Thomas Homes Ltd v Colin Macgregor [2016] UKUT 0495 (LC)

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Charles Knapper and others (members of the Point Curlew Tenants’ Association) v (1) Martin Francis (2) Rebekah Francis [2017] UKUT 003 (LC)
27th January 2017
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TEST

In this appeal, HHJ Huskinson observed that he was concerned with the proper apportionment of the service charge costs. As it transpired however, the issue was less about apportionment, and more about the application of section 19(2) of the Landlord and Tenant Act 1985.

The development

An air of retro romance hangs over the development where the dispute was born: it is the former Fairmile Hospital building in Oxfordshire. A listed property, it was described by Mr Macgregor, the lessee, as “a large, rambling structure comprising many blocks and wings linked by corridors”.

The hospital has been converted into 130 one- to four-bedroomed flats, with a large communal hall. Under a section 106 agreement, 39 of those flats were let and managed by Soha Housing as what the FTT described as “social housing”, by which it seems that it meant long shared ownership leases.

The section 106 agreement capped the social housing service charges at £522 per flat per year for the maintenance of the grounds and the buildings, and allowed for an annual increase in line with RPI.

Soha Housing’s lessees accordingly did not pay as high a service charge as the lessees of the remaining 91 “privately-owned” flats. 

Mr Macgregor’s lease

Mr Macgregor was the long lessee of one of the “privately owned” flats: No.11 Ipsden Court.

The percentage

Under the terms of his lease, Mr Macgregor was required to pay 10% of the costs incurred by the landlord in keeping in repair and servicing all of the buildings on the development, as opposed to the repair and servicing of just his building.

It was common ground between the landlord, Thomas Homes Ltd, and Mr Macgregor, that Mr Magregor’s – and presumably many other – leases contained an error. When all 91 “private lessees’” contributions were added together, the landlord stood to recover 3000% of its service charge expenditure.

The landlord accepted that an application to vary the terms of the leases under section 35 of the Landlord and Tenant Act 1987 would be all but bound to succeed.

The service charge machinery

The landlord was required to draw up a budget of estimated expenditure every year. Mr Macgregor was obliged to make two on account payments towards that estimated sum: 50% of his proportion in April, and 50% in October.

The lease then made provision for a balancing charge or credit at the end of the year after the landlord had prepared the service charge accounts.

The “social housing” leases

The leases of the social housing were in the same form as Mr Macgregor’s, except that those lessees were subject to the cap imposed by the s.106 agreement, and the proportion payable by each lessee was to be a “fair and reasonable” one, as opposed to being a fixed percentage.

The landlord’s practice

The landlord had adopted what it considered to be a sensible solution to its inflated entitlement:

  • Having set the annual budget, it deducted the fixed amount recoverable from the social housing;
  • It then applied a number-of-bedrooms formula to the apportionment of the remaining budget between the 91 privately owned flats.

Mr Macgregor owned a four-bedroomed flat, which meant that he paid four times the amount paid by the lessee of a one-bedroomed flat.

The dispute

Mr Macgregor’s dispute related to three service charge years. For all three years the disputed amounts appeared in advance/on account demands. He had five concerns:

  • He felt that he was being asked to subsidise the social housing occupiers;
  • The bedroomed-based apportionment did not take into account the large space occupied by the communal hall;
  • Gardens maintenance was the responsibility of Cholsey Meadows Management Co Ltd., which was a party to the lease. The social housing lessees’ service charge was applied first to satisfaction of the invoices raised for garden maintenance, with the whole shortfall then being borne by the private lessees for the maintenance of the buildings;
  • Even though the landlord had demanded £2,230.60 in service charges from him, 10% of the total expenditure on buildings maintenance would have required him to pay £12,330 for the 2015/16 service charge year, and
  • Some of the social housing lessees had sold their flats, but the new “private” lessees still enjoyed the capped service charges originally provided for in the lease. The saving in service charges to those lessees was about £1,500 per year for a four-bedroomed flat.

The FTT’s approach

Was Mr Macgregor contractually obliged, as a result of the s.106 agreement and his lease, to subsidise the social housing units?

That was the question that the FTT asked of itself. It considered whether a court would imply a term into all the non-social housing leases requiring those lessees to make up the shortfall caused by the social housing service charge cap.

The answer, it determined, was no.

The hearing before the Upper Tribunal

Permission was granted to appeal to the Upper Tribunal, and, in anticipation of the hearing, the parties agreed a statement of issues. They all related to the interpretation of the lease.

Flagging up his intention to depart from contractual issues, HHJ Huskinson observed that:

“the fact that the parties have agreed … does not mean that this Tribunal is obliged … to consider those matters at all if they do not arise. I prefer to consider the issues as they appear to me to be relevant and to express them in my own way”.

The Upper Tribunal’s decision

Advance and balancing demands

HHJ Huskinson noted that, this being a dispute about on account service charge payments, section 19(2) of the Landlord and Tenant Act 1985 applied:

“(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustments shall be made by repayment, reduction or subsequent charges or otherwise.”

He summarised the landlord’s arguments, by which he was not persuaded:

  • This was not an application to vary the lease under section 35 of the Landlord and Tenant Act 1987;
  • Mr Macgregor was liable to pay 10% of the costs of maintaining and servicing all of the buildings on the development;
  • He would therefore be liable to pay very large sums;
  • Accordingly, accepting the drafting error in the lease, the landlord was entitled to demand a lower sum. As HHJ Huskinson put it, pithily: “If you are contractually obliged to pay a large sum you have no defence to a claim for a smaller sum”.

He gave three reasons why the FTT’s decision could not stand.

First, the FTT had not answered its own question as to how much service charge Mr Macgregor was obliged to pay. That is what it was required to do on an application under s.27A(3)(c) of the Landlord and Tenant Act 1985. Instead, the FTT had decided that Mr Macgregor was subsidising the social housing lessees.

Secondly, the FTT had considered whether a term should be implied into the lease pursuant to which Mr Macgregor would be obliged to subsidise the social housing lessees. In HHJ Huskinson’s view, that was not the correct approach to the problem.

Thirdly, the FTT had not taken into account the fact that Mr Macgregor’s challenge was to on account demands, not to final balancing demands or credits.

The application should have been approached by recognising that:

  • The landlord had not issued any final accounts;
  • Section 19(2) applied to each of the on account demands, and therefore no greater amount than is reasonable is payable, and
  • An on account demand for 50% of the budgeted service charge, which would have led to a demand for £6,000 every six months, “would involve the demand of a greater amount than is reasonable”.

The application of section 19(2) removed the very foundation of the landlord’s argument. HHJ Huskinson explained:

“This is not a case where, at the date of the relevant demands, the [landlord] could say it was owed a very large sum and was being reasonable and moderate in demanding much less. Instead this is a case where, as at the date of the relevant demands, only a reasonable sum was payable in any event”.

How much?

Mr Macgregor did not dispute his liability to pay something. He made no allegation that his landlord had failed to comply with any of the formalities for demanding service charges.

If he was not liable to pay the amount demanded by the landlord, how much should he pay? How much was “reasonable”?

HHJ Huskinson determined that there was no justification for basing the amount payable on the potential, future, eye-watering demand that the lease required.

He had no doubt that, were such a demand to be issued, it would be met by an application under section 35 of the 1987 Act to vary the lease. Such an application, in his view, was highly likely to succeed, and any order made by the landlord could be backdated, in accordance with the Upper Tribunal’s decision in Brickfield Properties Ltd v Botten [2013] UKUT 0133 (LC).

A review of the service charge history allowed him however to quantify the amount payable. It was the amount in fact demanded by the landlord. He gave three reasons for his decision:

  • When the lease was granted to Mr Macgregor in 2013, he was informed of the service charge payable for the first year, and took no issue with it. The service charge stayed at broadly the same level for 2014 and 2015. The absence of protest against the service charge was “some indication that the amounts demanded were reasonable”;
  • The landlord had demanded amounts which were lower than 10% of the cost of maintaining Ipsden Court, the building in which Mr Macgregor lived. If the drafting error was that 10% should have applied only to Ipsden Court, that error was corrected in the demands, and
  • The demands being on account demands, Mr Macgregor could comforted by knowing that a final account would be drawn up and the position regularised, perhaps after the determination of an application to vary the lease.

Bearing in mind the absence of any application to vary the lease and the fact that many other lessees were likely to be affected – and parties – to an application to vary, HHJ Huskinson was at pains to emphasise that “it would be wrong … to express any view upon the merits of any argument as to how the lease should be varied and what, if anything, should be done about the apparent subsidy of the units of social housing”.

Section 20C

The landlord opposed Mr Macgregor’s application for a section 20C order on the ground that it had been broadly successful on the appeal.

HHJ Huskinson was not however persuaded. Even though the landlord had been substantially successful, the dispute between the parties and arisen as a result of the drafting error in the lease, for which the landlord should take primary responsibility.

In those circumstances, he made a section 20C order preventing the landlord from putting the costs of the Upper Tribunal proceedings through Mr Macgregor’s service charge.

Observations

If outcomes were all that counted, it might be said that this case is a good example of purposeless huffing and puffing, because in the end Mr Macgregor was held liable to pay the exact amount that he disputed from the outset, with no further clarity as to who should bear the shortfall between the capped service charges and the actual amount spent by the landlord.

It strikes me however that the reasoning has quite a radical effect. In relation to on account demands, HHJ Huskinson effectively liberates the landlord from any fixed percentages prescribed by the lease, provided that the amount sought can be justified as reasonable, and is demanded in accordance with any procedure contained in the lease.

It is only at the end of the accounting period that any fixed percentage is relevant, and, in this case, the real 3000% problem arises. Bearing in mind the number of flats on the development, and its rambling nature, it will be quite a sizeable task to vary the leases to achieve a 100% service charge recovery with which all parties are content, or can at least bear to live.

A good question for an IRPM membership exam paper, perhaps?

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