This case has a rather disheartening opening, in which the Upper Tribunal, comprising Martin Rodger QC and AJ Trott FRICS, note that the parties have been engaged in a “long running battle”.
That said, this is an unusual and useful case about a landlord’s liability to contribute towards the costs of repairs and redecorations, aka service charges in the non-technical sense, after the acquisition of the Right to Manage.
Clevedon Court, West Dulwich, is an L-shaped building dating from the 1950s. Initially it contained 23 flats on ground, first and second floors.
At the time when the dispute arose, all 23 flats were let on long leases, each requiring the lessee to contribuete a fair proportion of the landlord’s costs and expenses of maintaining, repairing and redecorating the structure and common parts of the building.
Mr and Mrs Gibbs bought the freehold of Clevedon Court in October 2006. They then carried out quite extensive works, creating seven new flats by adding an extra storey to the building, installing a lift in a new tower and replacing the original Crittall windows throughout.
They initially let all seven flats on short term tenancies, but later sold three flats on long leases.
On 13 February 2010 the RTM company, owned by the leaseholders of 22 of the flats, acquired the right to manage the building under the 2002 Act.
From that date the RTM Company assumed responsibility for the provision of services.
The RTM Company resolved to undertake a programme of major works comprising two main elements:
The appeal was concerned only with the external repairs and redecoration. A simple specification of the works was prepared and put out to tender.
Two tenders were submitted, the lower of which was from Willow & Beau Ltd at a cost of £48,350 plus VAT. It included a £2,000 contingency but was not itemised.
The RTM Company accepted that tender. Willow & Beau began work in the summer of 2014. The works were carried out in stages: scaffolding was erected on one elevation of the building at a time and each elevation was completed only when sufficient funds had been collected from the leaseholders.
Over the years since the RTM was acquired, Mr and Mrs Gibbs had not made the payments that had been demanded of them for works and services to the building.
By October 2016, some £55,000 was outstanding, covering the years ending 25 December 2010 onwards.
Mr and Mrs Gibbs disputed their liability to pay £25,000 of that sum and contended that they were entitled to set off the £30,000 balance by reason of a claim for damages against the RTM Company.
Mr Balmforth FRICS of Stapleton Long Chartered Surveyors, the former managing agents, monitored and reported twice to Mr and Mrs Gibbs on the RTM Company’s works.
In his first report of April 2015, Mr Balmforth recorded that some of the work in the specification had not been done, and other work had been done poorly.
In his second report of April 2016, Mr Balmforth noted that additional work had been carried out, but that issues that remained outstanding. The report was accompanied by a declaration that he understood his duty to the Tribunal as an expert and that the opinions he had expressed were true.
In response to Mr Balmforth’s report, Willow & Beau produced a letter which the Upper Tribunal assumed to have been from a senior member of its staff.
The letter enclosed photographs of the building, before and after the works. Whilst accepting that some snagging still needed to be attended to, it rebutted Mr Balmforth’s allegations.
There were two section 27A applications, which were heard together:
Oddly, given that the dispute turned on the standard of the works, the FTT did not consider it necessary or proportionate to carry out a site inspection.
Instead it reached its decision from the evidence before it, and from the evidence that it heard from Mr Balmforth for Mr and Mrs Gibbs; from Mr Adamson, a lessee and director of the RTM Company, and from Mr Ahmed of Sterling Estates Management. No one from Willow and Beau attended to give evidence.
The RTM Company emphasised to the FTT that Mr and Mrs Gibbs’s refusal to pay had caused considerable difficulty when it came to raising the funds needed to fund the repair and redecoration works that were the subject of the application before it.
The majority of the FTT’s decision comprised the recital of the evidence that it had heard. Its analysis and decision of the issues raised on the redecoration and repair works were contained in one paragraph.
In that paragraph, it found that the works had been needed, and that:
Despite those findings, the FTT determined that the full amount claimed from Mr and Mrs Gibbs was payable.
Having received the FTT’s decision, Mr and Mrs Gibbs made a payment of £24,000. By then however it appears that further sums had fallen due, leaving a balance of more than £44,000.
The Upper Tribunal granted permission to appeal primarily on the ground that the FTT had not provided sufficient reasoning to support its decision, and that it was arguable that it did not:
How was that Mr and Mrs Gibbs, as landlords, bore any liability to pay for the major works after the RTM was acquired?
Here we turn to Part 2, Chapter 1 of the Commonhold and Leasehold Reform Act 2002. That Part contains the procedure by which lessees may acquire the Right to Manage.
Section 103 of the 2002 Act is boldly entitled “landlord contributions to service charges”.
It is a bold title because “service charges” does not mean service charges in the section 18 sense of the word, as an “amount payable by a tenant”.
Instead, “service charges” in the section 103 header are defined in section 103(2) as:
“the difference between the “relevant costs”, and the aggregate amount payable in respect of the relevant costs under leases of flats contained in the premises which are held by qualifying tenants”.
“Relevant costs” does however have the same meaning as it does in section 18 of the 1985 Act:
“the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable”.
Stay with me.
The effect of section 103 here was that Mr and Mrs Gibbs were responsible for meeting any shortfall between the total amount contributed by the lessees by way of service charge and the actual amount spent.
In 2013, the FTT determined that the shortfall was 20.09% of the relevant costs.
Neither side raised the point, but the Upper Tribunal was concerned to explain the basis of its jurisdiction to assess the amounts payable by the Gibbses under both section 27A applications.
It noted the terms of sections 19(1) and 27A of the 1985 Act, and that section 27A of the 1985 Act gives the FTT the power to determine both the amount of the “relevant costs” recoverable, and the proportion payable by each tenant in a building.
Plainly, the amounts that the lessees were obliged to pay were service charges in the technical, 1985 Act sense because they were amounts:
But what about the amounts that Mr and Mrs Gibbs were required to pay? They were not service charges in the section 18 – or section 27A – sense. Mr and Mrs Gibbs were not tenants.
With some nifty footwork worthy of a well-known BBC1 dancing show, the Upper Tribunal came up with the solution:
“By deducting the aggregate contributions of the leaseholders from the relevant costs the balance payable by Mr and Mrs Gibbs can be ascertained”.
It accordingly had the power “at least, to make a determination of the components which enable the appellants’ liability to be determined”.
The Gibbses were represented by counsel at the appeal; the RTM Company self-represented.
Even though it was common ground that not all of the works in the specification had been completed, the FTT did not quantify the amount of work which remained to be done.
Instead, it made some general observations and concluded that the cost of the work was 100% recoverable. It should, said the Upper Tribunal:
“… have made some effort to assess the difference both in quantity and in workmanship between the work contracted for and the work completed”.
It was equally unimpressed with factor which had swayed the FTT:
“Without such an assessment it would have been difficult for the FTT to determine whether any additional work done by the contractor justified departures from the specification without a corresponding reduction in the contract price. The FTT did not consider that question at all.
“Finally,” said the Upper Tribunal, “the FTT expressed the view that the work carried out was justified given the limited funds that were available to the respondent and that the quality of the finished work reflected the price paid. This observation does not begin to address [Mr and Mrs Gibbs’s] case, which the FTT had found to be made out to an unspecified extent, that some works which were necessary had not been done, other works had not been done to a reasonable standard and that the contract had not been fully completed.
“The task of the FTT was to determine the reasonable cost of the work that had been undertaken to a reasonable standard. It is implicit in the FTT’s observation that poor quality work was all that could be afforded. That was not the case presented by the [RTM Company] nor, had it been, would it have been a case capable of acceptance by the FTT without a proper consideration of the quality of the work and the price which had been agreed for it. In the absence of such consideration we think [Mr and Mrs Gibbs] are justified in their complaint that they do not understand what the FTT made of their criticism that the standard of work had been very poor and did not justify the sum charged so that some reduction ought to be allowed against it”.
The Upper Tribunal accordingly determined that it should allow the appeal, leaving it with the potentially expensive prospect of remitting the case to the FTT for a re-hearing, given that the amount of money at stake was “relatively modest”.
The parties therefore agreed that the Upper Tribunal should determine the dispute on the papers, having regard to the photographs and evidence provided in writing to the FTT, without further oral evidence, but after an inspection by the Tribunal.
Martin Rodger QC and AJ Trott spent an hour and a half on their unaccompanied site inspection, comparing the specification and 2015 photographs with the building in its current condition.
At the time of their inspection in September 2017, the works, including snagging works, had been completed, except for the repainting of the entrance doors to the flats in relation to which there was a retention of £1,500+VAT.
In summary the Upper Tribunal found that:
That list does not make for happy reading, but the Upper Tribunal was not persuaded that the paintwork was so poor that the building would need to be repainted in its entirety in 2017.
That suggestion, made by Mr Balmforth in his reports, reduced the standard of workmanship below the reasonable standard that the contractor had in fact generally reached.
The Upper Tribunal came to the knotty issue of quantification.
Willow & Beau’s quotation was a round figure: it was not possible to identify the individual cost of each item or area of work.
In that long-honoured phrase therefore, the Upper Tribunal, “doing the best it could” in the light of the evidence and its experience of the building, reduced the amount recoverable by a percentage: 7.5%.
Making an allowance for the retention, the reduction totalled £4,216 including VAT.
The reasonable cost of the work that was undertaken to a reasonable standard was therefore £52,004 including VAT, of which the Gibbses’ share was 20.09% or £10,447.
Cases where landlords have disputed the acquisition of the Right to Manage are legion.
Cases about the exercise and running of a building after the Right to Manage has been acquired are rarer creatures.
It is worth reading section 103 of the 2002 Act in full when considering a landlord’s liability to contribute towards the cost of running the building.
It is generally engaged when a landlord has retained a flat within his/her freehold, and there is therefore no lease or other contract regulating the contributions, if any, that the landlord is to make towards running and maintenance costs.
Here it is (correct as at 01 November 2017):
103 Landlord contributions to service charges
(1) This section applies where—
(a) the premises contain at least one flat or other unit not subject to a lease held by a qualifying tenant (an “excluded unit”) [for “qualifying tenant” see section 74];
(b) the service charges payable under leases of flats contained in the premises which are so subject fall to be calculated as a proportion of the relevant costs, and
(c) the proportions of the relevant costs so payable, when aggregated, amount to less than the whole of the relevant costs.
(2) Where the premises contain only one excluded unit, the person who is the appropriate person in relation to the excluded unit must pay to the RTM company the difference between—
(a) the relevant costs, and
(b) the aggregate amount payable in respect of the relevant costs under leases of flats contained in the premises which are held by qualifying tenants.
(3) Where the premises contain more than one excluded unit, each person who is the appropriate person in relation to an excluded unit must pay to the RTM company the appropriate proportion of that difference.
(4) And the appropriate proportion in the case of each such person is the proportion of the internal floor area of all of the excluded units which is internal floor area of the excluded unit in relation to which he is the appropriate person.
(5) The appropriate person in relation to an excluded unit—
(a) if it is subject to a lease, is the landlord under the lease,
(b) if it is subject to more than one lease, is the immediate landlord under whichever of the leases is inferior to all the others, and
(c) if it is not subject to any lease, is the freeholder.
One of the major issues that can be faced by Right to Manage Companies, as was the case here, is cash flow. The company generally has no assets, so cannot raise funds through a mortgage or any other security.
A Right to Manage company generally has to rely on tenant contributions in order to perform its management function. That means of course that if a meaningful proportion of tenants do not pay, the RTM Company experiences serious difficulties:
It’s quite a balancing act.
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