Company; all are made by, or for the benefit of the freeholder. There is a reference to an “Agreement for Management Lease” for the grant of a management lease. The freeholder’s covenants in clause 5 of the lease are expressed to terminate after the freeholder has granted the Management Lease. Official copies of the freehold do not show that a management lease exists. The Tribunal therefore assumes (and the parties agreed this was likely to be the case) that no management lease was ever granted, and the lease can therefore be treated as if it is a straightforward lease between the freeholder and the lessees.

24. It is common ground that in or about 2009 a right to manage under the Commonhold and Leasehold Reform Act 2002 was acquired by the Respondent. Under section 96 of the Act, it has therefore acquired the management functions of the freeholder under the lease.

25. In the lease, the following defined terms are relevant to this decision:

6 “1.2 “the Building” means the block of flats comprised in [NAME] … 1.5 “the Common Parts” means the entrances roadways pedestrianways lighting common service media (whether within or outside [NAME]) hard and soft landscaped areas parking areas forecourts halls stairs landings passageways lifts storage cupboards bins stores and [NAME] parts of the Reserved Property intended to be used and enjoyed in common by the occupiers of any two or more Flats in the Building

1.6 “[NAME]” means [NAME] described in the First Schedule … 1.8 “the Flats” means the flats or [NAME] units of separate living accommodation forming part of the Building and “Flat” has a corresponding meaning and “the [NAME]” means the Flats excluding the Premises … 1.13 “[NAME]’s Service Contribution” is [x%] (or such [NAME] sum as may be determined by [NAME] (acting reasonably) from time to time as being a fair and reasonable contribution) of the Net Service Charge Cost … 1.16 “the Net Service Charge Cost” means the Total Service Charge Cost minus the [ADDRESS] Charges … 1.22 “the Reserved Property” means that part of the Building and [NAME] not included in the Flats as described in Part Two of the Second Schedule … 1.24 “the Total Service Charge Cost” means the costs charges and expenses … incurred by [NAME] in carrying out its obligations referred to or contained the Seventh Schedule…”

26. Clause 4 provides that [NAME] covenants to observe and perform the obligations set out in the Sixth Schedule. Clause 5 provides that [NAME] covenants to observe and perform its obligations set out in parts 1, 2 and 3 of the Seventh Schedule.

27. Part 1 of the Second Schedule describes the Building as:

“The block of flats erected on and forming part of [NAME] together with [NAME] parts structures gardens grounds areas ways or facilities (whether or not external to the said blocks) forming part of [NAME]”

28. Part 2 of the Second Schedule further identifies the Reserved Property as:

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“The Building and [NAME] excluding the Flats but including the main structural parts of the Building the roofs and loft space foundations and external parts thereof and the entrances hallways landings lifts and stairs giving access to the Flats or any of them or to any [NAME] part of the Building not included in the Flats and also the loadbearing walls cisterns tanks sewers drains pipes wires ducts conduits meters and apparatus not used solely for the purposes of one Flat and the floor and ceiling joists and slabs (but not the floor and ceiling boards or internal facings) and the boundary walls dividing the Building from adjoining property and (without limitation) any [NAME] parts of the Building and [NAME] not included in the Flats”

29. The Third Schedule defines the Premises as:

“The Flat shown edged red on the plan numbered 2 attached and known as Plot [] [NAME]/[ADDRESS] including the floorboards and ceiling boards and all cisterns tanks sewers drains pipes wires ducts conduits meters and apparatus used solely for the purposes of the Premises and the windows and window frames doors and door frames and the internal facings of loadbearing and party structures and the whole of the [NAME] non-loadbearing structures within the Premises but excluding any part of the Reserved Property”

30. The Sixth Schedule contains the following covenant by [NAME]:

“1.2 [NAME] shall pay a proportion equal to [NAME]’s Service Contribution of the Net Service Charge Cost”

and

“9 [NAME] shall do all such works as under any Act of Parliament or rule of law are directed or necessary to be done on or in respect of the Premises (whether by landlord tenant owner or occupier) and shall not do or permit to be done any act matter or thing on or in respect of the Premises which contravene the provisions of the Town and Country Planning Acts and the Building Regulations or any enactments amending or replacing them or any [NAME] statute or statutory instrument or [NAME] regulation of any local or public or statutory authority or undertaking and shall keep [NAME] indemnified against all claims demands and liabilities in respect thereof”

31. The Seventh Schedule contains the covenants by [NAME] with [NAME], including the following provisions:

“5. [NAME] shall keep the Reserved Property including the Common Parts and all fixtures and fittings therein and

8 additions thereto in a good and tenantable state of repair and condition including the renewal and replacement of all worn and damaged parts …

7.1 [NAME] shall do or procure all such [NAME] acts or things as may be necessary for the proper preservation and maintenance of the Building and the Common Parts (including provision of a sinking fund) and of all common services thereto or therefore and for the proper management of the Building”

The issues in this case

32. In a statement of case sent to the Tribunal in June 2021, the Applicants confirmed that their challenge was to the cost incurred and to be incurred in relation to fire stopping works in the internal corridors of the Building (“the [NAME]”). They did not wish to pursue a challenge they had initially made to the appropriateness of carrying out the [NAME] without also carrying out works to individual flats, nor did they wish to pursue any challenges to the need for consultation in respect of the [NAME]. This application is therefore limited to consideration of the contracting methodology and the consequential charges levied for the [NAME].

33. The Applicants have raised an additional issue relating to whether the costs of the [NAME] should be charged to lessees, rather than being recovered from contractors who they say failed to carry out works to a proper standard, resulting in the need for remedial work.

Facts

34. We heard evidence from six witnesses at the second hearing, being Mr [NAME] and [NAME] (two of the Applicants), Mr [COUNSEL], the managing agent’s representative, Mr [COUNSEL], the Respondent’s fire safely adviser, [NAME], chair of [NAME], and from [NAME], a director of the Respondent. From the oral evidence given at the two hearings, and the written bundle of documents supplied to the Tribunal, we find the following facts.

35. [NAME] is managed by [NAME], who have appointed a firm called [NAME] (formerly [NAME]) as their professional managing agent. The Respondent has had an association with this agent since around 2009 when Mr [NAME] from [NAME] had assisted the lessees at [NAME] to form the Respondent and to acquire the right to manage [NAME]. [NAME] has been in place as the Respondent’s agent ever since. Until around 2017, Mr [RESPONDENT] (wrongly named as Mr [NAME] in the First Decision) was the person from [NAME] who had day to day responsibility for the relationship. He left [NAME] at that point and for the last 3- 4 years, Mr [NAME] had taken over that role.

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36. Ms [NAME] described the relationship between the Board and [NAME] as a partnership. The Board was regularly consulted on management issues and [NAME] was not authorised to spend sums over £5,000 without express Board approval.

37. Matters relating to fire safety had been discussed by the Board prior to the Grenfell fire, but after that event the Board has decided to commission a full fire safety review via an intrusive inspection. A firm recommended by [NAME] called [COMPANY] was commissioned to prepare this report. The report is dated 14 January 2018. The inspection took place during 3 days on 12, 13, and 15 December 2017.

38. [NAME]’s principal concern was expressed in paragraph 1.1 of their report, which stated:

“The fundamental flaw in the fire safety of the building is the poor standard of fire / smoke separation to the structure and concealed voids. This combined with the automatic detection only being in the common areas and not in the flats could present a set of circumstances where a fire has time to develop undetected in a flat and is then able to spread from the flat via service penetrations and poor separation to [NAME] concealed voids. …”

39. Elucidating, the report continued:

“1.2.2 Service penetrations from flat to flat and from flat to common areas

There are numerous examples of service penetrations from the common areas into the flats being poorly finished and likely not to be to the requisite standard. It is recommended to open up and establish the standard of separation provided between the flats and common areas and also between the flats.

1.2.3 Separation within concealed voids

Only a very limited inspection of the concealed voids and principally those above suspended ceilings was undertaken.

It is essential there is adequate fire stopping of the concealed voids including those in the roof. This is in order to help prevent / limit the spread of fire/smoke undetected in the structure

Given the poor standard of separation seen it is considered highly probable there will be a deficiencies in the separation within concealed voids and it is therefore recommended to open up voids and establish the adequacy of separation.”

40. The inadequacy of the fire stopping in the concealed voids above the suspended ceilings is accepted by both parties and is therefore not an issue

10 on which the Tribunal needs to reach a determination. Various reasons for the defects have been suggested. They may have arisen from poor workmanship on the part of the main contractor when converting [NAME], or (and this appears to be the Applicants preferred view) they may have arisen when an upgraded fire alarm system or fibre broadband services were installed. For reasons which are given later, the Tribunal does not consider this to be a matter for this determination and we do not comment on it further.

41. After the issue of the [NAME] report, the relationship between [NAME] and [NAME] broke down and as a consequence the Board did not continue to use the services of [NAME].

42. At around the early part of 2018, the Board, on the recommendation of [NAME], decided to engage the services of a [NAME] from a firm called Richardson Hall. Mr [NAME] is a Member of the Chartered Institute of Building (MCIOB), which he achieved in 2010. Prior to obtaining that qualification he had worked in the building industry for 10 years. He told us he has worked extensively on building projects in the Nottingham area. He holds no specialist qualifications in [NAME] issues but he does come across the issue extensively in the course of his work.

43. Ms [NAME] told us that the reason Mr [NAME] was engaged was because the Board felt it needed a project manager who could interpret a fire risk assessment and liaise with the local authority. Arising from the [NAME] [NAME] report, there was clearly an issue regarding internal fire stopping works and it may be this was the principal reason for the Board feeling that a project manager was required. Mr [NAME] was given the task of preparing a strategic plan for [NAME].

44. At a director’s meeting held on 14 June 2018, Mr [NAME] and Mr [NAME] presented proposals to upgrade [NAME] at [NAME]. The priority was works in the basement and car park of [NAME]. Various works were carried out using appropriate contractors, supervised by Mr [NAME] during the period from early August 2018 up to around the summer of 2019. These works were known as Phases 1 – 3 of Mr [NAME] plan. There is no challenge to the necessity for these works or the reasonableness of the expenditure incurred on them.

45. In the middle of 2019, the Respondent’s attention turned to the next phase of [NAME] works – Phase 4. This was work to the corridors to improve fire stopping and create fire-proof compartments in order to limit the spread of fire.

46. In an email to Mr [NAME] dated 8 July 2019, Mr [NAME] said:

“At the moment we don’t have enough information to price the fire stopping in the corridors across all blocks. The smaller contractors are unable to provide a price and want to complete the works on the basis of a time charge. The larger contractors have declined to price without further information. Given the

11 volume and complexity of the work my plan is to tender the package and open it up to a wider audience. In addition to the final issue plans we will need to provide a performance specification and measure for the works. …”

47. Mr [NAME] clearly wished at this point to provide more information to proposed contractors in order for them to price the [NAME] in the form of some sort of specification. Indeed, he updated Mr [NAME] on 2 August 2019 to the effect that he would be on site on Tuesday 6 August to “begin the measure”.

48. However, at some point, probably in November 2019, he changed his mind about being able to provide a specification for the works. Instead, he wished to receive contractors proposals on the basis of the contractor being able to view the site to understand the nature of the works required, and on the basis of some plans giving dimensions of the corridors on which works were required. In his evidence he told us that six contractors came to view the job. In his statement he says:

“The works to the corridors and lift lobbies proved extremely difficult to price. Towards the end of 2019 a number of local specialists were approached to price the works but none were able to provide a lump sum tender. Most declined the works and [COMPANY] were only able to provide a day rate price. This information was communicated to [NAME].”

49. Mr [NAME] was unable to recall the day rate price suggested by [RESPONDENT], as was Mr [RESPONDENT]. It is unclear whether the Respondent’s directors were informed of the price, but neither of the two directors who gave evidence to us could recall the day rate quoted. Mr [NAME] said he was not attracted to a day rate basis for pricing the [NAME] as he was looking for contractors to take more risk. A day rate basis was too open ended and might be thought of as giving the contractor a licence to print money.

50. The Board’s position in or around November 2019 is best summarised by Ms [NAME] in her second statement, in which she says:

“33. Without completing a full survey of the building to create the scope of works it was difficult to find competitive quotes. It was clear that the work was needed, and we could have had a full building survey completed to create a specification but given the time it was taking to specify and get tenders for the cladding works it felt as though this would create delay and add costs that could be better spent on actually making the building safer.

34. It was agreed to ask [NAME] resources to complete a known length of corridor to use to provide an estimate for the whole building to help inform the directors decision-making. We do not usually use [NAME] resources to complete work on the building as this creates too many conflicts of interest. On this occasion it

12 was agreed, as they had resources available, and we were struggling to find a way to progress the work. ...”

51. It is appropriate to interrupt the narrative briefly to set out what, if any, impact these considerations had upon the service charge budget for 2020. It appears that £55,000 was included in the 2020 budget for fire safety works. Phases 1 – 3 were ongoing during 2019, as was consideration of works on external cladding. We have seen a copy of the letter to lessees about the 2020 budget prepared by [NAME], It contains no reference to the [NAME] being undertaken (or at least commencing) in 2020.

52. Mr [NAME] efforts to find a contractor who would be willing to contract to carry out the [NAME] at a price that had been market tested were therefore unsuccessful, but the Board decided instead to pursue the direct engagement of [NAME] to do remedial works to a sample corridor in order to provide an estimate for the whole building. At the time, they felt pressured by the statutory authorities to be seen to be making progress in [NAME] works at [NAME]. The Tribunal has not been provided with a copy of any document confirming the terms on which [NAME] were to carry out the works to the sample corridor, despite the March 2021 Directions.

53. The idea was that the [NAME] operatives would carry out all the fire stopping works they identified as necessary in the ground floor corridor of Block 1 (“the Sample Corridor”), measured by Mr [NAME] as 73 metres. That work was undertaken between January and March 2020, and it must therefore have been agreed in December 2019 / January 2020. The time that work took would be recorded, and the cost of labour and materials used would be calculated, in order to produce a cost net of VAT per linear metre of corridor. In effect, the formula was:

X + (Y x Z) ÷ A = Cost per metre

where

X is the cost of materials used on the whole corridor, Y is the daily cost of one operative (including on costs, profit etc) Z is the number of days it took for a single operative to complete the sample corridor, and A is the length of the corridor

54. As stated, work on the Sample Corridor took place between January and March 2020. At some point (we do not have the date of the document), an analysis of the Sample Corridor costs was prepared by [NAME]. The figures were:

a. Cost of materials - £545.00 b. Y is £384 (hourly rate £48 x 8 hours a day) c. Z is 33.75 d. A is 73 metres

13 so the result was £185 per linear metre.

55. Mr [NAME] explained that the daily rate had been provided by [NAME]’s estimator, a Mr [NAME]. He did not attempt to explain the basis upon which Mr [NAME] had selected the figure of £48 per hour.

56. There is no evidence which suggests the linear metre rate was the subject of any negotiations by the Board with [NAME]. There is no evidence that the Board researched an appropriate day rate for the labour cost. As we have already identified, they did not ask Mr [NAME] to become involved in approving the linear metre rate. Both Mr [NAME] and Mr [NAME] were asked at the hearing what they thought of the daily rate charged for the sample corridor. Both replied that they thought the rate was “at the top end”.

57. So far as control of speed (and quality) of work was concerned, Mr [NAME] said he visited the site very regularly to check the work to the sample corridor. There were no independent checks.

58. The total invoiced for the Sample Corridor was £14,769.46.

59. There is little or no material available to the Tribunal to indicate what happened with regard to the [NAME] in April. On 5 May 2020, Mr [NAME] emailed the person at Nottingham City Council who he was in discussions with concerning statutory compliance with [NAME] issues. He said “we have provided the client with a price for fire stopping and await their instructions”.

60. After the hearing, we directed the Respondent to provide a copy of the document referred to in that email. We have been provided with a document, attached to an email dated 29 May 2020, which sets out prices for further [NAME]. We have been told this document was originally dated 18 March 2020, but as a working document, it went through a number of iterations. The document is headed “fire risk assessment works to corridors”. All corridors are separately identified, grouped into blocks, with length given in linear metres. A price is shown as £185 per linear metre. The Sample Corridor is excluded, as the work had already been completed. For the [NAME] corridors, the total price for the [NAME] is shown as £350,062.50 (including fees for Mr [NAME]), plus VAT. The total is therefore £420,075.00.

61. The back page of the document sets out eleven “notes”. Notes 6 and 7 are:

“6 The rates have been taken from the indicative costs which we have already submitted and this was based on the sample corridor where the works were carried out. This includes a small 5% contingency figure.

7 Please note that these rates/costs could change depending on what is found in the subsequent corridors. Therefore the costs could go up as

14 well as down depending on the materials and labour that's required to complete the FRA works to a satisfactory level.”

62. This document was attached to an email dated 29 May 2020 from Mr [NAME] to Mr [NAME] and Ms [NAME]. After discussing the proposed works and their funding, Mr [NAME] continued:

“[NAME]

Our lettings business has a vested interest in the building with 130 managed apartments. With this in mind, [NAME], along with yourselves, are keen to get these issues resolved.

With this in mind, [NAME] are willing to carry out the works within 6 – 12 months and collect the funds over the next 2.5 years. Under this proposal, we would invoice £100k per half year for the next 5 half year periods.

Our offer of credit may be reconsidered / withdrawn if the control of the board where (sic) to shift. If we were faced with a potentially hostile board, we would feel uneasy about credit provided.

If we were to proceed, we would agree terms formally and issue contracts etc.

…”

63. We have no minutes of any director’s meetings between 10 July 2019 and 6 October 2020. We have no record, in the statements provided by the witnesses for the Respondent or the documentation annexed to them, of the board’s formal response to this email. Despite the March 2021 Directions (see paragraphs 4 and 5 of this Decision), we have not been supplied with any contract documentation between the Respondent and [NAME] for undertaking the [NAME]. We do however find that, whatever the response was, and whatever was put in place regarding formal contracts, the Board decided to proceed with further works to the corridors in July 2020. Without being given any contract documentation, we have assumed that the work was undertaken broadly on the basis of the document referred to in paragraph 60. We do not know which corridors were to be remediated under the arrangement, but we do know that in 2020, works were completed to the fifth floor corridors in Blocks 1 – 4 and to the ground floor corridor in Block 1 (that being the Sample Corridor).

64. It is at this point that Mr [NAME] comes back into this narrative concerning the [NAME]. He had been involved in the Phase 1 – 3 works in early 2020, but as identified above, not the Corridor (Phase 4) Works. His role was to be to check the work that [NAME] were to undertake as approved by the Board. But he had no role in approving the rate per linear metre. He was simply to check that the work had been done to the measured length of corridor for which [NAME] submitted an invoice.

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65. Over the course of August to November 2020, [NAME] completed some [NAME] and rendered invoices accordingly. The invoices which were challenged by the Applicants were:

Table 1 – disputed invoices Date Invoice number (page in bundle) Description Linear metres Sum claimed (net) Sum claimed (incl VAT) 31 Jan 20 10103 (178) Fire stopping - labour & materials 3,723.73 4,468.48 28 Feb 20 10299 (176) Fire stopping - labour 4,687.10 5,624.52 10 March 20 10369 (175) Fire stopping - labour & materials 3,787.70 4,545.24 31 March 20 10547 (174) Fees re fire stopping 73 109.35 131.22 31 August 20 11556 (190) Fire stopping works 73.98 13,686.30 16,423.56 31 August 20 11752 (191) Extra works 18.02 3,333.70 4,004.44 31 August 20 11571 (192) Fire stopping works 28 5,180.00 6,216.00 30 Sept 20 11831 (184) Fire stopping works 37 6,845.00 8,214.00 30 Sept 20 11829 (185) Fire stopping works 80 14,800.00 17,760.00 30 Sept 20 11830 (186) Fire stopping works 17.5 3,237.50 3,885.00 30 Nov 20 12349 (181) Extras 18 3,330.00 3,996.00 Totals

345.50 62,720.38 75,264.46

66. Corridor lengths had been measured in column 2 of Mr [NAME] analysis on page 67 of the hearing bundle. The works that resulted in the above invoices were works to the ground floor corridor in Block 1, and the Fifth Floor corridors in Blocks 1, 2, 3, and 4. The measured lengths of those corridors are, according to the schedule on page 67 of the bundle:

Table 2 – corridor lengths Corridor Metres Block 1 – ground floor 73 Block 1 – 5th floor 73.98 Block 2 – 5th floor 95 Block 3 – 5th floor 70 Block 4 – 5th floor 18 Total 329.98

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67. The work to the Sample Corridor was invoiced between January and March 2020. These invoices are the first four shown in table 1. One composite figure is given for the length of that corridor across all four invoices, taken from [NAME]’s assessment of the costs of their work on the Sample Corridor.

68. At the hearing, Mr [RESPONDENT] told us that the Respondent has continued to carry out works to the corridors in 2021. He said that the 3rd and 4th floors in Block 1 had now been completed. We were not provided with any contracts or invoices or valuations. Work in 2021 is outside the scope of this application.

69. At the hearing, the Respondent provided a quote from a [COMPANY] appearing to offer passive [NAME] installation, to carry out works to the ground floor corridor of Block 3 for £10,800.00. We assume VAT would be added. The ground floor corridor of Block 3 is measured (from Mr [NAME] schedule) as 71 linear metres, so the rate per linear metre from this quote is £152.11.

70. As referred to above, Mr [NAME] has attended [NAME] regularly from August 2020 to inspect the works and approve expenditure. Reports were provided dated 17 September 2020, and 17 November 2020. In his reports, Mr [NAME] has approved invoices for the [NAME] at the rate of £185 per linear metre. He has also approved expenditure on extra works. His valuation methodology is to allow extra linear metres, even though the extra works are not specifically related to additional corridor lengths. His additional allowances are:

Table 3 – Mr [NAME] approved extras Allowance for Extra metres Value (£) net Value incl VAT Invoice page Block 1 – 5th floor Replacement bulkheads above 6no fire rated doors 18.02 3,333.70 4,000.44 191 Block 2 - 5th floor Floor is 90 metres and original claim only for 80 metres 10 1,850.00 2,312.50 181 Block 2 – 5th floor Work in service risers 5 925.00 1.156.25 181 Block 4 – 5th floor Extra work in service risers – both 2.5 metres and 3 metres are referred to 3 555.00 693.75 181

The Applicants’ case

71. In essence, Mr [NAME] position is that the costs charged in the disputed invoices were unreasonably incurred due to the manner in which the [NAME] were pursued, and the lack of diligence by the Respondent. The decision to engage [NAME] to undertake the Corridor

17 Works was outside the range of reasonable responses on the part of the Respondent.

72. The first criticism Mr [RESPONDENT] makes of the Respondent is that they have not displayed appropriate diligence in scrutinising the advice and recommendations they have received from [NAME]. He points out their failure to read the original fire risk assessment (see paragraph 47 of the Original Decision), and Mr [NAME] admission that the Board’s primary focus was on the external cladding works rather than the [NAME]. He says there were no appropriate controls on the costs or the works that [NAME] were instructed to complete.

73. Regarding the [NAME] themselves, Mr [RESPONDENT] argues that the Respondent should have obtained a survey of the work required and gone out to the market to obtain competitive quotes. Failure to do so exposed the Respondent to over reliance upon [NAME] as the only contractor available.

74. Turning to the costings of the [NAME], Mr [NAME] drew attention to the report he had provided from a Mr [NAME] who works for [COMPANY] in which that company had advised that labour cost should be based on £170 per day for one man (£21.25 per hour for an 8 hour day). Mr [NAME] had surveyed seven corridors. His assessment for a sample corridor of 50m was that it would take 20 days to carry out required works. Materials would be in the region of £642.50. Labour cost plus materials was therefore £4,042.50, or £80.85 per metre. On the basis of this advice, Mr [NAME] case was that the sum charged by [NAME] was, in his view, excessive. He contended for a rate of between the £80.85 estimate from [NAME] and the £152.11 rate from [NAME].

75. Mr [NAME] did not call Mr [NAME] to give evidence, nor were his qualifications or experience given in the report. No evidence was provided to show what experience [NAME] had of building work.

76. Mr [NAME] urged the Tribunal to set a rate for the [NAME] still [NAME] to be done in future years.

77. Finally, Mr [RESPONDENT] made reference to his view that the Respondent should seek payment of the costs of the [NAME] from previous contractors rather than charging the service charge payers.

The Respondent’s case

78. Mr [RESPONDENT] reminded the Tribunal of the principles to be derived from Forcelux and from [NAME], to the effect that if a course of action has been pursued which leads to a reasonable outcome, the costs of pursuing that course of action will have been reasonably incurred. The Tribunal should not impose its own decision; it should look at whether the actions of the Respondent were within a range of reasonable responses.

18 79. He said it was the case that there had been no effective challenge to the fact that no [NAME] contractors could be found for the [NAME] [NAME] than [NAME]. It was therefore reasonable for the Respondent to incur the cost of the [NAME] so that a guideline rate for future works could be set. The involvement of Mr [NAME] provided comfort that the invoices were appropriately incurred, and the work was of a reasonable standard.

80. Mr [NAME] accepted that in the light of the quotation that had been obtained from [NAME], it would be unreasonable for the Respondent now to proceed with [NAME] for future works without exploring the lower cost option, but it is not necessarily the case that the cheaper option is the best option and that could only be assessed in the circumstances following further exploration of cost.

81. Mr [NAME] resisted the suggestion that a rate for future years be set by the Tribunal, as that should firstly depend on the Respondent’s assessment of the benefits and detriments of engaging any future contractor. He urged that the application be dismissed.

Discussion

82. The issue the Tribunal has to decide in this application is what sum has been reasonably incurred by the Respondent on the [NAME] in 2020 which it may then charge lessees of [NAME] as a service charge. The Tribunal understands that no service charge for 2020 has yet been demanded from the Applicants. This application relates to actual expenditure in 2020, rather than approval of a budgeted allowance for the [NAME]. Applicants more normally await a service charge demand before challenging service charge expenditure. The Tribunal does not consider this prevents us from making a determination on the issue we have been asked to address. Our determination will crystalize the amount the Respondent may include in the service charge accounts for 2020 for the [NAME].

83. We agree with Mr [NAME] submissions regarding the test that we have to apply. It is not for us to substitute our own decision; it is for us to assess whether the Respondent has made a reasonable decision, or has made a decision that has led to a reasonable outcome.

84. However, in our view there have been significant flaws in the Respondent’s decision-making process that has led to it paying too much for the [NAME] in 2020. Our view is that it did not make a reasonable decision, nor did the Respondent’s decision lead to a reasonable outcome, when it engaged [NAME] to carry out works either to the Sample Corridor, or to the further works carried out between August and November 2020.

85. We go back to the production of the first fire risk assessment in January 2018 by [NAME] (see the Original Decision). That has little relevance to the issue we have to consider in this application, but the fact

19 that some of the directors of the Respondent (on their own admission) failed to read that report sounds alarm bells. A director of a company (even a volunteer) has to understand the decisions he or she is taking.

86. There is no issue in this case about the necessity for the [NAME] to be undertaken, nor is there any challenge to the quality of the works that have been carried out in 2020. It is the procurement of those works that is in issue.

87. In our view, a reasonable board would have been alive to the need to control costs for a project with a potential value of in the region of £500,000. The variables that needed to be controlled were (a) labour cost, (b) time taken to carry out works if the payment related to time spent, and (c) quality of work. The normal method of controlling the costs is to obtain competitive quotations from the market on the basis of a clear specification against which all tenderers quote on an equal basis.

88. We were not persuaded by the evidence we heard from Mr [NAME] that it was impossible to obtain quotes. What he struggled with was persuading contractors to quote without a specification. We were also not persuaded that it was impossible to prepare a specification. Indeed, Ms [NAME] acknowledged that this was possible in paragraph 33 of her statement. In our view, the Board and its advisers should have realised in around November 2019 that it had a responsibility to control the costs of the [NAME] and should not have given up obtaining competitive quotes at that point (whether with or without a specification), because without proper cost control measures for this contract, they were always at risk of paying more than a reasonable market rate. The evidence is that they have indeed been able to obtain a quote from [NAME]. Nobody has tried to persuade us that this company would not have quoted in late 2019 or early 2020.

89. The evidence we had was that one contractor ([COMPANY]) did visit site and provide a day rate for the work, which could possibly have been a foundation for negotiations. We entirely accept the dangers of contracting for a £0.5m contract on a day rate basis, but at least that contractor had ventured a figure. We must express astonishment that nobody can remember that figure. Mr [NAME] was certainly told the figure. He must have had in the back of his mind, when offering the [NAME] proposal in around May 2020 that his firm’s day rate was £384 per day (£48 per hour for an 8 hour day). As adviser to the Respondent, had he been aware that a competitor could offer a lower day rate, he most certainly should have told his client. Had he been aware that the [NAME] day rate was higher than this, he would have informed the Respondent that his quote was based on a lower day rate than the one contractor who had indicated a rate, to give comfort to his client that his quote was competitive. The suggestion that this potentially important piece of information had escaped his mind is, in our view, not credible.

90. Whatever the difficulties the board was facing in late 2019 regarding contracting for the [NAME], in our view they were not live to the

20 disadvantages they were exposing themselves to by following their preferred route of contracting with [NAME], which was both their adviser and their contractor. [NAME] had a conflict of interest. We have seen no evidence of any attempts by the board to ensure those conflicts were appropriately managed. The failure to obtain competitive quotations was compounded by the further error of contracting with their own adviser without taking steps to manage the conflicts of interest this created.

91. The first and most obvious step they could have taken was to obtain independent professional advice on the [NAME] contract. Rather than asking Mr [NAME] to provide that advice, at this point Mr [NAME] seems to have bowed out from providing advice.

92. The second thing they would have done is enter into appropriate negotiations with [NAME] regarding their proposal. The board appears to have simply accepted Mr [NAME] labour rate of £48 per hour. For reasons that we give below, in our view that rate is too high. It should have been challenged. It should also have been obvious to the board that the formula [NAME] proposed to use to fix a linear metre rate was itself subject to the same disadvantage of effectively using an open ended day rate as the quote from [NAME] had been, as there were no controls (apart from the supervision of Mr [NAME] – who could not have been independent) on the actual time the work on the Sample Corridor took.

93. Finally, the board could and should have entered into a written contract for the [NAME]. A written contract had been foreshadowed by Mr [NAME] himself when he made his proposal in May 2020. If there was one, it should have been disclosed to the Tribunal as a result of our Directions. A board, acting reasonably, and finding itself in the position of the Respondents board in May 2020, would not have allowed [NAME] to undertake the [NAME] without a written contract.

94. In summary, the Tribunal’s view is that a reasonable RTM company / landlord would not have contracted for the [NAME] without testing the market thoroughly, if necessary by obtaining a professionally prepared specification of works. It would not have allowed itself to enter into an arrangement with an adviser which had a conflict of interest, even if that adviser was offering competitive terms, without proper independent advice, negotiation, and scrutiny of the terms, and it would have ensured that the terms of the arrangement were properly documented.

95. The Tribunal’s conclusion is that the [NAME] costs have not been reasonably incurred for the reasons outlined thus far.

96. It is obvious that the [NAME] have been carried out and our task now is to assess what a reasonable sum would be for those works.

21 97. An estimate has been provided for one corridor from [COMPANY]. The quotation is for the ground floor corridor of Block 3, which is measured as 71 metres. The quote is £10,800 net, which means that the linear metre rate is £152.11 per metre net. All materials are included.

98. Alternative methods of determining an appropriate rate, relying on the experience and expertise of the Tribunal, are

a. to take the market labour cost of a skilled operative, which we assess at £20 per hour, add on-costs on for national insurance, general insurances, welfare costs, access, and equipment costs (say £10.50 in total), and profit at 20% (say £6.10). This assessment suggests that an hourly rate could be in the region of £36.60.

b. to utilise available data on the internet to establish the cost of dry lining (which requires a similar skill set to the works under consideration). Many websites are available which will give average costs and timescales for dry-lining projects, including a break- down of those costs into materials and labour cost. Our own research has indicated that labour cost is in the region of £37.50 an hour. It is accepted that this is a broad-brush approach, but it is based on information in the marketplace and is a helpful indicator to the tribunal.

99. The Applicants have provided us with a report from [COMPANY], which suggests a daily rate of £170.00. Assuming a day is 8 hours, the hourly rate is thus £21.25. The report did not establish the credentials of either the [NAME] or the company, and we are unable to give it much weight. The hourly rate seems to us to be too low if proper attention is given to the on-cost that any commercial contractor would need to add. Having said that, it would be unwise to dismiss the [NAME] report entirely. Subject to being assured of their competence and resourcing, this company may well be able to provide a competitive alternative for the Respondent to consider.

100. Taking all the above information into account, the Tribunal assesses that:

a. Given the room for variability and market conditions, a reasonable hourly rate for an appropriately competent tradesman to carry out the remedial work is no more than £40 per hour;

b. Applying an hourly rate of around £40 per hour, a fair and reasonable linear rate for the [NAME] undertaken by [NAME] in 2020 is £155.00 per linear metre. This is slightly above the [COMPANY] rate because of uncertainties around due diligence enquiries into [COMPANY], their resources and quality control processes. It is not a given that just because they provided a quote for one corridor, they would have been the right company to undertake a £0.5m project.

22 101. Having determined a linear metre rate, our next task is to identify the length of corridor to which this rate should be applied. There is no real dispute about the corridor lengths of those corridors in which work has been completed, which we showed in Table 2 above, and which total 329.98 metres.

102. Using the rate of £155 per linear metre, we assess the reasonable cost of these works as £51,146.90 net.

103. Comparison with Table 1 at paragraph 65 above shows that we have only allowed 329.98 metres against the claimed metreage of 345.50 in Table 1. The difference is 15.52 metres. This difference comes about because in invoices 12349 (p181) and 11752 (page 191), Mr [NAME] allowed additional metres to reflect what he thought was extra work undertaken by [NAME]. He accepted that he rolled up what he regarded as the value of the extra work into additional metres which he then certified. Thus the extra metres were not strictly additional linear metres; they were his assessment of the value of the extra work expressed as if that work had been extra metres.

104. In our view, it is not reasonable for the Respondent to incur a charge for the extra works. Entitlement to charge for extra work is of course an issue that should have been covered in any contract for the works. The evidence we have is that the contract was not in writing. The Respondent has not told us the terms. Mr [RESPONDENT] evidence was that [NAME] would carry out works on the Sample Corridor to fix a price per linear metre for the rest of the works. Our view is that the price was indeed fixed, or alternatively the directors, acting reasonably, would have negotiated a fixed price. We do not consider therefore that payment for additions above and beyond the linear metres of corridor worked on were reasonably incurred.

105. We have given some thought to the weight we should apply to the terms of Mr [NAME] proposal referred to in paragraph 62 above. On one reading, extras could have been charged legitimately under paragraph 7 of those terms. Our difficulty is in knowing whether these were the terms that applied to the contract. Mr [NAME] email suggested they were not. Also, no reference has been made to the contingency of 5% referred to in paragraph 6. Unless matters have arisen of which we are unaware, there is a case for suggesting that the Respondent, if it contracted on the basis of these terms, might request a refund. The position is so uncertain that we took the view that we should not disturb our initial view to the effect that there was, or should have been, a fixed price.

106. Our determination is that the service charge for 2020 for [NAME] can include a charge of £51,146.90 net, being a sum reasonably incurred for the [NAME]. Any greater sum is not reasonably incurred and therefore would not be payable.

107. We have been asked to confirm the rate for which any future [NAME] should be charged. We decline to do so. Irrespective of the

23 contractual arrangements between the Respondent and [NAME], on the basis of their counsel’s own submission, the Respondent needs to go back to the drawing board and investigate alternative quotations. The board should possibly also review the whole Phase 4 proposal. It should take proper advice on consultation, as although the Applicants decided not to pursue that point in relation to the [NAME] for 2020, the point may be pursued in the future. It is not for this Tribunal to fix a rate for future work, not least because any rate we fix might be too high in the light of what can be achieved in the market, and we cannot be aware of market conditions, either positive or negative, at some point in the future.

108. Whatever the Respondent decides, it should of course make proper allowance for the likely costs in its budget. Either party has the opportunity to ask the Tribunal to determine whether a service charge based on the budget is payable, or alternatively, the Applicants may challenge the actual expenditure in future years if they are not persuaded that the actual sums were reasonably incurred.

109. Finally, we need to deal with Mr [NAME] argument concerning recovery of the cost of the [NAME] from third parties rather than the service charge payers.

110. It is incontrovertible that if the Respondent could have claimed the cost of the [NAME] from a third party, to claim them instead from the service charge payers is unreasonable (see for instance paragraphs 8 and 9 in the judgement of HHJ Rich in [COMPANY] v White [2006] 1 E.G.L.R. 85).

111. The question for us is whether the Respondent could in fact have claimed those costs. It is incumbent upon the Applicants to establish at least a prima facie case that a third-party claim exists. No such case was established. At the very least, the Tribunal would have needed to be told the party against whom the claim should be made, identify whether the claim would be in contract, tort, or under statute (and if so which) and why the Respondent was entitled to pursue a remedy, identify the document which would govern the claim, explain the reason why the claim might not be subject to limitation of time, and identify the breach for which a remedy would be pursued.

112. In the absence of this information, it is impossible for the Tribunal to conclude that there was any prospect of a claim against a third party, and we so determine. This does not mean that we have concluded there is no prospect of a claim; just that we have no basis for deciding there is.

Costs and fees

113. The Applicants have applied for orders under section 20C of the Act and under paragraph 5A of the Commonhold and Leasehold Reform Act 2002 Schedule 11.

24 114. The Tribunal will determine those applications on the basis of written representations, to allow the parties to reflect the outcome of this application in their representations. The Tribunal directs that both parties may submit written representations within 14 days of the date of this decision to the Tribunal (electronic version and three hard copies please) with a copy being supplied to the [NAME] party.

Appeal

115. Any appeal against this decision must be made to the Upper Tribunal (Lands Chamber). Prior to making such an appeal the party appealing must apply, in writing, to this Tribunal for permission to appeal within 28 days of the date of issue of this decision (or, if applicable, within 28 days of any decision on a review or application to set aside) identifying the decision to which the appeal relates, stating the grounds on which that party intends to rely in the appeal, and stating the result sought by the party making the application.

Judge C [NAME] First-tier Tribunal (Property Chamber)

25 Appendix – List of Applicants

[NAME] ([COMPANY] Mr [NAME] Ms [NAME] Mr [NAME] Mr [NAME] [NAME] Mr [NAME] Mr [NAME] [NAME] Ms [NAME] Dr [NAME] Mr [NAME] and Mrs [NAME] Mr [NAME]

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : BIR/00FY/LDC/2020/0018 BIR/00FY/LSC/2020/0007 BIR/00FY/LSC/2020/0008

Property : [NAME], [ADDRESS] [POSTCODE]

Applicants : [redacted] Representative : Mr A New Respondents : [redacted] [COMPANY] (2) Representative : Mr [COUNSEL] (Counsel) instructed by [COUNSEL] Solicitors (for the First Respondent) Type of applications : Application for an order under section 20C of the Landlord and Tenant Act 1985

Application under paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 for an order reducing or extinguishing a tenant’s liability to pay an administration charge in respect of litigation costs

: Paper determination Date of decision : 12 November 2021 DECISION © CROWN COPYRIGHT 2021

2 Determination

The Tribunal determines that:

A. Under section 20C of the Landlord and Tenant Act 1985, 25% of the costs of the proceedings under references BIR/00FY/LDC/2020/0018 and BIR/00FY/LDC/0007 are to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the Applicants.

B. Under section 20C of the Landlord and Tenant Act 1985, that none of the costs of the proceedings under reference BIR/00FY/LSC/2020/0008 are to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the Applicants.

C. Under paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002, the Applicants’ liability to pay any litigation costs in respect of all of the proceedings under consideration in this decision are extinguished.

Background

1. This is a decision on applications under section 20C of the Landlord and Tenant Act 1985 and under paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 consequent upon two decisions made by this Tribunal dated respectively 15 April 2021 (“the April Decision” (references BIR/00FY/LDC/2020/0018 and BIR/00FY/LDC/0007)) and 14 September 2021 (“the September Decision” (reference BIR/00FY/LSC/2020/0008)).

2. The two decisions (“the Decisions”) concerned liability to pay service charges at [NAME], in Nottingham. This is a converted building now primarily used for residential purposes, comprising 329 residential apartments, all of which are let on long leases.

3. In December 2020, both the Applicants and the First Respondent commenced proceedings in this tribunal virtually simultaneously. Both applications concerned the liability to pay service charges for external [NAME] works to the building. The First Respondent’s applications requested dispensation from consultation for those works and confirmation that expenditure on the works would be reasonably incurred. The Applicant’s application challenged the payability of the costs of the external works as part of a service charge.

4. The Applicant’s application also challenged expenditure on internal [NAME] works to the corridors in the building.

3 5. For case management purposes, the applications concerning external works were combined and determined in April 2021. The internal [NAME] works application was determined in September 2021.

6. The April Decision considered two elements of expenditure on external [NAME] works, being expenditure on re-cladding of the external structure housing the stairwells and replacement of the insulation within the cladding system (“re-cladding”) that had been installed as part of the conversion, and replacement of some timber balconies which had been identified as a fire risk. The Tribunal concluded:

a. The costs of the re-cladding work would be recoverable via the service charge;

b. In so far as may be necessary, dispensation from consultation was granted, though on the quotations for the re-cladding work alone, the cost was unlikely to exceed the consultation threshold;

c. It would not be reasonable to incur costs for replacing timber balconies as they were not recoverable under the lease(s) and would not have been reasonably incurred.

7. The September Decision considered liability for works to improve internal fire barriers in order to compartmentalise the building more effectively. These works were mainly required to the internal corridors in the building. At the hearing, the issues were reduced to the reasonableness and payability of invoices for 2020. The Tribunal concluded:

a. The costs incurred on the internal [NAME] in 2020 were unreasonably incurred. The sum paid of £62,720.38 net was considered to be unreasonable and it was reduced to a reasonable sum of £51,146.90 net;

b. The First Respondent had not managed the process of contracting for the [NAME] adequately, including failure to resolve an obvious conflict of interest on the part of the First Respondent’s agent, failure to obtain comparable quotes, and failure to contract on normal terms;

c. On the evidence, there was no reason to reduce any liability to pay a service charge on the grounds that a third party was liable.

8. The Applicants have applied for an order under section 20C of the Landlord and Tenant Act 1985 and under paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 limiting their liability to pay the First Respondent’s costs of the proceedings that led to the Decisions.

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9. The Tribunal directed that the parties provide written submissions on these applications. The Applicant’s submissions are undated but were received by the Tribunal on 12 October 2021. The First Respondent’s submission is dated 11 October 2021.

10. Our determination on the applications is set out at the beginning of this determination. Our reasons are given below.

Law

11. We firstly identify the law that applies.

12. Section 20C provides:

20C.— Limitation of service charges: costs of proceedings.

(1) A tenant may make an application for an order that all or any of the costs incurred, or to be incurred, by the landlord in connection with proceedings before … the First-tier 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 [NAME] person or persons specified in the application.

(2) The application shall be made— … (aa) in the case of proceedings before the First-tier Tribunal, to the tribunal; …

(3) The court or tribunal to which the application is made may make such order on the application as it considers just and equitable in the circumstances.

13. The purpose of section 20C is to give the Tribunal the power to prevent a landlord actually recovering its costs via the service charge when it was not able to recover them by a direct order from the Tribunal. The discretion given to the Tribunal is to make such order as it considers just and equitable.

14. Paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 provides:

Limitation of administration charges: costs of proceedings 5A (1) A tenant of a dwelling in England may apply to the relevant court or tribunal for an order reducing or extinguishing the tenant's liability to pay a particular administration charge in respect of litigation costs.

5 (2) The relevant court or tribunal may make whatever order on the application it considers to be just and equitable. (3) In this paragraph— (a) “litigation costs” means costs incurred, or to be incurred, by the landlord in connection with proceedings of a kind mentioned in the table, and (b) “the relevant court or tribunal” means the court or tribunal mentioned in the table in relation to those proceedings.

15. The table referred to in sub-paragraph 3(b) confirms that if the proceedings to which the costs relate were proceedings in the first-tier tribunal, then the first-tier tribunal is the relevant court or tribunal.

16. The Tribunal therefore has a discretion limited only by the requirement that it make a just and equitable decision.

Discussion

A. Are the First Respondent’s costs a service charge cost?

17. If the First Respondent’s costs are not recoverable under the leases, there would be no liability, and no need to make an order under section 20C or otherwise. The First Respondent relies upon paragraph 2 of Part 2 of the Seventh Schedule of the lease which allows it to “instruct solicitors … in connection with the maintenance and proper convenient management and running of [NAME]…”.

18. In his submission, Mr [APPELLANT] confirms that “there is no dispute over the Applicant’s contractual right to recover the legal costs under the terms of the lease.”

19. Whatever the correct interpretation of this clause, there is no need for the Tribunal to consider this aspect further as the parties are agreed that in principle the costs could be recovered under the lease.

B. The Section 20C application

20. We have approached this determination by having in mind three key factors; the outcome of the proceedings, the surrounding context (including the conduct of the parties), and the practical and financial consequences of any orders we may or may not make. We have carefully considered the parties submissions identified in paragraph 9 above. Our overriding aim has been to make a just and equitable decision about

6 whether the Applicants should contribute towards the costs of the proceedings.

21. The only people identified in the Applicants’ application are the 13 [NAME] (owning 39 flats) identified in the Appendix to this decision. There is no application on behalf of the [NAME] 290 flats. In the absence of a request to do so, we cannot make an order in favour of the [NAME]. If we do make orders as requested in favour of the Applicants, the First Respondent’s costs will then be shared between the [NAME] flat owners. [NAME] could of course apply for their own section 20C order, or could challenge expenditure on this litigation under section 27A of the Act when service charge accounts are produced, but our view is that unless any such applications are made and are successful, the making of any section 20C order does not deprive the First Respondent of the opportunity to recover costs from the [NAME]. Any orders we make therefore do not put the First Respondent at risk of financial insolvency.

The April Decision

22. Our decision is that the Applicants should make some contribution towards the First Respondent’s costs in connection with the April Decision, as we consider that it was reasonable for the First Respondent to seek a protective determination of the reasonableness of the costs for the re-cladding work, which the Tribunal agreed.

23. We do however take the view that it would be unjust for the Applicants to contribute their normal proportion of those costs. The First Respondent unsuccessfully sought a determination that the costs of the balcony work should also be charged. It also sought dispensation from consultation, which is highly unlikely, on the basis of the evidence presented to us, to in fact be required. So far as outcome is concerned, the Applicants achieved an outcome which we think they would have been unlikely to have achieved without tribunal involvement. We have also taken some account of the context of the April Decision in so far as transparency and disclosure of evidence is concerned, particularly the evidence about combustibility set out in paragraph 97 of the April Decision.

24. Our decision is that the Applicants should only be required to contribute 25% of their normal share towards the costs incurred in connection with the April Decision. This percentage figure is arrived at via a very broad brush assessment that the consideration of the liability for balcony repair consumed around 50% of the time and cost, and of the [NAME] 50%, our view is that the parties share equal responsibility for being unable to resolve matters without contested litigation.

The September Decision

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25. In outcome terms, the Applicants only secured a reduction of around 18% on the sum charged in 2020 for internal [NAME]. The Tribunal has noted carefully paragraph 13 of the First Respondent’s submission and the outcome of the case of Schilling v [COMPANY] (LRX/26/2005).

26. However, we do make a section 20C order in respect of the costs incurred in the September Decision case. We do not think it would be just and equitable for the Applicants to make any contribution towards the First Respondents costs of this case.

27. Our reason is that although the Applicants only secured a small percentage reduction, what the proceedings exposed was a significant failure on the part of the First [NAME] and/or its managing agent to discharge their responsibilities in the best interests of the service charge payers. We refer to paragraphs 82 to 94 of the September Decision in which our criticisms are identified. We do not think these deficiencies would have come to light without the proceedings.

28. In the light of these failures, our view is that it would be unjust for the Applicants to have to pay any contribution towards the First Respondents costs in relation to the September Decision.

29. We have considered whether the Applicants’ decision to withdraw its initial case concerning consultation and the scope of the works it challenged should impact this conclusion. In fact, our view is that this was a sensible step designed to save costs, rather than an action worthy of sanction. We cannot see that it was unreasonable to raise the additional issues in the first place, and if so, it would not be just to penalise the Applicants for sensibly limiting the extent of the Tribunal’s enquiry.

C. The paragraph 5A application

30. Claiming costs of tribunal proceedings via an administration charge is an alternative route by which a landlord or RTM company might recover costs. Rather than asking all lessees to pay their respective contributions through a service charge, individual lessees can be asked to pay via a direct covenant in a lease that may make them individually liable.

31. The First Respondent has not identified any specific clauses in the lease under which it argues that such charges might be recoverable from each [NAME] individually. In the light of our conclusions above, it would be invidious and unjust for any individuals to be the subject of a claim by the First Respondent that they should be personally responsible for the costs of the proceedings in the two applications.

8 32. We determine that an order under paragraph 5A should be made.

Appeal

33. Any appeal against this decision must be made to the Upper Tribunal (Lands Chamber). Prior to making such an appeal the party appealing must apply, in writing, to this Tribunal for permission to appeal within 28 days of the date of issue of this decision (or, if applicable, within 28 days of any decision on a review or application to set aside) identifying the decision to which the appeal relates, stating the grounds on which that party intends to rely in the appeal, and stating the result sought by the party making the application.

Judge C [NAME] First-tier Tribunal (Property Chamber)

9 Appendix – List of Applicants

[NAME] (Five) [COMPANY] Mr [NAME] Ms [NAME] Mr [NAME] Mr [NAME] [NAME] Mr [NAME] Mr [NAME] Ms [NAME] Dr [NAME] Mr [NAME] and Mrs [NAME] Mr [NAME]