Landlord and tenant – Service charge – Recoverability – Natural justice – Appellant landlord appealing against decision of First-tier tribunal determining questions concerning liability of respondent tenant to pay service charges – Whether costs incurred in objecting to planning permission recoverable through service charge – Whether costs of directors’ and officers’ insurance and administration of leaseholder-owned corporate landlord recoverable through service charge – Appeal allowed
The respondent held the lease of a flat in Chiswick Village, a 1930s development comprising a number of buildings containing 280 self-contained flats held on long leases. In 1997, the freehold interest in the development was acquired by the appellant, a company wholly owned by the leaseholders themselves. After acquiring the freehold, the appellant offered its members 999-year leases of their own flats in the development at peppercorn rents. All but two flats were held on such leases and the appellant’s sole income comprised ground rents of £150 and such sums as it was entitled to collect through the service charge.
The respondent challenged certain sums included in the service charges. The first issue concerned professional fees incurred by the appellant in connection with its opposition to two applications for planning permission in connection with the roof space above the buildings and the car park. The second issue concerned expenses incurred by the appellant in procuring liability insurance for its directors and officers, in organising its own AGMs and hiring premises for that purpose, and in taking advice on the conduct of meetings and on its entitlement to exclude certain individuals whom it considered likely to disrupt the proceedings. No other lessee raised any objection.
The First-tier tribunal (FTT) concluded that, in principle, the lease entitled the appellant to recoup through the service charge the cost of professional fees incurred in connection with the planning application. It nevertheless considered that only £10,000 of the total of £65,000 was reasonable and payable. Furthermore, the lease did not allow the recovery of directors’ and officers’ insurance or other corporate expenditure. Since the directors and the appellant were separate legal persons, insurance for the benefit of the directors was not “insurance against the liability of the lessor”. Therefore, the cost of the insurance did not qualify. Moreover, instead of being incurred “in the administration and management of the lessor’s property”, the corporate expenses were incurred in the administration and management of the appellant itself. The appellant appealed.
Held: The appeal was allowed.
(1) The appellant’s central complaint that it was denied the opportunity to address the FTT’s concerns about the quantum of the professional fees was accepted. In its decision, the FTT had addressed the question whether the appellant had a contractual right to recoup professional fees incurred in informing itself about the details of the proposed development and in understanding how it would affect the remainder of the building. The FTT was not entitled to make the distinction it did, between permissible and impermissible expenditure on professional fees, without alerting the parties to its concern and allowing them an opportunity to address it. The distinction was not one which the respondent himself had raised in his application. The question he had asked the FTT to decide was simply whether the appellant could use the service charge to pay professional advisers to oppose a planning application. The fact that the FTT accepted that it had exceeded the limits of the issue argued before it, without affording the parties a proper opportunity to address it on the issue which concerned it, was an insuperable obstacle to the respondent. Accordingly, the FTT had reached its decision in a manner that was inconsistent with the requirements of natural justice.
(2) Issues concerning the recoverability of directors’ and officers’ insurance and corporate administrative expenses depended on the terms of the particular agreement under which the liability was said to arise. In the context of the leases in issue in this case, all of which were granted by a leaseholder-owned and -managed company, the language of the lease was apt to cover the cost of the lessor obtaining insurance against the liabilities of its own directors and officers. The structure allowed for insurance against liabilities of persons other than the lessor itself, although the lessor would have to act reasonably in determining that it was appropriate to obtain such insurance. In the context of a landlord which was wholly owned by the leaseholders of flats in the building and which had no other assets or interests, an obvious risk against which it might wish to insure was the risk of its own directors being sued. Without such insurance it would be difficult to find individuals willing to take office or for the company to function at all unless the directors were to be expected to obtain insurance at their own expense despite providing their services voluntarily and for the benefit of their fellow leaseholders. There was therefore no reason why the lessor should not obtain it, at the expense of the leaseholders.
(3) General administration and management of the appellant’s property could not take place if the appellant itself was not managed. The company existed for one purpose only, namely to administer, manage and run the building on behalf of its members. All of the corporate governance activities of the company contributed to its own continuance and therefore to the achievement of that purpose, and all expenditure by the company on those activities was directed towards the same purpose. In circumstances where the appellant was intended to have no income-producing assets of any significance and was to be owned by the leaseholders themselves, the parties to the lease were unlikely to have intended any clear distinction between the management of the company and the management of the estate. In that context the language of the lease was apt to include within the service charge the expenditure necessarily incurred by the appellant in conducting its own AGMs and in obtaining advice, on the basis that it was incurred in the running of the building, or was related or incidental to the general administration and management of Chiswick Village. Therefore, the FTT took too narrow a view, in the circumstances of this lease, of the costs which the appellant was entitled to recoup through the service charge: Solar Beta Management Co Ltd v Akindele [2014] UKUT 0416 (LC); [2015] EGLR 18 followed.
Nicholas Isaac QC (instructed by Machins Solicitors LLP) appeared for the appellant; Owen Williams (of Clarke Willmott LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Chiswick Village Residents Ltd v Southey
