Commonhold and Leasehold Reform Act 2002 – Right to manage (RTM) – Section 94 of Act – Right of respondent RTM company to be paid any accrued uncommitted service charges held by appellant former manager – Whether including sums paid by tenants but subsequently found by leasehold valuation tribunal not to be payable – Whether including sums not yet collected from tenants at acquisition date or expended sums that benefited such tenants – Appellant’s appeal allowed – Respondent’s appeal dismissed
In October 2004, the respondent company acquired the right to manage a block of flats on behalf of the tenants under the Commonhold and Leasehold Reform Act 2002. The appellant was the previous manager of the building. 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, the leasehold valuation tribunal (LVT) found that certain items of service charge that the appellant had collected in the years from 1998 had not been properly payable. The Lands Tribunal disallowed further items on appeal, bringing the total amount of service charge disallowed to £121,742.
The respondent applied, under section 94(3) of the 2002 Act, for a determination of the total amount of accrued uncommitted service charges. It contended that the charges that the tenants had paid, but which had later been disallowed, were accrued uncommitted service charges that the appellant had to pay to it in the sum of £121,742 and that the overpaying tenants would be able to reclaim from it. After making some adjustments, the 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 the payment was made.
On appeal against that decision, the appellant submitted that: (i) an order under section 94 could apply only to money that remained in the service charge trust fund at the acquisition date, since such an order related to accrued uncommitted service charges that were “held by” the landlord or manager as at that date; and (ii) the LVT had no power to award interest. The respondent also appealed, seeking a determination that the appellant was obliged to pay: (i) the amount of any service charges that the appellant had not yet collected from tenants 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 charges.
Held: The appellant’s appeal was allowed; the respondent’s appeal was dismissed.
(1) The wording of section 94(1) was deliberately limited to those accrued uncommitted service charges “held by” the landlord or manager as at the acquisition date. The intention of the section was that the relevant party was obliged to give to the RTM company whatever it held on that date, that is, the contents of any bank accounts or any investment that represented such sums. On the natural meaning of section 94(1), what had to be paid was what the landlord or manager had received, not what it was entitled to receive but had failed to obtain or what it had previously but no longer had. Moreover, it was necessary for the sums to have been paid “by way of service charges” and, so long as they had been so paid, there could be no argument as to whether they were justifiable and reasonable. Further, they had to be uncommitted service charges; if they had been paid or committed to a particular management debt or function, they would not fall within section 94. The purpose of the legislation was strictly limited to transferring to the RTM company those assets that needed to be transferred in order for it to be an effective company from the date of acquisition, but ignoring rights and relationships that had existed before the date of acquisition. The relationship of the former manager and the tenants was preserved, as were the rights that had arisen between them up to the acquisition date. If a tenant could demonstrate to the court that the service charges paid or demanded were unreasonable, he could recover his payment or successfully resist a claim against him for payment. The Act did 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 charges held by the appellant on the acquisition date, and the appellant’s appeal succeeded.
(2) The respondent’s appeal failed. If a manager was committed to paying a supplier’s bill for services rendered, it was obliged to pay the entire bill; its obligation was not limited to a proportion that equated to the proportion of service charges that it had received. If it held sufficient money by way of accrued service charges to pay the entire bill, it could pay it out of that fund, and if it knew that it would have to pay such a bill, it was entitled to hold onto the necessary sum. Only the accrued uncommitted balance held by the manager at the acquisition date that had to be paid to the RTM company. If a former manager did not hold sufficient funds to pay bills incurred before the acquisition date it could sue the tenant for the relevant unpaid service charges; the RTM company could not do so by reason of section 97(5). Correspondingly, the legislation ruled out any payment, or repayment of service charges to the RTM company in respect of costs incurred before the acquisition date.
(3) The LVT had no power to award interest on the amount of accrued uncommitted service charges. It was impossible to spell out such a power from section 94(2)(b), which, in requiring the landlord or manager to hand over any income that had accrued on investments that represented sums paid by way of service charges, emphasised that only interest that had accrued on such investments should be paid to the RTM company. The LVT had no inherent power to award in the absence of a specific statutory power.
Adrian Carr (instructed by Peverel OM, of Luton) appeared for the appellant; John Hawkesley appeared for the respondent.
Sally Dobson, barrister
