How likely must it be that the cost of remedial work to a building will be recouped under a National House Building Council (NHBC) warranty before a residential service charge payable in advance in respect of that work can be reduced to reflect the anticipated receipt?
Avon Ground Rents Ltd v Cowley [2018] UKUT 92 (LC); [2018] PLSCS 56 concerned a mixed-use development, which was let on terms requiring the tenants to contribute to repair and maintenance through a service charge.
In due course, water began to penetrate a defective waterproof membrane. Responsibility for remedying the defect lay with the then-current owner of the freehold reversion, who was entitled to recover the cost of the remedial work from its tenants. However, it also had a claim against the NHBC.
The NHBC agreed, in principle, that the claim was valid, but the details had yet to be agreed. In particular, different NHBC warranties applied to different parts of the structure.
No excess was payable under the NHBC insurance by the individual tenants of the flats in the development, but the policy covering the commercial units did include an excess and the commercial tenants had yet to agree the figures.
The freeholder accepted that it would have to apply any sums paid by the NHBC to the service charge account, as and when they were received. Meanwhile, it sought to recover the cost of the repairs, estimated at £291,000, through the interim service charges payable by its tenants.
Section 19(2) of the Landlord and Tenant Act 1985 limits on-account payments made by tenants before relevant costs are incurred to such amounts as are reasonable – and the First Tier Tribunal decided that the tenants of the flats were not liable to make any advance payments towards the cost of the remedial work because the NHBC was liable to pay their full share of the cost of the repairs.
The freeholder appealed on the ground that the NHBC had not actually settled the claim and had not yet paid anything at all.
It argued that it would be wrong, in principle, to assume that the tenants’ liability would be reduced by receipts that were not yet certain – especially as section 19(2) of the Landlord and Tenant Act 1985 provides for advance payments to be adjusted once final liability has been ascertained.
The tenants of the flats maintained that their contributions ought to be calculated after taking into account the amount that the NHBC was expected to pay.
They cited Parker v Parham (Lands Tribunal), 6 January 2013, LRX/35/2002 and Knapper v Francis [2017] UKUT 3 (LC); [2017] PLSCS 11 in support of their argument that it was not reasonable to include the anticipated cost of the repairs in their interim service charges in this case.
The Upper Tribunal upheld the First Tier Tribunal’s decision.
It ruled that the question of whether an interim payment is reasonable must be assessed on the facts of each particular case – and that the prospect of a receipt from a third party need not be certain before it can be taken into account for the purposes of deciding whether an advance payment is reasonable.
The First Tier Tribunal had been entitled to reach the decision it did in this case. There was no uncertainty about the NHBC’s attitude to its liability and no reason to believe that payment would be delayed.
Allyson Colby is a property law consultant
