The High Court has handed down judgment in a number of cases concerning the terms of tenancies, previously owned by primary care trusts, which vested in NHS Property Services Ltd in April 2013 as part of a major reorganisation of the National Health Service. Valley View Health Centre (a firm) and others v NHS Property Services Ltd [2022] EWHC 1393 (Ch); [2022] PLSCS 95 will be of interest to landlords and tenants and their advisers.
Background
More than two-thirds of the 3,700 properties had been occupied by GPs practising in partnerships, often for decades, where there was no written lease or record of the terms of initial occupation. Where there was a written record, it was often basic, leading to questions of interpretation. Up to 2013, rent and service charges were reimbursed to GPs by the PCTs which commissioned GP services: non-reimbursable charges were often not pursued.
After the transfer, GPs continued to receive funding for rent and reimbursable service charges, but were otherwise required to pay NHSPSL’s costs of providing landlord services, in full.
From 2015 onwards, NHSPSL published annual charging schedules at the beginning of each service charge year, setting out the services to be provided to each practice and the estimated charges. At the end of each service charge year, NHSPSL undertook a reconciliation process, applying a credit or demanding an additional balancing payment.
In 2020, five GP practices issued proceedings against NHSPSL seeking declarations that the charging policies did not alter the terms of their tenancies. NHSPSL counterclaimed for declarations as to the scope of their liability to provide services, the obligations of the practices to pay service charges and for the arrears due – a total of more than £1m. The five cases were not isolated: the defendant claimed that, at 31 October 2021, GP service charge debt was approximately £175m and set to rise by £30m-£40m a year. The hearing determined issues of principle only: the quantification of arrears claims are reserved to a second trial. In its decision, the court clarified a number of issues in relation to the status of occupiers and the rights and obligations of the parties regarding the provision of services and the payment of service charges which are of wider relevance.
Tenancies at will or periodic tenancy?
Valley View took occupation of its surgery around 2007, without a formal lease or any document recording the agreed terms of occupation. By the date of the hearing, it had been in occupation for 14 years. For the first four years there was little negotiation for a formal letting. In later years there were periods of negotiation, including over the terms of a draft lease, and other periods when negotiations ceased or the parties were in dispute over arrears of service charges. Valley View did not pay for its occupation of the surgery until January 2019, when it paid arrears of rent which were refunded by NHS England.
Javad v Aqil [1990] 2 EGLR 82, the leading case on when the law should imply a tenancy at will rather than a periodic tenancy, established that, where parties are negotiating terms and the prospective tenant is allowed into possession, the fact terms have not yet been agreed will be a factor – often a weighty one – to be taken into account in ascertaining their intention. The law will imply, from what was agreed and all the surrounding circumstances, the terms the parties are to be taken to have intended to apply.
It is also clear that payment of rent is a relatively neutral factor in deciding whether a tenancy at will or periodic tenancy exists. Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Ltd [2014] EWCA Civ 303; [2014] PLSCS 94 established that continued payment of rent is not inconsistent with a tenancy at will, and does not give rise to a presumption of a periodic tenancy.
The judge found that Valley View occupied under a tenancy at will which was continuing. While negotiations proceeded slowly, with lengthy gaps between communications, the judge was satisfied that the parties treated them as continuing. The focus of negotiations changed over time – from the grant of a new lease between 2007 and 2011, to an assignment of NHSPSL’s own lease after 2011, and then back again to the grant of a new lease – but both parties clearly intended throughout that there should be the grant of a formal lease.
The grant of a periodic tenancy would also mean that Valley View would enjoy the protection of the Landlord and Tenant Act 1954, which was contrary to the provisions of the draft lease circulating between the parties which provided for it to be contracted out.
St Andrews had occupied under a written lease contracted out of the 1954 Act until March 2019 and had subsequently held over paying rent. There were no negotiations for a new lease. Payment of rent is but one factor to be considered, and it is clearly established that it is legitimate to have regard to relevant statutory protection in determining whether or not the acceptance of rent is a factor from which a new tenancy could be created: Cardiothoracic Institute v Shrewdcrest Ltd [1986] 2 EGLR 57.
The judge decided that St Andrews also occupied under a tenancy at will which was continuing. The parties’ objective intention throughout had remained that a new tenancy should be granted: the lack of negotiations reflected a stand-off due to a dispute over service charges. As with Valley View, an implied periodic tenancy would attract the protection of the 1954 Act, and neither party intended this.
Implied terms
In each case it was necessary to determine whether NHSPSL was obliged to continue to provide services to each practice – and if so, which ones – and the obligations of each practice to pay for those services.
In Valley View, the claimants conceded that they were obliged to pay a sum equal to the amount the defendant was obliged to pay its landlord to provide services. The court extended this to include the servicing and maintenance of the boiler system which the defendant provided and, the court decided, was obliged to provide.
In both Bushbury and St Andrews, the court interpreted the terms of a written agreement between the parties. However, in two cases – Coleford and St Keverne – the practices held periodic tenancies implied from conduct: landlord services had been provided over many years with some payments being made.
Coleford accepted a liability for service charges but argued that it was capped at a set amount by reference to amounts previously charged by the PCTs, with inflationary increases only. St Keverne argued it was liable to pay an “all-inclusive rent” and had paid service charges in excess of its contractual liability. Both claimants maintained that NHSPSL was obliged to continue to provide all the services that had previously been provided and had no right to discontinue any of them in the future.
The judge approached the issue in accordance with the principles in Javid by implying, based on what was agreed and the surrounding circumstances, the terms the parties were to be taken to have intended to apply. In each case, NHSPSL should be taken to have agreed to continue to provide the same services as before – as identified in a list prepared by the defendant – subject to the right to discontinue them if reasonable to do so, if, for example, they were no longer required or could not be provided. In return the claimants should be taken to have agreed to pay the landlord’s reasonable costs of services reasonably provided. There was no evidence to support either a service charge cap or an all-inclusive rent.
Management fees
In all five cases, NHSPSL sought to recover management fees associated with services provided for the years 2017/18, 2018/19 and 2019/20. A figure of 5% was applied to the cost of rates and utilities and other costs passed on to the tenants; a figure of 10% was applied to the costs of all other services delivered to the relevant premises. The claimants objected to these charges either because there was no express provision in the written leases for their recovery, or because management fees had not been charged by the PCTs before 2013 and could not now be charged.
The judge distilled the principles from Waverley Borough Council v Arya [2013] UKUT 0501 (LC) and decided that:
- There was nothing inherently objectionable in NHSPSL seeking to recover its own internal management costs in arranging for the provision of services and managing their delivery as part of the recoverable service charges.
- However, such recovery could only be made – subject to any other defences available to the tenant – if the relevant lease contains a provision for the recovery of costs incurred which is sufficiently wide.
- The relationship between the costs incurred and the services to which they relate is also relevant: a distant relationship may result in the costs falling outside the provision.
- Otherwise, there is no prescribed method for calculating and apportioning management costs: the central question is whether the costs fall within the scope of the provision.
Covenants in written agreements to pay to the landlord the apportioned cost of services, including gas, electricity and water where the landlord determines the costs, and to pay “a fair proportion” of costs for the maintenance and repair of common parts, were wide enough to authorise recovery of management fees. For tenancies implied from conduct, management fees are not a separate service but a cost associated with providing the services.
The judge decided that management fees were properly recoverable as service charges in each case, although the quantum was an issue to be determined at the second trial.
Conclusion
Perhaps unsurprisingly, the court relied heavily on the intention of the parties in establishing both the status of occupiers, where this was not clear, and what they could be taken to have intended in determining both the landlord’s obligations to provide services and the tenant’s liability to pay for them.
Management fees are, in principle, recoverable where covenants are drafted widely enough and in tenancies implied from conduct, as part of the reasonable costs of services reasonably provided.
The decision is helpful in setting out guidance for determining obligations in relationships which have existed for many years.
Louise Clark is a property law consultant and mediator
