Landlord and tenant – Service charge – NHBC warranty – Mixed-use development – Appellant landlord proposing to carry out works to property to repair defect – First-tier Tribunal determining liability of respondent leaseholders to contribute to cost of works through service charge – Upper Tribunal upholding decision – Whether landlord required to give credit for anticipated payment when assessing reasonable amount to be credited on account or take account of third-party payments only when received and apply as balancing charge back to leaseholders – Appeal dismissed
The appellant was the freehold owner of 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 let on terms requiring the lessees to contribute through a service charge to its repair and maintenance. The appellant discovered that water was penetrating 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 the defect and, in principle, 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. 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 First-tier Tribunal (FTT) was asked to determine the appellant’s entitlement to a service charge if it incurred the costs of the proposed remedial works and the liability of each respondent to pay their due proportion of those costs. The FTT determined that the contribution required from the first respondent 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 Upper Tribunal upheld that decision: [2018] UKUT 92 (LC); [2018] PLSCS 56. The appellant appealed.
Held: The appeal was dismissed.
(1) It was agreed that the monies due in respect of the relevant repair works fell within the estate provision terms of the lease and constituted reasonable and proper expenditure reasonably incurred by the landlord in connection with the repair, management, maintenance, improvement and other services for the estate excluding the building. The contractual position was the starting point. The court then had to consider the relevant statutory provisions, in this case section 19(2) of the Landlord and Tenant Act 1985, the effect of which was to modify the contractual obligation of the tenant so that no greater amount than was reasonable was payable before the relevant costs were incurred. The appellant had to give credit to the leaseholders for sums it received from NHBC. In construing the service charge provisions in a lease, the avoidance of double recovery by the landlord was a necessary objective. The sums in issue in this case were payable in advance, based on an estimate of anticipated expenditure made before any of the remedial work had been done. The Upper Tribunal correctly concluded that whether an amount was reasonable as a payment in advance was not generally to be determined by the application of rigid rules but had to be assessed in the light of the specific facts. Considerations which ought properly to be taken into account in determining reasonableness under section 19(2) included the time when the landlord would, or would be likely to, become liable for the costs, and how certain the amount of those costs was: Parker v Parham [2003] EWA Lands LRX/35/2002, Oliver v Sheffield City Council [2017] EWCA Civ 225; [2017] PLSCS 83 and Knapper v Francis [2017] L&TR 20; [2017] PLSCS 11 considered.
(2) The wording of section 19(2) was intended to allow for flexibility. There was no definition as to what was reasonable but the sense of section 19(2) was to encompass within the word “reasonable” any number of circumstances. As to what was “reasonable” was for the relevant tribunal to determine. It was an exercise which the tribunal was well-equipped to perform, assessing the relevant facts of each individual case and arriving at a determination based upon the evidence. The question whether the possibility of third-party payments could be taken into account in deciding what might reasonably be demanded on account would depend on the facts of the individual case. If certainty were required, it would constrain the discretion of the tribunal when in reality what was required was a test which allowed account to be taken of all relevant matters to which would be attributed the appropriate weight. That was particularly so when the purpose of the statutory provision was to protect tenants from unreasonable demands.
(3) In considering section 19(2), and determining what was a reasonable amount to be paid by the respondents, the FTT was entitled to take into account all relevant circumstances as they existed at the date of the hearing, giving such weight to the various factors as it considered just and reasonable. Critical to those considerations were the facts that: an effective policy of insurance was in place in respect of the repair works which would cover the majority of the works; the appellant had agreed to give credit for any sums received from NHBC by way of insurance; and the amount of the insurance contribution was not hypothetical as it had been identified to the FTT and formed the unchallenged factual basis for its determination. The FTT had properly exercised its discretion in making its final determination. It followed that where, as here, there existed an anticipated schedule of works, the total costs of which were reasonable and there was a possibility of a third party making a contribution to those costs, in assessing the residential service charge payable in respect of those works, the landlord had to give credit for anticipated payment when assessing the reasonable amount to be credited on account.
Justin Bates and Kimberley Ziya (instructed by Scott Cohen Solicitors, of Henley-on-Thames) appeared for the appellant; Timothy 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 a transcript of Avon Ground Rents Ltd v Cowley and others
