London Borough of Lewisham v Luis Rey-Ordieres & ors [2013] UKUT 014 (LC): Part I

In an appeal by way of a re-hearing of a dispute about major works and the fees charged in connection with them, the Lands Chamber:

• Held that it is open to lessees to challenge the cost of major works where the local authority has followed the EU public procurement process and is contractually obliged therefore to pay certain sums to the contractor (the Auger question);
• Allowed all but 2% of the professional fees charged, and
• Held that the management fee levied was properly levied, and was neither duplication of the professional fees nor profit on profit.

Between 2007 and 2009, LB Lewisham carried out major repair and refurbishment works affecting about 500 long leasehold and some 1,300 tenanted properties on the Brockley Estate.

Service charge demands to long lessees for the works included two sets of charges for fees:

1) 26% professional fees, also known as “on-costs”, comprising:

• Fees (planning, building control etc) of 3.48%, which the LVT allowed in full;
• Preliminaries of 10.52%, reduced to 3.5% by the LVT, “to take account of the fact that the majority of the preliminary costs related to the rented properties and not leaseholders”, and
• Refurbishment subcontractors costs of 12% (split between overheads (5%) and profit (7%)), which the LVT reduced to 10%.

2) 10% management fees, which were disallowed because the LVT considered that management charges were already included in the professional fees.

Lewisham appealed the LVT’s decision where it reduced or disallowed those fees.

The respondents’ leases were in substantially the same form, and entitled Lewisham to recover the costs of architects, surveyors, contractors, builders and management of the estate.

The value of the works required Lewisham, under the auspices of the Private Finance Initiative, to advertise in the Official Journal of the European Communities. The advert, placed on 16 March 2002, sought a contractor to refurbish, manage and maintain its housing in Brockley. There was a competitive tender, and on 4 June 2007 Lewisham entered a PFI contract with Regenter B3 Ltd for a 20 year term.

Regenter appointed three sub-contractors:

• Higgins Construction Plc for the provision of the works;
• Pinnacle Housing Limited to provide estate management services, and
• Equipe Regeneration Limited for responsive repairs and cyclical maintenance and renewals.

The major works on both tenanted and leasehold properties formed part of the Government’s Decent Homes Programme. Higgins was required to maintain the structure and fabric of the dwellings to ensure compliance with (i) the leases, and (ii) specific standards.

For rented properties, Higgins had to meet specific internal standards. These standards did not apply to the long leaseholds because the internal repair and maintenance of those properties were the responsibility of the lessees under their leases. There were therefore a total of 73 standards applicable to the 1,300 rented dwellings, but only 32 standards applicable to the 500 long leasehold households.

Pinnacle was responsible for the administration of the long leaseholds, ensuring that Lewisham complied with its covenants and statutory obligations, maintained records to generate timely service charge estimates and final invoices, and maximised recovery of service charges. Lewisham however retained its rent and service charge setting policies.

There were four issues in this appeal. The first is covered below. The remaining three will appear in Part II of this case.

1. Whether any reduction in professional fees or management fees was permissible under section 19(1)(a) of the 1985 Act;
2. Whether the LVT was wrong to reduce the preliminaries element of professional fees from 10.52% to 3.5%;
3. Whether the LVT was wrong to reduce the refurbishment sub-contractors element of professional fees from 12% to 10%; and
4. Whether the LVT was wrong to disallow management fees of 10%.

The Lands Chamber concurred with Judge Huskinson’s decision in Auger v London Borough of Camden (2008) LRX/81/2007 (unreported) at [47]:

“If works which are reasonably necessary and are done to a reasonable standard are carried out under a Partnering Agreement, Camden will be able to meet criticism regarding the level of expense by pointing out that Camden is already contractually bound to the Partner and had to place the works with the Partner at the contract rate provided for in the Partnering Agreement, and therefore the costs were indeed reasonably incurred because, even if the works could reasonably have been expected to have been done significantly cheaper by other competent contractors, Camden would be in breach of contract by giving the works to anyone other than the Partner.”

Notwithstanding that concurrence, it held that, as a matter of law, Lewisham’s having followed EU public procurement rules did not prevent the respondents from challenging the professional fees. The terms of the PFI contract were not conclusive, even if they were “strongly persuasive”, of the reasonableness of the costs of the works for the purposes of section 19(1)(a).

In any event, on the facts, the Lands Chamber also held that the PFI contract did not establish the cost of the professional fees, because those costs were wrapped up in a total, fixed, sum for individual properties.

The same point was relevant for the management fee. Whilst Lewisham was obliged to pay Regenter for leasehold services, those payments did not correspond to the 10% that Lewisham charged to the leaseholders.

It strikes me that some rather nimble-fingered knitting is required to reconcile Auger with the decision here. Technically, I think that a landlord could argue that the Lands Chamber’s views on the Auger question were obiter, since the PFI contract was not germane to its decision making.

I  imagine however that the Lands Chamber was reluctant to endorse Auger as a principle of law, even if only in the arena of OJEC advertised public procurement contracts. Approval of Auger could be the driving of the proverbial coach and horses through section 19 of the 1985 Act, resulting in lessees of local authorities losing more of the already limited powers that they have over contract pricing in multi-million pound major works contracts.