Landlord and tenant –– Service charges –– Section 19(2A) of Landlord and Tenant Act 1985 –– Service charges for insurance, management and repairs –– Whether item of expenditure must be reasonably incurred –– Whether amount of item of expenditure must be reasonable –– Whether tribunal has jurisdiction to determine reasonableness of costs of notices under section 146 of Law of Property Act 1925
The appellant was the landlord of a building containing two flats. The respondents, respectively, held long leases of each flat. The landlord incurred expenditure on insurance premiums, maintenance works and management fees. The landlord sought to recover these expenses as service charges in accordance with the terms of the leases. The respondents referred the charges to the leasehold valuation tribunal under section 19(2A) of the Landlord and Tenant Act 1985. The leasehold valuation tribunal determined that: the insurance premiums were excessive at £373 and £403.58 for the two relevant years, and reduced these to £300; the reasonable charge for redecoration works was £1,650 plus fees at 15%, rather than £2,973 plus fees of £787.84; the general management fees should be limited to £50 pa per flat, rather than £84.04 and £100 per flat for the two relevant years respectively; the landlord was not entitled to recover the costs of serving notices under section 146 of the Law of Property Act 1925; and the landlord was not entitled to include legal fees relating to the application as recoverable charges for the purposes of section 20(C) of the 1985 Act. The landlord appealed.
Decision: The appeal was allowed in part.
In relation to the expenditure on insurance premiums, works and management fees, section 19(2A) of the 1985 Act was not concerned with whether the costs were “reasonable”, but whether they were “reasonably incurred”. The question was not whether the expenditure for any particular service charge item was necessarily the cheapest available, but whether the charge that was made was reasonably incurred. In answering that question, two distinct matters have to be considered. First, the evidence, and, from that, whether the landlord’s actions were appropriate, and properly effected in accordance with the requirements of the leases, the RICS code and the 1985 Act. Second, whether the amount charged was reasonable in the light of that evidence. The second point was particularly important as if that did not have to be considered, it would be open to any landlord to plead justification for any particular figure, on the grounds that the steps it took justified the expense, without properly testing the market. The cost of the insurance premiums was reasonably incurred. Although there was no criticism of the landlord’s procedure in appointing contractors, the amount charged for the works was substantially in excess of the market rates; the related fees should be 15% and 10% respectively for consultancy and management. The general management fees were reasonably incurred. The costs incurred in serving the section 146 notices were outside the jurisdiction of the LVT and the Lands Tribunal.
The following cases are referred to in this report.
Berrycroft Management Co Ltd v Sinclair Gardens Investments (Kensington) Ltd (1997) 29 HLR 444; (1998) 75 P & CR 210; [1997] 1 EGLR 47; [1997] 22 EG 141
Havenridge Ltd v Boston Dyers Ltd [1994] 2 EGLR 73; [1994] 49 EG 111
Wandsworth London Borough Council v Griffin [2000] 2 EGLR 105; [2000] 26 EG 147; [2001] RVR 45
Yorkbrook Investments Ltd v Batten (1986) 18 HLR 25; (1986) 52 P & CR 51; [1985] 2 EGLR 100; (1985) 276 EG 545
Stan Gallagher (instructed by Paul Robinson & Co, of Westcliffe-on-Sea) appeared for the appellant; Peter Sweetman, with leave, represented the respondents.
Giving his decision, MR PR FRANCIS FRICS said:
Decision
1. This was an appeal under section 19 of the Landlord and Tenant Act 1985 (the 1985 Act), with leave of the tribunal given on 12 June 2000, against a decision of the Leasehold Valuation Tribunal for the Chilterns, Thames and Eastern Rent Assessment Panel (the LVT) issued on 3 February 2000 and relating to 43/43a Pall Mall, Leigh on Sea, Essex (the subject property). Mr Stan Gallagher, of counsel, appeared for Forcelux Ltd (the appellant), and called Mr Eric Jakob, a director of the appellant company, who gave evidence of fact, and Mr Philip Ashbee BSc (Est Man) FRICS, who gave expert evidence in respect of maintenance and repair costs, and practices. Mr Peter Sweetman gave evidence of fact on behalf of Mrs AV Sweetman and Ms C Parker (the respondents), although there was no cross–appeal and the LVT’s decision had been accepted by them.
Factual background
2. The subject property comprises a mid–terrace, late Victorian house that has been converted into two self-contained flats, these having been demised to the respondents respectively on long leases at low rents. The appellant was the freehold owner until 25 September 2000, the date upon which the respondent lessees acquired the freehold.
3. Relevant extracts from the former leases included the provision, under clause 3(2), that each of the lessees is “liable to pay one equal half part of the costs, expenses, outgoings and matters mentioned in the Third Schedule hereto”. Schedule 3 states:
1. The expenses of maintaining repairing redecorating and renewing:
(a) The main structure the foundations and in particular the roof chimney–stacks gutters and rainwater pipes of the Building
(b) The gas and water-pipes drains and electric cables and wires in under or upon the Building and enjoyed or used by the Tenant in common with the owners and lessees of the other flat
(c) The main entrances passages landing and staircases of the Building so enjoyed or used by the Tenant in common as aforesaid
(d) The boundary walls and fences of the Building
2. The cost of cleaning and lighting the passages landings staircases and other parts of the Building so enjoyed or used by the tenant as aforesaid
3. The costs of decorating the exterior of the Building
4. All rates taxes and outgoings (if any) payable in respect of the said parts of the Building
5. The costs of the insurance mentioned in sub–clause 4(2) hereof and of insurance against third–party risks in respect of the Building if such insurance shall in fact be taken out by the landlord
6. All other expenses (if any) reasonably incurred by the Landlord in and about the maintenance and proper and convenient management and running of the Building
4. Under clause 4, the landlord covenants with the tenant:
(2) That the landlord will at all times during the said term unless such insurance shall be vitiated by an act or default of the Tenant insure and keep insured the Building against loss or damage by aircraft fire explosion storm tempest or (so far as insurable) act of war or accident or by any other peril within the usual comprehensive Policy of such office as the Landlord shall determine at the full value thereof and whenever required produce to the Tenant the Policy or Policies of such insurance and the receipt for the last premium for the same and will in the event of the Building being damaged or destroyed by any of the said risks as soon as reasonably practicable lay out the insurance monies in the repair rebuilding or reinstatement of the same
(3) That the Landlord will maintain repair decorate and renew (a) the main structure the foundations and in particular the roof chimney stacks and rainwater pipes of the Building and (b) the gas and water pipes drains and electric cables and wires in under and upon the Building and enjoyed or used by the Tenant in common with the owners and lessees of the other Flat (c) the main entrances passages landings and staircases of the Building so enjoyed or used by the Tenant in common as aforesaid and (d) the boundary walls and fences of the Building
(4) That the Landlord will so far as practicable keep clean and reasonably lighted the passages landings and staircases and other parts of the Building so enjoyed or used by the Tenant in common as aforesaid
(5) That the Landlord will so often as reasonably required decorate the exterior of the Building in such manner as shall be agreed by a majority of the owners or lessees of the other flats comprised in the Building or failing agreement in the manner in which the same was previously decorated or as near thereto as circumstances permit and in particular will paint the exterior parts of the Building usually painted with two coats at least of good paint at least once every three years
5. In their original application to the LVT the applicants (the respondents in this appeal) sought a determination that:
(a) The insurance premiums charged by the landlord were excessive at £373 and £403.58 for the accounting years ending 31 January 1999 and 2000 respectively.
(b) The charges levied for the redecoration and repair of the property (at £2,973) were excessive, as were the management fees (£341.89) and consultancy fees (£445.95) specifically relating to those works,
(c) The general management fees (£84.04 and £100) for the years 1998 and 1999 respectively were excessive, as were the accountant’s fees at £41.25 for each of those two years.
(d) The respondent landlord’s claim for the cost of preparing and serving notices under section 146 of the Law of Property Act 1925 was excessive
(e) The landlords costs arising from the proceedings shall not be regarded as relevant costs to be included in the tenants’ service charges under section 20(C), and that the applicants fees shall be reimbursed by the respondent landlord.
6. In its decision of 23 February 2000, the LVT determined that the insurance premiums were excessive, and considered £300 for each of the years in question to be reasonable. A reasonable charge for the redecoration and repair works was £1,650 and the consultancy and management fees relating to them should not, in total, exceed 15% of that reasonable cost as determined (£247.50). The general management fees were also excessive and should be limited to £50 for each of the two years. The accountant’s fees as claimed were reasonable. The LVT considered it had jurisdiction to deal with the matter of the section 146 notice costs, but the respondent landlord’s claim in that regard was dismissed. Finally, as the applicant had substantially succeeded, the costs under section 20(C) may not be added to the service charge.
7. The appellant appealed against the LVT’s determination as to the reasonableness of the building insurance premiums, the costs of the major works, the consultancy and management charges relating to them, and the general management fees. It also appealed against the LVT’s determination on the costs of serving the section 146 notices.
8. Mr Gallagher said that while it was accepted that the sums in issue in this appeal were not great, as the appellant had over 300 freeholds in its portfolio, the implications of the LVT’s decision were potentially significant, and there could be a substantial knock–on effect upon the landlord’s management practices if that decision is upheld.
Evidence
9. I will deal with the evidence and submissions relating to each of the issues in turn.
10. Mr Gallagher pointed out that the respondents’ application to the LVT had been made under section 19(2A) of the 1985 Act, which provides:
A tenant by whom, or a landlord to whom, a service charge is alleged to be payable may apply to a leasehold valuation tribunal for a determination ––
(a) whether costs incurred for services, repairs, maintenance, insurance or management were reasonably incurred;
(b) whether services or works for which costs were incurred are of a reasonable standard;
(c) whether an amount payable before costs are incurred was reasonable.
The language of section 19(2A)(a), Mr Gallagher said, indicated that the section was not concerned with whether the costs per se were reasonable, but with the broader question of whether those costs were reasonably incurred. He said this distinction had two implications. First, the question of whether the costs were reasonably incurred was not interchangeable with the question of whether the relevant services could have been obtained more cheaply. Second, an inquiry as to whether costs had been reasonably incurred should focus upon the reasons why the decision maker (the landlord in this case) elected to incur the costs in question, for example, why he chose a policy on the terms offered by a particular insurer. If that decision was made upon reasonable grounds, then it must follow that the costs thereby incurred will have been reasonably incurred for the purposes of section 19.
11. The crucial point at issue, he said, was that the LVT’s task (and the Lands Tribunal’s on appeal) was not to consider whether comparable insurance cover or building works could have been contracted for more cheaply from another source or contractor, or whether it would have been reasonable for the landlord to take another course of action. The tribunals’ task was to consider whether the ways in which the landlord decided to discharge its repairing and insuring covenants were reasonable decisions. If so, then regardless of whether there may have been cheaper or other reasonable alternatives open to him, the costs thereby incurred will be costs reasonably incurred for the purposes of section 19. This approach had been confirmed in Wandsworth London Borough Council v Griffin [2000] 2 EGLR 105* (LT) where, dealing with the issue of repairs, Mr NJ Rose FRICS said at p110M:
This tribunal’s task, however, is not to determine which assumptions should have been fed into the CIU [life–cycle costing]; it is to decide whether the appellants acted reasonably in their choice of assumptions and in the conclusions that they drew from the analysis. In the light of the evidence, I am satisfied that they did.
* Editor’s note: Also reported at [2000] 26 EG 147
12. Furthermore, whilst Havenridge Ltd v Boston Dyers Ltd [1994] 2 EGLR 73* was a case relating to commercial premises to which section 19 therefore did not apply, it was recognised (in an obiter observation in the judgment), in connection with the recovery of insurance premiums, that there is a band of reasonableness and that it cannot be insisted that the lessor pays the lowest premium in the market.
* Editor’s note: Also reported at [1994] 49 EG 111
13. The contention by the respondent lessees that both the building works and the insurance premiums could have been obtained more cheaply was not the point, Mr Gallagher said. The point was: did the landlord comply with section 19(2A) and, therefore, was he entitled to
14. Mr Jakob is a director of the appellant company and produced a supplemental witness statement setting out the facts relating to each of the issues. Regarding the insurance premiums, Mr Gallagher first pointed out that there was no issue over the quality, quantity or suitability of cover obtained under the landlord’s block policy, nor, after some dispute with the respondents over the interpretation of the policy wording over subsidence excess, with that aspect. It was purely the cost of the premium that was in question. Mr Jakob said the landlord insured the whole of its property portfolio under a single policy with Royal and Sun Alliance Plc (RSA), this being arranged through Southern Insurance Brokers who, as a matter of course, canvassed a limited number of nationally known companies with strict prudential criteria on a triennial basis. Having concluded that the RSA terms, cover and premiums were competitive, overall policies were incepted on 1 February 1998 and 1 February 1999, for which the premiums relating to the subject property amounted to £373 and £403.58 respectively.
15. There were advantages to the landlord in having all its portfolio of properties covered under one policy, not least of which was the guarantee (through the “Inadvertent Omission to Insure” clause) whereby even if one of the properties was left off the policy schedule, cover would still be provided. The landlord not only had the comfort of knowing that there was satisfactory cover in place for all of its properties, but the administrative savings of only having to pay a single premium and using a broker who dealt with claims handling, were considerable. There were also benefits not normally available in single or individual policies, such as alternative accommodation cover and specially reduced subsidence excesses. The alternative of administering hundreds of different policies, and getting involved in claims negotiations was, he said, untenable and there were the inherent risks, if tenants arranged the policies, of incorrect information being provided or failure to disclose material facts.
16. Mr Jakob had recently undertaken an exercise to “test the market” and had only been able to elicit one quote (also from Royal and Sun Alliance but not on a block policy basis) and this was £431 but with less favourable cover. For example, it could not match the £500 subsidence excess that was the figure mentioned on the block policy schedule. Other companies he had approached had refused to quote stating that they did not quote for commercial landlords. Acknowledging that premiums for a commercial block policy could well be significantly higher than those quoted for owner/occupiers, he said he could only assume that was why the lessees had been able to achieve much––reduced quotes. The comparison was, therefore, an unfair one in his view. Mr Jakob accepted that this exercise had been carried out in April 2001, whereas the dispute was in connection with the 1999 and 2000 insurance years, but said that the principles were the same.
17. Mr Sweetman, who is a chartered quantity surveyor, said in his statement that he had obtained a quote from his insurance broker of £231 for the same level of cover, and was aware of another property in the vicinity, insured for the same amount (£110,000) where the premium had been £194. Since the lessees had purchased the freehold, they had arranged cover for an insured value of £120,000 and the premium paid was £212. The subsidence excess was £1,000 against the figure of £500 on the landlord’s policy, although his interpretation of the landlord’s policy wording was that that was £500 per flat. The wording relating to the excess applicable under the landlord’s policy was, it was agreed, ambiguous from the copy schedule provided to the hearing, but Mr Sweetman said that in overall terms, the difference was not material to the main argument. That was that the landlord was charging premiums of more than double those which could be obtained by owner occupiers, and therefore, under section 19 that part of the service charge was excessive. As far as the lessees were concerned, he said they were happy with the LVT’s determination of £300 for each of the insurance years.
18. As to the costs of the major works and the consultancy and management fees charged in connection with them, Mr Jakob summarised the steps that the landlord had taken in connection with the necessary redecoration and repairs. Eejay Property Consultants was the vehicle through which the appellant company’s properties were managed, and Mr Jakob was a consultant to that firm. Eejay prepared a specification of works and schedules and sought two competitive tenders in accordance with its quality control scheme, under which contracts were only awarded to approved contractors. In order to be included on the list, contractors had to complete a standard questionnaire that requested details of public liability and personal insurance, section 715 tax exemption information and references. It was important for a commercial landlord to ensure its approved contractors complied with basic requirements, as it could be potentially liable if problems occurred.
19. The quotes received were for £2,973 (KLS) and £3,307 (Empire (FS) Ltd) respectively and included a contingency sum of £200 and a prime cost sum of £125 for the renewal of the carpet in the communal hallway. On 10 December 1998 notice was given to the respondent lessees of the landlord’s intention to carry out the repairs and redecoration works in accordance with the specification of works. Copies of the specification and quotes were enclosed, as were details of the fees that were to be charged in relation to the consultancy works (including supervision) and contract management. Those fees were based upon 15% of the KLS quote for consultancy, and 10% of the total of the contract cost and consultancy fee for management. The total to be charged to the tenants was £3,760.84.
20. Mr Jakob said that one of the respondent lessees advised him on 13 January 1999 that a local builder had provided a quote in accordance with the specification at £1,250. In accordance with the company’s policy he forwarded a standard questionnaire for inclusion on the approved list, but no response was received. On 19 February the respondents’ solicitors forwarded three more quotes in the sums of £435, £584 and £785 and again Mr Jakob sent out questionnaires. He said that if favourable responses that complied with the company’s quality control criteria were received from contractors nominated by tenants, he did award contracts to them. However, none of the contractors responded and he therefore wrote to the lessees on 19 February giving notice that it was the intention to proceed and that the contract had been awarded to KLS.
21. The works were commenced on 1 March 1999 and completed on 19 March 1999. Mr Jakob said, in cross examination, that he made a total of three visits to the property in connection with the works; once to prepare the specification, once while the works were being carried out and once when they had been completed. He then submitted an invoice for £1,880.42 to each of the two respondent lessees.
22. Mr Jakob said that the whole of the contingency and per centage (pc) sums were applied to the extra works that were found to be required (including replacing some gutters and a hopper–head, repairs to a valley gutter and cutting out and replacing some defective woodwork). The carpet, for which the pc sum was reserved, was not, in the event, replaced, due to a dispute with one of the lessees.
23. Mr Ashbee is a chartered surveyor with Dedman Property services of Southend on Sea and had prepared an expert witness statement giving his opinion as to whether or not the charges for the redecoration and repair works were, in all the circumstances, reasonable. Having considered all the facts as set out in his report, he concluded that, as a responsible landlord, it was reasonable for the appellant to have a quality control procedure in place. That procedure was relatively simple and straightforward and bona fide contractors should have no difficulty in complying with its requirements.
24. He said that the estimates provided by the respondents did not conform with the specification that had been drawn up by the appellant’s consultant, and it was difficult to see how the three lowest ones could have possibly included the contingency and pc sums (a point accepted by Mr Sweetman at the hearing). The fact that none of the lessees’ nominated contractors complied with the appellant’s request for completion of its standard questionnaire precluded them from being
25. Mr Ashbee understood that the job took two men 10 days, and additionally a further individual spent four to five days carrying out the repair works for which the contingency sum had been allowed. This was adequate justification, in his view, for the sum quoted and he understood the works had been carried out to a satisfactory standard. In all the circumstances, therefore, he concluded that the landlord had acted reasonably in accepting the KLS tender, rather than pursue the estimates that had been provided by the respondent lessees. In response to a question from me as to whether or not it was right for the pc sum, not used for the purchase and fitting of the carpet, to have been used to cover the extra costs of dealing with the contingencies, Mr Ashbee said strictly speaking, it was not. However, bearing in mind the extent of the works that were in fact found to be required the sum of £325 (the reserved contingency and pc sums combined) was not inappropriate.
26. As to the fees charged in connection with the works, it was Mr Ashbee’s opinion that the 15% consultancy fee, and the 10% management fee were appropriate for a small job of this nature.
27. Finally, in respect of Mr Sweetman’s calculation of an appropriate cost, formulated from Spon’s Architects and Builders Price Book, Mr Ashbee said that that publication was inappropriate for such small jobs, and no jobbing builder or decorator would refer to it in pricing the job.
28. Mr Sweetman said that at no time had the respondents been made aware of the landlord’s special procedures for vetting contractors, nor were they aware of the requirement for application to be made by those contractors for inclusion on the appellant’s approved list. The respondents were therefore unable to advise the prospective tenderers of those requirements at the outset. The form of specification was a standard word–processed document that in many aspects, such as the requirement for a foreman, inappropriate for a small job like the one in question. There were a number of mistakes relating to the subject property, including lack of reference to the UPVC windows, and the construction of the front door.
29. The price quoted by both the appellant’s approved contractors was out of all proportion to the amount of work involved, and this was backed up by fact that the total number of hours expended (as witnessed by one of the respondents) was only about 64. At £10 per hour plus 30% for materials, this amounted to £832, more in line with the figures obtained by the respondents. This was also supported to the Spon’s analysis which, according to his calculations, came to £877.
30. Regarding the fees charged in connection with the contract, whilst accepting the percentages as being in accordance with market rates, Mr Sweetman said they were unrepresentative of the level of management input involved, and due to the tender price being substantially inflated, were likewise much too high.
31. On the subject of the general management fees, Mr Jakob set out the duties the landlord (or its nominated manager) is obliged to perform under the terms of the leases, and in accordance with the RICS Code. Para 6 of the third schedule to the lease entitles the landlord to charge a fee for those services. In 1998 a total of £83.04 (£41.52per flat) was charged to the respondents, and in 1999, a total of £100 was charged. In his submission these were modest sums and substantially less than those charged by some local firms of managing agents who were quoting between £95 and £100 per flat. By any stretch of the imagination the fees charged must satisfy the test of reasonableness, and the LVT’s decision to reduce the fees to £25 per flat did not reflect the market, and was totally uneconomic.
32. Any additional management functions (such as those relating to the major works) were charged out at 10% of the contract cost, and this was standard practice, Mr Jakob said.
33. Mr Sweetman made no submissions in respect of this element of the appeal.
34. In connection with the Section 146 Notices, which were served upon each of the respondents on or about 22 March 1999, the appellant had charged £130 per notice relating to the preparation and service thereof. Mr Gallagher said that the LVT had determined that it had jurisdiction to deal with the question of these costs but had dismissed the appellant landlord’s claim. It was the appellant’s case that the LVT’s decision was wrong in law in that its jurisdiction was limited under section 19 of the 1985 Act to determining the reasonableness of service charges. Service charge was statutorily defined under section 18(1) of the 1985 Act as: “an amount by a tenant… (a) which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management” The LVT had determined that the costs constituted part of the landlord’s costs of management, but Mr Gallagher said that each of the respondent lessees had specifically and separately covenanted, under clause 2(1)(d) of their leases, to pay the landlord’s costs relating to the preparation and service of a section 146 notice. Such costs could not, therefore, be deemed a part of the service charges which were dealt with elsewhere in the leases (para 6 of Schedule 3).
35. It is clear, Mr Gallagher said, that the costs of serving a section 146 Notice are recoverable exclusively from the tenant upon whom it is served under clause 2(1)(d), If it were otherwise and these costs were claimable under the service charge provisions, each tenant would be contractually liable to pay one half of the costs. Plainly, that was not what was intended by the scheme of the lease.
36. The respondent offered no evidence or comment in respect of this issue.
37. Finally, in connection with the landlord’s costs of the LVT appeal, Mr Gallagher said that whether or not this was pursued under section 20(C) of the 1985 Act would depend upon the outcome. Mr Sweetman said that now that the original leases had been extinguished, and in any event the respondents had paid all sums due in accordance with the LVT’s determination, it would not be right for the landlord, if it was successful, to claim its costs. He did not see why the respondents to this appeal should be liable for costs incurred by the landlord in what, it had admitted at the hearing, was a matter of principle that had a significant impact on the rest of its property portfolio.
38. In closing, Mr Gallagher also referred to Yorkbrook Investments Ltd v Batten [1985] 2 EGLR 100*, in which it was held that a conclusion must be reached on the whole of the evidence. In Berrycroft Management Co Ltd v Sinclair Gardens Investments (Kensington) Ltd [1997] 1 EGLR 47† (which did not directly concern the application of section 19) it was held that the insurance premium that could be charged to the lessees did not necessarily have to be the lowest available so long as it was at a market rate, and the landlord was also not required to give reasons why the insurance was placed through its own agency, or with any particular company. These cases, he said, added support to the appellant’s case.
* Editor’s note: Also reported at (1985) 276 EG 545
† Editor’s note: Also reported at [1997] 22 EG 141
Decision
39. In determining the issues regarding the insurance premiums and the cost of major works and their related consultancy and management charges, I consider, first, Mr Gallagher’s submissions as to the interpretation of section 19(2A) of the 1985 Act, and specifically his argument that the section is not concerned with whether costs are “reasonable”, but whether they are “reasonably incurred”. In my judgment, his interpretation is correct, and is supported by the authorities quoted. The question I have to answer is not whether the expenditure for any particular service charge item was necessarily the cheapest available, but whether the charge that was made was reasonably incurred.
40. But to answer that question, there are, in my judgment, two distinctly separate matters I have to consider. First, the evidence, and from that whether the landlord’s actions were appropriate, and properly effected in accordance with the requirements of the lease, the RICS Code and the 1985 Act. Second, whether the amount charged was reasonable in the light of that evidence. This second point is particularly important as, if that did not have to be considered, it would be open to any landlord to plead justification for any particular figure, on the grounds that the steps it took justified the expense, without properly testing the market.
41. It has to be a question of degree, and while the appellant has submitted a well reasoned and, as I have said, in my view a correct interpretation of ‘reasonably incurred’, that cannot be a licence to charge a figure that is out of line with the market norm.
42. Regarding the insurance premiums, it would appear from the appellant’s arguments that, in cost terms, the lessees are penalised because cover for commercial landlords is more expensive than that available to owner/occupiers. However, under the terms of the lease, it is for the landlord to insure, and the tenant does not have the option. I am satisfied from Mr Jakob’s evidence that the landlord’s block policy was competitively obtained in accordance with market rates, although I would have preferred to hear from a representative of Southern Insurance Brokers with details of the quotes received on its last triennial trawl of the market. Although the comparative exercise carried out by Mr Jakob in April of this year provides little assistance as regards the applicable rates in the years in question, it did indicate that there is a limited pool of insurers prepared to underwrite commercial cover for commercial landlords, and this will undoubtedly have an upwards effect on premium rates.
43. In all the circumstances therefore, I determine that the costs of the premiums for the two years in question were reasonably incurred and that there was no evidence from which I could conclude the costs were excessive. The quotes obtained by the respondent lessees were not on a like for like basis, and while the cover may have been comparable (the benefit of the landlord’s ‘inadvertant omission’ cover being of no benefit to the lessees), the lessees were in a different category to a commercial landlord. A direct comparison is not, therefore, appropriate.
44. I now turn to the major works and to my mind the question of whether or not the costs were reasonably incurred is, in this instance, a little more difficult to answer. I have no difficulty with the landlord’s ‘approved contractor’ procedures a policy that is undoubtedly prudent. The fact is that the landlord, on learning of the lessees quotes, forwarded its standard questionnaire to the contractors, but none of them were returned. Mr Jakob said that if contractors nominated by lessees comply with the company’s requirements there is no reason for them not to get the job, and I accept this.
45. Where I have some difficulty is with the specification of works, and it became apparent during the hearing that not only was it inaccurate in some respects but, as a standard document, one of the requirements was inappropriate for small works of this type. As Mr Sweetman said, a job like this did not require a full time foreman. Although two contractors provided quotes and the least expensive was accepted, and I accept that the contractors would have inspected the property before providing them, there was a dispute over the number of people employed on the job, and the amount of time spent on site. Mr Ashbee, in concluding that the sum involved was appropriate, had based his view upon the information that “the work took two men ten days”. According to the lessees considerably less time had been spent by KLS at the premises, and on a number of days there was only one man on site.
46. It does seem to me that, for the amount of work involved in redecorating this small property and effecting a limited number of repairs (for which a contingency sum had been reserved), a figure of almost £3,000 does appear excessive. Also, in my view, and as agreed by Mr Ashbee in response to a question from me, the transfer of an unused pc sum to the contingency for repairs was inappropriate.
47. In summary therefore, while there can, in my judgment, be no criticism of the landlords policies and procedures for appointing contractors, I consider the sum involved to be in excess of an appropriate market rate, this view being supported by the lessees contractor’s quote against the same specification, of £1,250. There was a question over the respondent lessees’ other quotes, as to whether the contingency and pc sums had been included. If the sum of £325 were added to each of those, the range of figures becomes £750 to £1,250.
48. It is unfortunate for the lessees that none of their nominated contractors complied with the landlord’s reasonable requirements, but I do not see why they should be saddled with a cost that appears from the evidence to be substantially in excess of what could reasonably be construed as a market rate. For these reasons, I conclude that the LVT’s determination at £1,650 was not wrong, and do not, therefore, overturn that decision.
49. As to the consultancy and management charges relating to the major works, I accept that the ability to charge fees for both are provided for in the lease, and that the percentages are in accordance with market rates. I am of the view that the LVT was wrong to reduce the claimed sums as unreasonable or excessive and determine that (on the basis of £1,650 allowable costs) 15% and 10% respectively for consultancy and management were reasonably incurred.
50. On the subject of management fees generally, I accept the evidence of the appellant that local managing agents charge in the region of £100 per flat, and that therefore the charges claimed in the two service charge years were not unreasonable. I do not agree with the LVT’s determination that the fees claimed were excessive, and believe it had no grounds for coming to that conclusion. I determine that the figures of £84.04 and £100 were reasonably incurred.
51. Finally, as to costs incurred in respect of the preparation and serving of the section 146 notices, I accept the appellant’s evidence in this regard. Those charges are specifically allowed for under clause 2(1)(d) of the lease and the question of whether or not they were reasonably incurred is outside the jurisdiction of the LVT or this tribunal.
52. In summary, I determine that the insurance costs of £373 and £403.58 were reasonably incurred in the 1999 and 2000 accounting years. The sum of £2,973 for the major works was not reasonably incurred due to the fact that, in my judgment, that sum was substantially above market rates, and the LVT’s decision at £1,650 as a reasonable cost shall stand. The consultancy charges at 15% of that allowed cost, and management charges at 10% shall stand. The general management charges for the service charge years 1998 and 1999 respectively shall stand at £84.04 and £100 as claimed. The Lands Tribunal has no jurisdiction to deal with the section 146 costs.
53. This appeal is therefore allowed in part. The above decision concludes my determination of the substantive issues in this appeal. As to the costs of this appeal, when granting leave, the tribunal determined that the appellant should pay its own costs in any event. I therefore make no award in relation to this appeal. With regard to the costs of the earlier LVT proceedings, the appellant said that it was reserving its position depending upon the outcome of this appeal. Any application will be considered in the light of the comments made by the respondents, and the fact that they are no longer lessees, having acquired the freehold in September 2000.
Appeal allowed in part
