Service Charges and Administration Charges Determined by First-tier Tribunal

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00AU/LSC/2024/024, 0025, 0027 0028 Property : Flats 25, 29, 59 and 103 [ADDRESS], [POSTCODE] Applicant : [redacted] Representative : [NAME] [COUNSEL] instructed by [NAME] : [COUNSEL] ([NAME] 25) [NAME] ([NAME] 25) [NAME] ([NAME] 29) [NAME] ([NAME] 29) [NAME] ([NAME] 59) [NAME] ([NAME] 103) [NAME] ([NAME] 103) Representative : [NAME] [COUNSEL] instructed by [NAME] of [NAME] : For the determination of the liability to pay service charges under section 27A of the Landlord and Tenant Act 1985 Tribunal members : Judge N O’Brien, Tribunal Member Sarah Phillips MRICS Venue : 10 [ADDRESS] [POSTCODE] Date of Hearing : 3 October 2024 Date of decision : 21 October 2024 Date of amendment : 22 January 2025

AMENDED DECISION

2 We have exercised our powers under Rule 50 of the Tribunal Procedure Rules (First tier Tribunal)(Property Chamber) Rules 2013 to correct a clerical error as shown in red below. The amended figures are agreed by the representatives for the Respondents and the Applicant.

Decisions of the tribunal (1) The tribunal determines that the sum of £6,816 is payable by the [NAME] in respect of the [NAME] for the year 2021- 2022, and the sum of £540 is recoverable as an administration charge. (2) The tribunal determines that the sum of £4,613.60 £4435.20 is payable by the [NAME] in respect of the [NAME] for the year 2021-2022, £202.73 is payable as a balancing charge and the sum of £498 is recoverable as an administration charge. (3) The tribunal determines that the sum of £3,880.80 is payable by the [NAME] in respect of the [NAME] for the year 2021- 2022 and the sum of £540 is payable as an administration charge. (4) The tribunal determines that the sum of £498 is payable by the [NAME] of [NAME] 103 as an administration charge. (5) The Applicant’s [NAME] for reimbursement of fees, and the Respondents’ applications for orders under section 20C of the Landlord and Tenant Act 1985 and Paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002, will be the subject of a further written determination. The Proceedings 1. The Applicant seeks a determination pursuant to s.27A of the Landlord and Tenant Act 1985 (“the 1985 Act”) and Schedule 11 to the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) as to the amount of service charges and administration charges payable by the [NAME], 29, 59 and [ADDRESS] in respect of the service charge year 1 April 2021 to 30 March 2022.

2. Four sets of proceedings were originally issued in the County Court for alleged service charge arrears, administration charges and legal costs. All four claims were transferred to this tribunal by order of District Judge Candlin on 4 January 2024.

3. Directions were issued to the parties on 24 February 2024 and the matter was listed for a final hearing on 7 June 2024. Following the disclosure of additional documents by the Applicant on 6 June 2024, at the start of that hearing the Respondents applied for and were

3 granted an adjournment and the Tribunal gave further directions. The final hearing was relisted for 3 October 2024. The hearing 4. The Applicant was represented by [NAME] [APPELLANT] and the Respondents were represented by [NAME] [NAME].

5. The tribunal was provided with a hearing bundle consisting of 874 pages and a supplemental hearing bundle consisting of 292 pages. We heard oral evidence from [NAME] [APPELLANT], the managing director of [APPELLANT], the Applicant’s managing agent. We also heard oral evidence from the First Respondent on behalf of the Respondents. We additionally had helpful skeleton arguments and supplemental skeleton arguments from both counsel. The background 6. The building in which the subject flats are situated is a Grade II listed 1930’s Art Deco style block consisting of 125 flats, communal areas and retained parts. Neither party requested an inspection and the tribunal did not consider that one was necessary.

7. The Respondents are the [NAME] of the subject flats. Each lease is in identical terms in respect of all matters which are material to this decision. The Landlord is a [NAME] owned limited company and the Applicant is the management company and a party to each lease. The leases require the Applicant to provide services and the Respondent [NAME] to contribute towards their costs by way of a variable service charge. The lease provides for service charges which are payable half yearly in advance. The specific provisions of the lease of relevance to this dispute are set out below.

8. In or about 2021 the Applicant’s then managing agent, [APPELLANT] ([APPELLANT]) proposed a major works programme for the block. The works included upgrades to fire safety provision, modernisation of the heating and hot water installations and other remedial works. The anticipated works were scheduled to take place over a 10-year period from 2021 to 2030. On 27 June 2021 the [NAME] of [ADDRESS] were invited to a meeting with [APPELLANT] representatives and [NAME] members of the [NAME]. In the course of the meeting they were shown a PowerPoint presentation summarising the planned works and the anticipated expenditure and likely cost for each [NAME]. A copy of the slide deck was made available to each [NAME]. The presentation included a summary of budget costs which appears at page 362 of the bundle. It presents a ‘high level’ view of the planned 10-year major works programme. The presentation indicated that the cost of the works would be spread out over a 10-year

4 period and would be met from the [NAME]. The presentation also indicated that [NAME] contributions to the [NAME] would have to increase significantly to cover the cost of the major works programme. The major works programme outlined in the presentation indicated that most of the works planned for the first year related to fire prevention and health and safety.

9. The Applicant issued half yearly service charge demands on all [NAME] on 10 September 2021. These demands sought payment towards the [NAME] varying from £4,420 in respect of [NAME] 59 to £10,080 in respect of [NAME]

29. The [NAME] declined to pay the charge in respect of the [NAME] essentially on the grounds that they did not know how it had been calculated. Consequently the Applicant issued 4 sets of proceedings in the County Court seeking service charge arrears, administration fees and legal costs. The [NAME] filed identical defences disputing their liability to pay. The defences all took a number of technical points with the claim and the Applicant’s standing to bring it, but the main thrust of each defence was an asserted failure to comply with the statutory consultation regime provided by s.20 of the Landlord and Tenant Act 1985 (LTA 1985). At paragraph 16(a) of each Defence the Respondents additionally averred that no breakdown had been provided in respect of the sums demanded towards the [NAME].

10. We were told that in October 2023, i.e. prior to the transfer of all proceedings to this tribunal, the [NAME], [NAME] [NAME], paid the demanded contribution towards the [NAME]. We were also informed that the Applicant was not seeking a determination in respect of the legal costs claimed as damages in the county court proceedings as they had not yet been demanded as an administration charge.

11. Pursuant to the directions issued on 24 January 2024 the parties served their respective statements of case. The Respondents’ statement of case again asserted that the service charges were not payable due to; (i) a failure to comply with the s20 LTA 1985 consultation process; (ii) a failure to comply with the duty to provide information as required by s21 LTA 1985; (iii) the conduct of the directors of the Applicant and the manner of their appointment, and (iv) a failure to provide adequate information regarding the breakdown of the sums demanded towards the [NAME] for the year in question; They also took issue with the reasonableness of the sums demanded.

5 12. On 5 June 2024 [NAME] served and filed a skeleton argument which expressly abandoned points (i) and (ii) and did not pursue point (iii) above. He pointed out that the Applicant had not disclosed either the capital expenditure plan or any of the underlying documents used to prepare it. The Respondent disclosed the capital expenditure plan on the day before the hearing listed on 7 June 2024 but unfortunately this was not forwarded to [NAME] until after the hearing had started. As set out in paragraph 3 above this resulted in the adjournment of that hearing. In accordance with the further directions the Applicant disclosed both the full capital expenditure plan covering each year of the 10-year major works programme, and various reports and costs estimates which had been used to prepare it.

13. The summary of the capital expenditure plan in respect of the anticipated costs for the first year of the programme is included in the supplementary bundle at page 8. The subtotal in respect of the estimated costs was £598,500. Once contingencies, fees, preliminaries and VAT were added the budget total for the first year of the major works programme was £1,032,412.50. The sums demanded of all [NAME] towards the [NAME] in September 2021 totalled £800,000 which was £232,412.50 less than the anticipated cost of the works planned for Year 1 of the major works programme.

14. Following the adjourned hearing [NAME] each served a further witness statement and the Respondents additionally obtained a review of the costs of the anticipated works for the first year of the major works programme prepared by their surveyor, a [NAME] [NAME]. A copy of that costs review is included in the supplemental bundle at page 266 to 273. [NAME] [NAME] took issue with a number of costs estimates in his review. In general he considered that some of the costs were too high or not required in the first year, or that cheaper means of achieving the same result were available.

The leases 15. The leases are in identical form. The front entrance doors and door frames of each [NAME] are demised: para 1(f) Schedule 1. The service charge (which includes the estimated service charge) is payable in two instalments on the 1st of April and the 1st of October (para 1.1 Schedule 4). The service charge is defined as “The tenant’s proportion of the service costs” (Clause 1.1). The tenant’s proportion is a percentage specified in the lease.

16. Paragraph 4.1 of Schedule 6 to the lease obliges the landlord to ‘use all reasonable endeavours to provide the services . The services are set out in Part 1 of Schedule 7 to the lease. They include the maintenance of the Retained Parts and Common Parts and also include remedying any inherent defect in the Retained Parts. Paragraph 1.15 includes ‘any other service or amenity that the landlord or the management

6 company may in their reasonable discretion (acting in accordance with the principles of good estate management) provide or procure the provision of for the benefit of the tenants and occupiers of the building.’

17. The service costs are listed in Part 2 of Schedule 7. They include “all of the costs reasonably and properly incurred or reasonably or properly estimated by the landlord or the management company to be incurred of or in providing the services” . Paragraph 1.1.8 of schedule 7 includes as a service cost ‘such sum as shall reasonably be considered necessary by the Landlord or the Management Company (whose decision shall be final as to questions of fact) to provide reserves or sinking funds for items of future expenditure to be or expected to be incurred at any time in connection with providing the services.’. Reasonableness of the [NAME] demands.

18. The Respondent challenges the following costs in the Capital Expenditure plan for the first year of the major works programme;

Item Cost Respondents’ case Applicant’s case Fill Penetrations (item 2.12) £4000 Not required in year 1 and consequently not reasonable Recoverable and reasonable Metal Handrails (item 5.6) £10,000 Not required in year 1 and consequently not reasonable Recoverable and reasonable Asbestos Survey (item 18.1) £10,000 Not required in year 1 and consequently not reasonable Recoverable and reasonable Car park Soffit £30,000 Not required in year 1 and consequently not reasonable Reasonable and recoverable. Asbestos Remedials (item 18.2) £50,000 Not required in year 1 and consequently not reasonable. Recoverable and reasonable Replace decorative rails (Item 5.8) £30,000 Remediation should be considered. Recoverable and reasonable

7 Doors to flats (18.14) £125,000 Doors are demised to [NAME]. Costs not recoverable as a service charge. Recoverable pursuant to paragraph 1.15 of Part 1 of Schedule 7, notwithstanding the fact the doors are demised [NAME] entrance cupboards (item 18.5) £65,000 Cupboards demised to [NAME]. Cost not recoverable as a service charge Recoverable pursuant to paragraph 1.15 of Part 1 of Schedule 7, notwithstanding the fact the cupboards are demised.

19. It is common ground that the sum demanded of each respondent towards the [NAME] in September 2021 was based, loosely, on the sums included in the capital expenditure plan for 2021. [NAME] [NAME] was unable to say why it was that the total sums demanded by [APPELLANT] from all [NAME] toward the [NAME] in September 2021 totalled £800,000, which was £232,412 less than the estimated costs of the year 1 works. He suggested it could be because they realised that some of the year 1 works were in respect of the demised flats, or because there was already £290,000 in the [NAME], or due to affordability concerns or a combination of all three factors.

20. It is also common ground that this major works programme devised by [APPELLANT] did not commence as planned, and while it remains the intention of the Applicant to carry out the works, the structuring of the programme has undergone substantial review. Both counsel agree that we must consider the question of reasonableness in the light of what was known or ascertainable at the date on which the contractual liability to pay the charge arose; See Knapper v Francis [2017] UKUT 3 (LC) at para [30].

21. Both counsel referred us to the decision of the Court of Appeal in [NAME] v Hounslow LBC [2017] EWCA Civ 45; [2017] W.L.R. 2817 which determined the approach which the Tribunal must take when considering whether a particular cost is reasonable. In summary, the Court of Appeal held that the following principals should be applied when determining whether a given cost was reasonably incurred;

(i) A cost may be unreasonable even if the landlord acted entirely properly and rationally when deciding to incur it; (ii) If there is more than one reasonable outcome, and the landlord chooses a course of action which leads to a reasonable outcome, the cost of pursuing that course of action is recoverable notwithstanding the fact that a lower cost option was also available;

8 (iii) The interests of the tenants are to be taken into account, including the likely financial impact on them when considering whether a cost is reasonable. This is particularly relevant where the landlord has a discretion rather than an obligation to carry out the works; (iv) There is no need to consider the means of individual tenants, but the landlord should consider the financial implications for them generally, and in particular should bear in mind that [NAME] are not usually expected to be asked to pay substantially increased demands at short notice. The Tribunal’s Decision 22. The Tribunal is not determining the reasonableness of the estimated costs of the works, much less the reasonableness of any costs already incurred but the reasonableness of the service charge demands for the [NAME] in the light of the Applicant’s estimate of the costs for the first year of the major works programme. We consider that the correct approach is to consider the recoverability and reasonableness of each item on the capital expenditure programme and then consider what in our view would have been a reasonable sum to demand in respect of the [NAME], having due regard to the Applicant’s margin of discretion in matters of estate management.

23. We are not persuaded that charges to the soffit, the asbestos survey and remedial works, or fire penetration remediation ought to have been deferred as they all seem to relate to, or to be a precursor to, the health and safety and fire remediation works which were planned for year 1 of the programme. Further we noted that while the estimated charge for the average [NAME] was anticipated to be £6,452, the anticipated costs for years 2 and 3 was £14,113 for both years. In the circumstances it might not have been in the interests of the [NAME] to defer costs from year 1 to years 2 or 3. Those costs, even if they could have been deferred, were not significant in the context of the overall budget, Consequently deferring them by a few years would not have made a great deal of difference to the demands for year 1 and would have potentially added to the significantly increased costs in years 2 and 3. Even if the Applicant could have deferred those costs, in our view it did not act unreasonably by including the costs in year 1.

24. The reports disclosed by the Applicant indicated that the decorative railings at the front of the building posed a health and safety hazard as the gaps between them were large and could permit a child to fall through them into the basement level below. The Respondents submit that the Landlord should not have included the cost of replacing the railings at the front of the building but should have considered whether the danger could be remediated by installing additional bars. We have no alternative costings from the Respondent to suggest that this would have resulted in a cost saving. [NAME] [APPELLANT] evidence to us was that in the event the Applicant decided to remedy the gaps in the railings rather than replace them but that due to several redesigns demanded by the conservation officer, remediation ended up costing

9 more than the anticipated cost of replacement. Of course subsequent events cannot colour the reasonableness of the demand, which must be judged according to the facts known or ascertainable at the time it falls due, however it seems to us that, in the absence of any evidence from the Respondents indicating that remediation was a cheaper solution, the submission that it was not reasonable to budget for replacement railings cannot succeed.

25. It is common ground that the entrance doors and side cupboards form part of the demised flats. The Respondents submit that there is no specific clause in the lease which permits the Applicant to recover the cost of works to the demised premises. [NAME] accepts that this is correct but submits that the cost of works to the demised premises are recoverable as a service charge by virtue of Paragraph 1.15 of Part 1 of Schedule 7.

26. Paragraph 1.15 of Part 1 of Schedule 7 is what is commonly referred to as a ‘sweeper clause’ . The approach which must be taken to construing such clauses in the context of leasehold covenants was recently considered by the Court of Appeal in [ADDRESS] v Dell [2023] EWCA Civ 1460; [2024] H.L.R. 9 where it reiterated that the scope of such general provisions in a leasehold covenant will be limited by the nature of any specific provisions of that covenant. In this case the specific provisions of Part 1 of Schedule 7 to the lease all relate to either the common parts or the retained parts of the building. There is no paragraph in Schedule 7 which specifically includes the cost of works to demised parts of the building as service costs recoverable from [NAME] as a service charge. We are consequently not satisfied that Paragraph 1.15 permits the Applicant to recover the costs of works to demised parts of the building as a service charge.

27. Further the fact that the cost of works to the doors and cupboards may not be a recoverable is acknowledged in the capital expenditure plan itself. The summary of anticipated costs for the first year of the major works programme notes that confirmation was needed as to whether the [NAME] are responsible for the works to their front doors and cupboards. It seems therefore that this cost was included in this part of the capital expenditure plan on a provisional basis because it was not clear to the person or persons who prepared the capital expenditure plan whether such costs could be recovered as a service charge.

28. The effect of this is that the subtotal for 2021 should have been reduced by £190,000. This would have reduced the total estimated costs to £704,662 including contingency, preliminaries, fees and VAT. This represents a reduction in the total cost of about 32%. It is 12% lower than the £800,000 demanded of all [NAME] in September 2021.

29. What then would have been a reasonable demand in respect of the [NAME] for the year 2021-2022? We have no evidence to explain

10 why the total sum demanded of all the [NAME] was £232,412 less than the total anticipated costs for the first year of the programme. [NAME] [NAME] speculated that it could be because [APPELLANT] recognised that a proportion of the year 1 costs might relate to demised parts of the building, or because there was already £290,000 in the [NAME], or due to affordability concerns or a combination of all three factors. One certainly would not expect the sums demanded to have exceeded the anticipated costs without good reason. Doing the best we can with the evidence we have been given and having regard to our expertise we consider that the [NAME] demands should have been reduced by 12% because it ought to have been clear that the cost of fireproofing to the doors and cupboards should not have been included. Administration Fees 30. In the county court proceedings the Applicant sought to recover sums varying from £490 to £540 from the [NAME] in respect of each [NAME] as an administration fee. This represented fees paid by the Applicant to a [COMPANY] to pursue the outstanding charges prior to the issue of proceedings. The Respondents accept that such a fee is in principle recoverable under the terms of their leases and do not seek to argue that they were unreasonable in amount. The Applicant accepts it is a variable administration charge within the meaning of Paragraphs 2 and 4 of Schedule 11 to the CLRA 2002. The Respondents submit that the administration charges were unreasonably incurred because the Applicant should have provided them with the information they were seeking before instructing a [COMPANY].

31. Paragraph 2 of Schedule 11 to the Commonhold and Leasehold Reform Act provides that a variable administration charge is payable only to the extent that the amount of the charge is reasonable. [NAME] [NAME] [NAME] submitted that there was binding authority to the effect that this permitted the tribunal to disallow a variable administration charge if it considered it had been unreasonably incurred. We were unable to identify any such authority and note that the 5th Edition of Service Charges and Management indicates that the position is ‘unclear’ (para 12-13). In our view the language of the paragraphs 2 and 4 of Schedule does not support this submission. In our view the charges were payable under the terms of the lease because the Respondents had failed to pay their service charges when they fell due. The fees do not seem to be outside the range of reasonable charges for a debt collection agency. In our view they are recoverable and reasonable in amount. [NAME] under s.20C/Paragraph 5A and refund of fees 32. In the statement of case and at the hearing, the Respondents applied for an order under section 20C of the LTA 1985 and paragraph 5A of Schedule 11 to the CLRA 2002 in respect of the Applicant’s costs of the proceedings. The [NAME] was opposed. Bearing in mind the

11 unfortunate procedural history set out above, and the fact that both sides have had a partial measure of success, and also bearing in mind that [NAME] [NAME] paid the disputed charge prior to the transfer of the proceedings to this tribunal, we consider that the parties should be given the opportunity to make further written submissions in respect of both costs applications and any [NAME] in respect of the tribunal fees. The next steps 33. The Respondents should file and serve their written submissions on costs, and the reimbursement of fees by 1 November 2024. Any submissions in response by the Applicant should be served and sent to the tribunal no later than 8 November 2024. The Tribunal will provide the parties with a written determination in the week commencing 18 November 2024.

Name: Judge N O’Brien Date: 21 October 2024 22 January 2025

Rights of appeal By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) 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 [NAME] for permission must be made to the First-tier Tribunal at the regional office which has been dealing with the case. 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]. 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. 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.

12 If the tribunal refuses to grant permission to appeal, a further [NAME] for permission may be made to the Upper Tribunal (Lands Chamber).