Landlord and tenant – Service charge – Management fees – Insurance costs – Appellants holding long leases of flats in building owned by first respondent – Challenge by appellants to service charge liability – Dispute over management fee charged by second respondent as manager appointed by leasehold valuation tribunal under section 24 of Landlord and Tenant Act 1987 – Whether appellants entitled to argue for reduction from management fee specified by tribunal on ground that management services performed inadequately – Correct approach to calculation of insurance costs recoverable under terms of leases – Appeal allowed
The appellants were the long leaseholders of three flats on the upper floors of a building in London NW3, which also contained a ground-floor commercial unit occupied by a dry-cleaning business. The terms of the leases required the first respondent landlord to insure against various risks and reserved a fair proportion of the insurance costs by way of further rent. The landlord also covenanted to “do or cause to be done all such works installations acts matters and things as in the absolute discretion of the Lessor may be necessary or advisable for the proper maintenance safety and administration or the building”.
In 2011, the second respondent was appointed as manager of the building on an application to the leasehold valuation tribunal (LVT) under section 24 of the Landlord and Tenant Act 1987. The LVT’s order provided for the payment to the second respondent of a basic management fee of £1,750 plus VAT “for performing the duties set out in paragraph 2.5 of the [RICS] Code”.
Disputes arose between the appellants and the respondents regarding the service charges for 2012 and 2013, in particular for management fees and insurance costs. The appellants applied to the first-tier tribunal (FTT), as successor to the LVT, for a determination under section 27A of the Landlord and Tenant Act 1985 of the service charge for those years.
In relation to management fees, the appellants alleged serious failings in the second respondent’s conduct as manager and contended that the full amount of her management fee should not be recoverable; they also disputed her entitlement to charge £300 in respect of the costs of preparing consultation notices, under section 20 of the 1985 Act, in respect of proposed works. In relation to insurance, they submitted that: (i) they should not be liable for any part of the cost relating to risks connected to the commercial premises or for a sum charged as a premium in respect of property owner’s liability cover; (ii) it had been unreasonable for the second respondent to take out additional cover against terrorism with an “excess” of £5,000; and (iii) they were entitled to a credit for a commission of £184.90 allegedly received by the second respondent in respect of the 2013 insurance.
The FTT found in favour of the respondents on those issues and appellants appealed. The respondents took no part in the appeal since, by then, the first respondent had by then sold the freehold and the second respondent was no longer acting as manager.
Held: The appeal was allowed.
(1) Section 19 of the 1985 Act was relevant to the calculation of what was properly payable by way of service charge. While the appellants could not argue that the management fee of £1,750 plus VAT was unreasonably high, since the LVT’s order had specified the appropriate remuneration for the manager’s services, they were entitled to argue that a reduction should be made on the ground that the services were not in fact provided, or not properly provided. It was necessary for the FTT to consider, having regard to the terms of section 19, whether the management fee had been provided to a reasonable standard but it had failed to do so. Where leaseholders made serious criticisms to the FTT about the conduct of a manager which it or the LVT had appointed, then the leaseholders could expect the FTT to examine those allegations with care. The criticisms were being made against the manager as an officer of the FTT: Maunder Taylor v Blaquiere [2002] EWCA Civ 1633; [2003] 1 EGLR 52; [2003] 1 WLR 379 applied. The FTT in the instant case had failed to give proper and adequate reasons for rejecting the appellants’ criticisms. The FTT’s decision did not deal with the substantial points which had been raised or make clear why the appellants’ arguments were rejected. While the amounts of money at stake were small, a serious issue had been raised by way of complaints against a tribunal-appointed manager and those complaints required proper consideration and a reasoned decision. The FTT’s decision could not stand and the matter would be remitted to it for reconsideration, on evidence, at a further hearing.
(2) The second respondent was not entitled to the £300 charge for the preparation of section 20 notices. The terms of para 2.5 of the RICS Code, coupled with the terms of the second respondent’s appointment, made it clear that she was not entitled to charge for that work. The fee specified in the terms of appointment was in respect of preforming the duties set out in para 2.5 of the Code, which included preparing statutory notices and dealing with consultations where qualifying works or qualifying long term agreements were proposed. The preparation of the section 20 consultation notices was therefore covered by the basic fee and the second respondent was not entitled to charge a further £300 for it.
(3) Regarding the appellant’s liability for insurance costs, the building was in mixed use and, while insurance on a similar building in wholly residential use might be cheaper, the leaseholders of flats in a mixed-use building were not entitled to demand that they pay an insurance premium calculated as if the building were something that it was not. The appellants therefore could not complain that the premium to which they were required to contribute was appropriate to a mixed-use building. They could not claim that the entirety of the loading for a commercial use should be attributed solely to the commercial unit, leaving the appellants to pay a premium as if the entire building had been residential. It was nonetheless necessary to ascertain what “fair proportion” of the insurance premium should be payable by the appellants. The expenditure incurred on the insurance premium in relation to the residential part of the building should be calculated as two-thirds (on the basis of floor area) of the insurance premium payable on the assumption that the ground-floor unit was occupied by a normal risk commercial occupier. They should not be required to pay to the extent that the insurance premium contained any addition representing a high-risk use by the actual occupier.
(4) As to the property owner’s liability cover, the landlord’s obligation to insure under the terms of the lease should be read together with the reservation of insurance costs as further rent. The wording of both provisions was concerned with the insurance of the building against various risks and this did not include placing an insurance in respect of personal liability as an occupier or owner of the building. However, the lease terms also conferred on the landlord a wide discretion to do other acts matters and things as in its absolute discretion might be necessary or advisable for the proper maintenance, safety and administration of the building. A decision to extend the insurance cover on the building so as to include property owner’s liability fell within that power. The part of the insurance premium which as properly attributable to property owner’s liability was therefore reasonably incurred and would form part of the costs on which the service charge should be calculated provided that the property owner’s liability extended to cover the appellants as well as the respondents, a matter on which no finding could be made on the information before the Upper Tribunal. The matter would have to be decided by the FTT at the further hearing.
(5) It was not unreasonable to take out a separate policy to cover the risk of terrorism and the overall premium was not unreasonably high. While £5,000 was a large excess, it was not so large as to justify the conclusion that expenditure on the terrorism policy was not reasonably incurred. Placing the separate terrorism insurance was an act which fell within the insurance provisions in the lease and involved the payment of a premium which could properly be charged to the appellants through the service charge.
(6) Assuming that the second respondent had received a commission in respect of the 2013 insurance, the onus was not on the appellant to prove that she was liable to account for the commission but on the second respondent to prove that she was not so liable. Where there was no evidence from the second respondent justifying the retention of the commission, the proper finding was that the commission sum of £184.90 did not form part of the insurance premium properly chargeable to the appellants.
The first and second appellants appeared in person for the appellants; the respondents did not appear and were not represented.
Sally Dobson, barrister
Click here for the transcript: Sadeh and others v Mirhan and Azzniv (Charitable Trust) and another
