Landlord and tenant – Service charges – NHBC warranty – Reasonableness of sums payable in advance – Relevance of NHBC warranty – Whether receipt of funds from NHBC had to be guaranteed before being taken into account in determining reasonableness of advance payments – Appeal dismissed
The appellant acquired the freehold reversionary interest in The Interchange, 63-67 Dalston Lane, London E8, a mixed-use development on basement, ground and four upper floors around a central courtyard. It was completed in 2008 and let to lessees on terms requiring them to contribute through a service charge to its repair and maintenance. Soon after its acquisition, the appellant discovered that water was penetrating through the central courtyard into the basement commercial premises let to the third and fourth respondents. The water proof membrane separating the courtyard from the basement was defective and needed to be replaced.
The appellant was liable for repairing that defect and, in principle, it was entitled to recover the cost of the remedial works from the two commercial tenants and the lessees of the 49 residential flats. A claim was made on the building’s NHBC warranty. The NHBC agreed in principle that the claim was valid although it was unable at that stage to confirm its liability on each policy type.
The first respondent was the long leaseholder of one of the flats and represented the leaseholders of another 34 flats. The second respondent was the leaseholder of the remaining 15 flats, which it held under a single lease. Each leaseholder covenanted to pay the service charge by quarterly payments in advance.
The appellant applied under section 27A(3) of the Landlord and Tenant Act 1985 to determine its entitlement to a service charge if it were to incur the costs of the proposed remedial works, estimated to be about £291,000, and the liability of each respondent to pay their due proportion of those costs. The First-tier Tribunal (FTT) determined that the contribution required from the first respondents towards the cost of the remedial work was nil since the NHBC was liable to pay the full amount apportioned to the private residential leases. Taking into account the NHBC contribution net of the excess, the second respondent was liable to pay £11,697.98. The appellant appealed.
Held: The appeal was dismissed.
(1) The contractual position was that each of the leaseholders was required to pay, by quarterly instalments, its specified proportion of the reasonable and proper expenditure estimated by the landlord as likely to be incurred in the account year. At the end of the year, the leaseholders had to meet any amount by which the estimate had fallen short of the actual expenditure or were entitled to a credit or allowance for any surplus. The appellant had to give credit to the leaseholders for sums it received from NHBC. It could not have been intended that the appellant would be entitled to recover the cost of the remedial works both as a service charge and under the NHBC warranties.
(2) The analysis of the liability of the first and second respondents did not stop with the contractual position. Both the individual private leaseholders and the housing association were “tenants of a dwelling” within section 18(1) of the 1985 Act and the contributions which they were required to make towards the appellant’s expenditure were subject to the detailed regulatory scheme in sections 18 to 30 of the 1985 Act. The sums in issue were payable in advance, based on an estimate of anticipated expenditure before any of the remedial work had been done. They were sums to which section 19(2) of the 1985 Act applied, the purpose of which was to limit the amount payable in advance to such amount as might be reasonable; it presupposed an obligation to make a payment in advance and was not concerned with the reasonableness of the contractual obligation, but only the reasonableness of the amount of the proposed payment. Considerations which a tribunal either ought, or might properly, have regard to in determining the reasonableness of an advance payment included the time at which the landlord would, or was likely to, become liable for the costs, how certain the amount of those costs was and whether there was certainty that the works would in fact be carried out and paid for during the period covered by the advance payment: Parker v Parham (Lands Tribunal), 6 January 2013, LRX/35/2002, Continental Property Ventures Inc v White [2006] 1 EGLR 85 and Knapper v Francis [2017] UKUT 3 (LC); [2017] PLSCS 11 followed.
(3) Whether an amount was reasonable as a payment in advance had to be assessed in the light of the specific facts of the particular case. There was no reason why the prospect of a receipt from a third party had to be certain before it might be taken into consideration in determining the reasonableness of an advance payment. In this case, by the time the first advance payment was demanded, there was no uncertainty over the NHBC’s own liability. There was some uncertainty between the appellant and NHBC over the apportionment of liability to the particular policies. However, there was in reality no disagreement between the appellant and the second respondent over its contribution and the liabilities of the first and third respondents were fixed. The only disagreement concerned the contribution of the fourth respondent which was not likely to be a stumbling block to a final agreement within a reasonable time.
(4) The FTT had been entitled to conclude that a contribution equal to the full cost of the remedial works was not a reasonable advance payment, where a payment of a near-equivalent amount was anticipated from NHBC and there was no reason to believe it would be delayed. The reasonable amount of the advance payment was a matter of judgment and the Upper Tribunal would not interfere with a judgment of the FTT unless it had taken into account something irrelevant, failed to take into account something relevant or had reached a conclusion which was not open to it.
Justin Bates (instructed by Scott Cohen Solicitors, of Henley-on-Thames) appeared for the appellant; Tim Clarke (instructed by Metropolitan Housing Trust Ltd) appeared for the second respondent; the first, third and fourth respondents did not appear and were not represented.
Eileen O’Grady, barrister
Click here to read transcript: Avon Ground Rents Ltd v Cowley and others
