Rent Acts — Fair rent — Service charges — Services provided and charged for by separate management company — Landlords having no liability under the leases to provide services or repairs — Whether services provided by management company are ‘services provided by the landlord’ for purposes of section 71(4) of Rent Act 1977 — Whether service charges fell to be included as part of registered rent
This was a conjoined hearing
of a preliminary issue of law. BESL, a management or service charge company,
was a wholly-owned subsidiary within the same group of companies as the
landlords. Its sole function was to provide services and carry out repair and
maintenance of 451 flats in Belgravia owned by companies within the group. For
the most part, BESL’s obligations to carry out works and recover costs were
contained in separate service agreements between BESL and the tenants. The
service agreements had the same dates as the connected underleases, which
contained covenants by the lessees to enter into service agreements.
service charges did not fall to be included as part of the registered rent for
the purposes of section 71(4) of the Rent Act 1977 as none of the underleases
required payments to the landlords in respect of services or works or contained
covenants by the landlords to provide any services or carry out any works of
repair or maintenance; BESL was not the agent of the landlords. On behalf of
the tenants, it was said that BESL was an agent for the landlords,
alternatively the corporate veil should be lifted; the service charges should
be included as part of the registered rent.
Decision: The landlords’ contentions were correct. There
were no exceptional circumstances for piercing the corporate veil. BESL was not
the landlords’ agent for the provision of services and the receipt of service
charges in respect of any of the underleases in question. The situation
differed fundamentally from the usual one, whereby a landlord employs an agent
to act on its behalf in the provision of services that the landlord is required
to perform. The service charges do not have to be included in the respective
registered rents.
The following cases are referred to in this report.
Adams v Cape
Industries plc [1990] Ch 433; [1990] 2 WLR 657; [1991] 1 All ER 929, CA
Anthony Radevsky (instructed by Boodle Hatfield) appeared for the
landlords; Stanley Gallagher (instructed by Direct Professional Access)
represented the Hon James Ogilvie; Peter de Scheel appeared in person and was
unrepresented; Beryl Reid attended the hearing.
Delivering the decision of the committee, LADY MARGARET WILSON said: These
applications for the determination of fair rents, heard together with the
consent of the parties, raise a point of law that we have been invited to
determine as a preliminary issue, so that the parties and their advisers may
know the basis upon which the valuation will be made in advance of the main
hearing, which, with the exception of one flat, is to take place on 8 and 9
March. The one exception is flat H, 70 Eaton Square, where the valuation
evidence was already prepared, and which, in order to save costs, we heard on
17 and 20 January 2000.
We heard argument on the preliminary issue on 17 January 2000. The
landlord, Eaton Square Properties Ltd (ESPL), in the case of the flats in Eaton
Square, and Grosvenor Estate Belgravia (GEB), in the case of the Cundy Street
flats, was represented by Mr Anthony Radevsky of counsel, who called Mr William
Robinson BSc ARICS, a surveyor employed by Grosvenor Estate Management Ltd
(GEML). The Hon James Ogilvie, the tenant of flat D, 51 Eaton Square, was
represented by Mr Stanley Gallagher of counsel, who called Miss Jennifer Ellis
FRICS of Langley-Taylor, chartered surveyors. Mr Peter de Scheel, the tenant of
flat A, 18 Eaton Square, appeared in person, and Mrs Beryl Reid, of flat E, 48
Eaton Square, also attended the hearing.
Section 71(4) of the Rent Act 1977 provides:
Where, under a regulated tenancy, the sums payable by the tenant
to the landlord include any sums varying according to the cost from time to
time of —
(a) any services provided by the landlord or a superior
landlord, or
(b) any works of maintenance or repair carried out by the
landlord or superior landlord,
the amount to be registered under this Part of the Act as rent
may, if the rent officer is satisfied or, as the case may be, the rent
assessment committee are satisfied, that the terms as to the variation are
reasonable, be entered as an amount variable in accordance with those terms.
The preliminary issue is whether the services provided to the
tenants by Belgravia Estate Services Ltd (BESL) are ‘services provided by the
landlord’, and whether the variable sums payable to BESL by the tenants for
those services are ‘sums payable by the tenant to the landlord’ within the
meaning of section 71(4). If they are, and provided we are satisfied that the
terms as to variation are reasonable, the registered rents must include the
variable service charge. Apart from those few rents that have not been
previously registered, previous registrations in relation to the other flats
have, for many years, excluded the service charges, on the basis that the
services were provided by, and the service charges were payable to, a body other
than the landlord. But the present registrations by the rent officer, in all
cases save flat H, 70 Eaton Square, where the rent was registered by a
different rent officer, have included the variable service charges on the basis
that the services were, in reality, provided by, and the service charges
payable to, the landlord.
ESPL, GEB and BESL are all members of the Grosvenor Group of
companies. The ultimate holding company is Grosvenor Ltd. That company has a
wholly-owned subsidiary, Grosvenor Estate Holdings,
subsidiaries, including Grosvenor British Isles Ltd and Grosvenor Estate
Investment Management Ltd. ESPL and BESL are both wholly-owned subsidiaries of
Grosvenor British Isles Ltd, and GEB is a wholly-owned subsidiary of Grosvenor
Estate Investment Management Ltd, which is a dormant company. The sole function
of BESL is to provide services and carry out works of repair and maintenance to
the 451 flats in Belgravia owned by companies within the Grosvenor Group. In
the course of providing such services, it employs resident and other caretakers
and staff, but its officers and managers are all employed by GEML. Grosvenor
Investments Ltd acts as agent to ESPL and BESL, and collects rents and service
charges from the tenants in Eaton Square. Grosvenor Estate Belgravia acts as
agent to BESL and collects rents and service charges from the tenants of the
Cundy street flats.
BESL’s obligations to carry out works of repair, maintenance and
services, and its rights to recover the costs, are contained, for the most
part, in separate service agreements between BESL and the tenants. These
service agreements have the same date as the connected underleases, which
contain, in the case of the Eaton Square underleases, covenants by the tenants
to enter into service agreements, and, in the case of the Cundy Street
underleases, require the tenants to comply with the provisions of the service
agreements, and contain a covenant by the landlord to procure the performance
by some other person of BESL’s obligations under the service agreement if BESL
goes into liquidation or ceases to carry on business. We are told that the most
recently-drawn underleases incorporate the service agreement with BESL in the
same document to which the landlord, the tenant and BESL are parties. As far as
we are aware, all the tenants whose rents are now under consideration hold
separate service agreements with the exception of Mr Carnacho and Mrs Connor,
the tenants of flat H, 70 Eaton Square.
Half of the cost of the team of employees who manage the properties
is charged by GEML to BESL. BESL runs at a loss, but is provided with a loan by
Grosvenor Estate Holdings in order to permit it to continue trading.
Landlords’ case
Mr Radevsky said that none of the different forms of underlease
required payments to the landlords in respect of services or works or contained
covenants by the landlord to provide any services or carry out any works of
repair or maintenance. The modern law on the relationship of companies within a
group was conveniently set out in the judgment of the Court of Appeal in Adams
v Cape Industries plc [1990] Ch 433, and made it plain that each company
within a group was a separate entity. Exceptional circumstances, such as
evidence of sham or deceit, were required before the corporate veil could be
pierced. No such suggestion was made here. The arrangements had been made
openly and consensually. The landlord implied repairing covenants did not apply
to any of these tenancies, the underleases being for over seven years, and the
landlord had no residual statutory obligations in respect of these tenancies.
It could not be said, on the facts, that BESL was the landlord’s agent, because
the landlord had no obligations to provide services. Although not relevant to
the question that had to be decided, it was the case that the system had
operated perfectly satisfactorily for many years.
Mr Radevsky called Mr Robinson, who produced a written proof of
evidence. Having described the corporate structure and the arrangements for the
provision of services to the flats, he said that rents were treated entirely
separately from service charges in the Grosvenor accounting system. BESL used
the same accounting year and date for all the service charges it administered,
which provided advantages in terms of bulk purchasing and ease of accounting,
and also advantages to the tenants, who could budget properly for service
charges. He believed that the inclusion of part of the service charge provision
in the registered rents would produce a much more complex, confusing and,
possibly, unworkable system.
Cross-examined by Mr Gallagher, Mr Robinson surmised that the
system of the separate provision of and payment for services had been
introduced to provide a transparent system for the residents. The system worked
very well, in the interests of the tenants as well as the landlords. He did not
know whether any other landlord used a similar arangement. He did not agree
that the system worked only because the service provider was part of the
Grosvenor Group. He understood that recent underleases had merged the service
agreement to make the arrangements simpler for the tenants to understand.
Cross-examined by Mr de Scheel, Mr Robinson said that BESL provided
a good service to the tenants. A lot of BESL’s functions were carried out by
people who were employed by other companies in the group.
Tenants’ case
On behalf of Mr Ogilvie, Mr Gallagher said that while his primary
submission was that BESL was the agent of the landlord, he also submitted that
the commonality of directors, the interdependence of the underlease and the
service agreement and the ‘inhouse captive service company status of BESL’,
taken cumulatively, were exceptional circumstances that justified raising the
corporate veil. He said that the purpose of the Rent Act 1977, and the
protection it intended to confer on tenants, was furthered by including all
sums payable by a tenant for the accommodation within the scheme of
registration. If parties arranged matters so that there was nothing to which
the Rent Act applied, it must be a genuine transaction and not a mere sham. He
invited the committee to infer that the structure was intended to avoid the
effect of the Rent Act, although he did not suggest deception or impropriety.
Mr Ogilvie’s occupational underlease and the service agreement
were, in reality, a single composite transaction, and one could not stand
without the other. They were entered into on the same day; the tenant
covenanted in the underlease to observe the service agreement; assignees of the
underlease were required to enter into a service agreement; ESPL covenanted to
give BESL access to perform its agreement; ESPL covenanted to procure the
performance of the service agreement if BESL ceased to exist; other than ESPL’s
covenant to insure, all the obligations that typically accrued to a landlord
were absent from the underlease but were in the service agreement; BESL was
dependent on ESPL granting access to the property to perform the service
agreement, BESL’s duties under the service agreement were typically within the
landlords’ covenants, there was a provision that allowed BESL to procure that
ESPL or some other person perform its obligations under the underlease, in
which case the tenant was required to provide BESL with a deed of release. If
there were no underlease, there could be no service agreement. Invoices for
service charges and rents were issued by Grosvenor Investments Ltd ‘for and on
behalf of the Landlord: Eaton Square Properties Limited’.
BESL did not employ senior management, which was provided by
another company within the group, and it could not continue to trade without a
loan from the holding company. BESL was a legal fiction that had no existence
outside the Grosvenor Group. BESL assumed risks that would be unsustainable if
it were outside the group. The underlease without the service agreement would
have no commercial value. The definition of ‘landlord’, for the purposes of the
Rent Act, in section 152(1) of that Act, was defined in non-exhaustive terms,
and, in his submission, ‘provided/carried out by the landlord or the superior
landlord’ meant no more than ‘provided/carried out by or on behalf of the
landlord’, and similar considerations applied to ‘sums payable to the
landlord’.
Mr Gallagher called Miss Ellis, who said that she had managed flats
where variable service charges were included in the registered rent. The
arrangement did not affect the accounting date for service charge purposes, and
the practical difficulties outlined by Mr Robinson could be overcome.
Mr de Scheel said that the separate provision of services was not
to the advantage of the tenants. In his view, Mr Robinson’s evidence confirmed
that BESL was, in reality, the agent of the landlord.
and the logical conclusion to be drawn was that the object of the scheme was to
avoid the services being included in the registered rent.
Decision
We have come to the conclusion that the landlords’ argument is
correct. In the first place, we have heard no evidence of any exceptional
circumstances that justify piercing the corporate veil. Mr Gallagher conceded
that there is no evidence of any sham or deception, and he did not, in our view,
begin to substantiate any other exceptional circumstances, such as to justify
any exception from the general rule that even closely interdependent companies
within a group structure must be treated as separate entities. We agree with Mr
Radevsky that Mr Gallagher’s case for treating them as one entity does not get
off the ground.
We have also come to the conclusion that BESL ought not to be
treated as the landlords’ agent for the provision of services and the receipt
of service charges in respect of any of the underleases with which we are
concerned. We are not satisfied that any of the circumstances that Mr Gallagher
put before us create an agency. In particular, the invoicing arrangements we
regard only as an accounting device; and we do not consider that what Mr
Gallagher described as the ‘long-stop’ provisions in Mr Ogilvie’s underlease,
whereby the landlords covenant to provide the services if BESL does not render
BESL their agent. The company structure has been carefully, but openly, set up
in order to ensure that BESL, and not the landlords, provides the services and
is paid for them, and the situation therefore differs fundamentally from the
usual one, whereby the landlord employs an agent to act on its behalf in the
provision of services that the landlord is required to perform.
In reaching our decision, we have not had regard to any practical
difficulties that it might cause, although we do not consider that they would
be as dire as Mr Robinson predicts. However (although, again, this is not a reason
for our decision) we do not consider that the advantages to the tenants of
including the variable service charges in the rents are substantial. In
practical terms, they extend largely to permitting a rent officer or rent
assessment committee to consider whether the terms as to variation are
themselves reasonable. The tenants’ remedy, if the costs that form the basis of
the service charge are considered unreasonably incurred or the services are
considered to be of an unreasonable standard, is to apply to a leasehold
valuation tribunal under section 19 of the Landlord and Tenant Act 1985. The
corporate structure here is no bar whatsoever to such an application, because,
by section 30 of that Act, ‘landlord’ includes any person who has the right to
enforce payment of a service charge.
