Right to manage — Commonhold and Leasehold Reform Act 2002 — Accrued uncommitted service charge — Section 94 RTM company exercising right to be paid accrued uncommitted service charge |page:98| held by former manager — Whether including sums paid by tenants but found by leasehold valuation tribunal not to be payable — Whether including sums not collected from tenants by acquisition date — Whether including expended sums to extent that benefiting non-paying tenants
In October 2004, the respondent acquired the right to manage a block of flats on behalf of the tenants under the Commonhold and Leasehold Reform Act 2002. The appellant had previously managed the building for the landlord. It paid £154,390 to the respondent pursuant to its statutory obligation, under section 94(1) of the 2002 Act, to pay any “accrued uncommitted service charges” that it held on the acquisition date, namely any sums that it had received by way of service charges.
On an application by tenants under section 27A of the Landlord and Tenant Act 1985, items of service charge collected by the appellant from 1998 were found not to have been properly payable; a total of £121,742 was disallowed. The respondent applied, under section 94(3) of the 2002 Act, for a determination of the total amount of accrued uncommitted service charge. It contended that the £121,742 fell to be paid to it as accrued uncommitted service charges, after which the overpaying tenants would be able to reclaim from it. After making adjustments, the leasehold valuation tribunal (LVT) found that £122,192 was due to the respondent and awarded interest on that sum at the rate of 4% pa on a compound basis from October 2004 until payment was made.
On appeal, the appellant submitted that: (i) an order under section 94 could apply only to funds that remained in the service charge trust fund at the acquisition date, since such an order related to accrued uncommitted service charge that was “held by” the landlord or manager as at that date; and (ii) the LVT had no power to award interest. The respondent appealed, seeking a determination that the appellant was obliged to pay: (i) the amount of any service charge that the appellant had not collected as at the acquisition date; and (ii) sums that the appellant had expended out of the service charge fund so far as they benefited tenants who had not paid their service charge.
Held: The appellant’s appeal was allowed; the respondent’s appeal was dismissed.
(1) The obligation of the landlord or manager under section 94(1) is to give to the RTM company whatever it holds on the acquisition date, either in one or more bank accounts set up by that party or in any investment that represents such sums. The obligation is to pay over those funds that it actually has; it is not obliged to pay over sums that it is entitled to receive but has failed to obtain or that it previously had but has no longer. The sums must have been paid “by way of service charges”. So long as they have been so paid, there can be no argument as to whether they are justifiable and reasonable. They must also be “uncommitted”, such that, if paid or committed to a particular management debt or function, they will not fall within section 94. The purpose of the legislation is limited to transferring to the RTM company those assets that need to be transferred to enable it to be an effective company from the date of acquisition, but ignoring rights and relationships that existed before the date of acquisition. The relationship of the former manager and the tenants is preserved, as are the rights that have arisen between them up to the acquisition date. If a tenant can demonstrate to the court that the service charges paid or demanded were unreasonable, he may recover his payment or successfully resist a claim against him for payment, but the Act does not allow an RTM company to take over the tenant’s claim or defence. On that approach, £121,742 was not an amount of accrued uncommitted service charge held by the appellant on the acquisition date, and the respondent was not entitled to be paid that sum. (2) The legislation rules out any payment or repayment of service charge to the RTM company in respect of costs incurred before the acquisition date. Where a manager is committed to paying a supplier’s bill for services rendered, its obligation to do so is not limited to a proportion that equates to the proportion of service charges that it has received. It is entitled to pay the entire bill out of the fund of accrued service charge and to hold the necessary sum for that purpose. Only the accrued uncommitted balance held by the manager at the acquisition date has to be paid to the RTM company. If a former manager does not hold sufficient funds to pay bills incurred before the acquisition date, it may sue the tenant for the relevant unpaid service charges; the RTM company cannot do so: see section 97(5). (3) The LVT has no power to award interest on the amount of accrued uncommitted service charges. No such power is conferred by section 94(2)(b) and the LVT has no inherent power to award interest in the absence of a specific statutory power.
The following cases are referred to in this report.
BCL (RTM) Co Ltd v Barrington Court Developments Ltd LON/00AP/LIS/2006/0091 unreported 22 November 2006
San Marino Estates Ltd v Kennett Properties Ltd LON/00AU/LIS/2004/0095 unreported 30 March 2006, LVT
San Marino Estates Ltd v Peveral OM Ltd unreported 21 May 2008, LT
This was an appeal by the appellant, OM Ltd, and a cross-appeal by the respondent, New River Head RTM Co Ltd, from a decision of the leasehold valuation tribunal on an application, under section 94(3) of the Commonhold and Leasehold Reform Act 2002, for a determination of the amount of accrued uncommitted service charges payable to the respondent on acquisition of the right to manage a building under the Act.
Adrian Carr (instructed by Peverel OM, of Luton) appeared for the appellant; John Hawkesley represented the respondent.
Giving his decision, HH Judge David Mole QC said:
Introduction
[1] This matter concerns a building containing 129 individual flats, collectively known as New River Head, which were converted from the former headquarters of Thames Water Board. All of the flats are held on long leases, with terms of 999 years commencing on 1 February 1996. The leases named OM Ltd (then called Peverel OM Ltd) as the management company of the premises. Neither Peverel OM Ltd nor OM Ltd have or had any legal or beneficial interest in the property; their only function was to manage the premises. In 2004, the tenants, or some of them, set up the New River Head RTM Co Ltd, a right to manage company under the provisions of the Commonhold and Leasehold Reform Act 2002 (the 2002 Act), in order to take over the management of the premises. This company acquired the right to manage the premises on 1 October 2004, which is therefore “the acquisition date”. Before that date, OM sent the RTM company a cheque for £100,000 on account of accrued uncommitted service charges and then, on 31 January 2005, sent a letter enclosing a “Closing Statement of Account” and a cheque for £54,390.87 in respect of the balance of the accrued uncommitted service charges.
[2] After the acquisition of the right to manage, some of the tenants made an application to the leasehold valuation tribunal (LVT) against OM, under section 27A of the Landlord and Tenant Act 1985: LON/00AU/LIS/2004/0095*. The application asked for a determination as to whether service charges collected by OM in the years from 1998 until the acquisition were properly payable. In a decision dated 30 March 2006, the LVT found in favour of the tenants to the extent of £59,267.13. It was unable to deal with that part of the claim that related to gas charges. That claim was renewed, and when the LVT again determined that it was unable to deal with it there was an appeal to the Lands Tribunal (LT)†. In its decision of 21 May 2008, the LT found in favour of the tenants and disallowed £39,368.77 in respect of those charges. This amounted to £98,635.90. To that figure other sums, which were conceded by OM Ltd in either correspondence or at the LVT hearing, were added, bringing the grand total to £121,742.39.
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* Editor’s note: San Marino Estates Ltd v Kennett Properties unreported 30 March 2008
† Editor’s note: San Marino Estates Ltd v Peverel OM Ltd unreported 21 May 2008
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[3] In November 2008, the RTM company brought an application against OM under section 94(3) of the 2002 Act to determine the |page:99| amount of the payment that fell to be made to the RTM company under the section. The RTM company argued that the entire £121,742.39 was to be interpreted as an “accrued uncommitted service charge” within the meaning of section 94. It also claimed interest on that sum. After a hearing on 5 February 2009, the LVT found in favour of the RTM company in a decision dated 16 May 2009 and, after some adjustments, ruled that the amount of accrued uncommitted service charges was £122,192.39. It also awarded interest at 4% pa compound from 1 October 2004 until payment. Both parties have appealed and the appeals have been consolidated.
[4] OM appeals for a determination of whether the sum of £121,742.39 is an accrued uncommitted service charge and, if so, whether OM is obliged to pay the RTM company the entire sum, given that only 35 out of 129 tenants were applicants in the proceedings. Second, whether the LVT has a general power to award interest on an accrued uncommitted service charge.
[5] The RTM company appeals for a determination first of whether OM is obliged to pay it the amount of service charge that it did not collect from tenants prior to the acquisition date. Second, where, during its period of management, OM paid a bill using funds held in the service charge fund although some of the tenants had not paid their service charges, whether the money used to settle that proportion of the bill that benefited those tenants who had not paid their charges is recoverable as an accrued uncommitted service charge from OM.
[6] The first issue raised by OM and the issues raised by the RTM company turn on the proper interpretation of section 94 of the 2002 Act. This provision is in a section of the Act that deals with the establishment and powers of a body known as a right to manage or RTM company. It provides for payment to the RTM company of a sum equal to the amount of any “accrued uncommitted service charges” held by a person who is a manager or a landlord on the acquisition date.
[7] The LVT granted permission to appeal to this tribunal on that issue. Both the RTM company and OM have appealed. The second issue, raised by OM, on which leave was granted by the president on 14 September 2009, is whether the LVT had the power to award interest to represent income that could have accrued on the investment of accrued uncommitted service charges.
[8] The LVT set out its reasons thus:
11. The main issue is whether it is appropriate for this Tribunal to make an Order, under section 94, in respect of the £121,742. 39 referred to… .
12. The Tribunal has reached the firm view that it is appropriate for such Order to be made.
13. Mr Carr, on behalf of the Respondent, made a number of submissions to the contrary, including:
(i) That an Order under Section 94 can only apply to money which is in the trust fund on the acquisition date. Mr Carr referred to the words “held by him” in the last part of Section 94 (1) and submitted that only the amount (if any) which was in credit in the fund, on the date of acquisition, could be the subject of an Order under Section 94.
[Mr Carr did not shrink or flinch from the corollary that if money was stolen from the fund even by a trustee only any amount remaining in credit could be the subject of an order under section 94.
We consider that such a construction cannot have been the intention of parliament.]
(ii) That when the (previous) Tribunals decided that the amounts totalling £100,642.21 were not payable, they ceased to be “service charges” and, therefore, section 4 did not apply.
[We consider that this submission is contrary to the wording of section 94(2)(a) in that the amounts were, in our view, paid “by way of service charges”.
We also consider that it cannot have been the intention of parliament to allow a party that has been paid money by way of service charges to retain that money if a tribunal decides it was not payable.]
(iii) That the tenants who had made the “overpayments” would be able to reclaim them from the payee.
[We consider that such a system would be unworkable in practice especially since a number of the tenants will have changed since 1 October 2004.
This submission also fails to take into account the likelihood that previous tenants who have assigned their tenancies will have made arrangements in the transfer deeds in respect of service charges.
We consider that such a system is likely to result in the payee benefiting from an unjustified “windfall” that would be better applied to the credit of the RTM’ s service charge account for the premises.
Although it does not apply in this case, one can easily imagine devices by which managers who were in similar positions to the respondent could reduce assets to avoid payment to a RTM.
Further, such a system would be likely, in our view, to lead to unnecessary duplication of proceedings in the tribunals and the courts, with the concomitant extra costs, possibility of conflicting decisions and inevitable delay.
In addition, this submission contradicts the respondent’s (successful) submission on other issues to the effect that services provided to tenants who do not pay their service charges are nevertheless the deductible under the last part of section 94(2).]
[9] The LVT then went on to consider the decision of another LVT in BCL (RTM) Co Ltd v Barrington Court Developments Ltd LON/00AP/LIS/2006/0091 unreported 22 November 2006, in which a contrary view was taken. Several paragraphs of the BCL decision were quoted, of which the following seem most helpful:
50. Mr Joss’s essential argument was as follows…:
“it is submitted that amounts paid as a service charge which is subsequently found not to be recoverable should be treated in exactly the same way as any other amounts of advance or interim service charge paid to a landlord which is subsequently found to have been overpaid and really payable to lessees ie under the annual accounting provisions in a lease….”.
51. Persuasive though this argument appeared, the Tribunal prefers Mr Gallaher’s opposing position…
“if it is correct (as the Applicants contend) that any overpayments (resultant upon the Tribunal disallowing sums that have been charged and paid) are recoverable by the lessees [or former lessees who made the overpayment] that is a compelling reason why the sums should not be paid over to the RTM Company on what basis does the RTM company operate as a trustee or collection agent for the current and former leaseholders? Similarly, if the payments were (when paid and prior to being declared not properly due and payable) not in fact recoverable, that does not convert the payments into “uncommitted service charges”, rather it would convert these sums from being service charges at all.
If there have been overpayments then, subject to equitable defences, the remedy is for the overpaying party to seek restitution (in the Civil Courts), not for the RTM company by an ingenious, though it is submitted, wrong argument to stake a claim to the overpayments. Rightly or wrongly, Parliament has not given the LVT jurisdiction to entertain restitutionary claims. To use section 94 as the basis to garner such jurisdiction by a side wind (at best) cannot reflect Of Parliament’s intention.
It is of note that the tribunal in Barrington gave no reasons for its preference and describes the contrary view as persuasive.
On the other hand, we have given reasons for our view and we regard the contrary view as wrong in law and unworkable in practice.
[10] The LVT dealt with the issue of interest in [20] of its decision. It said:
The Respondent submits that this Tribunal has no jurisdiction to award interest. However, we consider that Section 94(2)(b) should be construed to allow the award of interest in the circumstances of this case.
[11] The LVT considered that the fairest solution was to award interest at 4% pa compound from 1 October 2004 until payment.
Submissions
[12] Mr Adrian Carr’s primary submission on behalf of OM was that the obligation of a manager such as OM, a “party to… a lease otherwise than as landlord or tenant” was clearly defined in section 94(1) and (2). The obligation was to make to the RTM “a payment equal to the amount of any accrued uncommitted service charges held by him on the acquisition date”. He emphasised the words “held by him”. Those words were plain. The intention of the section was easily understandable and the sum in question was readily calculable. Section 94(2) defined “accrued uncommitted service charges” as any sums “which have been paid by way of service charges” and any investments that represent such sums “and any income which has accrued on them”. Each element is easily ascertained because it refers to what the party actually holds as a result of having been paid money by way of service charges. Parliament intended a simple transaction whereby the old manager or |page:100| landlord hands over to the new RTM all the money actually held by way of service charges paid. Mr Carr submitted that the only objects a RTM company may legitimately pursue are the acquisition of the right to manage the premises and the exercise of that right. The RTM company has no standing to pursue an ex-manager for payment of a sum disallowed as a service charge following an application under section 27A by certain tenants. It is impossible to spell out of the section an intention by parliament to give the RTM company the right to step into the shoes of the tenants and recover such sums. The reasons given by the LVT do not stand up to examination.
[13] The LVT has no power to award interest as such. If in fact interest has been earned on service charges held by the party, it is payable by virtue of section 94(2)(b) as “any income which has accrued” on those charges, but it is impossible to spell out of that provision a parliamentary intention to give the LVT the power to award interest on accrued uncommitted service charges, even where it is not actually income that has accrued. Furthermore, said Mr Carr, the LVT has no inherent jurisdiction to award interest. Even in the higher courts the award of interest is subject to statute: see section 69 of the County Court Act 1984 and section 35A of the Senior Courts Act 1981.
[14] Mr John Hawksley argued on behalf of the RTM company that the intention of section 94 was to pass guardianship of the funds that the management company had received from tenants in excess of those tenants’ share of allowable costs, and which were therefore unavailable for the future management of the building, to the RTM company. He said that the dispute was as to the amount of such payments that were actually required to meet costs incurred before the acquisition date in connection with matters for which the service charge was payable. He criticised the finding of the LVT that OM was entitled to deduct 100% of those costs notwithstanding that not all the tenants had paid their share of such costs. He argued that costs can be deducted from the service charge only to the extent that tenants had paid service charges for their share of such costs. This point arises out of sums that tenants had not paid but that the RTM none the less collected from those tenants in the mistaken belief that it was acting as the agent of OM. Mr Hawksley said:
In the course of these proceedings OM stated that they have not appointed the RTM company as their agent. The RTM company has no right to collect this amount other than as the agent of OM. Accordingly the RTM company cannot agree to these costs being deducted from the AUCS and requires the full amount of the AUCS to be paid so that it can pay the arrears back to the tenants. Obviously this would not be necessary if OM did appoint the RTM company as its agent.
[15] If OM wants to recover a cost or proportion of a cost for which it has not received a service charge payment, it must itself collect it from the tenants in question and not help itself from the service charge payment of other tenants. The right to collect service charges for costs incurred before the acquisition date is not transferred to the RTM company: see section 97(5).
Law
[16] Section 94 provides:
(1) Where the right to manage premises is to be acquired by a RTM company, a person who is
(a) the landlord under a lease of the whole or any part of the premises,
(b) party to such a lease otherwise than as landlord or tenant, or
(c) …
must make to the company a payment equal to the amount of any accrued uncommitted service charges held by him on the acquisition date
(2) The amount of any accrued uncommitted service charges is the aggregate of
(a) any sums which have been paid to the person by way of service charges in respect of the premises, and
(b) any investments which represents such sums (and any income which has accrued on them),
less so much (if any) of that amount as is required to meet the costs incurred before the acquisition date in connection with the matters for which the service charges were payable.
(3) He or the RTM company may make an application to a leasehold valuation tribunal to determine the amount of any payment which falls to be made under this section.
(4) The duty imposed by this section must be complied with on the acquisition date or as soon after that date as is reasonably practicable.
[17] Section 96 provides for the transfer of management functions under leases to the RTM. The RTM steps into the shoes of the landlord or the manager in respect of management functions. Management functions are functions with respect to services, repairs, maintenance, improvements, insurance and management but do not include certain functions, for example functions relating to re-entry or forfeiture, specified under section 96(6). Section 97 makes various supplementary provisions. Subsections (4) and (5) provide that:
(4) So far as any function of a tenant under a lease of the whole or any part of the premises
(a) relates to the exercise of any function under the lease which is a function of the RTM company by virtue of section 96, and
(b) is exercisable in relation to a person who is landlord under the lease or party to the lease otherwise than as landlord or tenant,
it is instead exercisable in relation to the RTM company.
(5) But subsection (4) does not require or permit the payment to the RTM company of so much of any service charges payable by a tenant under a lease of the whole or any part of the premises as is required to meet costs incurred before the right to manage was acquired by the RTM company in connection with matters for which the service charges are payable.
[18] Section 42(2) of the Landlord and Tenant Act 1987 says:
Any sums paid to the payee by the contributing tenants by way of relevant service charges, and any investments representing those sums, shall (together with any income accruing thereon) be held by the payee either as a single fund or, if he thinks fit, in two or more separate funds.
[19] Subsection (3) requires the payee to hold any trust fund on trust to defray costs incurred in connection with the matters for which the service charges were payable and then on trust for the contributing tenants.
Conclusion
[20] In my judgment, the sum of £121,742.39 is not an amount of accrued uncommitted service charge held by OM on the acquisition date.
[21] The intention of the section is that the relevant person is obliged to hand over to the RTM company whatever he holds on the acquisition date, meaning whatever is either in one or more bank accounts set up by that person or in any investment that represents such sums, as contemplated by section 94(2)(b).
[22] The purpose of the legislation seems to me to be strictly limited. Its words suggest an intention to achieve the transfer to the RTM of those assets and powers that need to be transferred to the RTM for it to be an effective management company from the date of acquisition, leaving alone existing rights and relationships before the date of acquisition. I cannot spell out from the words of the Act an intention to make substantial changes to the rights and powers of an RTM management company in respect of tenants, as compared with the rights and powers of any other landlord or management company in respect of tenants. Hence, section 97(5) makes it plain that the payment of service charges to the RTM in respect of costs incurred before the date of acquisition is neither required nor permitted by subsection (4). If the Act had intended to provide remedies where none had existed before it could and should have said so. However, I am sure that was not its intention.
[23] The words of section 94(1) are deliberately limited. The payment of accrued uncommitted service charges is confined to those accrued uncommitted service charges “held by” the landlord or manager on the acquisition date. The natural meaning of those words is that what has to be paid is what the landlord or manager has actually got; not what it was entitled to have but failed to get or had at one stage but does not have now. Quite how broadly “held by him” should be interpreted in any particular case will depend on the facts of that case. In dealing with an argument that appears to have troubled the LVT, |page:101| I would have little hesitation in deciding that such charges were “held by him” within the section in a case where a manager had for his own reasons, dishonest or not, decided to put the service charges in cash in a box under his bed. That will be a matter for the LVT to determine under section 94(3). Nor am I concerned that, as the LVT said, “one can easily imagine devices by which managers who were in similar positions to the respondent could reduce assets to avoid payment to a RTM”. Managers could lawfully and properly reduce the payment by making sure they used the accrued service charges to ensure that they had paid their suppliers what they owed them by the acquisition date. There would be nothing wrong with that. Apart from that, it is difficult to see how managers could lawfully and honestly, bearing in mind their position as trustees, reduce the payment. Indeed, it is difficult to see why a rational and honest manager would want to do so.
[24] The sums must have been paid “by way of service charges”. Those emphasised words, to my mind, are there to make it plain that there is to be no argument so far as the payment is concerned about whether the charges are in fact justifiable and reasonable service charges; if they were paid “by way of service charges” they are service charges for the purpose of section 94.
[25] They also have to be uncommitted service charges, so if they have been paid or committed to a particular management debt or function they do not fall within section 94.
[26] Such a simple and limited objective, which does not seek to introduce new procedures or rights, seems to me to be eminently workable.
[27] I do not find Mr Hawksley’s arguments persuasive, well argued though they were. If a manager is committed to pay a supplier’s bill for services rendered, he is not merely obliged to pay the proportion of the bill that equates to the proportion of service charge that he has actually received, he has to pay the entire bill. If he holds enough money by way of accrued service charge to pay the entire bill, he is entitled to pay the entire bill out of that fund. If he knows that he will have a bill to pay, he is entitled to hold enough to pay it as money representing committed accrued service charge. If there still remains an accrued uncommitted balance held by him at the acquisition date, that is the money that must be paid to the RTM company. If the former management company or landlord does not hold enough money to pay bills incurred before the acquisition date, it or he may sue the tenant for the relevant unpaid service charge. The RTM company may not do so: see section 97(5). Since the payment to the RTM company of service charges in respect of costs incurred before the acquisition date is expressly ruled out by the statute, it is highly unlikely that parliament can have intended that repayment of service charges in respect of costs incurred before the acquisition date should be made to the RTM company.
[28] The relationship of the management company and the tenants and the rights that have arisen between them up to the acquisition date, are preserved. If a tenant succeeds in demonstrating to the county court or the LVT that service charges paid or demanded are unreasonable, he will recover his payment for himself or successfully resist a claim against him for any payment. The Act gives the RTM company no power, still less a right, to take over a tenant’s claim or take over the defence of a claim properly made against a tenant. That does not involve the duplication of proceedings; it keeps things as they are.
[29] Given my conclusion on the first issue, the second issue whether the LVT has the right to award interest becomes somewhat academic. However, in my judgment, it is impossible to spell a power for the LVT to award interest out of the words of section 94(2)(b). On the contrary, the words in that provision “any investments which represent” sums paid by way of service charges “and any income which has accrued on them” make it plain to my mind that parliament intended only interest that has actually accrued on such investments to be transferred to the RTM company. Nor, in the absence of any specific statutory power to do so, does the LVT have an inherent power to award interest.
[30] The appeal of OM therefore succeeds, the appeal of New River Head RTM fails, and the decision of the LVT on the application under section 94(3) must be quashed.
Appellant’s appeal allowed; respondent’s appeal dismissed.
