Elizabeth Dwomoh seeks avian inspiration in discovering whether the appointment of a tribunal manager can transmogrify the character of monies paid as service charges.
Key point
- Monies previously paid as service charges did not lose their character as such on the appointment of a manager
During these strange times I have enjoyed seeing birds thriving. It therefore seemed fitting to recall the “duck test” when reading the decision of the Court of Appeal in Chuan-Hui and others v K Group Holdings Inc and others [2021] EWCA Civ 403; [2021] PLSCS 58 – a case which concerned whether sums previously paid as service charges lost their character as such on the appointment of a manager under section 24 of the Landlord and Tenant Act 1987.
If it looks like a duck…
Aldford House, Park Lane, London W1 was a mixed-use purpose-built block of flats. The freeholder owner was the Grosvenor Estate. The long headleases of the residential flats were vested in the first and third respondents, K Group Holdings Inc and Park Lane Holdings Inc. The appellants were underlessees of residential flats within the block.
The underleases were all in substantially the same tripartite form. The second respondent, Aldford House (Park Lane) Maintenance Trustee Ltd, was the management trustee responsible for maintenance and repairs to the block. The maintenance expenses incurred were collected by the management trustee from each underlessee through the service charge provisions of the underleases.
Swims like a duck…
In July 2011, ongoing management problems at the block led to a manager being appointed and a management order made pursuant to section 24 of the 1987 Act. In 2012, the appointment of the manager was extended by a further management order until July 2013.
When the manager’s tenure expired, many of the underlessees were in substantial service charge arrears. The total amount owed was approximately £650,000.
In August 2016, the former manager assigned the right to payment of the arrears to the management trustee by way of a purported deed of assignment. The management trustee subsequently commenced proceedings to recover the arrears.
And quacks like a duck…
The appellants challenged the substantive character of the monies paid. They argued that the sums paid to the manager under the service charge provisions of the underleases were not in fact service charges within the meaning of section 18 of the Landlord and Tenant Act 1985. Accordingly, the sums paid fell outside the regime regulating the operation and recovery of such charges laid down in the 1985 Act.
Relying on Maunder Taylor v Blaquiere [2002] EWCA Civ 1633; [2003] 1 EGLR 52, the appellants argued that, under section 24 of the 1987 Act, a manager derived his powers exclusively from his appointment by the tribunal. As an officer of the tribunal he could not derive his power from the lease, even if the order appointing him defined the content and scope of those duties by reference to the same.
The appellants asserted that the source of their liability to pay the manager any monies during his tenure arose under the orders made by the tribunal and not under the terms of the lease. In the circumstances, the orders operated so as to suspend or displace any covenants relating to the exercise of the manager’s functions while they remained in force.
Then it probably is a duck!
The Court of Appeal had no difficulty in finding that, during the manager’s tenure, the monies paid to him by the appellants retained their character as “service charges” within the meaning of section 18 of the 1985 Act. This remained the case even though payment was made to the manager rather than management trustee and the appellants’ obligation to pay arose under the terms of the management orders. Maunder Taylor was not authority for the proposition advanced by the appellants.
Following an assessment of the conditions required to satisfy the definition of a “service charge” under section 18, the court observed that the underlessees were required to pay the sums in question as the tenant of a dwelling. Additionally, those payments were in respect of maintenance, repairs and management. The amount payable was variable in accordance with the “relevant costs”, provided that those costs were “incurred or to be incurred by or on behalf of the landlord”. Lastly, the manager satisfied the extended definition of “landlord” in section 30 of the 1985 Act, because by virtue of the management orders he was “a person who has a right to enforce payment of a service charge”.
In observing that to reach a different conclusion would lead to an absurdity, the Court of Appeal commented that it could not have been the intention of parliament that the service charge regime under the 1985 Act would cease to apply on the appointment of a manager under section 24 of the 1987 Act, in circumstances where there had been a serious failure to comply with repairing and maintenance obligations for which service charges were payable. Further, that the void created could be replaced by the provisions made by the tribunal in the order appointing the manager.
The provisions contained in a management order were superimposed on the existing contractual framework of the lease, but the underlying contractual rights and obligations of the parties remained in place, subject to the terms of the management order, and they were not permanently disapplied or modified.
Elizabeth Dwomoh is a barrister at Lamb Chambers
