First-tier Tribunal Rules on Service Charges Under Landlord and Tenant Act

OUTCOME: Allowed

© CROWN COPYRIGHT 2022

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case References :

LON/00BK/LSC/2022/0215

Property : 11 [NAME], Kensington Gore London [POSTCODE] Applicant : [redacted] [RESPONDENT] [COMPANY] : Mr [COUNSEL] KC instructed by [COUNSEL] Respondent : [redacted] : Ms [COUNSEL] [NAME] of Counsel instructed by [COUNSEL] LLP Type of Application : Transfer from County Court Reasonableness and payability of Service charges under s27A of the Landlord and Tenant Act 1985 Tribunal Members : Tribunal Judge Roger Cohen Tribunal Member [NAME] Date of hearing : 28 November 2022 Date of Decision : 23 December 2022

DECISION

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Decision of the Tribunal In this decision, the following terms have the following meanings: the [NAME] [NAME] [NAME] the Commonhold and Leasehold Reform Act 2002 the [NAME] [NAME], 4 and 5 [NAME] the Flat Flat 11, [NAME], Kensington Gore, London [POSTCODE] the Landlord [NAME] ([NAME] 1 -3) [RESPONDENT] the Lease A lease dated 12 December 2008 of the Flat (being on the ground floor of the [NAME]) and made between (1) the Landlord (2) the [RESPONDENT] and (3) the Respondents the [RESPONDENT] [NAME] [RESPONDENT] [COMPANY] The right to manage under part 2 CLRA

Background 1 Since 2011, the Applicant has exercised the right to manage a building known as [NAME], [NAME], London SW7. [NAME] comprise one building. Flat 11 is one of the flats in [NAME]. [NAME] are adjacent to two other buildings known respectively as [NAME] 4 and [NAME] 5. Thus, there are five [NAME] in three buildings.

2 The Landlord, being the owner of the reversion to the Lease (and the other leases of flats in the [NAME]) was and is the nominee purchaser through whom the leasehold owners of all the flats exercised their rights of collective enfranchisement of the freehold of each building.

3 The Respondents are the leasehold owners of the Flat pursuant to the Lease. The Lease is for a term of 999 years from 12 December

3 2008 at a peppercorn rent. The Lease reserves a service charge. The Lease as granted included a further party; the [RESPONDENT] whose role was to provide the [RESPONDENT] services specified in clause 4 of the Lease. The administration of the service charge is governed by schedule 5 to the Lease.

4 On 12 August 2021, the Applicant issued proceedings against the Respondents in the County Court claiming service charge arrears of £30,855.47 for the period from 24 June 2019 to 23 June 2021 together with interest and associated administration charges. The Respondents defended the proceedings initially on the basis that: 1) the sums claimed were not reasonable and/or are not due; and 2) the apportionment of the service charge was incorrect.

5 On 26 May 2022, the County Court transferred the claim to this Tribunal for a determination under section 27A Landlord and Tenant Act 1985.

6 On 28 July 2022, this Tribunal listed the matter for a hearing stating that “the issues in the case are set out in the County Court pleadings”.

7 As at 25 November 2022 when Ms [COUNSEL] of Counsel settled the Respondent’s skeleton argument, the Respondents challenged a number of individual items of service charge expenditure under four heads of challenge which the Tribunal summarises as follows: 1) reasonableness; 2) compliance with consultation requirements; 3) section 20B limitation; and 4) incorrectly addressed invoices.

8 The items in dispute were helpfully recorded in a schedule agreed between Counsel and provided to the Tribunal on the working day before the hearing.

9 At the outset of the hearing, [NAME] requested and was given some time to take instructions. The upshot was that Ms [NAME] withdrew all grounds of challenge to all service charge items except for the following, which remained live issues for the determination of the Tribunal: 1) the apportionment of the service charge; and 2) the claim for electricity charges, challenged as a supply under a qualifying long term agreement on which the Applicant had not consulted with the Respondents.

10 The Tribunal heard helpful submissions from Ms [COUNSEL] and from Mr [COUNSEL] for the Applicant.

11 The Applicant tendered the first witness statement of its director, Mr [NAME]. Ms [NAME] had no cross-examination for Mr [NAME] nor did the Tribunal have any questions for him. His

4 evidence was taken as read. His [NAME] witness statement was not considered as it related to issues withdrawn by the Respondents from the Tribunal’s consideration.

12 The [NAME] Respondent had made a short witness statement to which reference was made in closing submissions. The [NAME] Respondent was not in attendance at the hearing. The First Respondent who had made a witness statement was called and cross-examined. The Tribunal found much of the First Respondent’s evidence to be unsatisfactory with repeated failures to answer the question asked or to make what would have been realistic concessions.

13 In the course of his evidence the First Respondent, who has a legal qualification from Sudan, stated that his son, who attended the hearing, is a solicitor practising with the firm representing the First Respondent in the proceedings.

14 Originally, [RESPONDENT] had been the owner of the freehold of the entire [NAME]. However, following a collective enfranchisement process in 2008, the Landlord (as nominee purchaser) became the freehold owner of the [NAME] with other companies (being the respective nominee purchasers) becoming the freehold owners of [NAME] 4 and [NAME] 5.

15 When the [NAME] was in common ownership, services were provided by the [RESPONDENT] to all the flats in the [NAME] who together paid all the service charge costs. Following the collective enfranchisements, all the flats in the [NAME] contributed to the service charge costs for the [NAME]. When the right to manage passed from the [RESPONDENT], the right to manage was obtained by a separate right to manage [RESPONDENT] for each of the three buildings. Instead of one [RESPONDENT] (the [RESPONDENT]) providing the [RESPONDENT] services for all five [NAME], separate companies provided the services for the [NAME] and for [NAME] 4 and [NAME]

5. Thus, after the right to manage was achieved in respect of the three buildings, the service charges for the [NAME] (not the [NAME]) became payable by the owners of the flats in the [NAME] (but not the owners of all the flats in the [NAME]), with the leasehold owners in [NAME] 4 and 5 paying for the service charge costs attributable to their respective [NAME]. The first issue for the Tribunal concerns the implications of this change on the apportionment of service charges due from the Respondents as the leasehold owners of flat 11 in the [NAME].

16 The Respondents were the leasehold owners of the Flat at the time of the collective enfranchisement.

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The pre-lease correspondence 17 On 23 July 2008, [NAME], a partner with [COMPANY], the solicitors acting for the flat owners in connection with the collective enfranchisement at the [NAME], emailed the Respondent as follows: “I shall shortly … send to you a draft of the new 999 year lease for the flat where you are … the lessee. If you are not a solicitor, then I must advise you to take independent advice on the terms of the document as it creates legal obligations. The first figure at 1.3 on page 17 is your current service charge % … the [NAME] figure is that grossed-up by 100/47.509; [NAME] have 47.509% of the total service charge for [NAME] and therefore if [NAME] ever had to manage themselves independently it would be that grossed-up % which would apply”

18 A table showing the higher and lower percentages for each flat in [NAME] was produced to the Tribunal.

19 On 12 December 2008, the Landlord as freehold owner granted the Lease of the Flat to the Respondents. The provisions in the lease

20 The following provisions of the Lease are relevant

The Definitions The [NAME] means the [NAME] of flats in which the premises hereby demised are situate and known as [NAME] [NAME] in the City of Westminster. [NOTE: the [NAME] as defined in the Lease is the same as the [NAME] as defined in this decision]. The [NAME] means the five [NAME] (as defined and described in this decision) Tenants means the owners lessees tenants and occupiers for the time being of the other flats in the [NAME]

6 Clause 2.3 A covenant by the Tenant with the Landlord and as a separate covenant with the [RESPONDENT] and the (other) Tenants subject to the provisions of Clause 13 hereof to pay the Interim Charge and the Service Charge at the time and in the manner provided in Schedule 5

Clause 4 contains covenants by the [RESPONDENT] with the Landlord and as a separate covenant with the Tenant to provide the services specified in detail in that clause. Clause 7 contains covenants by the Landlord with the Tenant including 7.4 If the [RESPONDENT] shall fail to perform any of its obligations hereunder the Landlord on the request in writing of the Tenant shall perform such obligation or obligations but [COMPANY] only to such obligations in respect of the [NAME] (and in such circumstances any references to “the [NAME]” in this Lease shall be deemed to refer only to the [NAME]) and any obligations of the Tenant to the [RESPONDENT] in respect of those obligations shall thereupon be owed by the Tenant to the Landlord instead of the [RESPONDENT] 5 Paragraph 1.1 … “the Total Service Cost” means the aggregate amount in each year running from 26 March (“the accounting period”) reasonably and properly expended by the [RESPONDENT] in carrying out its obligations under Clause 4 of this Lease and the amount of such reserve(if any) as may be reasonably required … Paragraph 1.3 “the Service Charge” means 0.941% of the Total Service Cost … PROVIDED THAT in the event of the Landlord being required to act in accordance with Clause 7.4 the Service Charge shall be 1.981% of the costs thereby incurred. Post grant of lease events 21 The [RESPONDENT] provided [RESPONDENT] services for all five [NAME] in the buildings. That is until the flat tenants in each building sought to acquire and did acquire the right to manage each building. In 2010, the tenants in [NAME] 4 and 5 were the first to acquire the right to manage their respective [NAME]. The tenants of [NAME] were the last to do so, in 2011.

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22 On 31 July 2013, the First Respondent wrote to the Applicant’s agents, [NAME] [RESPONDENT] [COMPANY] querying an invoice dated 25 July 2013 for £25,748.80. The First Respondent requested details about the larger amount, how it was calculated, who authorised the works, the total amount and how it is shared among the owners.

23 On 5 August 2013, [RESPONDENT] of [NAME] [RESPONDENT] [COMPANY] replied to three enquiries stating that an external works contract was underway and they urgently needed funding in order to meet the stage payments for which the contractor had applied. Mr [NAME] confirmed that in the case of Flat 11 the calculations were levied on the Respondents’ service charge percentage which was 1.9807%.

24 On this letter, the First Respondent wrote in manuscript the text of a reply that was typed up by his secretary. The reply stated: “In order for me to authorise full payment of your invoice can you please send me copy of the invoice you sent to my bank earlier as full due from Flat 11”. Impact of the RTM

25 The impact of the acquisition of the RTM of [NAME] on the parties to the Respondent’s lease was as follows. The Landlord (the nominee purchaser) remained the landlord. The Respondents remained the tenants. However, the role of the [RESPONDENT] was subject to the application of Section 96 CLRA 2002. This provides as follows: “96 [RESPONDENT] functions under leases (1)This section and section 97 apply in relation to [RESPONDENT] functions re- lating to the whole or any part of the premises. (2)[RESPONDENT] functions which a person who is landlord under a lease of the whole or any part of the premises has under the lease are instead functions of the [RESPONDENT]. (3)And where a person is party to a lease of the whole or any part of the prem- ises otherwise than as landlord or tenant, [RESPONDENT] functions of his under the lease are also instead functions of the [RESPONDENT]. (4)Accordingly, any provisions of the lease making provision about the rela- tionship of— (a) a person who is landlord under the lease, and

8 (b) a person who is party to the lease otherwise than as landlord or tenant, in relation to such functions do not have effect. (5)“[RESPONDENT] functions” are functions with respect to services, repairs, maintenance, improvements, insurance and [RESPONDENT]. (6)But this section does not apply in relation to— (a)functions with respect to a matter concerning only a part of the premises consisting of a flat or other unit not held under a lease by a qualifying tenant, or (b) functions relating to re-entry or forfeiture. (7)An order amending subsection (5) or (6) may be made by the appropriate national authority.” 26 By virtue of sub-section (3), as a party to the Lease otherwise than as landlord or tenant, the [RESPONDENT] functions of the [RESPONDENT] under the Lease became instead functions of the [RESPONDENT], that is to say the Applicants. Therefore, the effect of section 96 is that the [RESPONDENT] functions of the [RESPONDENT] were assumed by the Applicant as the [RESPONDENT].

27 The first issue for the Tribunal is whether the Applicant has correctly claimed service charges being 1.981% of the Total Service Cost for the [NAME] for the years in question or whether the claim should be for 0.941% of the Total Service Cost for the [NAME] for those years.

28 Mr [NAME] stated in his witness statement that because leases were granted out of the freehold [NAME] prior to the [NAME] separating, the primary service charge apportionment on each lease was such that all of the leases in [NAME] 1-5 make up 100% of the total service charge for the [NAME]. [NAME] 4 and 5 are removed from the equation, the total service provisions of the leases in the [NAME] only add up to 47.509%, thus creating an obvious deficit of 52.5% (rounded up).

29 Mr [NAME] stated that since the [NAME] acquired the right to manage in 2011, service charges had been pro-rated up to a cumulative total of 100%, to avoid such a deficit, consistently with clause 7.4. The Respondents had been charged at an apportionment of 1.981% being the pro-rated amount. Between 2011 and June 2019, the Respondents paid their service charge in full and on time, based on the 1.981% calculation. They had never, prior to these proceedings, questioned that calculation. During the same period, all other leaseholders in the building ([NAME])

9 paid a serviced charge based on the pro-rata calculation. As a result, the Applicant has continued to take all reasonable steps to comply with its obligations under the leases. The evidence of the First Respondent 30 In his witness statement, the First Respondent stated that Mr [RESPONDENT] email of 23 July 2008 was sent to him but not to his wife, the [NAME] Respondent. He also stated that he did not receive any indication that “the service charges demanded would increase to 1.981%...

31 In cross-examination, the First Respondent stated that he qualified in law at the [COMPANY], served as a judge in Sudan and as a partner in law firm he established in Saudi Arabia.

32 He specialised in commercial and international law and serves on the board of a number of companies. He did not instruct solicitors in relation to the grant of the lease in 2008. He signed the lease, knowing its purpose. His decision whether not to sign a document without advice would depend on his common sense.

33 The First Respondent accepted that although in his witness statement he said that he did not understand Mr [NAME] 23 July 2008 email, he did understand now and did understand then what it meant. However, the First Respondent said that he was not given enough information as to how the service charge would work in practice.

34 Whilst he accepted that the Applicant needed to recover 100% of the service charge expenditure, he was concerned because his bank, who paid the service charges on his behalf, queried a demand for £25,000.

35 The First Respondent said he did not pay attention to the service charge percentages. He did not concentrate on the percentages. The service charge invoices went to Mr [RESPONDENT] at [NAME].

36 The First Respondent complained that the level of the service charge is too high for what is provided. He accepted that if he did not pay the Applicant, maybe it would be liquidated. In those circumstances, he did not know what would happen. He stated that he did not care how much he lost in the proceedings as it was a matter of principle. Pressed as to what that referred to, the First Respondent said that he had noticed a conflict of interest. He was concerned about the integrity of the people who run the Applicant [RESPONDENT]. The Tribunal notes that these allegations did not appear in the First Respondent‘s witness statement or in the statements of case which define the issues for the Tribunal to decide.

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The true meaning of the Lease 37 The Tribunal sets out the terms of clause 7.4 of the Lease which is the critical clause. It states (with the principal phrases in dispute highlighted):

If the [RESPONDENT] shall fail to perform any of its obligations hereunder the Landlord on the request in writing of the Tenant shall perform such obligation or obligations but [COMPANY] only to such obligations in respect of the [NAME] (and in such circumstances any references to “the [NAME]” in this Lease shall be deemed to refer only to the [NAME]) and any obligations of the Tenant to the [RESPONDENT] in respect of those obligations shall thereupon be owed by the Tenant to the Landlord instead of the [RESPONDENT] ( emphasis added). 38 On the first issue, Ms [RESPONDENT] submitted as follows. First, the relevant approach to construction is as set out by Lord [NAME] in Arnold v Britton [2015] AC 1619 at [15]-[23]. Secondly, Mr [NAME] email is inadmissible on this issue being at most subjective evidence of the landlord’s intentions. Thirdly, the Landlord is only required to act in accordance with clause 7.4 of the Lease if (a) the [RESPONDENT] fails to perform any of its obligations; and (b) the Tenant requests in writing that the Landlord shall perform such obligation or obligations. These conditions have not been fulfilled and therefore the Landlord has not acted or been required to act under clause 7.4. Consequently, the service charge remains 0.941% of the Total Service Cost.

39 Ms [NAME] submitted in closing that Clause 7.4 had to be construed in accordance with commercial common sense. The Lease post-dated CLRA and could have expressly dealt with the consequences of the RTM being acquired pursuant to it. The Tribunal should not interpret Clause 7.4 to save the Applicants from a bad bargain by applying retrospective common sense.

40 Mr [NAME] also took the Tribunal to [NAME] v [NAME] and other recent authorities on the construction of contracts.

41 As to whether the [RESPONDENT] failed to perform, Mr [RESPONDENT] submitted that “fail” was not [COMPANY] to “failure” in a culpable way. The [RESPONDENT] had, he submitted, failed to perform its obligations when the responsibility for

11 services fell within the scope of the Applicant as the [RESPONDENT] for the [NAME]. “Fail” in clause 7.4 meant “cease”. 42 As to the effect of the words “on the request in writing of the Tenant”, Mr [APPELLANT] characterised the phrase as a requirement not mandatory to the operation of the clause.

43 Thus, in circumstances where the [RESPONDENT] had failed to perform, a tenant could require the Landlord to step in under clause 7.4 or the Landlord could choose to step in absent a requirement in writing by the tenant. In any event, the absence of a written requirement by the Respondents did not preclude clause 7.4 from being engaged.

44 The Tribunal has borne in mind the guidance as to contractual interpretation in all the authorities cited by both counsel. The Tribunal does not find it necessary to rehearse all of that authority. The Tribunal has come to a clear conclusion.

45 The Tribunal notes that Clause 4 of the Lease first recorded that the Landlord and other owners of the [NAME] other than [NAME] had agreed to grant the [RESPONDENT] the right to enter the [NAME] and the [NAME] to perform its functions. Secondly, it contained a covenant by the [RESPONDENT] with the Landlord and separately with the Respondents as Tenants to perform the services listed in the following 15 sub-paragraphs most of which expressly provided for the provision of services by the [RESPONDENT] to the [NAME] and to the [NAME] (emphasis added).

46 Thus, the drafter of the Lease recognised that the [RESPONDENT] provided services to the [NAME], not just the [NAME] and considered what would happen if that role was curtailed so that the services were rendered only to the [NAME] but not the [NAME].

47 Having regard to that feature of the Lease, the Tribunal prefers the submissions of Mr [RESPONDENT]. First, by reason of section 96(3) of CLRA the [RESPONDENT] ceased to manage once the RTM was acquired by the Applicants. The Tribunal holds that ceasing to manage amounts to a failure to manage within the meaning of clause 7.4

48 X promises to Y to inspect the lighting in a corridor at regular intervals and to replace any lights that are not working. Subsequently, Y informs X that its services in this regard are no longer required as Z will be inspecting and replacing in future. Y may have transferred the responsibility from X to Z. It is an appropriate use of language to say that following the transfer of responsibility X “fails” to perform these works.

49 The Tribunal holds that in clause 7.4 “fail” does not connote fault.

12 50 The Tribunal prefers the submissions of Mr [APPELLANT] as to whether a request in writing from the tenant is necessary to invoke clause 7.4 of the Lease. The function of clause 7.4 is clearly to provide a mechanism for the due apportionment of the Total Service Cost in circumstances where, as on the facts of this case, the [RESPONDENT] is no longer performing its obligations to manage the [NAME] and the Landlord steps in to manage the [NAME]. The Landlord, or an [RESPONDENT] in its stead would look to invoke clause 7.4 and trigger a new formula under Schedule 5. This formula would provide for a higher service charge percentage but applied to a lower amount of cost as the [RESPONDENT] is managing the [NAME] only and not the [NAME].

51 Accordingly, the Tribunal finds in favour of the Applicant on the question of apportionment based on the true construction of the Lease.

Estoppel by convention

52 The Applicant had a secondary case, in the event that it lost on the first issue. That case was that by reason of an estoppel by convention, it is not now open to the Respondents to dispute the application of the service charge percentage of 1.981% on the costs of managing the [NAME] for the years in question.

53 In Jetha and another v [RESPONDENT] [COMPANY] [2017] UKUT 58 (LC), Judge Behrens said

26. Estoppel by convention is described by Lord [NAME] in Republic of India v [COMPANY] (“the Indian Endurance and The Indian Grace”) [1998] AC 878 at 913–914: “[A]n estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption. It is not enough that each of the two parties acts on an assumption not communicated to the other. But ... a concluded agreement is not a requirement.”

54 Had the Tribunal found in favour of the Respondents on the true meaning of clause 7.4 it would have held that the Respondents were estopped by convention from disputing the claim having regard to: (a) The correspondence with the First Respondent before the lease was granted; (b) The correspondence in 2013; (c) The demands made and paid on the basis for which the Applicant now contends

13 (d) The evidence of the First Respondent to the Tribunal suggesting that his true complaint was the amount of the service charges not a dispute as to apportionment.

Electricity

55 Apart from the dispute as to the correct apportionment, there was one specific item of cost that the Respondents challenged. They complained that electricity was supplied under a Qualifying Long Term Agreement within the meaning of the CLRA in respect of which there had been no consultation.

56 The Applicant accepted that the supply contract was a QLTA and that there had been no consultation. This is because a price had been obtained from a [NAME] in the spot markets and there was no time for any meaningful consultation. The Applicant applied for dispensation from the consultation requirements. The Respondents’ answer to the Applicant’s claim for dispensation from consultation in relation to the contract for the supply of electricity to the [NAME] was that there was no evidence as to what enquiries had been made by a [NAME] to find the best spot price available.

57 The Tribunal noted that there was no contention that the Respondents had been prejudiced by the failure to consult. Accordingly, the Tribunal grants dispensation Conclusion 1 The case can now be returned to the County Court for disposal in accordance with the terms of this decision.

Name: Tribunal Judge Roger Cohen Date: 23 December 2022

Rights of appeal By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Cham- ber) Rules 2013, the tribunal is required to notify the parties about any right of appeal they may have. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber), then a written application for permission must be made to the First-tier Tribunal at the regional office which has been dealing with the case.

14 Under present Covid 19 restrictions applications must be made by email to [EMAIL].

The application for permission to appeal must arrive at the regional office within 28 days after the tribunal sends written reasons for the decision to the person making the application. If the application is not made within the 28-day time limit, such application must include a request for an extension of time and the reason for not comply- ing with the 28-day time limit; the tribunal will then look at such reason(s) and decide whether to allow the application for permission to appeal to pro- ceed, despite not being within the time limit. The application for permission to appeal must identify the decision of the tri- bunal to which it relates (i.e. give the date, the property and the case number), state the grounds of appeal and state the result the party making the applica- tion is seeking. If the tribunal refuses to grant permission to appeal, a further application for permission may be made to the Upper Tribunal (Lands Chamber).