First-tier Tribunal Rules on Service Charge Validity and Costs

OUTCOME: Allowed

1

Case Reference

: CHI/45UC/LSC/2019/0016 Property

: [NAME], Littlehampton, West Sussex [POSTCODE] Applicants

: [redacted]

Representative

: Ms [COUNSEL] Respondents

: [redacted] Representative of [COUNSEL] deceased

Representative

: [NAME] [COUNSEL] of counsel, instructed by [NAME]

: Determination of service charges: section 27A Landlord and Tenant Act 1865

Tribunal Members

: Judge E Morrison Judge J [NAME] B HR Simms FRICS Date and venue of Hearing

: 28 February 2020 at Havant Justice Centre Date of decision

: 18 March 2020 _______________________________________________

DECISION ____________________________________

© CROWN COPYRIGHT

FIRST - TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

2 The applications

1. By an application made on 4 January 2019 [NAME] [APPELLANT] applied under section 27A of the Landlord and Tenant Act 1985 (“the Act”) for a determination of his liability to pay service charges for service charge years ending 30 June 2013, 30 June 2014, 30 June 2015, and 30 June 2016. The respondents are the freeholders of the block.

2. The Tribunal also had before it an application under section 20C of the Act for an order that the respondents’ costs of these proceedings should not be recoverable through future service charges.

3. On 19 November 2019 [NAME] [NAME] co-[NAME] of [NAME], Mrs [APPELLANT], was joined as an applicant.

Summary of decision

4. The service charges recoverable by the respondents from the applicants upon payment of a valid demand are as follows:

Year ending £

30 June 2013 1617.58 30 June 2014 827.24 30 June 2015 1332.55 30 June 2016 1699.18

These demands referable to these service charges became valid once

reissued on 21 January 2020.

5. An order is made under section 20C of the Act.

The lease

6. The Tribunal had before it a copy of the lease for [NAME]. It is for a

term of 99 years from 24 June 1977.

7. The relevant provisions in the lease may be summarised as follows:

(a) [NAME] is required to pay ¼ of the [NAME]’s costs of complying with its covenants under sub-clauses(2),(4) (5) and (6) of clause 4 of the lease, and is required to pay 1/6 of the [NAME]’s costs of complying with its covenants under sub-clauses (1) and (3) of clause 4 of the lease (these are discussed further below);

(b) On account payments are payable on 24 June and 25 December in each year; any balance payable is due 21 days after the [NAME] serves notice requiring payment of expenditure which has been certified by the [NAME]’s surveyors or accountants;

3 (c) Surplus monies in the hands of the [NAME] shall be credited against [NAME]’s future liability but this does not prevent the [NAME] “opening a sinking fund out of such monies towards the future cost of replacing major items of equipment or repairs and decoration”;

(d) Sub-clauses (1),(3) (4) and (6) of clause 4 make reference to “the Block”, which is defined in clause 1 as “the block of flats and shops comprising Shops No. 5 and 6 and Flats No. 5a and 6a 5B and [ADDRESS].

The inspection

8. The tribunal inspected the subject property on the morning of Friday 28th February 2020, immediately before the hearing, when the parties’ representatives were also in attendance. [ADDRESS] is a first floor self-contained flat in a 3 storey block at the edge of Littlehampton town centre, close to the sea front and harbour. The property adjoins retail and commercial premises with residential properties to the south and east. The tribunal briefly inspected the common parts and the exterior generally, and the interior of [NAME] where black mould discoloration to some of the internal walls in some corners and to the window reveals was seen. [NAME] is presently let out by [NAME] [NAME].

9. The block has two retail shops on the ground floor with a separate central entrance to common hallways and stairs leading to four flats on the first and second floors. The building has brick elevations with balconies to the flats at the front under a flat roof (not inspected). The flats have replacement plastic double-glazed replacement windows, and the timber casements to the common parts are overdue for redecoration. The fascia is of timber and is in poor condition with peeling paintwork. The tribunal was asked to note replacement and repaired lintels over some of the flat windows at the rear and wet surfaces to the East flank brick wall.

10. At the rear is a yard storage/garages for the shops and 4 parking spaces accessed from a driveway at the side leading to [ADDRESS]. The access drive is heavily pot-holed.

Representation and evidence at the hearing

11. The applicants did not attend the hearing, but were represented by [NAME] [NAME] aunt [NAME], who had also made the application on his behalf, attended the earlier case management hearing, and dealt with the case preparation. The tribunal has been told that [NAME] [NAME] now works abroad in Vietnam. Mrs [NAME] has not lived at the property for some years and lives in Bristol.

12. The respondents did not attend the hearing but were represented by [NAME]

[COUNSEL] of counsel. [NAME] [COUNSEL] of the managing

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agents [NAME] had provided a witness statement and was in

attendance.

13. The parties had prepared statements of case and supporting documents

and these were before the tribunal.

The law and jurisdiction

14. The tribunal has power under section 27A of the Act to decide about all aspects of liability to pay service charges and can interpret the lease where necessary to resolve disputes or uncertainties. The tribunal can decide by whom, to whom, how much and when a service charge is payable.

15. By section 19 of the Act a service charge is only payable to the extent that it has been reasonably incurred and if the services or works for which the service charge is claimed are of a reasonable standard. When service charges are payable in advance, no more than a reasonable amount is payable.

16. Under section 20C of the Act a tenant may apply for an order that all or any of the costs incurred by a landlord in connection with proceedings before a tribunal are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or persons specified in the application.

17. Section 47 of the Landlord and Tenant Act 1987 requires that any written demand given to a tenant of a dwelling contains the name and address of the landlord, and if that address is not within England and Wales, provides an address within England and Wales where notices may be served. If a service charge demand does not contain this information the sum demanded “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”.

The issues

18. Ms [APPELLANT] had clearly identified the issues that she wished the tribunal

to consider and the respondents did not add to these. They were as

follows:

(i) Whether the service charge demands were valid (ii) Whether various costs had been correctly apportioned (iii) Whether various costs had been reasonably incurred (iv) Whether the sums shown for reserves in the end of year statements had been correctly calculated (v) Whether the sums charged for insurance were all payable.

5 (i) Whether the service charge demands were valid

19. Ms [NAME] contended that none of the service charge demands as originally made contained the landlord’s name and address as required by section 47 of the Landlord and Tenant Act 1987. Thus no service charges were due.

20. The respondents did not dispute non-compliance with section 47 but

relied on demands re-issued on 21 January 2020 which provided the

required information.

21. The tribunal therefore finds that the service charges covered by these

demands, dating back to June 2011, were not validly demanded until 21

January 2020.

(ii) Whether various costs had been correctly apportioned

22. Ms [NAME] submitted that various items of expenditure had been

incorrectly apportioned, requiring the four flats lessees each to pay ¼

of the cost, instead of apportioning the cost 1/6 each between the flats

and the two commercial units in the block. Some of the challenged

expenditure arose in every year; other costs were one-offs. The

respondents conceded certain points in [NAME] [NAME] witness statement;

other items were conceded by both sides at the hearing. Others were

not agreed and the tribunal therefore determines them.

Insurance

23. In every year the cost of buildings insurance for the block had

apportioned on a ¼ basis for the flats to pay, instead of a 1/6 basis as

specifically provided by clause 4(3) of the lease. The respondents

conceded this was incorrect, but did not explain why the error had

occurred. Accordingly a credit must be applied so that flat lessees pay,

between them, only 2/3 of the total cost.

Fire alarm costs

24. Ms [NAME] originally contended this cost should also be split 6 ways

instead of 4 ways as she had assumed the alarm system served the

whole building. However it emerged at the inspection that it served

only the flats and their common parts. She therefore withdrew this

challenge.

Management Fees

25. Clause 4(5) of the lease is a covenant by the landlord which covers the employment of managing agents “subject to payment of [NAME]’s one fourth part (or one sixth where appropriate)…”. Ms [NAME] said the management should cover the entire building and therefore the flats should pay 1/6 instead of 1/4 of the cost. [NAME] [NAME] replied that it was only recently that his firm had taken on management of the commercial

6 units and that was why more recent service charges split the cost six ways; however, during the years in question [NAME] had dealt only with the flats.

26. There being nothing to contradict [NAME] [NAME] evidence it is accepted and the charge remains payable ¼ by each [NAME].

Bank charges

27. On the same basis these were challenged by Ms [NAME]. The tribunal

raised a further issue as to whether they were payable at all under the

lease. [NAME] [RESPONDENT] said they were charges incurred by the landlord. [NAME]

[RESPONDENT] was given time to consider this point; he accepted there was

nothing in the lease that might cover the charges except possibly clause

4(6) which covers costs of persons employed by the landlord. However,

without any evidence that these were costs incurred by an employee or

agent that the landlord was liable to reimburse (in addition to any

management fee), the tribunal finds that they are not payable under the

lease.

Removal of external rubbish, drain clearing, external signs, gardening, bin cleaning, fence panels, and ground maintenance etc relating to rear yard

28. Ms [NAME] had submitted that all costs relating to the outside ground area should be split 1/6 instead of ¼ as charged, and the respondents agreed. The costs are payable under clause 4(1) of the lease which clearly provides for a 1/6 split for costs relating to maintenance of “the yard at the rear…”. It is noted that at paragraph 5 of his witness statement [NAME] [NAME] sets out tables of agreed credits which indicate an acceptance that the flat lessees should not be paying anything at all towards these costs. However, this is contradicted by the opening words of paragraph 5, and by the clear position taken at the hearing, and we accept that the figures in the tables are therefore a mistake.

Exterior decorations in 2012/13 and 2013/14

29. Ms [NAME] said that none of the invoices showed what work had been done and she therefore queried whether the costs should have been split 1/6 instead of ¼. [NAME] [NAME] referred the tribunal to the works specification which explicitly stated that no works to the ground floor apart from the communal entrance doors to the flats were included. Clause 4(4) of the lease requires the landlord to redecorate the exterior “excluding the two shops”, subject to [NAME]’s ¼ contribution. The tribunal therefore finds that the lessees are only being asked to pay for work to which they are required to contribute ¼, and no adjustment is required.

Nosings

30. Having been shown the nosings on the communal stairs during the

inspection, Ms [NAME] withdrew her challenge to this item.

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Electrical repairs

31. Various minor electrical repairs were carried out. The tribunal was

referred to the invoices to consider whether the cost should have been

split six ways instead of four. Only one invoice for £60.00 at page 47 to

the exhibits to [NAME] [NAME] statement is found to have been wrongly

apportioned, the other charges all relating to works in or relating to the

flats’ common parts electricity.

No smoking sign/asbestos testing/front and back door locks

32. Having heard the respondents’ submissions, Ms [NAME] accepted that a ¼ apportionment was correct.

Health and Safety risk assessment

33. Having heard the respondents’ explanation that this was only carried out for the flats, that outside experts were employed, and that the work was not covered by [NAME]’ management fee, Ms [NAME] did not further dispute a ¼ apportionment.

Major works in 2014/15 and 2015/16

34. These were works to the exterior balconies, lintels and drains of the

building for which clause 4(1) of the lease provides a 1/6

apportionment. At the hearing [NAME] [NAME] accepted that 1/6 was right

and that a credit should be given. It should be noted that for 2015/16

Ms [NAME] had only specifically mentioned the lintel repairs but having

considered the parties’ written submissions on the issue, invited after

the hearing, the tribunal concludes that a 1/6 apportionment should

extend to all these major works, which fall within clause 4(1) of the

lease.

Land Registry fees

35. It was unclear what these fees were for. [NAME] [NAME] relied on clause

4(6) of the lease but without evidence that that they were costs properly

incurred by persons employed to perform the [NAME]’s covenants or for

the proper management of the block the tribunal cannot be satisfied

that they are recoverable through the service charge.

Building inspection costs

36. This expense was the cost of a revaluation for insurance purposes. [NAME]

[NAME] accepted that 1/6 was the correct apportionment.

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(iii) Whether various costs had been reasonably incurred

Communal cleaning

37. Over the four year period the fortnightly charge varied but was in the range of £22.64 - £28.48 + vat per fortnightly visit. Ms [NAME] submitted these costs were unreasonably high. She said that [NAME] [NAME] had offered to do the cleaning himself (although it was unclear when) and that the cleaning should only take an hour. [NAME] had engaged a cheaper contractor who charged £20.00 per visit.

38. [NAME] [NAME] said the charges were reasonable; [NAME] [NAME] said they were minimal, and that professional contractors with liability insurance etc. were required.

39. Landlords are entitled to use professional contractors. In our view, bearing in mind time to travel to the site and to clean the common areas, and provision of equipment, it cannot possibly be said that the sums charged are unreasonable. Landlords do not have to use the cheapest contractor. The charges are allowed in full.

Door entry system

40. Ms [NAME] withdrew her challenge to this expenditure.

Fire alarm maintenance contract

41. Without any expert evidence or comparable quote, Ms [NAME] said that the number of visits (weekly tests, three quarterly an one annual inspection) was excessive, and that an annual inspection should be sufficient. The costs were too high.

42. [NAME] [NAME] referred to a recent fire risk assessment in which the independent assessors, while not querying weekly testing, had said there should also be monthly emergency lighting tests. [NAME] [NAME] said that weekly alarm tests were the norm in the many properties managed by [NAME].

43. There is no evidence that the work or costs carried out under the fire alarm maintenance contract are unreasonably incurred and the costs are allowed.

General repairs charges

44. Ms [NAME] suggested that the costs of three attendances to change a fuse in the communal cupboard (£35.00 + VAT) change fire alarm batteries (£70.00 + VAT) and change four common parts light bulbs (£50.00 + VAT) were too high[NAME] 45. [NAME] [NAME] noted that Ms [NAME] had provide no comparable quotes. All three invoices covered labour and materials. [NAME] [NAME] mentioned that the costs covered any call out charge, labour, parts and disposal of materials.

46. Again there is insufficient evidence that these costs were unreasonably incurred and they are allowed.

(iv) Whether the sums shown for reserves in the end of year statements had been correctly calculated

47. Although the lease requires the landlord to “keep proper books of

accounts” it does not require the landlord to serve formal service

charge accounts, simply a certified notice (in effect a statement) of the

landlord’s expenditure. Within the statements provided for each of the

four years under consideration, an amount is shown for “general

reserve”. Ms [NAME] submitted that the amounts were incorrect, and that

there were other errors in the calculations.

48. The tribunal explained that its consideration was limited to determining the actual service charge payable for each year. In our view there is no provision in the lease for a reserve or sinking fund to be funded from the service charge. The effect of clause 2(5) of the lease – see paragraph 7 (c) above – is simply that if a [NAME] has paid more on account than is required to meet actual expenditure, the surplus may be retained as that [NAME]’s forward payment towards future major works. However if a [NAME] only pays enough to meet actual expenditure, an additional contribution for a reserve or sinking fund, cannot be demanded.

49. Having said that, the statements provided do not appear to be accurate in all respects. For example, the 2013/14 statement gives an end of year surplus in General Reserve of £2573.52. However this sum does not appear to have been brought forward into the 2014/15 statement which is a more formal service charge account.

(v) Whether the sums charged for insurance were all payable.

50. Ms [NAME] challenged the insurance costs on the basis that, in the first

three years, the sum charged to the lessees was considerably higher

than the actual insurance premium, without explanation. [NAME] [NAME]

said that in those years the previous landlords had sourced the

insurance themselves and charged a fee for this. In 2015/16 [NAME]

had taken over this function, as well as claims administration, for

which they received a commission that was included as part of the

premium. He accepted this commission had not been disclosed as

required by the RICS Code.

51. With respect to the first three years, there is no evidence of any actual cost to the landlords in addition to the premium and no clause in the lease which would permit them to recover a fee. In the fourth year, we

10 note that the premium, inclusive of [NAME] commission, is at a very reasonable level, given that it covers the entire block including the commercial units. [NAME] should have disclosed the commission arrangements, but there is nothing objectionable to such commission being included in the premium if it represents payment for a service that would otherwise be provided by the insurance company: [NAME] v [NAME] (2001) 33 HLR 224. The tribunal therefore allows recovery in all four years of the premium but no more, apportioned six ways as previously discussed. It should be noted that the insurance sum charged for 2015/16 is put at £508.53 in the service charge accounts as opposed to the actual premium figure of £663.97. We do not understand how the figure of £508.53 is arrived at. We are allowing the actual premium apportioned on a 1/6 basis and if any adjustment is required (for example due to a time apportionment) this should be made in the current year’s service charge account.

Calculation of service charges

52. Appended to this decision is a calculation of the service charge

payable by the four flats for each year as determined by the tribunal.

Where the expenditure is apportioned on a 1/6 basis, only 2/3 of the

total cost has been included, the other 1/3 being attributable to the

commercial units.

Section 20C application

53. Ms [NAME] applied for an order under section 20C on the ground that

the application had been necessitated by the failure of [NAME], and

later [NAME], to answer reasonable queries first raised by [NAME] [NAME]

in December 2017. It was only at the case management hearing that

there was some admission that some costs had been incorrectly

charged.

54. [NAME] [NAME] said that on balance the challenges made had been

disproportionate; many items challenged had now been accepted as

reasonable. Moreover Ms [NAME] had been “aggressive” in pursing the

application.

55. In deciding whether to make an order under section 20C a tribunal must consider what is just and equitable in the circumstances. The circumstances include the conduct of the parties and the outcome of the proceedings. We accept, from reviewing the correspondence, that the respondents failed to give proper consideration to valid queries raised by [NAME] [NAME] and later by Ms [NAME] on his behalf. Although there was some concession of incorrect charging made at the case management hearing, nothing was specified. The respondents then failed to comply in a timely manner with the tribunal’s directions for disclosure and service of their statement of case. The applicants were left to “make the running”. It was only when [NAME] [NAME] witness statement was served that there was any specific acceptance that some costs had been incorrectly charged to the lessees. Further concessions

11 were made at the hearing. It is true that Ms [NAME] also made concessions, but she pointed out that this was in response to information disclosed late in the day that could have been made known much earlier. The applicants have succeeded on a number of important aspects, including the invalidity of the service charge demands, apportionment of significant costs, and improper fees charged by the lessors.

56.

For these reasons, the tribunal determines it is just and equitable for

an order to be made that to such extent as they may otherwise be

recoverable, the respondents’ costs in connection with these

proceedings are not to be regarded as relevant costs to be taken into

account in determining the amount of any service charge payable by

the applicants.

Dated: 18 March 2020

Judge E Morrison

Appeals

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.