First-tier Tribunal Rules Service Charge Demand Unreasonable Due to Payment Timing

OUTCOME: Allowed

© CROWN COPYRIGHT 2019

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case Reference : LON/00AX/LSC/2019/0019 Property : [ADDRESS] [POSTCODE] Applicant : [redacted] Mrs [COUNSEL] (2) Representative : Mr [COUNSEL] Respondent : [redacted] : [APPELLANT] of [NAME] : S27A Landlord and Tenant Act 1985 – determination of service charges payable Tribunal Members : Judge [NAME] Mr John Francis QPM Date of Decision : 7 March 2019

DECISION

2 The issues before the tribunal and its decisions 1. The issues before the tribunal were:

1.1 The reasonableness of the time for a demand for payment of

£322 on account of the cost of insurance;

1.2 The reimbursement of the [NAME] fee of £100; and

1.3 The [NAME] for an order pursuant to s20C Landlord and

Tenant Act 1985 (the Act) in relation to any costs which the

respondent (the landlord) has incurred or might incur in

connection with these proceedings.

2. The decisions of the tribunal are:

2.1 It was unreasonable (and inappropriate) of the landlord to have

served a demand for a contribution of £322 to the cost of

buildings insurance in December 2018 when the landlord was

not going to incur the expense of such insurance until some 9 or

more months or after the date of the demand;

2.2 The landlord shall reimburse the applicants (the tenant) with the

sum of £100 by way of reimbursement of the [NAME] fee

(such reimbursement may be affected by the [NAME] of a

credit for £100 to the cash account as between the landlord and

the tenant; and

2.3 An order shall be made (and is hereby made) pursuant to s20C

of the Act that none of the costs incurred or to be incurred by the

landlord in respect of these proceedings shall be regarded as

relevant costs to be taken into account in determining the

amount of any service charge payable by the tenant

3. The reasons for these decisions are set out below.

NB Later reference in this Decision to a number in square brackets ([ ]) is a reference to the page number of the file provided to us for use at the hearing.

Background The parties 4. Dr [RESPONDENT] is the secretary of and a director of the

landlord. His fellow director is [RESPONDENT]. Those

persons are also the officers of [RESPONDENT], the landlord’s managing agent. The registered office of both

companies is at [NAME], [ADDRESS], Great Warley,

Brentwood, Essex.

The landlord appears to be a substantial property investor and claims

to have 46 properties in a portfolio insured under a block policy

5. The tenant is also a substantial property investor and they conduct

their business from Lee House, [ADDRESS], [ADDRESS],

Surrey. The subject Property, a flat is sublet by them.

The development – [ADDRESS]

3 6. The development at [ADDRESS] is registered at HM Land

Registry with title number SGL251874. On 20 August 2012 the landlord

was registered as proprietor. The Charges Register: Schedule of Leases

records that three long leases have been granted out of the freehold:

43D (FFF) Date: 5 October 1984 Term:100 years from 24.06.1984

43B (LGFF) Date: 21 April 2004 Term: 170 years from 24.06.1984

43C (GFF) Date: 17 June 2005 Term: 99 years from 17.06.2005

The lease of the Property and the service charge regime 7. Evidently, there are 5 flats within the development. The tenant says in

its [NAME] form that there are 2 schedules to the service charge

account:

Schedule 4: Flats A and B which are both basement flats and which do

not contribute to costs associated with a communal hallway; and

Schedule 5: Flats C, D and E only.

8. The lease of the Property, which was granted in April 2004 [188], was

granted pursuant to s56 Leasehold Reform, Housing and Urban

renewal Act 1993. It recites the original lease was granted on 17

January 1985 for a term of 100 years from 24 June 1984, and that that

lease was varied by a deed of variation dated 8 April 1988. Those dates

appear to be incorrect.

At [191] there is page 1 and at [192] page 12 of a document which states

it is a lease. It is dated 17 January 1985.

Starting at [193] there are very poorly copied pages of an undated lease

which may have been granted in 1984. The pages provided are:

Page 1 [193] – bears a certificate dated 16/1/85 that it is a true copy of

the original!

- the date is blank but the year 1984 has been typed in in

words

Page 2 [194] – grants a term of 100 years from 24 June 1984

Page 4 [195] – commencement of clause 4 – tenant covenants

Page 6 [196] – continuation of landlord covenants

Page 8 [197] – not relevant

Page 9 [198] – not relevant

Leaseplan [199]

Backsheet [200] undated

9. Evidently, both parties are of the view that the service charge

provisions payable under the current 2004 lease are those set out in

clause 4(ii) (a) and (b) of the 1984 lease.

Clause 4, which starts on page 4 of the lease [195] sets out covenants on

the part of tenant. At the foot of the page there is:

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4(ii) (a) Contribute and pay on demand 14% of the costs expenses and

outgoings and matters mentioned in the Fourth Schedule

We were not provided with a copy of page 5 of the lease. In the detailed

further particulars attached to the [NAME] form the tenant says that

clause 4(ii)(b) is in these terms:

“Pay on demand to the [NAME] such reasonable sum as the Landlord

shall request on account of expenditure to be incurred by the [NAME] on

such matters”

We have not been provided with a copy of the Fourth Schedule. The

tenant says it “… refers to the usual insurance, repairs, roof etc.”

These extracts have not been challenged by the landlord and as the only

complaint made by the tenant is the timing of the demand for the

contribution to the cost of insurance, we proceed on the basis that they

are broadly accurate.

However, we do wish to flag up to the parties, both of whom are

substantial property investors that it would have been helpful to us if

not only had we been provided with a full copy of the lease of the

subject Property but also with an explanation of the service charge

provisions of the other two long leases which have been granted and the

arrangements for the contributions in relation to the two flats which do

not appear to be the subject of long leases.

The issue raised in the [NAME] form 10. For a number of years the landlord has managed the development as if

there were what might be termed a modern service charge regime of a

set service charge accounting period with a budget, full payment on

account at the commencement of the period and then at the end of the

period, when actual expenditure is ascertained, a balancing debit or

credit as the case may be. Until now the tenant has not objected to this

approach.

The adopted service charge period (which may have been inherited

from the previous freeholder) was 1 October to 30 September.

The previous freeholder effected buildings insurance on an annual

basis 20 July to 19 July and so one year’s premium was collected in

each accounting period.

The tenant complains that the landlord changed the insurance period.

Insurance was effected from 20 July to 29 September 2013 and since

then the insurance period has been 30 September to 29 September. A

consequence of that was that in the final accounts for service charge

period 1 October 2016 to 30 September 2017 [055] the cost of insurance

was claimed for two annual periods – a total of £3,833.43.

5 11. A further consequence of the change is that the landlord prepares a

budget for each period commencing 1 October. Insurance is included in

full even though the premium may not be paid by the landlord until the

following 30 September – or even perhaps later because the insurers or

the brokers appear to allow the landlord several days, if not weeks of

grace.

The annual budget shows the tenant’s contribution to the various costs

included within it and the landlord demands 100% payment of the

contribution on account and appears to expect payment in full by the

following 6 November at the latest. The tenant complains that the

landlord thus demands funds on account to be paid, even though the

insurance premium will not be incurred or expended by the landlord

for some 11 or 12 months or so.

12. The budget for 2018/19 [061] includes £2,300 for buildings insurance.

The tenant’s contribution to that at 14% amounts to £322. The landlord

asserts that there are arrears of service charges of £709.16 – which

includes the controversial £322 towards insurance. The landlord

demanded payment of £709.16 on 15 December 2018. Evidently the

delay arose due to a re-issue of the budget/demand following the

reallocation of an exterior light repair.

The landlord threatened to commence legal proceedings against the

tenant to recover the alleged arrears of £709.16. The tenant has made

an [NAME] to this tribunal in which a determination is sought that

the contribution of £322 towards insurance is not (yet) payable to the

landlord.

13. Thus, the sole issue as regards insurance is whether the contribution of

£322 is yet payable to the landlord.

The directions and the issues 14. Following receipt of the [NAME] form directions were issued on 16

January 2019 [001]. No oral case management conference was

convened probably because the sole issue was the timing of the

payment of the contribution of £322 on account.

15. The directions notified the parties that the tribunal proposed to

determine the [NAME] on the papers and without an oral hearing,

unless either of the parties expressly requested an oral hearing. The

tribunal indicated that the paper determination would take place

during week commencing 4 March and that if an oral hearing was

requested it would take place on 6 March 2019. The tribunal has not

received any request for an oral hearing.

16. In summary the directions required:

16.1 The [NAME] form and the detailed Further Particulars

attached to it to stand as the tenant’s opening statement of case

(This is at [005- 021);

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16.2 The landlord to file its statement of case in answer by 1 February

2019

(This is at [022 – 073];

16.3 The tenant to file and serve their statement of case in reply by 18

February 2019

(This is at [074- 187].

17. As made clear above the only issue for determination raised in the

[NAME] form was the timing of the advance or on account payment

of £322 being the estimated contribution to the anticipated cost of

insurance.

Unfortunately, perhaps due to a misunderstanding or misuse of

standard directions on some types of insurance disputes, the directions

included fairly standard directions applicable to a case where a tenant

disputes the reasonableness of the cost of insurance actually incurred.

18. The landlord may have appreciated this error because in its statement

of case in answer the focus is on the timing of the advance payment

point, and the directions concerning the reasonableness of the historic

or anticipated future cost of insurance have not been addressed.

19. In their reply the tenant addresses the timing for payment point and, in

paragraph 9 attaches two quotes for insurance because: “It is noted that

the Tribunal have requested (b) alternative premium quotations …”

20. Of course, the landlord will not have seen this material before and as the directions stand has no opportunity to address the matter. This

reinforces our view that the directions concerning the cost of insurance

were included in error. In these circumstances we do not propose to

make a determination on the cost of insurance.

21. If the tenant wishes to challenge the reasonableness of the cost of block

insurance effected by the landlord, the tenant will have to make a

separate and specific [NAME] to raise that. In case it may be of

assistance we observe that the tenant does not appear to have the

claims record for the development which is usually fairly critical when

considering the cost of alternative quotes on a like for like basis. Also

the quotes obtained by the tenant are not like for like in a number of

important respects, including building sum insured, nature and extent

of cover and the amount of excesses. Also the brokers or insurers who

prepared the quotes appear to have made a number of assumptions

which may be questionable or inaccurate. Examples include the

employment status/occupation(s) of the [NAME] and the

claims history.

The timing of the advance payment towards the estimated cost of insurance

7 22. The answer to the question lies in the proper construction of the terms

of the lease. The lease was originally granted in 1984 and the wording

set out in it has been adopted in both 1985 and 2004. The starting point

is the words actually used by the parties in the context of the factual

matrix which existed in 1984 when the lease was granted.

23. The wording of clause 4(ii)(b) as relied upon by the parties is plain

enough “Pay on demand to the [NAME] such reasonable sum as the

Landlord shall request on account of expenditure to be incurred by the

[NAME] on such matters” The sum payable on account must be

reasonable in amount. We find it can properly be implied that the

reasonable amount is payable in respect of a sum to be incurred within

a reasonable time. In the context of the cost of insurance we find that a

reasonable time would not be any longer than three months before the

date on which the landlord proposed to pay the premium. In respect of

other expenditure the reasonable period may be more or less than three

months depending on the nature and the amount of the anticipated

expenditure.

24. We have given careful thought to the rival contentions of the parties.

25. The landlord has adopted (perhaps inherited) an annual service charge

period, with a budget and ascertainment of a contribution and has

demanded the whole of that contribution upfront, such sums to be held

by the landlord for a considerable period, potentially in excess of one

year. The landlord appears to support that practice because it fits well

with the regimes at other developments within its portfolio, eases

administration and assists or secures cash-flow. Whilst that might be

advantageous to the landlord it is plainly not the scheme envisaged by

the parties in 1984 when the lease was granted. If it had been the lease

would have spelled it out. Such regimes were quite commonplace in

1984 and it was one of the options readily open to the parties. But it

was not was not what the parties embraced or agreed upon. Instead the

parties agreed a much less formal ad hoc arrangement. It was quite

simple. As and when the landlord proposed to incur expenditure within

a reasonable period the tenant was obliged to pay a reasonable sum on

account. Once the cost was incurred the landlord would account to the

tenant and any balance would be payable or repaid as the case may be.

26. We find that it was not reasonable for the landlord to have made a

demand in December 2018 for a contribution of £322 towards the

anticipated cost of insurance when that cost was not to be incurred

until late September 2019, or possibly a little later than that.

The total sum demanded on 15 December 2018 was £709.16. The

tribunal has not been asked to make any findings as to whether, and if

so when, the balance of £387.16 might be payable and we do not do so.

27. The tenant has alleged that the landlord has deliberately manipulated

the timing of the payment for buildings insurance in order to obtain

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funds on account to which it was not entitled. No evidence to support

that conjecture was provided and we reject it.

28. We find that given the size of the landlord’s portfolio it was not

unreasonable that the subject development was brought into line with

the block policy.

Given that the landlord adopted (or inherited) the practice of an

accounting period commencing 1 October it was a one off accounting

quirk that two payments for insurance fell into the account in 2016/17.

29. As mentioned we have no information about the service charge regimes

for the other two flats let on long leases or the two flats which do not

appear to be the subject of long leases. It may that there is mutual

advantage to adopt a more modern service charge regime with budgets

and perhaps quarterly payments on account to enable all parties to

undertake financial planning and regulate cash-flow. If so, the best

course will be to execute a deed(s) of variation to properly and formally

adopted such a regime for the development.

Reimbursement of fees and s20C of the Act 30. The [NAME] form and the attached Further Particulars included an

[NAME] for an order under s20C of the Act and a request for

repayment of the [NAME] fee of £100. The directions invited the

landlord to include representations on both matters in its statement of

case. The landlord has not done so.

31. S20C of the Act provides that a tribunal may make such order on an

[NAME] as it considers just and equitable in the circumstances.

32. Rule 13(2) provides that a tribunal may make an order requiring a party

to reimburse to any other party the whole or part of the amount of any

fee paid to the tribunal which has not been remitted by the Lord

Chancellor. The rule does not stipulate any particular criteria for the

tribunal to adopt when considering whether to make an order. In the

circumstances of this case we consider it is appropriate to adopt the

just and equitable criteria provided for in s20C.

33. The tenant has in effect succeeded in their case in which the [NAME]

was made against the threat of legal proceedings by the landlord to

recover alleged arrears.

We thus find it just and equitable to make an order under s20C of the

Act and we have done so. For the same reason we find that the

landlord shall reimburse the [NAME] fee of £100. But, as there is or

may be an issue of arrears and given that on any view further sums will

become due by the tenant to the landlord in the not too distant future,

the just and equitable manner in which to effect that reimbursement is

by way of a credit to the cash account between the parties.

Judge John Hewitt

9 7 March 2019

ANNEX - RIGHTS OF APPEAL

1. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber) then a written [NAME] for permission must be made to the First-tier Tribunal at the Regional office which has been dealing with the case.

2. The [NAME] for permission to appeal must arrive at the Regional office within 28 days after the Tribunal sends written reasons for the decision to the [NAME].

3. If the [NAME] is not made within the 28-day time limit, such [NAME] must include a request for an extension of time and the reason for not complying with the 28-day time limit; the Tribunal will then look at such reason(s) and decide whether to allow the [NAME] for permission to appeal to proceed despite not being within the time limit.

4. The [NAME] for permission to appeal must identify the decision of the Tribunal to which it relates (i.e. give the date, the property and the case number), state the grounds of appeal, and state the result the party [NAME] the [NAME] is seeking.