Tenant Wins Service Charge Determination Case in First-tier Tribunal

OUTCOME: Allowed

© CROWN COPYRIGHT 2023

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

Case Reference

:

CHI/24UJ/LSC/2023/0019 Property

: [ADDRESS], [RESPONDENT] [NAME], [RESPONDENT], Southampton [POSTCODE]

Applicants

:

[redacted]

:

In person

Respondent: [redacted]

: [COUNSEL] LLP (solicitors)

Type of Application

:

Section 27A Landlord and Tenant Act 1985 (service charges), s.20C Landlord and Ten- ant Act 1985 and para 5 of Sch.11 to the Commonhold and Leasehold Reform Act 2002

Tribunal Members

:

Judge Mark Loveday

Date and venue of hearing

:

22 June 2023 - Decision without a hearing (Rule 31)

Date of Decision

:

22 June 2023

DETERMINATION

Introduction

1. This is an application for a determination of liability to pay service charges un- der s.27A Landlord and Tenant Act 1985 (“the 1985 Act”).

2. The applicants are the lessees of [ADDRESS], [RESPONDENT] [NAME], [RESPONDENT], Southampton [POSTCODE]. The Respondent is the landlord. The application dated 30 January 2023 seeks determinations in respect of relevant costs in- curred during the 2019/20, 2020/21, 2021/22 service charge years and budg- eted costs to be incurred in the 2022/23 service charge year. The amount in dispute consists of management fees and reserve fund contributions in each year. The sole issue is whether these costs are payable under the terms of the applicants’ lease.

3. Directions were given on 10 March 2023 and the Deputy Regional Judge di- rected that the Tribunal would make a decision without a hearing under Rule 31 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013. In accordance with those directions, the applicants have filed a statement of case and reply, and the respondent’s solicitors have filed a statement of case dated 21 April 2023.

The facts

4. [RESPONDENT] [NAME] is a modern mixed-use development on the western shore of Southampton Water, comprising a 206-berth [NAME], 226 waterside homes, shops, restaurants, bars and a hotel. The residential and commercial properties are arranged along the sides of the various boating berths. There are also three separate blocks containing services for the boatowners, including showers and laundry facilities.

5. [ADDRESS] is part of a complex block that forms the main archway en- trance to the [NAME]. The flat itself is on the first and second floors. The street entrance is shared with another flat at [ADDRESS] and there is a door entry system for both flats. The bundle includes photographs of the carpeted hallway at ground floor level inside the street door, the stairs and the lift leading to the first floor, where it appears the entrance to [ADDRESS] is located.

6. The respondent initially employed [NAME] as [NAME], but they were replaced by [COMPANY] with effect from 14 August 2019. The [NAME] prepared service charge budgets in each relevant year and annual end of year accounts, audited by Messrs UHY Hacker Young. The papers in this case in- cluded various end of year accounts and budgets.

7. The first issue relates to management fees. In each year, the respondent’s ac- countants assessed [NAME]’ fee for an unspecified number of apart- ments at [RESPONDENT] [NAME]. They then applied an apportionment of 14.998% to ar- rive at the applicants’ contribution to these costs:

Service Charge Y/E [NAME]’ Fees Applicants’ contribu- tion 24 March 2019

£1,200 £179.98 24 March 2020

£2,914 £437.04 24 March 2021 £3,016 £452.34 24 March 2022 £3,076 £461.34 24 March 2023 (interim) £3,169 £475.29

8. The second issue relates to reserve fund contributions. In each year, the re- spondent’s accountants assessed a reserve contribution for “6-7 Shamrock Elec- tricity, Repairs and Decoration”. It appears to be common ground that this was a reserve fund contribution for works to the premises containing the two units. The accountants then applied an apportionment of 50% arrive at the applicants’ contribution to these costs:

Service Charge Y/E Reserve Applicants’ contribution 24 March 2019

- - 24 March 2020

£1,250 £625 24 March 2021 £2,500 £1,250 24 March 2022 £500 £250 24 March 2023 (interim) - -

The two sets of contributions are the subject of the application.

The Lease

9. The underlease of [ADDRESS] is dated 22 March 1988, and demised the premises and a garage at the [NAME] for a term of 999 years less 10 days from 25 March 1984 together with a right to use a mooring berth.

10. There are various obligations on the part of the [NAME] to pay charges to the les- sor. The provision at the heart of this application is at clause 6.24 of the Lease:

“6.24 To pay on demand a fair and reasonable proportion (to be conclu- sively determined by the [NAME] as to all matters of fact) of the cost to the [NAME] of complying with the clause 7.4 and if required by the Re- versioner to pay on demand a fair and reasonable proportion (to be con- clusively determined by the [NAME] as to all matters of fact) of such sum as the [NAME] in its absolute discretion considers appropriate on account of the anticipated future costs of complying with clause 7.4”.

To understand this, one must also consider clause 7.4. The [NAME] must:

“… repair clean and maintain in good and substantial repair and condition where necessary renew rebuild and replace the pontoon and entrance hall and to light the entrance hall”

The reference to the “entrance hall” is slightly misleading, since under clause 1.27, the expression includes much of the structure of the building containing the

flat:

“The staircases, the loadings, the roof, the lifts, the foundations, the exter- nal walls and one-half in thickness of every internal wall separating the en- trance hall from the adjoining premises forming part of the [NAME]”.

11. Another similar charge is at clause 6.3.1, which requires the [NAME]:

“6.3.1 to pay to the [NAME] on demand a fair and reason- able proportion (to be conclusively determined by the Rever- sioner as to all matters of fact) of the cost of insuring the Building in accordance with clause 7.8”

12. However, the principal and most detailed service charge provision is at clause 9 of the Lease. Under this, “the Owner … covenants with the [NAME] to pay an annual service charge in accordance with the provisions of this clause”. Clause 9 sets out detailed machinery for the calculation and payment of the ser- vice charge, including provision for interim and balancing service charges. In the initial period, the service charge was a fixed figure which was index linked until 24 March 1990. From that date, the service charge was payable on a conventional basis by apportioning the [NAME]’s “total service charge expenditure”. The material parts of clause 9.4 are as follows:

“9.4 The certified service charge shall in each service charge year be a sum equal to the specified proportion of the [NAME]’s share of the total service charge expenditure in that year Provided That for this purpose the following expressions have the following meanings:

9.4.1 “The total service charge expenditure” in any service charge year means the actual costs and expenses incurred by the [NAME] in that year in providing all or any of the services and other matters set out in clause 8 hereof and otherwise complying with the [NAME]’s obliga- tions thereunder including any interest and fees in respect of moneys bor- rowed to finance the payment of such costs and expenses but excluding any costs and expenses paid out of the reserve fund or out of insurance moneys received by the [NAME] under any policy effected pursuant to clause 8.7 hereof

…

9.4.3 "Residential lettable unit" means any premises forming part of the [NAME] which are or are at any time intended or designed to be occupied and used for residential purposes including any mooring berth lower quay wall or car parking space the right to the use of which is or is intended to be included on any letting of such premises

9.4.4 “The specified proportion” means in any service charge year the pro- portion which the aggregate rateable value of the demised premises and the mooring berth bears to the total aggregate rateable values of all Resi- dential lettable units comprised in the [NAME] on the first day of that year”

A feature of the clause 9 scheme is that the apportionment relies on domestic rateable values, which have now of course been abolished. However, clause 9.7 permits a re-apportionment by the [NAME] in the event of “any change in rateable values or any other change in circumstances”. In such a case, the apportionment is subject to “such fair and reasonable adjustments in the specified proportion as appear to be required”.

13. Clause 8 includes three sets of material covenants on the part of the [NAME]. First, at clause 8.1 is the primary obligation of the [NAME] to maintain the retained parts:

“8.1 To clean repair decorate and maintain in good and substantial repair and condition and where necessary renew rebuild reinstate or replace the [NAME] (including but without prejudice to the generality of the foregoing the locks and ancillary equipment the lock control building the sea wall the [NAME] walls and the sheet steel piling form- ing the face to the [NAME] walls the piling the sewage pumping system the services and service conducting media and the roads walkways and footways) but excluding the lettable units

In order to understand clause 8.1, it is necessary to consider various terms which are defined elsewhere in the Lease. In clause 1.5, “the [NAME]” is defined as:

“means the property from time to time comprised in [RESPONDENT] [NAME] [RESPONDENT] the current extent of which is shown edged red on Plan No. 1 but subject to such variations or extensions as shall from time to time be noti- fied by the [NAME] to the Owner and references to the [NAME] are to the [NAME] and any part of it”

Plan No.1 shows the site of the [NAME], including the site of the various estate roads and boat basins, and the site of the building containing [ADDRESS] is plainly within the area edged red. By clause 1.16, “Lettable Units”:

“means residential or commercial premises forming part of the Vil- lage which are or are intended or are designed at any material time to be the subject of a separate letting but shall exclude mooring berths the [NAME] walls and car parking spaces and a ‘ lettable unit’ shall be construed accordingly”

14. Returning to clause 8, the second material group of landlord obligations are at clauses 8.9 and 8.10:

“8.9 For the purpose of performing its obligations hereunder at its dis- cretion to employ on such terms and conditions as it shall think fit one or more surveyors builders architects engineers tradesmen account- ants or other professional persons caretakers [NAME] harbour masters lock operators maintenance staff cleaners and such other persons as the [NAME] may from time to time in its absolute discretion consider

necessary and in particular to provide for such persons a flat or other accommodation free of rent rates or other outgoings to the occupier and any other services considered necessary or desirable by the [NAME] for them

8.10 To employ at the [NAME]’s discretion a firm of [NAME] to manage the [NAME] and discharge all proper fees salaries charges and expenses payable to such [NAME] and/or to such ether per- sons (including the [NAME]) who may be [NAME] the [NAME] in- cluding the cost of computing auditing and collecting the service charges in respect of the [NAME]”

15. The third material obligation in clause 8 is at clause 8.13. The rever- sioner is obliged:

“8.13 To set aside such sums at such times as the [NAME] shall in its absolute discretion consider appropriate as a reserve against the an- ticipated future costs of supplying the services and other matters set out in this clause 8 and performing the [NAME]’s obligations hereun- der with a view to equalising so far as practicable the annual payments to be made by the Owner under clause 9 hereof and to apply and admin- ister the said sums ("the reserve fund") and the income thereof … ”

Administration of the Reserve is dealt within in clauses 8.13.1 to 8.13.5.

The case for the parties

16. In their first statement of case, the applicants’ argument was straightforward. They argued that under clause 6.24 of the Lease, the [NAME] could charge the “cost” of complying with clause 7.4, the “cost” of lighting the entrance hall and the “cost” of renewing, rebuilding and replacing the entrance hall. But it could not charge for employing [NAME] to provide those services in re- lation to the ‘Entrance Hall’. There was simply no provision the charge the [NAME]’ fees to the “entrance hall schedule”. Equally, there was nothing in clause 7.4 which provided for a reserve fund. There was no dispute about any charges made under clause 9 to the Lease, which had been paid in full.

17. The respondent accepted in its statement of case that the management fees were in respect of the “Entrance Hall”, and it listed the considerable work undertaken by the [NAME] in relation to maintenance of the common parts and structure, including the lift. Clause 7.4 of the Lease places an obligation on the respondent to maintain the entrance hall. The cost is of compliance with clause 7.4 of the Lease is recoverable from the applicants in such proportion as the re- spondent determines under clause 6.24 of the Lease. It had determined that ap- portionment at 14.998%.

18. The respondent further accepted that a reserve fund contribution was included in the service charge accounts issued to the applicants for the years in dispute. Clause 6.24 of the Lease placed an obligation on the applicants to pay such sums

as the respondent considered appropriate on account of anticipated future costs of complying with clause 7.4 of the Lease. The reserve fund was used to build a reserve for the respondent to comply with its future obligations under clause 7.4 of the Lease. The respondent was therefore entitled to collect a reserve fund from the applicants for future expenditure in this regard. There was a provision in the Lease (presumably clause 8.13) for the respondent to request monies from lease- holders for the reserve fund at its absolute discretion.

19. In their Reply, the applicants submitted that clauses 8 and 9 of the Lease were wholly irrelevant, since they related to the Estate Service charge only. Only the “true cost” of complying with clause 7.4 could be charged. There is no provision for employing [NAME] to manage the entrance hall, etc. The “manage- ment fee” was “therefore payable by the applicant under the terms of the Lease”. But “only under the Estate Service charge in [clause 9]” Similarly, there was a provision at clause 8.13 to recover a contribution to a reserve, but no separate one for the hallway, etc. expenditure.

Discussion

20. This is an issue of interpretation. The general principles were succinctly summa- rised by Lord [NAME] in Arnold v Britton [2015] EWSC 36; [2015] A.C. 1619 at [15]:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person hav- ing all the background knowledge which would have been available to the parties would have understood them to be using the language in the con- tract to mean”, to quote [NAME] in [COMPANY] v [COMPANY] [2009] UKHL 38, [2009] 1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial con- text. That meaning has to be assessed in the light of”: • the natural and ordinary meaning of the clause, • any other relevant provisions of the lease, • the overall purpose of the clause and the lease, • the facts and circumstances known or assumed by the parties at the time that the document was executed, and • commercial common sense, but • disregarding subjective evidence of any party’s intentions.

[NAME] v [NAME] was a case which involved service charges, and Lord [NAME] berger (with whom [NAME] and [NAME] agreed) said this at [23]:

“… [R]eference was made in argument to service charge clauses being con- strued ‘restrictively’. I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation. Even if (which it is unnecessary to decide) a landlord may have simpler remedies than a tenant to enforce service charge provisions, that is not relevant to the issue of how one interprets the contractual machinery for assessing

the tenant’s contribution. The origin of the adverb was in a judgment of Rix LJ in [NAME] v Earl Cadogan [2010] HLR 412, para 17. What he was saying, quite correctly, was that the court should not ‘bring within the gen- eral words of a service charge clause anything which does not clearly be- long there’.”

Accordingly, service charge provisions are not subject to any special rule of in- terpretation, but the court should not “bring within the general words of a ser- vice charge clause anything which does not clearly belong there”. These words of qualification were stressed by the Court of Appeal in the more recent case of [COMPANY] v Boakye [2021] EWCA Civ 1725, although the precise scope of the qualification is open to some debate.

21. The Tribunal considers there is force in the applicants’ principal argument, that clause 6.24 alone does not provide any route for the respondent to recover a contribution to the costs of employing [NAME] to manage the common parts of the building containing their flat. The words “costs” in clause 6.24 more naturally relates to expenditure on the services provided, rather than [NAME] the delivery of those services. More significantly, the provision can be con- trasted with clause 8.10 (which expressly mentions [NAME]) and to some extent clause 8.9 (which refers to other professionals employed to deliver services).

22. However, the Tribunal does not agree with the applicants’ submission that that is a sufficient answer to the question of contractual recoverability. The Tribunal considers that clause 8.1 places an express obligation to repair and maintain all parts of the [NAME], except the “lettable units”. The hallways, staircases, roofs, foundations and other parts of the blocks of flats within the development are not “lettable units” as defined by clause 1.16 of the Lease. The obligation to maintain these areas falls within “clause 8” of the Lease, which engages clauses 8.9 and 8.10, In other words, the plain meaning of the words used in these cov- enants is that the respondent may properly employ [NAME] to deliver management services at [RESPONDENT] [NAME], including the management of the common parts of the block containing 6 and [ADDRESS]. The contri- bution to the fees paid to the [NAME] for [NAME] those parts is still recoverable under clause 9 of the Lease, notwithstanding that the lessees’ con- tribution to the services themselves is payable under clause 6.24.

23. The Tribunal finds support for this from a further consideration. The evident purpose of the service charge provisions is to enable the landlord to recover all its expenditure on [NAME] the development. The applicants’ contention would result in the surprising conclusion that the respondent could not recover contributions to the costs of maintaining and repairing significant parts of the development. As explained above, the ‘Entrance Hall’ in this particular lease means the roof, foundations, hallway, staircases, lifts and other structural parts of the building containing the flat. And as stressed by the respondent, the maintenance, repair, insurance and management of these parts requires con- siderable work. Indeed, the obligation to maintain in clause 7.4 and the obliga- tion to pay a service charge in clause 6.24 extend even further than the building containing the flat – they include the maintenance of the pontoon adjacent to the applicants’ mooring berth. It would therefore have been obvious to the

parties at the time of the Lease that the [NAME] would in all probability employ [NAME] to deliver these services and that the [NAME] would have to contribute to those costs. The context of the Lease and the purpose of the service charge provisions therefore suggest that the parties would have pro- vided for the recovery of contributions to the [NAME] fees for deliver- ing these burdensome management obligations – and the most obvious way of achieving this is for the clause 9 service charges to include contributions to these management fees. Moreover, it would be particularly odd if the only per- sons who did not have to contribute to the fees paid to manage the common parts of 6 and [ADDRESS] and the pontoon adjacent to the applicants’ mooring berth were the applicants themselves. Indeed, to be fair to the appli- cants, in their Reply it seems they did not entirely dispute they were liable to contribute under clause 9 of the Lease.

24. The question which remains is whether the contributions set out in the annual service charge accounts reflect the clause 9 contractual provisions. The Tribunal was told the apportionment of the [NAME] fees for [NAME] the “Hallway” etc, was set at 14.998% of the total fees of the [NAME]. It is unclear how many flats these fees are divided between. The service charge anal- ysis for [ADDRESS] in the service charge statements suggest that various different apportionments were used for its service charge calculations. For ex- ample, the “[NAME]”, and “Estate Residential Reserves” (which accounted for over 98% of expenditure in every year) has been apportioned us- ing a percentage of 0.2454% to arrive at the clause 9 service charge for 6 Sham- rock Way. Moreover, insurance contributions (under clause 6.3.1 of the Lease) were apportioned using a percentage of 8.35%, and cleaning (presumably under clause 6.24) at 16.64%.

25. The Tribunal reminds itself that it should not generally intervene if the landlord has a discretion about apportionment (or indeed re-apportionment): [NAME] GP v Williams [2023] UKSC 6 at [33]. But in this case, it is difficult to reconcile the various apportionments in the accounts with the con- tractual apportionments in the Lease. The Lease does allow different percentage apportionments to be made to various different heads of cost. For example, the percentage “fair and reasonable proportion” of insurance costs (clause 6.3.1) may and almost certainly will differ from the percentage used for the clause 9 apportionment. Similarly, the percentage “fair and reasonable proportion” of Hallway and pontoon costs (clause 6.24) may and almost certainly will differ from the percentage used for the clause 9 apportionment. But in this case, the respondent has applied the same apportionment for the [NAME]’ fees as it has for the clause 6.24 apportionment. In effect, it has wrongly introduced ‘sub-apportionments’ into clause 9, something which is not permissible under the Lease. It appears it should have apportioned these costs in the same way as the “[NAME]”, but it has not done so.

26. The respondent’s answer to this seems to be that it has a discretion to find an apportionment of 14.998%. Its argument in the statement of case that it has power to do so under clause 6.24 of the Lease is plainly wrong. As already ex- plained, the relevant service charge provision is clause 9, where the apportion- ment and re-apportionment provisions are clauses 9.4 and 9.7. And for the rea- sons already given, the power to re-apportion in clause 9.7 allows only a

discretion to vary the percentage contributions for all costs in the same way. It gives no discretion to sub-apportion. It follows that the [NAME] agent’s fees must therefore be split between all the residential lessees in the [NAME], not just the lessees of 6 and [ADDRESS].

27. As to the Reserve Fund contributions, the outcome essentially follows the above. The provision for expenditure falls squarely within clause 8.13 of the Lease, and the costs are therefore recoverable from the applicants under clause 9 of the Lease – not under clause 6.24. Once again, the apportionment of 50% is not one which is permitted under clause 9 of the Lease. There is no provision for a separate reserve fund for 6 and [ADDRESS]. If other separate reserve funds are maintained for different parts of the [NAME], these will also have to be reviewed.

28. It follows that the Tribunal finds the apportionments of [NAME]’ fees and reserve fund contributions have not been made in accordance with the terms of the Lease. This may of course mean a reconsideration of the charges for all the residential units at the [NAME], once the respondent has aggregated the [NAME]’ fees for the various parts of [RESPONDENT] [NAME] and re- viewed the various reserve funds. It may also be that this complicated (and no doubt expensive) exercise produces only a trivial difference to the charges pay- able by the applicants and the other lessees. But that is not a good reason for ignoring the contractual service charge regime in the Lease.

Section 20C/Para 5A

29. Section 20C of the 1985 Act provides as follows: “(1) A tenant may make an application for an order that all or any of the costs incurred, or to be incurred, by the landlord in connection with proceedings before … the First-tier Tribunal … are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or persons specified in the ap- plication.

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

30. The well-known principles applicable to s.20C applications are summarised in Tanfield on Service Charges & Management (5th Ed) at paras 15-06 to 15-11. In the recent case of [NAME] v [COMPANY] and another [2022] UKUT 121 (LC), the Upper Tribunal stressed that when considering a section 20C application, “the FTT was not exercising a conventional costs jurisdiction but was determining to what extent” leaseholders “should be relieved of a con- tractual obligation” which they have “willingly entered into”.

31. The applicants have substantially succeeded in their application. There is noth- ing in their conduct in relation to the proceedings to suggest they have acted improperly. Notwithstanding any contractual entitlement to costs, it is just and equitable to make an order under section 20C of the 1985 Act. The respondent’s costs incurred in connection with proceedings before the 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 applicants.

Conclusions

32. The application succeeds. The Tribunal determines under s.27A of the 1985 Act that the following elements of the service charges payable by the applicants have not been determined in accordance with the Lease: (a) [NAME]’ fees for [NAME] the communal areas of 6 and [ADDRESS], and (b) the Reserve Fund contributions for the communal parts of 6 and 7 Sham- rock Way. The Tribunal does not have sufficient material to determine the sums payable in any of the service charge years referred to in the application. But it has indi- cated above how they ought properly to be computed.

33. Under s.20C of the 1985 Act, the respondent’s costs incurred in connection with proceedings before the 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 applicants.

Judge Mark Loveday 22 June 2023

Appeals

1. A person wishing to appeal this decision to the Upper Tribunal (Lands Cham- ber) 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 Tri- bunal to which it relates, state the grounds of appeal, and state the result the party making the application is seeking.