Landlord and tenant – Service charge – Major works – Appellant council carrying out programme of major works to housing estates – Funding contribution obtained from third party – Liability of respondent leaseholder to contribute to cost of works through service charge – Whether service charge contribution properly reduced to take account of third-party funding received by appellants – Appeal dismissed
The appellant council was the freehold owner of two council estates in Sheffield dating from the late 1960s and early 1970s. The estates comprised a total of 40 blocks of flats and maisonettes of a non-traditional construction. Eighty units on the estates were held on long leases granted pursuant to the statutory right-to-but provisions, under which a service charge was payable by the leaseholder. The respondent was the leaseholder of a maisonette on one of the estates.
In 2011 and 2012, following statutory consultation with tenants, the appellants undertook a programme of major works to the estates which included the removal of the original cladding, with its wooden supporting frame, from the exterior of each of the 40 blocks and its replacement with new cladding material on steel frames.
Overall, the works cost more than £11.4m. The appellants sought to recover £615,323.64 of that cost from leaseholders through the service charge, with the respondent’s contribution calculated at £9,378.72. A funding contribution obtained from a commercial energy company as part of the Community Energy Savings Programme (CESP) was not passed on directly to the leaseholders, as a set-off against their service charge contributions; instead, the appellants decided to use those funds as a contribution towards the cost of aspects of the work for which they had chosen not to charge leaseholders.
The leasehold valuation tribunal (LVT) made a determination, under section 27A of the Landlord and Tenant Act 1985, that, save for one small item, the service charge contribution sought by the appellants was properly recoverable.
The respondent was partly successful in an appeal to the Upper Tribunal, which held that the recoverable costs should be reduced to take account of the CESP funding. The UT held that the appellants had not “incurred” all those costs, within the meaning of the service charge provisions in the lease, in circumstances where they had reached an agreement with a third party which bound that party to reimburse part of the cost; it considered that any other interpretation would lead to double recovery: see [2015] UKUT 229 (LC); [2015] PLSCS 171.
The appellants appealed. Issues arose as to the meaning of the service charge provisions in the lease, so far as they referred to costs “incurred” by the appellants, to the appellants’ “actual costs, expenses and outgoings” as opposed to estimated costs, and to the leaseholders’ liability to pay a “fair proportion” of the incurred costs.
Held: The appeal was dismissed.
(1) A construction of the service charge provisions in the lease that permitted the appellant to make double recovery of costs would produce a result that reasonable parties in the position of the appellants and the respondent could not sensibly have intended. The prospect of double recovery would not be limited to payments under the CESP scheme: it might also occur if, for example, the appellants received an insurance pay-out in respect of an insured risk under a policy taken out at the leaseholders’ joint expense, or a payment from an original builder of a block under a guarantee, or damages from someone who had malicious damage. All those sources would be third-party contributions to the cost of carrying out the requisite works, and double recovery would occur if the appellants did not have to give credit for the receipt of them when determining the service charge liabilities of the long lessees within the block.
The statutory prohibition of double recovery in relation to some forms of grant in section 20A of the 1985 Act should not be taken to indicate a mutual understanding, under the lease, that double recovery was permissible in principle save where specifically prohibited. The statutory provisions might equally and, more sensibly, be regarded as a form of belt and braces where a particular lease made no sufficient provision for the avoidance of double recovery in relation to such grants.
(2) It was therefore necessary to interpret the lease so as to prevent all such forms of double recovery, on the simple basis that the lease would otherwise lack common sense, as between long leaseholder and lessor. There were three alternatives: (i) giving a particular meaning to costs “incurred”; (ii) treating “actual costs, expenses and outgoings” as limited to those which left the appellants out of pocket; or (iii) treating the avoidance of double recovery as a matter to be taken into account when determining a “fair proportion” of the appellants’ incurred costs, outgoings and expenses.
The UT had chosen option (i) but had been wrong to do so. Giving a special rather than a natural particular meaning to the word “incurred” was the least attractive option. There was force in the argument that a cost was incurred once there was a liability to pay it on the part of the appellant, regardless how that liability was defrayed or recouped.
(3) Per Briggs and Longmore LJJ: Option (iii) was to be preferred. While the lease required a fair proportion to be “based upon” a comparison of rateable values, or on some substitute formula if, as had occurred, rateable values were done away with, that could be regarded as no more than a starting point, leaving room to make further adjustments to the proportion mechanically derived from that formula where it was necessary to do so in order to avoid double recovery and make sure that the proportion to be paid by the leaseholder was a “fair proportion”. Double recovery of that kind might not lend itself to a simple mechanical deduction but might have much more to do with fair and reasonable apportionment.
Option (ii) was not an attractive method of avoiding double recovery since there was a persuasive argument that an estimated cost became an actual cost once it had crystallised and fallen due to the building contractor; since the appellants had in fact paid the contractor, they had actually incurred those costs even if they later recouped some of them.
Per Lewison LJ: The preferable solution was option (ii), which involved treating the “actual costs” as the costs that ultimately left the landlord out of pocket. Although the reference to “actual costs” was in contrast to “estimated costs”, it was pertinent to ask why the actual cost differed from the estimated cost. One possible answer was that, since the date when cost had been estimated, part of it had been paid by a third party and the actual cost to the appellants had therefore been reduced by that amount.
(4) In determining the fair apportionment of the costs, the apportionment carried out by the appellants’ surveyor was irrelevant, regardless of any provision of the lease requiring s determination by him, since such a provision would be void under section 27A(6) as providing for a determination in a particular manner or on particular evidence of a question that could be the subject of an application under section 27A(1) or (3). It made no difference in that regard whether or not the lease provision in question stated that the surveyor’s determination was to be “final and binding”. Accordingly, the court should determine the fair proportion of the appellants’ costs incurred to be levied as a service charge on the respondent without having first to conclude that the appellants’ apportionment was unfair or unreasonable. Overall, the apportionment made by the UT was appropriate: Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC); [2014] 3 EGLR 12; [2014] EGILR 38 and Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC); [2015] PLSCS 12 applied.
Christopher Baker (instructed by the legal department of Sheffield City Council) appeared for the appellants; James Fieldsend and Amanda Gourlay (instructed by the Bar Pro Bono Unit) appeared for the respondent.
Sally Dobson, barrister
Click here to read transcript: Oliver v Sheffield City Council
