Landlord and tenant — Service charges for flats — Dispute as to an item charged in respect of supervision and management — Services carried out by parent company as agent for landlord company — Appeal by landlords against judge’s reduction of amount claimed in respect of supervision and management in an action against a tenant — Judge had reduced the amount for this item on consideration of estate agents’ charges given in evidence, but it appeared that he had incorrectly understood such charges to have included fees for the collection of rents — Acting on this incorrect assumption, which was contrary to the evidence, he took as a guide one half of the lowest estate agents’ figure — In fact the estate agents’ charges, properly understood, were higher than those made by the landlords, so that the tenants were obtaining the services in question at less than the charge in the market — Held that the amount claimed by the landlords was a proper charge — Landlords’ appeal allowed
This was an
appeal by Parkside Knightsbridge Ltd from a decision by Judge McDonnell at
Westminster County Court in an action by the appellants as landlords against
the respondent, Ralph Horwitz, a tenant of a flat at 46 Parkside,
Knightsbridge, London. The amount claimed from the tenant included his
proportion of a charge in respect of supervision and maintenance.
Paul H Morgan
(instructed by Roche Hardcastles) appeared on behalf of the appellants; the
respondent, Dr Ralph Horwitz, appeared in person.
Giving the
first judgment at the invitation of Cumming-Bruce LJ, SIR DENYS BUCKLEY said:
This is an appeal concerning the amount of service charge which the plaintiff
company, Parkside Knightsbridge Ltd (‘Parkside’) can properly charge the
defendant, Dr Horwitz, in respect of a flat at 46 Parkside, Knightsbridge,
London, of which he is the tenant and of which the plaintiff company is the
landlord, in respect of the year ended March 31 1981. Parkside is a
wholly-owned subsidiary of a company called McKay Securities plc (‘McKay’) who
are owners of other companies which let properties in London.
The amount of
money involved in this case is very small, but the plaintiffs appeal to this
court because of the effect which the decision between the parties to these
proceedings may have on other tenants of Parkside and because of the effect
that it may have upon the service charge properly chargeable in subsequent
years.
The property
of which Dr Horwitz is the tenant is held under a lease dated June 21 1963,
which was granted to a predecessor in title of Dr Horwitz but under which he
now holds flat no 46. It is let at a yearly rent (the amount of which is
immaterial for present purposes) for 70 years from December 5 1960 and provides
that the tenant not only pays a fixed yearly rent but shall also pay
by way of
reimbursement from time to time a half per cent of the sums which the Landlord
shall expend as agent for and on behalf of the occupiers for the time being of
the Building upon the matters specified in the Second Schedule hereto such reimbursement
to be paid without any deduction by such instalments and on such days as are
hereinafter mentioned.
Clause 3
subclause (2) contains a covenant by the tenant in these terms:
To bear and
repay to the Landlord a half per cent of the sums expended by the Landlord in
each year (reckoned to the Thirty first day of March) of the said term (and so
in proportion for any period less than one year) upon the matters specified in
the Second Schedule hereto . . .
Clause 4
subclause (2) contains a covenant by the landlord:
To use its
best endeavours to provide and carry out and ensure the efficient performance
and supply of the repairs and service for the demised premises and the
buildings set out in the Second Schedule hereto during the term
repairs to the Building not covered by the provisions of the Second Schedule
hereto including the replacement so required of boilers and other equipment not
so covered.
Clause 4
subclause (3) provides:
That the
Landlord will keep accounts of the sums expended by it in each year (reckoned
to the Thirty-first day of March) of the said term upon the matters specified
in the Second Schedule hereto and will by Thirtieth June in each year furnish
such accountant’s certificates for the preceding year as is referred to in
Clause 3 . . .
Clause 5
subclause (2) contains a provision in the following terms:
If within
Fourteen days after the service on the Tenant of any certificate of the
Accountant or Agent of the landlord given under subclause (2) or (5) of Clause
3 hereof the Tenant shall duly pay to the Landlord the sum stated to be due in
such certificate and shall give notice in writing to the Landlord stating her
dissatisfaction with such certificate and requiring this present subclause to
take effect the matter shall be referred to the determination of an independent
accountant to be nominated by the . . . Institute of Chartered Accountants . .
. but save as in this subclause provided the said certificates of the
Accountant or Agent of the Landlord shall be final and binding on the Tenant.
It is conceded
by counsel on behalf of Parkside that that subclause is of no effect by reason
of the provisions of the Housing and Finance Act 1972 section 91 (A) as introduced
into the Act by the Housing Act 1974. Those provisions were later replaced by
provisions which will be found in the 19th Schedule to the Housing Act 1980, to
which it is unnecessary to refer in this judgment because, as I have said,
counsel accepts that clause 5 subclause (2) of the lease has no effect.
In respect of
the year under consideration Thomson McLintock & Co certified to Parkside
on June 23 1981 in the following terms:
Gentlemen
Parkside
Knightsbridge
We have
examined the accounting records of Parkside Knightsbridge Limited for the year
ended March 31 1982 with reference to the items therein relating to the
property known as Parkside, Knightsbridge, and have audited the attached
schedule of the cost of services for which tenants are liable to contribute
under the terms of the leases.
We certify
that in our opinion, on the basis of this examination and from information
supplied by the company, the attached schedule is in accordance with the
accounting records and the costs are proper charges under the terms of the
leases.
The schedule
attached to that certificate consists of items under 10 heads and is headed
‘Summary of service charge items set out in the second Schedule of the leases’.
The first nine heads contain references to various services as cleaning,
painting, maintenance and repair of the exterior of the building, inspection,
maintenance and repair of the lifts, inspection, maintenance and repair of the
boiler plant and common amenity pipes, wires and drains, electricity used for
the lifts and other services and for the lighting of the other interior common
parts of the building, fuel for the boilers, repairs to furniture, remuneration
of porters and staff, rates in respect of a flat which was used as offices for
the company and insurance of the building to the full reinstatement value
thereof. The tenth item is in these terms:
Supervision
and management by the landlord — £12,811.09.
The total of
those 10 items came to £130,097.05.
The amount
charged to Dr Horwitz in respect of his obligation to pay one half per cent of
moneys expended on the services came to £650.48. By a letter dated June 26 from
Parkside, enclosing a copy of the certificate from Thomson McLintock & Co,
payment was demanded of £490.48 (Dr Horwitz having paid £160 on account).
The amount
included in that certificate under heading 10 for supervision and management
had been invoiced by McKay to Parkside in an invoice dated March 31 1981 in
these terms:
Invoice
Management
and supervision charges for the year ended March 31 1981 £12,460.73.
(The difference
between the figure of £12,811.09 and the figure of £12,460.73 contained in the
invoice was due to an adjustment which fell to be made because one flat in
Parkside was occupied by Parkside (the company) and McKay, the parent company,
for company business and it is unnecessary to go into detail in that respect.
The method
adopted by Parkside for some years of calculating what sum should be paid in
respect of services afforded them by McKay in the way of management and
supervision of the flats was somewhat rough and ready. It was accepted by the
learned judge in the course of his judgment as ‘an unscientific method of
evaluating the right sum to be paid’.
Parkside, the
company, does not carry out any supervision itself or management activities in
connection with the flats; all that work is carried out and provided by McKay,
the parent company. In 1976 an estimate was made of the total remuneration to
the staff of McKay who were connected with the supervision or management of the
flats in that block. The total number of hours worked during the period of six
weeks in 1976 was calculated and the number of hours in the same period
estimated to have been devoted exclusively to matters concerned with supervision
and management of the Parkside block was estimated and a calculation made of
what percentage of time of those members of McKay staff had been employed on
Parkside business, ie on matters falling within schedule 2 to the Parkside
lease. The percentage in question was 11.94. That factor was applied to the
remuneration of members of the staff concerned and the same factor was applied
to office expenses of McKay. By applying that factor to the salaries and to the
office expenses an estimate was made, or purported to be made, of the amount of
the expenditure of McKay on Parkside business. That formula had been continued
in use from 1976 to 1981. That was a formula which clearly could not claim to
be a realistic approach. It takes no account of possible changes in the amount
of time spent by staff of McKay upon Parkside business in various years, it
takes no account of possible changes in the office expenses of McKay in various
years, and even in respect of the year 1976, in which it was made, it cannot be
said to afford any precise basis for calculating what expenditure McKay
incurred in fulfilling functions in Parkside which might fall within clause 10
of the second schedule to Dr Horwitz’s lease.
But the
learned judge in his judgment, after criticising the method of proceeding,
which he described as ‘wholly unscientific’, said this:
But I would
say in favour of the plaintiff that it was an attempt to provide some basis for
estimating what was the figure which the parent company might reasonably charge
the plaintiffs.
The invoice
for £12,460.73, to which I have made reference, was not paid in cash by
Parkside to McKay, but the matter was disposed of by an account between the two
companies (who no doubt had various accounts running between them).
The only oral
evidence called before the learned judge was the evidence of a Mr Chiltern who
is, or was at that time, a director of Parkside and of McKay. He explained that
Parkside had no employees and that all business transactions were carried out
by McKay. He explained the method of calculation, which I have attempted to
describe, based on the six-week period in 1976 and he said that the figures in
that calculation were exclusively connected with matters in the second schedule
to Dr Horwitz’s lease, which was in similar form to the leases of other
residents’ flats in the block. Mr Chiltern said that that calculation was an
honest attempt to arrive at a reasonable estimate of the charge which should
properly be made by McKay against Parkside for services rendered relating to
any year of account. Mr Chiltern said this:
I have made
inquiries of four agents as to their charges for carrying out such work and
find that they have no set scales.
Pausing there,
‘such work’ must, in the context, refer to matters contained in the second
schedule to the lease. Mr Chiltern continued:
Jones Lang
Wootton quoted 5% of the gross rents, namely about £23,000. Chestertons quoted
4% of the gross rents, namely £18,000. Goddard & Smith quoted £20,000 plus
15% of the service charges, namely £22,000. Mellersh & Harding quoted 14%
of the service charges, namely £19,000. Rent officers normally allow 12 to 15%,
namely £20,000. All these figures exclude charges for professional surveying
work and include value added tax.
It emerged
from his evidence in cross-examination that the fees quoted by other agents
excluded the collection of rents. He also said in cross-examination:
Maintenance
and supervision involves payment and checking of bills. The surveyor would
check and pass to the accountant and I would pay. The managing director and
director might be involved with respect to new capital expenditure. Parkside
takes twice as much time as all the other properties together.
(He was there
referring to other blocks of flats in which McKay was concerned through
subsidiary companies).
At the time
the matter was before the learned judge there were disputes between the parties
as to what proportion of sums expended
parts of the block and various other matters of that kind, ought properly to be
regarded as improvements and how much ought to be regarded as repairs. The
learned judge went through all those items and decided what was reasonable for
the landlords to charge in respect of maintenance and there is no appeal as to
any of those matters and we are not concerned with them.
The matter
with which this court is concerned is whether the item of £12,400 odd for
management and supervision is one which can properly be brought into account,
or whether, as the judge thought, some smaller sum which he assessed at £9,000
ought to be brought into account. The learned judge said that he approached the
matter de novo to see what was a reasonable amount to charge. He said
this in his judgment:
But what I
have to bear in mind is that the managing agents are acting as agents for the
landlord and have the responsibility of looking after the landlord’s interest
and collecting rents.
I pause there
to say that it will be recalled that the only evidence in connection with the
quotations given by the other estate agents was that their quotations included
nothing in respect of collecting rents.
Chestertons
said they would undertake the whole responsibility for £18,000 per year,
bearing in mind that para 10 of the Second Schedule relates to supervision and
management of the landlord or his agents.
In my judgment
the reasonable sum for that work would have been £9,000. That means that the
plaintiffs’ claim should be adjusted, and the amount of expenditure which I
find properly chargeable is £117,286 plus the amount for supervision of
£9,000–£126,286.
The defendant
is liable for 1/2% of £126,286, ie £631.43. Less received on account
£360–£271.43.
Therefore,
the amount due from the defendant to the plaintiffs is £271.43. I therefore
give judgment for the plaintiffs for £271.43. The plaintiffs are also entitled
to interest from July 14 1981 at the rate of 12 1/2% per annum.
That was
calculated at £53 odd. He therefore gave judgment for the sum of £271.43 plus
interest and said: ‘Bearing in mind that the plaintiffs were not wholly
successful on the issue which involved more than half of the court’s time, I
would award the plaintiffs one half of their costs on Scale 2.’
It is
impossible to find in the evidence any material to support the judge’s figure
of £9,000 for supervision. From the language of his judgment it would seem that
his process of thought was that Chestertons’ quotation of £18,000, which was
the lowest quotation from other estate agents, included something in respect of
collecting rents and that it was reasonable to take the view that a charge for
services other than collecting rents might reasonably be about half of
Chestertons’ quotation, and so he arrived at a figure of £9,000. If that was
his process of thought, then the learned judge fell into error, because he
evidently forgot that the only relevant evidence before him was to the effect
that the quotations from the other estate agents did not include anything in
respect of the collection of rent. There is nothing else in the evidence to
assist one in any way in seeing how the learned judge arrived at that figure of
£9,000.
Dr Horwitz,
who has appeared in person and has presented his argument clearly and
courteously, has submitted that the method of calculation which was adopted by
the company in arriving at a basis for fixing the charge to be made for
supervision and maintenance was wholly illogical and that to apply it produces
a resultant figure which is purely notional. As I have said, the learned judge
agreed with his view that applying that test is a quite unscientific process,
although the learned judge explained that he thought it was a genuine effort on
the part of the plaintiffs to arrive at a reasonable result. Dr Horwitz
contends that to be reasonable the subject-matter must have a quality of
rationality and must also be reasonable in the sense of being fair. He says
that here no process has been adopted that makes the figure arrived at, and
charged in respect of the year in question, one which can be supported on
rational grounds as precisely the right figure to charge. He says that there is
no basis for treating the remuneration of McKay’s staff as a basis for
calculating the value of the services provided for Parkside in connection with the
flats because there is no evidence that if McKay had not carried out the
services which they did carry out in respect of the relevant year, there would
have been any difference in the rates of remuneration of the staff employed,
or, I suppose he would say, no evidence that the office expenses would in any
way be affected. He urges that the judge reviewed all the evidence before him
and took into account not only such evidence as I have referred to, but also
evidence which he (Dr Horwitz) had given about defaults on the part of the
company to take proper care of security in the flats and other matters which he
says were negligent on their part, and that his decision that £9,000 was a
reasonable charge to make must be assumed to have been arrived at upon a general
view of all that evidence.
I have no
doubt that this experienced judge did take into account all the evidence that
he had heard, except for the unfortunate fact that he overlooked the evidence
which made it clear that the quotations of the various estate agents did not
include any element for collection of rents. But I do not think one can assume
that all the evidence he heard affected his mind in arriving at the figure of
£9,000. The best indication that one can find about how he reached that figure
is the rationalisation of the language which he used, which I have already
referred to. It seems to me that the evidence of Mr Chiltern, referring to the
four quotations from other estate agents, is strong evidence, in the absence of
any rebuttal, that the figure of £12,400 charged by McKay to Parkside was a
reasonable charge to make for the services which McKay were giving to Parkside
in connection with the flats, for all those quotations are substantially in
excess of the amount charged.
Precisely how
that amount was arrived at is not, in my opinion, of significance. The question
is whether the amount can be said to have been a reasonable charge, and a
comparison with the quotations of the other estate agents indicates that it was
a reasonable charge and in fact Parkside were getting the services of McKay at
a considerably lower cost than they could have got similar services on the
market. Dr Horwitz has said that to take quotations from four estate agents is
no way of discovering what the market price for such services would be. But he
did not himself adduce any evidence to indicate that these quotations were not
fair and reasonable, or that the services could have been obtained elsewhere on
the market for smaller expenditure. I do not think myself, therefore, that Dr
Horwitz succeeds in establishing that the charge of £12,400 was not a
reasonable charge. But Dr Horwitz also says that there is no evidence that that
sum of £12,400 represents any expenditure incurred by the landlords. In my
judgment, that quite overlooks the fact that although McKay is the owner of all
the share capital in Parkside, the two companies are different entities in law
and that McKay did provide services to Parkside which fall within paragraph 10
of Schedule 2 to the lease, that they charged Parkside £12,460.73 for the
management and supervision which they had provided and that that amount has
been discharged between those two companies by normal accounting processes. It
seems to me that it is fully established that that was an expenditure incurred
by the landlords in providing management and supervision of the flats and that
it is a proper charge to be brought into account in the service charge
calculation ascertaining the amount which Dr Horwitz was liable to pay in
respect of the year ended March 31 1981. Accordingly, in my opinion, this
appeal succeeds.
The learned
judge awarded the plaintiffs only half of their costs in the court below. In my
opinion they are entitled to the whole of their costs there. They have,
however, appealed on terms that they will not ask for any costs in this court,
presumably on the ground that this appeal is largely brought for their own
advantage because of the effect of this decision upon the liabilities of other
tenants and its possible impact on service charges raised in other years.
For these
reasons I would allow this appeal and enter judgment for the plaintiffs for
£288.73, which is the recalculated balance due from the defendant, plus the sum
of £53.82 which was included in the judgment below for interest. I understand
that the appellants do not seek to vary that amount, for the variation would be
very small indeed. The amount of the judgment will be £342.55 and I would give
judgment for the plaintiffs in that amount, with their costs in the court of
first instance.
Agreeing,
CUMMING-BRUCE LJ said: Such difficulty as arose in this appeal turned out to be
due to the fact that in the last two paragraphs of his judgment on p 19 of the
bundle, the learned judge did not in terms state that the consideration which
he described in the penultimate paragraph of that page formed the basis of his
conclusion in the next paragraph, which reads simply: ‘In my judgment the
reasonable sum for that work would have been £9,000.’ Dr Horwitz was able to submit with force that
as all that the judge was concerned with was determining a reasonable sum
incurred by the landlord and his agents, and as he had heard all the evidence
and expressed the result that, in his judgment, a reasonable sum for that work
would have been £9,000, that judgment reflected
adding the remaining £3,000 odd to the total figure. The judge had regard to
the inadequate basis of their calculations and the absence of any up-to-date
material connecting the 1976 basis (if it can be called such) with a reasonable
sum for 1981.
But when one
reads the whole of the judgment, it seems to me perfectly clear that in
comparison with many cases in which landlords pursue their tenants for what
appear to be enormous service charges, on this occasion the judge was impressed
with the fact that the landlords had made genuine, though clumsy, efforts to
provide some basis for arriving at an honest figure.
I am quite
sure that the learned judge, who is known to have a gift for trenchant
expression, would, if he had smelt an indication of some thousands of pounds of
unjustified profit, have said so in no uncertain terms, and if he thought that
this was a device by which the controlling company and the subsidiary had
worked out a technique to conceal an exaction of unreasonable charges, this
judge would not have hesitated to say so clearly. As I read the last two
paragraphs of his judgment it is abundantly clear that the consideration in the
penultimate paragraph was the basis of his decision to reduce the landlords’
figure to £9,000. The penultimate paragraph, unfortunately, has a mistake, a
simple mistake due to a failure by the judge to remember accurately the
evidence given about the estimates given by four outside estate agents.
For those
reasons, the doubts raised by the respondent can properly be set at rest and I
agree with the order proposed by my Lord.
The appeal
was allowed. No order was made for costs in the Court of Appeal, but the order
below was varied to give the appellants their whole costs.
