Landlord and tenant – Service charge – Flats – Small number of lessees in development making unsuccessful application to leasehold valuation tribunal for appointment of manager under section 24 of Landlord and Tenant Act 1987 – Respondent landlord a company owned by substantial number of lessees of flats – Section 20C of Landlord and Tenant Act 1985 – LVT making order under section 20C that respondents’ costs of proceedings not recoverable through service charge – Whether such costs recoverable under terms of lease in absence of order under section 20C – Whether appropriate to make such order on facts of case – Appeal dismissed – Cross-appeal allowed
The appellants were 14 long leaseholders of flats in a development that comprised three Victorian buildings, at a former jam factory in London SE1, which been converted in 2003 to provide 194 flats and penthouses. The flats were all let on long leases in a standard form for terms of 999 years, with covenants by the landlord coupled with an obligation on the leaseholders to pay a service charge. There had been problems with the management of the development from the outset, leading some leaseholders to withhold service charges. In 2010, the respondent, a company incorporated and owned by a substantial group of leaseholders, had acquired the management of the building by purchasing the freehold from the developer. On acquiring the freehold, the respondent controversially decided to retain the services of the developer’s managing agent.
The appellants made various applications to the leasehold valuation tribunal (LVT), including: (i) an application under section 24 of the Landlord and Tenant Act 1987 for the appointment of a manager to take over the responsibilities of the managing agent; and (ii) an application under section 20C of the Landlord and Tenant Act 1985 for an order that the respondent’s costs of the proceedings should not be recoverable through the service charge.
The LVT refused to appoint a manager, finding that it was neither just nor convenient to do so since the failings of the managing agent were not sufficiently serious to justify that course and the manager proposed by the appellant was unsuitable. It went on to find that the respondent’s costs were in principle recoverable as service charge under the terms of the leases, but that it was appropriate to make an order under section 20C of the 1985 Act to prevent their recovery; in that regard, it made certain criticisms of the managing agent’s conduct.
The appellants appealed against the finding that the lease in principle permitted recovery of the respondent’s costs. The relevant lease provisions were contained in the ninth schedule to the lease, which set out various items that were recoverable as service charge, and clause 14.1, which provided that “For the avoidance of doubt the parties acknowledge and declare that notwithstanding anything herein contained or implied: In the management of the Building and the performance of the obligations of the Landlord hereinafter set out the Landlord shall be entitled to employ or retain the services of any appropriately qualified or experienced employee agent consultant service company contractor engineer or other advisers of whatever nature as the Landlord may reasonably require in the interest of good estate management” and that the leaseholders were liable to contribute to the landlord’s proper expenses incurred in that regard in accordance with the provisions set out in the ninth schedule.
The respondent cross-appealed against the order under section 20C, arguing that the LVT had given insufficient weight to the fact that the appellant’s application for the appointment of a manager had been unsuccessful.
Held: The appeal was dismissed; the cross-appeal was allowed.
(1) The provisions of clause 14.1 of the lease were wide enough to enable the recovery of the costs of employing solicitors and counsel in connection with an application by leaseholders of flats in the development for the appointment of a manager under section 24 of the 1987 Act. The scope of clause 14.1 was not restricted to costs or activities already comprehended within the ninth schedule and its effect was not limited to clarifying that the landlord could engage a variety of professionals in performing the tasks to which the service charge provisions related. The opening words of clause 14.1 confirmed that the clause was not to be read as restricted by other parts of the lease. The drafting technique of deeming costs that fell within clause 14.1 as being recoverable as part of the service charge expenditure, rather than a simple statement that the landlord was entitled in performing its service charge obligations to engage professional assistance, further indicated that the parties intended to bring within the scope of the service charge the costs of activities that might not otherwise be within that scope.
The costs of dealing with the section 24 application fell within the conditions laid down by clause 14.1. They were costs incurred “in the management of the building”. The management of a complex residential building necessarily and routinely involved dealing with inquiries, complaints and criticism. Where a group of leaseholders, dissatisfied with the landlord’s response to their request for a change in the identity of the manager or in other aspects of management, made an application for the appointment of a manager under section 24 of the 1985 Act, resisting that application also properly fell within the scope of management of the building. Moreover, the proper expenses incurred by the respondent in engaging solicitors and counsel were, in principle, capable of falling within clause 14.1. That scope of that clause was not confined to advisers whose services were akin to those of a consultant, service company, contractor or engineer. Such a restrictive approach would require that the words “of whatever nature” be given no effect. Moreover, the employment of professional assistance in successfully resisting an application to appoint a manager that the LVT found not to be suitable could objectively be described as being “in the interest of good estate management”.
(2) The LVT’s decision under section 20C was flawed and could not stand. The LVT had not given appropriate weight to the most important feature of the proceedings as far as the section 20C application was concerned, namely its own unequivocal dismissal of the application to appoint a new manager. The application had been brought by only a small group of leaseholders. Given that the purpose of the recent freehold acquisition had been to enable the majority of leaseholders, who were members of the respondent, to control management of the development in the interests of leaseholders as a whole, the respondent had no alternative but to resist the section 24 application in principle. After expenditure of very substantial sums, the respondent had been entirely successful in defeating the application.
Further, the section 20C order did not state to whom it was intended to apply. The LVT had not considered in any detail how its order would operate and it was likely that it had wrongly assumed that it applied to all of the leaseholders. In fact, no person other than the appellants themselves was entitled to the benefit of the order. The benefit of an order under section 20C extended only to “the tenant or any other person or persons specified in the application”, which, in the instant case, was limited to the appellants since no other tenant was specified in the application. It would be unjust if the majority of leaseholders, who did not support the appellants’ application under section 24, were required to contribute through the service charge to the costs incurred by the respondent in defeating the application, while the appellants themselves were protected from what would otherwise be their contractual obligation to pay their share of those costs, notwithstanding the fact that the costs had been incurred in ensuring that their efforts to secure the appointment of an unsuitable manager did not succeed. In the context of a development owned by leaseholders through their own company, an outcome that discriminated between leaseholders in that way could not be described as just and equitable. Such an order would benefit the losing appellants at the expense of the members of the successful respondent, each of whom would not only be liable to pay their own share as leaseholder, but would also have to make up the shortfall created by the respondent’s inability to recoup an equal share from the appellants. On an application under section 20C, it was essential to consider what the practical and financial consequences of an order would be for all of those who would be affected by it and to bear those consequences in mind when deciding on the just and equitable order to make. The omission of the LVT to take that course in the instant case, was sufficient to vitiate its section 20C order: Iperion Investments Corporation v Broadwalk House Residents Ltd (1994) 71 P&CR 34; [1995] 2 EGLR 47 and Church Commissioners v Derdabi [2011] UKUT 380 (LC) applied.
(3) This was not a case in which an order relieving the appellants from all responsibility for contributing towards the relevant costs through the service charge would be just and equitable. However, in light of the LVT’s criticisms of the managing agent and of the respondent itself, the appropriate order was that 10% of the costs incurred by the respondent in resisting the appellants’ applications under section 24 of the 1987 Act were not to be regarded as relevant costs to be taken into account in determining the amount of the service charges payable by the tenants who were party to the proceedings before the LVT.
The first appellant appeared for the appellants; Nathaniel Duckworth (instructed by Bishop & Sewell) appeared for the respondent.
Sally Dobson, barrister
