23 June, 2016
by Amanda Gourlay
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Willow Court Management Company (1985) Ltd v Mrs Ratna Alexander [2016] UKUT (LC)

A double first: no, not the mark I was awarded in my degree, but the contents of this post.

The first first – and the good news – is that we now have a decision from the Upper Tribunal on rule 13 costs.

The bad news is that it is 38 pages long, which brings me to my second first – my first guest post on this blog, written by my colleague, Mark Loveday, who also sits as a First-tier Tribunal (Property Chamber) judge.

This is his commentary – it is considerably shorter than the decision and identifies the key points you need to know.

The long-awaited Rule 13 costs decision

As expected, Willow Court puts a firm brake on applications for costs for “unreasonable conduct” by one of the parties. Such applications have been widely perceived to be on the increase in recent months and years – especially in service charge cases.

The basic costs rule appears in Rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013. It states that “the Tribunal may make an order in respect of costs only … if a person has acted unreasonably in bringing, defending or conducting proceedings…” There is no limit on the level of costs that may be awarded under Rule 13 – unlike the £500 cap on costs under the old LVT rules.

The Upper Tribunal listed three appeals specifically to give general guidance on how Rule 13 should be applied – and to show they were serious Chamber Deputy President Martin Rodger QC sat with the President of the First-tier Tribunal Siobhan McGrath. The decision runs to 145 paragraphs, but below are the ‘juicy’ bits.

Procedure

The Tribunal started with a general discouragement of Rule 13 applications at para 26:

We … consider that tribunals ought not to be over-zealous in detecting unreasonable conduct after the event and should not lose sight of their own powers and responsibilities in the preparatory stages of proceedings. As the three appeals illustrate, these cases are often fraught and emotional; typically those who find themselves before the FTT are inexperienced in formal dispute resolution; professional assistance is often available only at disproportionate expense. It is the responsibility of tribunals to ensure that proceedings are dealt with fairly and justly, which requires that they be dealt with in ways proportionate to the importance of the case (which will critically include the sums involved) and the resources of the parties. … Tribunals should therefore use their case management powers actively to encourage preparedness and cooperation, and to discourage obstruction, pettiness and gamesmanship.”

Again, at para 43 its stated:

“…such applications should not be regarded as routine, should not be abused to discourage access to the tribunal, and should not be allowed to become major disputes in their own right.”

It then went on to set out a three stage test for Rule 13 costs orders.

First stage: unreasonable conduct

The first stage is “whether a person has acted unreasonably”. This was described in para 28 as follows:

If there is no reasonable explanation for the conduct complained of, the behaviour will properly be adjudged to be unreasonable, and the threshold for the making of an order will have been crossed.”

This is a pretty high threshold.  

Second stage: discretion

Unlike the first stage, the second involves a discretion on the part of the Tribunal. Again, this was dealt with at para 28:

At that second stage it is essential for the tribunal to consider whether, in the light of the unreasonable conduct it has found to have been demonstrated, it ought to make an order for costs or not

At this stage:

“the nature, seriousness and effect of the unreasonable conduct will be an important part of the material to be taken into account”: see para 30.

Third stage: the order

Even if stages 1 and 2 are made out, this does not mean there will automatically be an order for costs on the standard basis against one of the parties. At para 29, the Upper Tribunal stated:

The only general rules are found in section 29(2)-(3) of the 2007 Act, namely that “the relevant tribunal shall have full power to determine by whom and to what extent the costs are to be paid”, subject to the tribunal’s procedural rules. Pre-eminent amongst those rules, of course, is the overriding objective in rule 3, which is to enable the tribunal to deal with cases fairly and justly. This includes dealing with the case “in ways which are proportionate to the importance of the case, the complexity of the issues, the anticipated costs and the resources of the parties and of the Tribunal.” but other circumstances will clearly also be relevant...”

When considering the order to make, there is no need to show that the unreasonable conduct caused any identifiable loss on the part of the innocent party: see paras 40-41. The order need not be confined to the costs: “attributable to the unreasonable conduct”.

Procedural guidance

The Tribunal ended with some guidance about procedure at para 43:

“…[Applications] should be determined summarily, preferably without the need for a further hearing, and after the parties have had the opportunity to make submissions. We consider that submissions are likely to be better framed in the light of the tribunal’s decision, rather than in anticipation of it, and applications made at interim stages or before the decision is available should not be encouraged. The applicant for an order should be required to identify clearly and specifically the conduct relied on as unreasonable, and if the tribunal considers that there is a case to answer (but not otherwise) the respondent should be given the opportunity to respond to the criticisms made and to offer any explanation or mitigation.”

Tribunal decisions should be short and sweet:

“A decision to dismiss such an application can be explained briefly. A decision to award costs need not be lengthy and the underlying dispute can be taken as read. The decision should identify the conduct which the tribunal has found to be unreasonable, list the factors which have been taken into account in deciding that it is appropriate to make an order, and record the factors taken into account in deciding the form of the order and the sum to be paid.”

Litigants in person

One possibly controversial conclusion (at least for lawyers) is that the Tribunal should be prepared to apply different standards to litigants in person when compared to parties advised by lawyers. At para 32, it stated that at the first stage:

The behaviour of an unrepresented party with no legal knowledge should be judged by the standards of a reasonable person who does not have legal advice. The crucial question is always whether, in all the circumstances of the case, the party has acted unreasonably in the conduct of the proceedings.”

The fact someone is not legally represented is also relevant (to a lesser extent) at the second and third stages:

When exercising the discretion conferred by rule 13(1)(b) the tribunal should have regard to all of the relevant facts known to it, including any mitigating circumstances, but without either “excessive indulgence” or allowing the absence of representation to become an excuse for unreasonable conduct.”

Conclusions

Bear in mind Rule 13 applies in England in all the jurisdictions of the Property Chamber of the F-tT. It can be used in enfranchisement cases as well as service charge cases. We now have comprehensive guidance on Rule 13 costs, and it’s likely far fewer such applications will now be made.

Click here for a printer-friendly version of this post.

The decision is not yet up on the Upper Tribunal website. Please email Mark at markloveday@tanfieldchambers.co.uk, or me law@lawandlease.co.uk if you would like a copy.

20 June, 2016
by Amanda Gourlay
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Mrs Vairaven Valliammai v Mrs Denise Jorgensen & others [2016] UKUT 0218 (LC)

Headleases and subleases cause all sorts of timing issues in service charges.

This appeal throws out two points.

The straightforward element relates to the eighteen month rule under section 20B of the Landlord and Tenant Act 1985. In this case, some of a head landlord’s demands for service charges were not passed on by the tenant to the subtenants until more than eighteen months after the costs were incurred.

The second element requires skills not dissimilar to ambidexterity. In it, Judge Elizabeth Cooke considers the nature of advance service charge demands paid by a lessee and then passed on to sub-lessees.

The action takes place in Folkestone, at 19/21 Rendezvous Street. I wonder whether, after the EU referendum on 23 June, it may have to be renamed “Appointment Street” if the Leavers succeed in persuading the country to turn its back on the EU.

Rendezvous Street v Appointment Street. I would go for the former: I do enjoy a good Gallic ring to a place name.

The freehold of 19/21 Rendezvous Street was held by a Mr Godden.

Mrs Vairaven, the appellant in this appeal, was long lessee of part of the building. Mr Godden was her landlord. I will describe her as the “landlord”, and Mr Godden as the “freeholder”.

Mrs Vairaven sublet the flats in her part of the building on long leases to sub-lessees.

The head lease

Under the terms of the lease between Mr Godden and Mrs Vairaven, Mr Godden was obliged to maintain the exterior of the building. In exchange, Mrs Vairaven covenanted to pay 75% of that cost.

The machinery for payment of that cost provided that Mrs Vairaven should make an on-account payment on 01 January every year.

If there was any money left over at the end of the year, the lease provided that the surplus should be credited to Mrs Vairaven’s account.

The sub-leases

Mrs Vairaven’s covenants

Rather oddly, given Mr Godden’s covenant to maintain the exterior of the property, Mrs Vairaven covenanted with the sub-lessees:

  • That she too would repair, maintain and renew the structure and exterior of the building.
  • That she would repair, maintain and renew the common parts;
  • That she would “pay the rent and service charge and insurance premium and other rents reserved by the Head Lease…”;
  • That she would “use [her] best endeavours to ensure that the Head Landlord keeps the Building maintained renewed repaired and decorated in accordance with his covenants in the Head Lease”.

The sub-lessees’ covenants

The sub-lessees covenanted to pay a service charge.

Each sub-lease set out the percentage payable by each sub-lessee, but unfortunately did not actually define “service charge”.

There does not appear to have been any mechanism in the sub-leases by which the service charge was to be paid either. Not the clearest lease in Kent perhaps, but these things happen.

In any event, the sub-lessees did not dispute their liability to pay a service charge for in respect of costs incurred:

  • By Mrs Vairaven on the interior of the property, or
  • By Mr Godden, the freeholder, on the exterior.

Mr Godden’s demands of Mrs Vairaven

Mr Godden, the freeholder, made four interim demands of Mrs Vairaven:

  • £5,840.00 for the year ending 31 March 2008;
  • £6,215.63 for the year ending 31 March 2009;
  • £6,480.00 for the year ending 31 March 2010, and
  • £6,716.25 for the year ending 31 March 2011.

The demands related to insurance, a management fee, and repairs.

Mrs Vairaven refused to pay the demands because she did not consider that the sums claimed were all due to Mr Godden.

Despite that, Mr Godden took no action to recover the amounts claimed in the 2008 demand.

In July 2009 however, the LVT determined that the 2009 demand was payable in full.

In January 2012, the LVT determined, with Mr Godden’s and Mrs Vairaven’s agent’s agreement, that the total amount payable for the 2010 and 2011 demands together was £12,463.19.

Mrs Vairaven finally paid the interim demands on 01 August 2013, after Mr Godden had begun possession proceedings against her.

Mrs Vairaven’s demands of the sub-lessees

A week after paying Mr Godden, Mrs Vairaven sent a service charge demand to the sub-lessees, requiring payment of the sub-lessees’ respective proportions of the costs that she had had to pay to Mr Godden.

The sub-lessees declined to pay.

Mrs Vairaven issued a county court claim.

The county court transferred the question of the amount of service charge payable by the sub-lessees to the FTT.

The FTT’s decision

Before the FTT, relying on section 19 of the Landlord and Tenant Act 1985, the sub-lessees argued that the works and services provided to them had not been reasonably incurred or carried out to a reasonable standard.

The FTT decided however that the sub-lessees were not liable to pay the service charge demands made of them by Mrs Vairavan because the demands were for payments on account, and the sub-leases did not allow Mrs Vairavan to make on-account demands.

In the alternative, the FTT determined that if the service charge demands were not for payments on account, but were actually end of year charges, the demands for first two years were irrecoverable by reason of section 20B of the Landlord and Tenant Act 1985.

Neither of the above required the FTT to consider the sub-lessees’ section 19 issues.

The appeal

None of the parties were legally represented at the appeal.

Mrs Vairavan was represented by her husband, Mr Vairavan.

Four of the sub-lessees attended: Mrs Jorgensen, Mr Blackett, Mr Smith and Mr Samuels. 

Payments on account or balancing charges?

The parties – and Judge Cooke – agreed that the sub-leases contained no provision for service charge payments on account with a balancing charge at the end of the year, as there was in the head lease.

It was however unclear as to why the FTT decided that the service charge demands were for payments on account:

  • The demands made no reference to payment on account;
  • They were headed “Service Charge Demand”;
  • The County Court statements of case referred to “service charges”;
  • The applicant’s Statement of Case in the FTT refers to service charges, and
  • There was no mention of payments on account.

Speculating, Judge Cooke wondered whether, in discussion with the FTT, Mr Vairavan had referred to the payments as payments on account.

It was understandable if he had done, because the money paid by Mrs Vairaven to Mr Godden was a payment on account.

The money sought from the sub-lessees was however a reimbursement of that payment.

As between Mrs Vairaven and the sub-lessees, the payments could not therefore be described as advance, or on-account, payments. Her demands for payment from the sub-lessees were demands for reimbursement of the sums that she had actually paid to Mr Godden.

They were not advance payments representing what she might have to pay.

Years ending 2008 and 2009

Mrs Vairaven did not appeal the FTT’s decision for the years ending 2008 and 2009.

That did not surprise Judge Cooke, given her decision the sub-lessees’ service charge demands were end of year demands and not on-account demands. The demands had been made too late: section 20B of the Landlord and Tenant Act 1985 was engaged.

Years ending 2010 and 2011

The demands for the years ending 2010 and 2011 were not however caught by the eighteen month rule in section 20B.

Judge Cooke therefore allowed the appeal on those two years, and informed the parties of her decision orally at the end of the hearing.

Back to the FTT

Her decision meant that the sub-lessees’ arguments on reasonableness under section 19 of the Landlord and Tenant Act 1985 needed to be properly considered.

She accordingly sent back to the FTT for a determination of the amount payable for the service charge years ending 2010 and 2011.

“Unfortunately,” she observed, “that means that there is still no finality and that there may have to be a further hearing; however, I have also pointed out to the parties that the FTT operates a free mediation service, and I have recommended … that they engage in mediation in order to bring matters to the conclusion that all parties need”.

It must be said that the appeal put the parties into a rather messy situation requiring them to adopt the attributes of a Janus because, as Judge Cooke noted, at any hearing, the FTT would have “to apply section 19 to a sum which is final as far as the sub-tenants are concerned, but was only a payment on account so far as the Appellant is concerned”.

The test for the reasonableness of incurred costs being wider than the equivalent test for costs paid on account, it followed that the sub-lessees had more extensive grounds for challenging the service charges demanded by Mrs Vairaven than Mrs Vairaven had of challenging the charges demanded by Mr Godden.

“If [the sub-lessees] succeed it may be possible for [Mrs Vairaven] then to rely on the FTT’s finding in any future proceedings against the freeholder”, she added.

“These are difficulties that would not have arisen if the [sub-lessees] had been joined as parties to the LVT proceedings between [Mrs Vairaven] and [Mr Godden]; likewise in the current proceedings it would have been helpful for the FTT to consider at an early stage when directions were being given whether [Mr Godden] should have been joined”.

Further submissions

There was a short delay between Judge Cooke informing the parties of her decision at the hearing, and the preparation of the written reasons for it. In that delay, Mr Vairaven addressed further submissions to her. The sub-lessees objected.

Judge Cooke dealt with the argument shortly: “I have not taken any of this correspondence into account in writing my reasons; it is not open to Mr Vairavan to seek to re-open the decision I made on 19 April in this way”.

Observations

Payments on account: the reasonableness test

Section 19 of the Landlord and Tenant Act 1985 sets out two distinct tests.

The first applies where the cost of works or services have been incurred. The second applies where the costs have not been incurred and an on-account service charge demand has been made.

When making an application under section 27A of the Landlord and Tenant Act 1985, it is important to know which of the two tests is the relevant one.

The test for on-account payments is the narrower of the two: the FTT is only interested in whether the amount demanded is reasonable.

It is only when costs have been incurred that the wider, “reasonably incurred” and “reasonable in standard” tests come into play.

It does happen that a section 27A application is made to the FTT in connection with an on-account demand, but by the time the application is actually heard, the costs have been incurred and final, balancing charges have been issued.

In that event, the parties need to be clear as to the relevant test.

Where there are challenges to the quality of works and services, everyone will need to be equipped with evidence in relation to the questions raised. That evidence will in all likelihood be more wide-ranging and detailed than the evidence needed to challenge on-account payment demands.

Extra submissions

I know that I am not the only one to whom the irrefutable, case-winning point has come in the dead of night, several days after the conclusion of a hearing. I know this from conversations with colleagues, other members of the Bar, litigants in person – in fact from just about everyone I speak to about the challenges of oral advocacy.

If the tribunal has not given its decision, I think that it is acceptable to send a short note to the tribunal – and the other side – setting out the position. If the parties have overlooked an important point of law that goes, for example, to the tribunal’s jurisdiction, it seems to me that some liaison with the other side is required to ensure that the tribunal is alerted to the issue.

If however the decision has been given, there is no way back, unless the advocate in question has made a submission that needs to be corrected because it was wrong, and it would be to mislead the tribunal to allow it to stand.

Mediation

“En vogue”, “de rigueur”, “le dernier cri” – alternative dispute resolution (ADR) is very much the thing nowadays. Mediation is the form of ADR with which most are familiar, and there can be a real benefit to be derived from it:

  • It allows the parties to take control of their dispute and its resolution;
  • It allows settlement on terms that the FTT cannot order. Indeed, the settlement does not need to have anything to do with the actual matter before the FTT. The dispute may appear to be about money, but may in fact be about communication or engagement;
  • It tends, if done reasonably early, to save the parties money. The FTT’s free mediation service is a real bonus here. LEASE, the Leasehold Advisory Service, is planning, I believe, to provide a mediation service, but for a charge.

In the private sector, The Property Mediators – unsurprisingly – mediate property disputes across a wide range of specialisms, including service charges.

They are planning a “Mediation Awareness Week” in the autumn: it should be an invaluable opportunity to ask all the questions you always wanted, but never dared, to ask about mediation.

Watch this space.

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Click here to read the decision in full on the Upper Tribunal website.

8 June, 2016
by Amanda Gourlay
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Syed Balkhi v Southern Land Securities Ltd [2016] UKUT 0239 (LC)

Rather like the gyrfalcon to Great Britain, reserve fund disputes are not regular visitors to the Upper Tribunal.

This case is one of those rare visitors.

The gyrfalcon? Thank you Springwatch.

18 Maddox Street

We tread the smart streets of Mayfair here.

The property at 18 Maddox Street is about 100 years old, but was converted in about 2007 to create ground floor commercial units and four residential upper floors.

The ground floor units were let by the freeholder, Pollen Estate Trustee Company Limited, to commercial tenants.

The whole residential section on the upper floors was let under a headlease of the internal, non-structural parts to Southern Land Securities Ltd.

Mr Balkhi was the long underlessee of flat 6.

Pollen retained the exterior and structure of the building, and demised only the internal parts of both commercial and residential accommodation.

 The headlease

Under the terms of the headlease, Pollen covenanted:

  • To keep the exterior and structure of the building “in good repair and condition and in whole or in part to rebuild or renew the same in so far as necessary to keep the same in good and substantial repair and condition;
  • “From time to time as often and in such manner as the Landlord shall reasonably consider desirable or necessary to redecorate treat clean and preserve the exterior of the Building.”

Southern Land Securities, as lessee under the headlease, was obliged to pay Pollen a service charge, including an estimated, on-account service charge.

The service charge payments included contributions towards:

  • Pollen’s costs of complying with the two covenants above, and
  • A reserve fund, which appears to been included in a category of expenditure entitled “Landlord Estate Charge”.

The underlease

Under the underlease, Southern Land Securities was bound: “… to use all reasonable endeavours to procure [Pollen] to carry out provide manage and operate the Services.” (sic)

Mr Balkhi, as underlessee, was also obliged to pay a service charge. He paid it to Southern Land Securities as his landlord. The service charge included:

The costs of maintaining in good and tenantable repair and condition the main structure of the building, including external & certain internal decorations, and

The setting aside of “such sums of money as the Landlord shall reasonably require to meet such future costs as the Landlord shall reasonably expect to incur in replacing maintaining and renewing those items which the Landlord have hereby covenanted to replace maintain or renew (such sums set aside to form a sinking fund).”

It is worth making a note to self here: the Landlord in the underlease is Southern Land Securities. It was not responsible for the maintenance and repair etc of the exterior and structure of the building – that was Pollen’s job.

The proportion payable

Mr Balkhi’s service charge was 20.04% of Southern Land Securities’ “Total Expenditure”.

“Total Expenditure” was defined as “the total expenditure incurred or payable by the Landlord in any Accounting Period in carrying out its obligations under this Underlease including … all costs and expenses payable to the Superior Landlord under the Head Lease in respect of insurance and services relating to the Building and any other costs and expenses reasonably and properly incurred in connection with the Building…”

The county court claim

From 2011 onwards, the amount of the Landlord Estate Charge increased, and Mr Balkhi took issue with it. In short, he refused to pay it.

Southern Land Securities therefore issued a claim in the Northampton County Court. It claimed £11,815.51 in respect of unpaid service charges and ground rent.

Once the claim had been issued and a defence filed and served, it seems that the case fell into District Judge’s box work.

On 04 February 2015, District Judge Johnson ordered that “the matter be transferred to the Leasehold Valuation Tribunal”, and so it was – or at least transferred to the First-tier Tribunal.

We forgive the county court for being just eighteen months behind the times. There is so much going on in the court system at present that ignorance of the existence of the FTT is genuinely understandable.

The FTT’s decision

The parties agreed that the FTT should determine the case on paper, without hearing oral evidence or submissions.

Unfortunately, the FTT was confused by the way in which the parties presented the case, but it battled on.

  • It decided that it was the reasonableness of the Landlord Estate Charge that was at the heart of the dispute;
  • It noted that Southern Land Securities’ surveyor had prepared a report which appeared to suggest that the exterior needed “extensive and expensive” works, but
  • Having struggled valiantly with the figures, it was unable to reconcile the claim for £11,815.51 with the figures attached to Southern Land Securities’ claim.
  • It did however manage to reach a decision.

The surveyor’s report appears to have played a significant role in that decision because the FTT allowed the amounts claimed by Southern Land Securities, in full, on the basis that:

  • It was reasonable to build up a sinking fund for the maintenance of the structure and exterior of the building;
  • It was reasonable for Southern Land Securities to collect a relatively substantial sum of money towards the costs of carrying out planned repairs, and
  • Contrary to arguments made by Mr Balkhi, consultation requirements must be complied with when monies held in a sinking fund were spent, as opposed to when they were collected.

The FTT was at pains to emphasise that its decision did not give Southern Land Securities carte blanche to continue to charge a high Landlord Estate Charge in the future.

Permission to appeal

The Upper Tribunal granted permission to appeal to Mr Balkhi, observing:

“The First-tier Tribunal’s decision does not determine why the sums required by the landlord for the sinking fund were reasonable.

“In particular it appears to have misconstrued the report of the tenant’s surveyor, which did not indicate any need for extensive or expensive works at present, nor indeed any major repair for another 10 to 15 years.

“The First-tier Tribunal refers to the landlord’s currently planned repairs but there is no indication of what these were nor of the reason why, by reference to those plans, the sums demanded were reasonable.”

The appeal proceeded by way of a re-hearing.

The re-hearing before the Upper Tribunal

The Upper Tribunal, in the shape of HHJ Huskinson and Peter McCrea FRICS, expressed sympathy for the FTT’s tussle with the case.

“At the outset of the hearing before us we enquired of the parties what precisely were the matters which were before us for decision”, said HHJ Huskinson.

That was perhaps not the wisest question to ask, because the parties treated it as an invitation to raise new arguments, which the Upper Tribunal was unable to admit because they exceeded the ambit of the permission to appeal.

Ultimately however, a consensus was reached, and everyone agreed that the only issue before the Upper Tribunal was:

“The extent (if at all) that [Southern Land Securities] was entitled to recover from [Mr Balkhi], as part of the service charge for the accounting years 2011, 2012 and 2013, an amount in the respect of the sum paid by the respondent to Pollen which was referred to as the Landlord Estate Charge”.

The parties also identified the annual Landlord Estate Charge paid by Southern Land Securities and passed on to the residential lessees:

  • For 2011, it was £25,397.56
  • For 2012, £16,691.80, and
  • For 2013, £19,648.53.

The Evidence

An appeal by way of re-hearing is what it says on the tin – it is a complete re-hearing of the application made to the FTT.

Mr Balkhi

Mr Balkhi gave oral evidence, and relied on two reports.

The first was by Mr D Rogers MRICS, a building surveyor who had inspected the building on 18 June 2013. Mr Rogers did not give evidence in the FTT.

The second was dated 20 December 2015, from James Barry, Chartered Surveyors.

Neither report contained the normal declaration acknowledging the expert’s duty to the court/tribunal, set out in paragraph 8.2 of the Upper Tribunal’s Practice Direction.

In February 2016, the Upper Tribunal directed that if Mr Barry was going to attend to give evidence he should annex that declaration to his report.

That did not happen, nor did Mr Barry attend the Upper Tribunal hearing to give evidence. Mr Balkhi informed the Upper Tribunal that Mr Barry was unwell on the day.

Southern Land Securities

Southern Land Securities did not call any oral evidence. It relied on two witness statements prepared by Mr Brendan Milward, an employee in its legal department.

Those statements were before the FTT, and served the principal function of exhibiting documents, rather than setting out any narrative or expertise in relation to the building.

The Upper Tribunal’s decision

The Upper Tribunal began its substantive decision with a further lament about the lack of detail in Southern Land Securities’ claim.

In the event, it arrived at figures it was content to work with through a combination of agreement between the parties and its own determination, but, said HHJ Huskinson:

“It is unclear how the amount claimed in the County Court proceedings in the sum of £11,815.51 is made up.”

The description of the failings in the claim makes for helpful reading in terms of what the Upper Tribunal expects to see in a county court claim for service charge arrears:

  • The amount that is allegedly due;
  • When it became due;
  • How it is calculated, and
  • The basis on which it is said to be payable.

The claim should then be supported by documents capable of producing figures that match the overall claim.

The numbers

2011

£25,397.56: Landlord Estate Charge paid by Southern Land Securities to Pollen. A proportion of that payment constituted a contribution to Pollen’s sinking fund.

£5,087.67: 20.04% of the Landlord Estate Charge, demanded from Mr Balkhi as part of his service charge.

Mr Balkhi did not pay the £5,087.67, although he paid all the other elements of the service charge demanded from him by Southern Land Securities.

Southern Land Securities included the £5,087.67 in its county court claim.

2012

£16,691.80: Landlord Estate Charge paid by Southern Land Securities to Pollen. Again, a proportion of that payment was a contribution to Pollen’s sinking fund.

£3,345.04: 20.04% of the Landlord Estate Charge, demanded from Mr Balkhi as part of his service charge.

Mr Balkhi did not pay that £3,345.04, but again paid all the other elements of the service charge demanded from him by Southern Land Securities.

Southern Land Securities included the £3,345.04 in its county court claim.

2013

£19,648.53: Landlord Estate Charge paid by Southern Land Securities to Pollen. Again, a proportion of that payment was a contribution to Pollen’s sinking fund.

£3,937.56: 20.04% of the Landlord Estate Charge, demanded from Mr Balkhi as part of his service charge.

Mr Balkhi did not pay that £3,937.56, although he paid all the other elements of the service charge demanded from him by Southern Land Securities.

Southern Land Securities included the £3,937.56 in its county court claim.

A short calculation

The total amount that Mr Balkhi had withheld in the years 2011, 2012 and 2013 was £12,370.27.

That was more than the £11,815.51 claimed in the county court proceedings, which also included a claim for ground rent arrears, over which the FTT and Upper Tribunal had no jurisdiction.

The case having been presented to the Upper Tribunal as a year by year accumulation of service charge arrears, HHJ Huskinson and Mr McCrea dealt with it in that way, leaving the parties to make any relevant applications to amend the county court claim to the county court.

Muddier waters

The parties’ input was needed not only in respect of the breakdown of the claim, but also in connection with the nature of the sums claimed: were they on account payments or final service charges calculated after the end of the service charge year?

The Upper Tribunal considered the position:

  • The service charge year ran from 01 January to 31 December;
  • The claim was issued in August 2013;
  • It was therefore not possible for the money demanded for 2013 to be anything other than an on account demand, and
  • There was nothing in the paperwork to suggest that there was any difference in the nature of the three years’ demands.
  • It concluded that all of the demands must be on account demands.

Liability to pay

The Upper Tribunal was unswayed by Mr Balkhi’s argument that his liability to pay into a sinking fund could only arise under the clause in the underlease which expressly referred to Southern Land Securities collecting a sinking fund for its own purposes.

“We consider that sums properly payable by Southern Land Securities to Pollen under the headlease can properly be charged to Mr Balkhi through the service charge … notwithstanding that such payments include a payment towards Pollen’s sinking fund”.

The definition of Total Expenditure was the gateway through which such expenditure could be passed to Mr Balkhi.

Here is that definition again:

“Total Expenditure” was “the total expenditure incurred or payable by the Landlord in any Accounting Period in carrying out its obligations under this Underlease including … all costs and expenses payable to the Superior Landlord under the Head Lease in respect of insurance and services relating to the Building and any other costs and expenses reasonably and properly incurred in connection with the Building …”

The burden of proof

Without expressly referring to it, or to the authorities which consider it, the Upper Tribunal determined the appeal by reference to the burden of proof.

It noted that Southern Land Securities, as Mr Balkhi’s landlord, was seeking to recover sums which it had been obliged to pay to its own landlord, and made the following observations:

“In such a case questions may emerge (as here) as to the reasonableness of amounts demanded by the landlord from the tenant by way of on account service charge payments where the amounts demanded are based (in part) upon sums which the landlord has paid over to the freeholder.

“In our view it is not sufficient for the landlord merely to say: I have paid this sum to the freeholder and so it is reasonable for me to recover it from you through the service charge”.

The Tribunal continued:

“In such a case where a tenant raises a question regarding the reasonableness of the amount claimed and where the tenant (as here) produces material suggesting the amount claimed may not be reasonable, then it will be for the landlord to justify the reasonableness of what is claimed.

“This may involve landlord producing evidence – and in producing such evidence the landlord may have to seek assistance from the freeholder or the freeholder’s managing agent so as to justify the reasonableness of the sum which the landlord has paid to the freeholder and a proportion of which the landlord wishes to recover from the tenant through the service charge”.

Turning to the case before it, the Upper Tribunal determined that Mr Rogers’s report was “sufficient to raise a serious question regarding the reasonableness of the disputed sums”.

It noted that it had not received any oral evidence from Southern Land Securities, nor even a witness statement justifying the reasonableness of the amounts claimed from a person with expertise in building maintenance. The only witness statements that it had received were from an employee in the Southern Land Securities legal department.

The Tribunal continued:

“We reject the suggestion that in these circumstances it is appropriate for the respondent, without evidence, to say to the Upper Tribunal: the building is substantial and on a corner in Mayfair so a substantial sinking fund is reasonable and you (the Upper Tribunal) are an expert tribunal and can decide for yourself what is a reasonable sum to include in the service charges demands in respect of the sinking fund contributions”.

It did not however simply dismiss the application for want of evidence.

Instead, it focused on documents drawn up by Drivers Jonas Deloitte and exhibited to the witness statement of Mr Milward, the employee in Southern Land Securities’ legal department.

The Upper Tribunal described Drivers Jonas Deloitte as an “experienced firm of managing agents”.

It emerged from those documents that, for the 2011 service charge year, Drivers Jones Deloitte had projected a sinking fund contribution of £40,000 towards external redecorations, to be carried out in 2012.

The Upper Tribunal therefore adopted £40,000 as a “reasonable sinking fund to build up for the purpose of the prospective external redecoration”.

That £40,000 had however increased, without satisfactory explanation, to £70,000, and without the redecorations being carried out in the timeframe envisaged.

In the Upper Tribunal’s judgment, that sum was not reasonable, nor had Southern Land Securities acted reasonably in simply paying over the money without obtaining an explanation for it.

“We conclude,” said HHJ Huskinson, “that the reasonable amount which [Southern Land Securities] was entitled to seek to recover through the service charge in respect of its contribution to Pollen’s sinking fund over the years 2011, 2012 and 2013 was an amount based upon a £40,000 sinking fund rather than based upon a £70,000 sinking fund”.

The maths

Southern Land Securities’ headlease covered only the residential upper floors of the building. Commensurate with that demise, it was liable to contribute towards 63.56% of any whole building costs.

Between 2011, 2012 and 2013, it had therefore paid 63.56% of the total £70,000 paid into the sinking fund for redecoration works. That amounted to £44,492.

The Upper Tribunal had determined however that the sinking fund contributions should have totalled £40,000. Southern Land Securities should therefore have paid 63.56% of £40,000. That would have amounted to £25,424.

Southern Land Securities had therefore:

  • Overpaid Pollen by £19,608, and
  • Demanded £3,821.23 more than was reasonable from Mr Balkhi. That figure was reached by calculating 20.04% of £19,608.

The amount payable by Mr Balkhi, based on the total amount demanded of him – and not the amount claimed in the county court proceedings – was therefore:

            £12,370.27

            -£3,821.23

            £8,549.04.

Disposition of the appeal

“Doing the best we can upon unsatisfactory material,” said HHJ Huskinson, “we conclude that the amounts claimed by Southern Land Securities from Mr Balkhi were unreasonably high”.

Even to the end, the Upper Tribunal remained wounded by the poor presentation of the claim.

Some wounds are plainly slow to heal.

Observations

There is no earth-shattering revelation in this case, but it highlights a number of small points which, together, focus the mind.

Transfers to the FTT

It is oft said that a case is transferred to the FTT by the county court.

That is not technically accurate. The FTT does not have the same powers as the county court.

For example, whilst the FTT has the power to determine matters of service charge and variable administration charge under section 27A of the Landlord and Tenant Act 1985 and Schedule 11 to the Commonhold and Leasehold Reform Act 2002, it has no power to decide the amount of ground rent or interest payable by a lessee.

Even if a claim is brought solely on the basis of service charge arrears, the part of the claim that is transferred to the FTT is the part that involves assessment of whether those service charges were reasonably incurred, reasonable in amount and completed to a reasonable standard under section 19 of Landlord and Tenant Act 1985.

The part of the claim for an order that the lessee must actually pay the service charge remains in the county court. It too must be dealt with after the FTT’s determination, even if it sometimes seems like tidying up an empty dusty house.

No matter what the court orders at the outset of a case therefore – including transfer to the LVT – a case is never transferred in its entirety to the FTT.

There may indeed be occasions where the matters pleaded in the county court case are sufficiently diverse to justify the service charges being determined in the FTT at the same time as the court deals with the issues that it is better positioned to deal with. A rent review may be such an issue.

That sinking feeling

There is a difference between a sinking fund, a reserve fund and a depreciation charge. All three phrases appear in the Law and Lease Glossary, although “sinking fund” and “reserve fund” tend to be used interchangeably.

Clarity of pleadings

In the summer of 2012, the Upper Tribunal was rather vexed by several appeals where the LVT made decisions that included frolics unforeshadowed at the hearing.

In the course of Birmingham City Council v Keddie, Hill [2012] UKUT 323 (LC), HHJ Gerald was clear that the purpose of pleadings or statements of case or “whatever”, as he put it, is to:

  • “Set out the nature and scope of the issues in dispute;
  • “Limit the issues in respect of which the parties must adduce evidence in support of their respective cases, and
  • “Define the issues in respect of which they seek resolution by the LVT”.

The burden of proof

Reliance on the burden of proof has been described as the last refuge of the desperate.

If you are in need of refuge, the Upper Tribunal’s decision in LB Southwark v Champenois [2013] UKUT 114 (LC) is a good place to start.

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3 May, 2016
by Amanda Gourlay
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Christopher Moran Holdings Ltd v Laura Carrara-Cagni [2016] UKUT 0152 (LC)

If a lessee has added a new structure – or in this case two new structures – to his/her flat, possibly in breach of covenant, are the remaining lessees liable to contribute to the maintenance of that/those structure(s) by way of service charge?

That was the question before Martin Rodger QC on this appeal. It related to the cost of repairs to two conservatories forming part of a penthouse flat.

The action unfolds on the King’s Road in London. It is a road which has played a significant role in my life: one university holiday, I took a short course in Russian in a building there which has since been converted into commercial units and now houses the William Yeoward glassware showroom; I bought my first sofa from the King’s Road Habitat; I pedalled along it weekly when teaching French at evening class before I came to the Bar, and several of the banner photographs on this very blog are the result of my bicycling perambulations on and around it.

The building

The building in question, Daska House, stands opposite Chelsea Town Hall. It was constructed in the 1970s.

The ground and first two floors contain commercial premises, with a further seven floors of residential accommodation above, culminating in a penthouse. Each floor houses three flats save for the penthouse, which is (obviously) on the top floor.

The headlease

The whole building is let under a 99 year lease.

At the time of the dispute giving rise to this appeal, the lessee was Charles Moran Holdings Ltd (“CMHL”).

Under the terms of the lease, CMHL covenanted with its landlord to keep the building in repair.

That covenant covered: “all buildings, structures or erections which now are or may at any time hereafter be erected thereon”.

CMHL also covenanted not to make “any structural alterations or additions to the demised premises”.

External alterations were only permitted if it obtained the prior written consent of the head landlord, that consent not to be unreasonably withheld.

The underleases

The original lessee underlet each flat in the building, thereby creating 25 underleases. CMHL was the original lessee’s successor in title.

All of the underlessees covenanted to pay a service charge.

The demised premises under these underleases:

  • Extended to “the interior faces only of such walls as bound the flat (for which purpose the interior faces shall include the plaster on such walls”, but
  • Excluded “the main structural parts of the building … and external parts thereof (but not the glass of the windows which shall be included in the premises)”.

CMHL retained property which included:

  • All those premises demised by and included in the [headlease] other than the 25 flats … and without prejudice to the foregoing specifically includes … the main walls structure and roof of the property including all walls not included in any flat or dividing any flat from another”.

CMHL also covenanted to keep the retained property “and all fixtures, fittings and furnishings therein and additions thereto in a good and tenantable state of repair”.

The penthouse underlease

There was rather a question mark hanging over the date of execution of the underlease for this flat. Happily, Martin Rodger QC decided that nothing turned on point and I do not therefore propose to dwell on it.

The underlessee of this flat, which was in fact also CMHL:

  • Paid twice as much in service charges as the underlessees of the other flats in Daska House;
  • Covenanted to comply with the covenants made by the headlessee in the headlease, and
  • Covenanted not to erect any new or additional building on the demised premises nor to make any external addition.

The conservatories

The penthouse has two conservatories: one extends the kitchen and living area of the flat to the south, and the other a bedroom to the east. The FTT described them as “an integral part of the flat” in the sense that they form part of the living accommodation at the flat and are not self-contained.

The FTT concluded that the conservatories must have been constructed in about 1973. To Martin Rodger QC’s mind, in the light of the little information that was available on the point, that was a “reasonable hypothesis”.

There was no evidence as to whether the freeholder’s consent was obtained for the construction.

Christopher Moran Holdings Ltd

CMHL was the appellant in this appeal. It acquired both the headlease and the underlease of the penthouse way back in the bell-bottomed mists of June 1975. The conservatories already existed at the time.

Fast-forward some thirty-seven years to June 2012, when CMHL undertook major repair work at Daska House, at a total cost of nearly £1,380.000.

The works included the replacement of windows and patio doors for every flat in the building. The conservatories were demolished and rebuilt. The cost was £91,334.

Everyone agreed that the conservatories needed replacing, but Ms Carrara-Cagni – and many of her fellow under-lessees – took issue with demands to contribute towards the costs of doing so. They applied to the FTT for a section 27A determination.

The FTT’s decision

It was common ground between the parties that the conservatories were constructed after the grant of the underlease of the penthouse.

The FTT determined that the conservatories had been built in breach of the covenants in both the underlease and the headlease.

It agreed with Ms Carrara-Cagni, and held that the costs of replacing the conservatories were not recoverable from the lessees.

It considered that it could not have been the intention of the original parties to the leases that the under-lessees should be liable to contribute towards the costs of repair and replacement for structures put up in breach of covenant.

It therefore disallowed the costs of replacing the conservatories, but allowed a figure of £34,000, which would have been the cost of replacing the original windows and patio doors in the penthouse.

The appeal

“This appeal turns entirely on the proper construction of the terms of the underleases”, announced Martin Rodger QC, turning his feet towards the well-trodden path of contractual interpretation, a path festooned with the lush, ever-verdant judgments of the senior courts of record.

Taking advantage of breach

As a preliminary point, he noted that this was not a case where one party was attempting to take advantage of its own breach of covenant “in order to obtain a benefit under a contract”, as illustrated in the line of cases including Alghussein Establishment v Eton College [1988] 1 WLR 587.

Rules of interpretation

The parties agreed on the principles of construction relevant to the interpretation of the underlease. There are no prizes for guessing that they had alighted upon Arnold v Britton [2015] AC 1619.

Martin Rodger QC repeated the principles summarised in Arnold by Lord Neuberger of Abbotsbury PSC:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14. And it does so by focusing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of:

(i)  The natural and ordinary meaning of the clause,

(ii) Any other relevant provisions of the lease,

(iii) The overall purpose of the clause and the lease,

(iv) The facts and circumstances known or assumed by the parties at the time that the document was executed, and

(v) Commercial common sense, but

(vi) Disregarding subjective evidence of any party’s intentions.”

Further:

  • There are no special, restrictive rules of interpretation applicable to service charges, and
  • “… in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention.”

Ado about additions

Martin Rodger QC also recorded the parties’ agreement that:

“in principle, a repairing covenant will apply to subsequent alterations and additions to a building, unless that result is excluded by the language used.

“That proposition was described as “elementary law” by Fletcher Moulton LJ in Rose v Spicer [1911] 234, 248:

““If a lessee whose lease contains such a [repairing] covenant erects a house on the land leased to him he is just as much bound to maintain it and keep it in repair as if it had been built before the lease was granted.””

Liability towards the head landlord

As headlessee, CMHL covenanted:

  • With the head landlord to keep the building in repair, and
  • With the underlessees, that it would comply with its covenants with the head landlord, unless those obligations had been passed on to the underlessees themselves.

Having already established that the conservatories fell within the ambit of property for which CMHL was responsible, Martin Rodger QC concluded that CMHL was liable to keep the conservatories in repair under the terms of its own lease with the head landlord.

Addition: before or after?

Unfortunately for the underlessees, the date of construction of the conservatories could not save them.

If they had been added to the penthouse after the underlease was granted, they were “additions” within the meaning of the underlease. CMHL was obliged to keep the property reserved to itself “and all additions thereto” in repair. It was also entitled to recover the costs of doing so from the underlessees.

If the conservatories had been added to the penthouse before the underlease was granted, they were part of the property reserved by the landlord because they were either:

  • Part of the main structure, or
  • “Part of the roof and walls not included in the penthouse flat”, because the flat itself was defined in such a way as to exclude all but the inner faces of exterior walls.

… “it is clear that the repair of the conservatories falls squarely within the natural meaning of the language of the appellant’s covenants,” said Martin Rodger QC. “[T]he outcome of the appeal therefore turns entirely on the effect of their (supposedly) having been constructed in breach of the covenants in either the Superior Lease or the penthouse underlease”.

Any permissible process…

“Respectfully”, he continued, “I cannot accept that the FTT’s conclusion is capable of being arrived at by any permissible process of contractual interpretation. It is open to a number of objections”.

He gave five reasons.

First, the under lease did not distinguish between lawful and unlawful additions.

Second, the FTT’s reading of the lease was “subversive of the overall purpose of the clause and of the general arrangements for allocating responsibility for repair”.

If the cost of repairing or replacing the conservatories was not recoverable through the service charge, the under lease was not at all clear as to who would bear the repairing, replacement and/or payment obligations.

The identity of that party would depend on whether the conservatories pre- or post-dated the under lease, a point of which future owners of interests in the building would in all likelihood be ignorant.

Third, it was “contrary to common sense”. Martin Rodger QC could give no weight to the suggestion that instead of the landlord suing for breach of covenant, it agreed with the transgressing under-lessee that the responsibility for maintenance and replacement of the conservatories should be borne by that under-lessee.

Fourth, it was improbable that the landlord had not been aware of the construction of two conservatories on its property.

Two planning applications had been made, and the conservatories were visible from ground level. Speculation as to the landlord’s state of knowledge was “futile, and underlines the importance of giving the words of the lease their natural and ordinary meaning”, he said.

Finally, the under lessees had no control over the decisions of the head landlord, within whose gift it was to grant or withhold consent to alterations.

In this case, there was “simply no reason for the historic lawfulness of the addition to the [building] to make any difference to the analysis of the continuing rights and obligations of different parties… It cannot be suggested that a lawful addition, erected with the consent of the freeholder and the Lessor of the penthouse underlease, would fall outside the Lessor’s repairing obligation or the liability of lessees to contribute… To interpret the head lessee’s repairing obligation as extending only to lawful additions would therefore provide only a very weak and ineffectual protection for the flat lessees against an increase in the burden of the service charge”.

Disposal of the appeal

The FTT had been “wrong to rewrite the clear and practical language of the underleases”.

So saying, Martin Rodger QC allowed the appeal.

Observations

It strikes me that it would be rather an understatement to say that the parties were hampered here by a lack of reliable evidence as to what happened in the early 1970s.

Even so, it goes against the grain that a lessee should contribute through the service charge towards the repair of an item which may have been added to a building in breach of covenant.

A covenant to keep in repair requires the party with the repairing obligation not only to keep in repair, but to put into repair if in disrepair.

What if the Upper Tribunal had been faced with a poorly constructed conservatory, which, from day one, needed repair? Could the landlord recover the cost of putting it into repair from the lessees?

My initial thought is that the covenant to obtain the landlord’s consent to alterations is designed to protect at least the landlord – and, where a service charge is payable, the lessees who pay – from a decrease in the value of the asset by reason of poorly carried out alterations.

It is however presumably also a provision which ensures that where alterations are carried out, they are carried out in such a way as not to oblige the service-charge paying lessees to bear the cost of effectively completing those works.

Is the answer therefore that the costs are not reasonably incurred as a service charge because the lessee who is carrying out the works has not completed them to a reasonable standard?

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19 April, 2016
by Amanda Gourlay
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(1) Philip Hemmise (2) Tina Hemmise v London Borough of Tower Hamlets [2016] UKUT 0109 (LC)

Fans of the heavyweights – this is one for you.

In this post I bring to you the House of Lords, the Supreme Court, Lord Keith, Sir Nicholas Browne-Wilkinson in his Vice-Chancellor days, Lord Sumption and an array of Lords Justice of Appeal.

Frankly, after a two month posting hiatus, I felt I must return to writing with something impressive, and the above list is, I think, up there with the best. The only names really missing are their Lordships Lords Denning and Neuberger.

Why the fanfare? Because this appeal begins with a straightforward enough question of contractual interpretation, but it then forays behind the curtain into the mysterious world of issue estoppel.

Our guide is HHJ Behrens. Appearing before him were the lessees in person, and my colleague Rebecca Cattermole for the London Borough of Tower Hamlets.

The issue

By a country mile, the main issue before HHJ Behrens was whether estate costs were recoverable from the lessees.

That was not a difficult question to answer as a matter of contractual interpretation. It was however complicated by an LVT decision made a decade earlier on the same issue.

The lease

The lease required the Hemmises to pay a service charge, being a proportion of the money spent by Tower Hamlets in fulfilling its obligations under the lease.

In exchange Tower Hamlets covenanted to:

“maintain and keep in good and substantial repair and condition … the Common Parts”.

The Common Parts were defined as follows:

“all main entrances passages landings staircases (internal and external) gardens gates access yards roads footpaths parking areas and garage spaces (if any) passenger lifts (if any) means of refuse disposal (if any) and other areas included in the Title above referred to or comprising part of [the Landlord’s] Housing Estate and of which the Building forms part provided by the [Respondent] for the common use of residents in the Building and their visitors and not subject to any lease or tenancy to which the [the Landlord is] entitled to the reversion.”

The LVT’s 2006 decision

In 2006, the LVT determined that the “estate costs” were not recoverable. It:

“… noted that in the terms of the Applicant’s lease [sic] that there is no reference to ‘Estate’ only to the “Demised Premises” and “Building” the latter comprising 173 to 193 Campbell Road”.

It recalculated the service charge accordingly. The recalculation resulted in a 50% reduction of the Hemmises’ service charge.

We will pass over the correctness of that determination for the time being. Tower Hamlets plainly gave it little houseroom: it continued to charge estate costs to the Hemmises as if the LVT decision had never happened.

Understandably buoyed by the LVT’s finding in their favour, the Hemmises challenged the estate costs for the years following 2006, along with several other items of expenditure, including the cost of television aerial maintenance.

Their challenge was heard in two parts: first in April and then July 2015.

The FTT’s April 2015 decision

This was a preliminary decision as to whether the 2006 LVT decision was binding.

Tower Hamlets put forward a different argument on the interpretation of the lease. The FTT concluded that not only was it not bound by the antecedent LVT decision, it was entitled to determine the matter in the opposite direction. In its view, the Estate costs were recoverable from the Hemmises.

“With all due respect to the decision of the previous Tribunal, this Tribunal is satisfied that the definition of “Common Parts” in … the lease extends to the whole of the Title or the Estate”, it wrote.

It expressly exonerated the Hemmises from any fault in the LVT’s reasoning:

“It is not [the Tenant’s] fault that the effect of [the relevant] clause … was previously overlooked and the Tribunal intends no criticism of their decision to challenge service charges since 2006 in reliance on the previous tribunal’s decision”.

The FTT’s July 2015 decision

In this second decision, the FTT:

  • Dismissed all of the Hemmises’ challenges – including the one to the television aerial costs – apart from those relating to the repair of a refuse chute door and the refuse area door, and
  • Declined to make a section 20C order, considering that the Hemmises had lost on most points. Tower Hamlets indicated that in any event it did not intend to put the costs through the service charge.

Permission to appeal

Martin Rodger QC granted permission to appeal to the Hemmises on these points:

  • The FTT’s decision that it was not bound by the previous LVT decision;
  • The dismissal of the television aerial challenge, and
  • The s.20C order.

Of the first of these, he said:

“It is arguable that [the FTT] is bound to follow the decision of a previous tribunal which had not been the subject of an appeal and which included a determination on the meaning and effect of the same lease in proceedings between the same parties”.

How binding is an FTT/LVT decision?

As a matter of general precedent

HHJ Behrens started from first principles. The LVT was not, and the FTT is not,  a court of record. Their decisions do not create a binding precedent.

He was supported in that view by West Midland Baptist (Trust) Association (Inc) v Birmingham Corp [1968] 2 QB 188. That was a compulsory purchase case, decided by a well-regarded surveyor in the then Lands Tribunal.

In reaching his decision, that surveyor appeared to have considered that he was bound by another Lands Tribunal decision, also made by a surveyor, from 1952.

West Midland was appealed to the Court of Appeal, where their Lordships deprecated the Lands Tribunal’s practice of treating its own decisions as binding.

HHJ Behrens quoted Salmon LJ on the subject:

“No doubt previous decisions of the tribunal on points of law should be treated with great respect and considered as persuasive authority, even when made by a layman. But they should never be treated as binding. It is important that such decisions should be most carefully scrutinised and if necessary rejected particularly in cases such as the present which raise points of law of outstanding importance with far reaching consequences.”

So far, so clear where the parties to the matter being decided were different to the parties in the case relied upon.

The same parties with the same lease

What then of cases where the same parties and the same lease were involved? The FTT/LVT’s powers in such cases depended on whether there was an estoppel between the parties.

Time for the heavy hitters: this is where the doctrine of estoppel came into play, and we step behind the curtain into the mystical world of equity.

Estoppel

Estoppel comes in different forms. In the Hemmises’ case, it was upon issue estoppel that the Tribunal’s energies were focused.

In that endeavour, it reflected the energy expenditure of the Supreme Court and “a strong Court of Appeal where the leading judgment was given by the Chancellor” in:

  • Arnold v National Westminster Bank plc [1991] 2 AC 93;
  • Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] UKSC 46, and
  • Price v Nunn [2013] EWCA Civ 1002.

Virgin Atlantic Airways Ltd

In Virgin Atlantic, Lord Sumption traced the evolution and differences between issue and cause of action estoppels. HHJ Behrens cited an extensive excerpt from it.

The citation is, as I say, extensive. You can read it in full here, but for present purposes the key conclusions that Lord Sumption drew from his examination of Arnold are these:

“(1) Cause of action estoppel is absolute in relation to all points which have to be and are decided in order to establish the existence or non-existence of a cause of action;

“(2) Cause of action estoppel also bars the raising in subsequent proceedings of points essential to the existence or non-existence of a cause of action which were not decided because they were not raised in the earlier proceedings, if they could with reasonable diligence and should in all the circumstances have been raised;

“(3) Except in special circumstances where this would cause injustice, issue estoppel bars the raising in subsequent proceedings of points which:

“(i) Were not raised in the earlier proceedings or

“(ii) Were raised but unsuccessfully. If the relevant point was not raised, the bar will usually be absolute if it could with reasonable diligence and should in all the circumstances have been raised”.

Heavy stuff.

Returning to Tower Hamlets and the facts of the Hemmises’ case, HHJ Behrens decided that there was an issue estoppel to be dealt with.

“It follows in my view that unless there are special circumstances the doctrine applies so as to prevent the Landlord challenging the finding in subsequent proceedings”, he said.

Special circumstances

Arnold saw life in the High Court, the Court of Appeal and the House of Lords.

Arnold in the High Court

Sir Nicholas Browne-Wilkinson V-C, sitting in the High Court, set out the backdrop of principle against which facts can be tested for “special circumstances”.

In a nutshell, it was a question of doing justice for the parties.

“Turning again to the circumstances of the present case”, he said, “I have no doubt that justice does require the matter to be re-litigated. The following factors are in my judgment relevant.

“(1) There is a continuing contractual relationship of landlord and tenant under which (if there is an issue estoppel) the decision of Walton J will regulate four further rent reviews and thereby affect the rent payable until the end of the term.

“(2) Because of the peculiarities of the procedure applicable to appeals from arbitrators, unlike the ordinary case of a prior decision by a judge, the decision of Walton J was not subject to appeal. Therefore a matter of very great financial importance involving millions of pounds will, if an issue estoppel applies, be decided on a point of law which the lessees have never had the opportunity to test in the higher courts.

“(3) The decision whether or not to permit an appeal was the decision of Walton J himself and there was no right of appeal against his refusal to certify the matter fit for appeal. The lessees took every step to test the decision in the earlier case in the higher courts but without success.

“(4) Subsequent decisions, in particular that of the Court of Appeal in Equity and Law Life Assurance Society Ltd v Bodfield Ltd [1987] 1 EGLR 124, make it, at the lowest, strongly arguable that the decision of Walton J was wrong.

“These factors taken together satisfy me that this is a case in which justice requires that issue estoppel should not apply. I therefore hold that the plaintiffs are not estopped from raising the matter of construction pleaded in para 20 of the statement of claim and accordingly dismiss the application to strike out that paragraph”.

Arnold in the Court of Appeal

The Court of Appeal upheld the Vice-Chancellor’s determination that justice to the parties was the benchmark by which issue estoppel should be measured.

Dillon LJ observed that a party could not avoid an unhelpful finding of issue estoppel simply by saying that it was arguable that the previous decision was wrong. There needed to be more, and in the case before him there was more. He did not mince his words:

  • It was agreed that the previous judge’s was not in accordance with the guidelines since laid down and approved by the Court of Appeal;
  • There was nothing in the lease before him, properly construed, to constrain the previous judge to the extreme (and to Dillon LJ’s mind “ridiculous”) position that he seemed to have taken;
  • The previous judge’s decision was contrary to commercial sense and the underlying commercial purpose of a rent review clause.

Staughton LJ was rather gentler on the previous judge, noting that:

  • The law had moved on since he had reached his decision, and
  • Whatever decision was ultimately reached was going to be reached in the context of the parties being in a continuing contractual relationship.

It seems that for him the key point was the fact that the original decision was plainly wrong.

In one of those sentences which has negatives in places which tie the grey matter in knots, he said:

“I do not say that the result would have been different if there had been no further elucidation of the law. I have difficulty in seeing why the lessees would have failed if the original decision had merely been plainly wrong (as I think it was), but should succeed now that subsequent courts have shown that to be the case. That difficulty may have to be resolved on another occasion”.

Mann LJ, the third judge in the Court of Appeal, had the following to say:

“It therefore follows that nowadays ‘special circumstances’ or ‘exceptional circumstances’ can defeat an issue estoppel of whatever species. What is a special, or if one wishes it, exceptional circumstances cannot, and in my judgment should not, be defined. It is a matter for the judge in any case. I only say that a special or exceptional circumstance may relate to fact, law or even, apparently, practice: see The Mekhanik Evgrafov and the Ivan Derbenev (No 2) [1988] 1 Lloyd’s Rep 330.

“I would not disagree with Sir Nicolas Browne-Wilkinson V-C’s finding of special circumstances in this case… I regret to say that Walton J’s decision was in my view plainly wrong. If it were arguably wrong, I might have taken a different view as to whether there was a special circumstance”.

Arnold in the House of Lords

Matters did not stop there: the case was appealed from the Court of Appeal up to the House of Lords, where, mercifully, there was a lead judgment given by Lord Keith, who, equally mercifully, agreed with the courts below.

These points emerged from his judgment:

  • There had been no right of appeal against the decision of Walton J. because the case had been decided by arbitration, from which rights of appeal are tightly circumscribed;
  • If the question were not re-opened, the landlord would most unfairly be receiving a very much higher rent than he would be entitled to on a proper construction of the lease;
  • The public interest in seeing an end to litigation was of little weight in circumstances under which, failing agreement, there must in any event be arbitration at each successive review date;
  • Estoppel per rem judicatam, whether cause of action estoppel or issue estoppel, is essentially concerned with preventing abuse of process, and
  • In the present case he considered that abuse of process would be favoured rather than prevented by refusing the respondents permission to reopen the disputed issue.

Resolution of the Hemmises’ appeal

Armed with the guidance from Arnold – all three sets of it – HHJ Behrens turned to the Hemmises’ case.

Five points sprang to his mind:

  • The LVT’s decision was plainly wrong. The Estate was included in the definition of common parts, and the landlord was entitled to recover the costs of maintaining the Estate from the lessees;
  • The Hemmises and Tower Hamlets were in a continuing landlord and tenant relationship which still had about 100 years to run. The estoppel would benefit the Hemmises’ successors in title, resulting in a significant underpayment of service charge over the life of the lease;
  • The point was taken by the LVT in its decision without giving the landlord to make representations on it at the hearing or in writing afterwards;
  • It was reasonable for the landlord not to deal with the point before the LVT because the pleaded case related to the reasonableness of the charges, and
  • The landlord could – “and probably should” have appealed the decision, but on the current case, it was not wanting to overturn the LVT’s decision about the 2006 service charges, it wished to reargue the point in respect of later charges.

By contrast with Arnold, Tower Hamlets had enjoyed a right of appeal from the LVT’s decision, but HHJ Behrens felt that Lord Keith’s observations in Arnold were:

“as applicable to this case as to that. It is a case where justice is not served by perpetuating a wrong decision over the whole life of the lease. I accordingly think that special circumstances do exist and that accordingly the Landlord was not estopped from arguing whether it could recover the appropriate portion of the service charge in respect of maintenance of the Estate”.

That limb of the appeal therefore failed.

The television aerials

HHJ Behrens disposed of this part of the appeal in just one – admittedly rather long – paragraph.

The issue has a perverse symmetry with the main ground of appeal.

Whereas the LVT had decided that the Hemmises’ service charge did not extend to paying for maintenance of the estate, the FTT decided that the Hemmises were liable to pay for the aerials serving the whole estate even though, as HHJ Behrens interpreted their lease, they were only liable to pay for maintenance of the aerials serving the building in which their flat was located.

He imagined that there was probably little difference between the amounts that Tower Hamlets had charged the Hemmises and the amounts that it should actually have charged – but the lease was the lease, and whatever the administrative inconvenience, Tower Hamlets was required to abide by its terms.

Costs

Tower Hamlets did not intend to put its legal costs through the service charge. Even so, HHJ Behrens made it clear that he would not make a section 20C order, since the Hemmises had lost the significant element of the appeal.

Observations

Every now and again the stately bows of the great ship Contract create ripples over the service charge sea across which we sail.

This is a case in point, and one I shall bookmark for future general reference on issue estoppel and special circumstances. The relationship of landlord and tenant is perhaps peculiarly suited to “special circumstances” arguments too because of the length of the term to which the parties bind themselves.

Many are the reasons why a party might not bring an appeal from a decision which is patently wrong: lack of resource and, sadly, lack of competence being but two that spring immediately to mind.

It strikes me as rather imprudent not to bother appealing a decision on the basis that a special circumstances argument can be run later.

“Doing justice for the parties” allows the Tribunal to plump for one of a range of outcomes. It is the archetype of flexibility at the expense of certainty, but it is however at least comforting to think that if a decision slips through the net, so to speak, all may not be lost.

Caddick and abuse of process

There is clear water between arguments advanced in this, the Hemmises’ case, and the those deployed by Mr & Mrs Caddick in Caddick v Whitsand Bay Holiday Park Ltd [2015] UKUT 0063 (LC).

In Caddick, HHJ Mole QC decided that a previous decision that a holiday chalet was not a “dwelling” meant that a challenge to the service charge by a successor in title – which required reconsideration of the “dwelling” question – was an abuse of process.

He reached that conclusion even though the first finding had been made in the context of an application for recognition of a tenants’ association, and the second was an application under section 27A of the 1985 Act.

There is not a breath about issue estoppel in his decision.

What would have been the result, I wonder, if it had been raised?

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