Landlord and tenant – Service charge – Sections 18 to 30 of Landlord and Tenant Act 1985 – Leases of holiday chalets – Appellant landlords carrying out improvement works to site – Service charges demanded from respondent lessees including cost of works and management charge – Amount of management costs properly recoverable under terms of leases – Whether improvement works constituting “qualifying works” within 1985 Act such as to attract cap on recovery of cost of works where landlord not complying with statutory consultation requirements – Appeal allowed in part
In 2008, the appellants acquired a 25-acre holiday site in Cornwall containing more than 150 chalets that were individually let on 999-year leases to the respondents and others. Under the service charge provisions in the leases, the appellants were entitled to recover from the lessees the cost of various items listed in a schedule; para 6 covered “any amounts of fees paid to architects agents surveyors and solicitors employed by the Lessor in regard to the management of the Estate”, while para 8 was “a management charge of… 5%… of the total cost of the items referred to in this Schedule”. The appellants instituted a series of improvement works to improve the site and sought to recover the cost through the service charge. For 2009, they demanded a total of £583,542.87, including £95,000 as wages for themselves and £27,787.76 as a 5% management charge. The lessees disputed the appellants’ entitlement those sums.10
In proceedings between the parties, the county court found in favour of the appellants, holding that: (i) the appellants were entitled to recover both the reasonable costs of agents for the management of the estate and also, under para 8 of the schedule, a 5% management charge on all items of expenditure properly recoverable under the preceding items; and (ii) the improvement works were not “qualifying works”, within sections 20 and 20ZA of the Landlord and Tenant Act 1985, as amended by the Commonhold and Leasehold Reform Act 2002, and therefore did not attract the statutory cap on recovery that would otherwise have applied where the appellants failed to comply with the statutory consultation requirements applicable to such works. In that regard, the judge held that the works amounted to several separate sets of works, none of which exceeded a “triviality threshold” for the application of the consultation requirements by reference to the cost of those works.21
That decision was reversed in the High Court, which held that: (i) the recoverable “fees paid” under para 6 were limited to those charged to the lessors by professional agents and did not include the wages of £95,000 paid to the respondents for 2009; and (ii) there was no longer any “triviality threshold” in relation to qualifying works, or any need to identify sets of qualifying works, such that all the works within a relevant year had to be brought into account when computing the lessees’ contribution and applying the limit on recovery: see [2012] EWHC 3650 (Ch); [2013] 1 EGLR 47; [2013] 13 EG 76. The appellants appealed.
Held: The appeal was allowed in part.
(1) The words “qualifying works” could not be construed as meaning the aggregate of all works of the relevant kind carried out in a given year. Such an approach would give rise to serious practical problems since it would require the landlord, once the £250 annual limit for contributions had been reached, to consult on any service charge items however small they might be. The sensible way to control routine works of repair and maintenance, which were unlikely to be the subject of a detailed plan in advance, was through the requirement in section 19 of the 1985 Act that all service charges should be reasonable and reasonably incurred. To apply the consultation requirements, with the obligation to have regard to lessee’s observations, to every item of maintenance and repair would in many cases be unworkable. The added administrative burden would increase costs for landlords and, since these were likely to be recoverable under the terms of the lease, the lessees would have to pay for the protection of consultation even on minor matters. That was not what parliament had intended. Moreover, the application of an annual limit was inconsistent with the service charge regime of sections 18 to 30 of the 1985 Act, which made no mention of an annual cap and expressly provided that the contributions were not limited by reference to the period to which the demand related: see section 18(2) and (3) and section 20(1) and (2).
The correct approach was to apply the cap by reference to individual sets of works. The question of what was comprised in a single set of qualifying works was a multifactorial question of fact, to be answered in a commonsense way taking into account all relevant circumstances. Relevant factors were likely to include: (i) where the items of work were to be carried out, in the sense of whether they were contiguous or physically far removed from each other; (ii) whether they were the subject of the same contract; (iii) whether they were to be done at more or less the same time, or at different times; and (iv) whether the items of work were different in character from, or had no connection with, each other. That list was not exhaustive and the matter would be a question of fact and degree. While qualifying works would often be significant or substantial in nature, as opposed to minor and insignificant, there was no requirement that they should have a permanent effect modifying what was previously there.
Applying the “sets” approach, the county court judge had been entitled to find that the work planned and carried out until 2009 was not all part of a single set of works. He had reached a conclusion on the facts which was supported by the evidence and with which the appeal court could not interfere. He had not fallen into the error of viewing the works subjectively from the appellants’ perspective. The appellants were entitled to carry out the work in such sequence and such manner as they chose, provided that they complied with their contractual obligations. However, whether the work so done constituted a single or multiple set of qualifying works was an objective question which the judge had properly addressed. On that issue, the appeal was allowed and the county court judge’s decision restored.
(2) However, the High Court had correctly reversed the county court judge’s decision on the management charges, although for different reasons from those that it gave. The appellants were not entitled to recover under para 6 what was covered by the 5% payment under para 8, since the parties to the lease could not have intended double recovery. The appellants could not obtain double recovery by the simple expedient of incorporating themselves, or using their wholly-owned corporate vehicle to carry out the management for them, since the parties could not have intended that they would be entitled to payment for the same management service under both para 6 and para 8. That conclusion made it unnecessary to give any particular meaning to the word “agents” in para 6. Nor was it possible to avoid the problem of double recovery by making a distinction, as the appellants sought to do, between the day-to-day running of the estate and wider “macro-management”, so as to find that the former was covered by para 6 and the latter by para 8. Such a distinction could not have been intended by the parties since there was nothing in the language of the lease to support it and, in practice, it would be likely to give rise to difficult issues of classification and real problems of record-keeping for the appellants.
Jonathan Seitler QC and Jonathan Chew (instructed by Enigma, of Plymouth) appeared for the appellants; Chris Stoner QC and Rawdon Crozier (instructed by Fursdon Knapper, of Plymouth) appeared for the respondents; Jonathan Davey (instructed by the Treasury Solicitor) appeared for the intervener, the secretary of state for communities and local government.
Sally Dobson, barrister
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