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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.
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 was the long lessee of one of the “privately owned” flats: No.11 Ipsden Court.
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 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 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 had adopted what it considered to be a sensible solution to its inflated entitlement:
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.
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:
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.
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”.
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:
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 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”.
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  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:
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”.
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.
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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