Westmark (Lettings) Ltd v Elizabeth Peddle and others [2017] UKUT 449 (LC)

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30th November 2017
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In 2016 we had the big case (Leaseholders of Foundling Court and O’Donnell Court v The Mayor & Burgesses of the London Borough of Camden, Allied London (Brunswick) Limited, Brunswick GP Limited, Brunswick Nominee Limited, BIS (Postal Services Act 2011 Company) Limited [2016] UKUT 366 (LC)) on whether superior landlords are obliged to consult with sub-lessees. In late 2017 comes this case, where we have a similar, landlord-chain issue in relation to section 20B of the 1985 Act. Does the eighteen-month rule apply to the first demand in a chain, or to each demand along it?

In a nutshell, under section 20B, a landlord may not recover service charges from lessees where the costs included in the service charge demand were incurred more than eighteen months before the demand is served on the lessee.

As I read this decision, I found myself wondering whether Parliament considered those points when enacting the 1985 Act or the amendments inserted by the 1987 and the 2002 Acts. I was not alone: Martin Rodger QC looks at that very question in his decision.

Queen Square, Bristol

Queen Anne, in whose honour Queen Square, Bristol, was named, was the last Stuart Monarch.

The square was laid out in the early 18th century as a garden square.

The development in dispute had been worked into the Georgian façade at numbers 22 to 25, Queen Square, and overlooked Bristol Harbour at the back. It comprised offices, shops and residential units, including 29 flats let on long leases on the top five floors.

Parties

The ownership and management structure at Queen Square in Bristol must be little short of a record: there were five layers of property interest in it.

It comprised the following parties and responsibilities:

  • Bristol City Council, the freeholder, which provided no services;
  • The Trustees of the Epic (Colmore Row) Trust, the long lessees of the whole development. They were liable to insure; to keep the development in good and substantial repair and condition, and to manage it in accordance with the principles of good estate management;
  • Westmark (Lettings) Ltd was the long lessee of the residential units and their associated common parts;
  • Queen Square (Bristol) Residential Management Company Limited held a concurrent lease of the same parts of the development as Westmark. It was responsible for looking after the residential common parts of the building;
  • The occupational leaseholders sat at the end of the chain. There were 29 flats in the development.

Broadly speaking, there was a cascading liability to pay for the services provided by each of the parties. So the Trustees of the Epic (Colmore Row) Trust charged Westmark, Westmark charged the Management Company, which in turn charged the occupational leaseholders.

Everyone except Bristol City Council appears to have been party to the proceedings, although neither Epic nor the management company took part in the appeal.

The management problems

It was envisaged that ownership of the Management Company would be transferred to the lessees when the development was completed in 2007. That way the lessees would be in charge of their own destiny, or at least the maintenance and finances of the residential common parts.

For reasons that are not divulged in the decision, that transfer did not happen for ten years. By the date of the appeal, the lessees had owned the Management Company for less than a year.

The FTT proceedings arose from what appeared to be at least eight years of mismanagement of the development, including:

  • A failure to reconcile estimated and actual service charge costs between 2009 and 2011, and
  • A failure, after 2011, to demand or collect any estimated service charges.

Those failings caused problems for lessees who were trying to sell their flats.

At the end of November 2015, presumably in an effort to remedy that latter issue, the Management Company sent five invoices to the lessees:

  • A combined invoice for the accounting years 2008 to 2011, and
  • One each for the years from 2012 to 2015.

The demands were described as “Epic service charges total liability”. The first word was shorthand for the Trustees of the Epic (Colmore Row) Trust, rather than a description of the demand… I hope.

The costs were allocated between insurance, car park, building service costs and no further.

The section 27A application

The lessees made a section 27A application, relying on section 20B. The eighteen months began to run, they argued, when Epic incurred the costs of the services. It did not run when the Management Company became liable for those costs.

That being the case, they had no liability for costs pre-dating 31 May 2014.

The FTT’s decision

The FTT determined that a cost could be incurred only once, that being when it was incurred by the landlord who actually provided the services giving rise to the service charge demand.

It concluded that, a cost could not become a cost at two different times, once when incurred by a head landlord and then again when the intermediate landlord received a demand from that head landlord.

The FTT reasoned that the power to serve a notice under section 20B(2), and the power to raise estimated demands saved an intermediate landlord from otherwise being time-barred by section 20B(1) from raising its own service charge demands of its own lessees.

Consequently, in the case before them, the lessees were relieved of the liability pay service charges pre-dating May 2014.

The relevant statutory provisions

Sections 18 to 30 are the main provisions governing residential service charges in the Landlord and Tenant Act 1985.

Service charge and relevant costs

Are defined in section 18 of the 1985 Act:

“(1) In the following provisions of this Act “service charge” means an amount payable by a tenant of a dwelling as part of or in addition to the rent—

“(a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management, and

“(b) the whole or part of which varies or may vary according to the relevant costs.

“(2) The relevant costs are 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.

“(3) For this purpose—

“(a) “costs” includes overheads, and

“(b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period.”

The “tenant of a dwelling”

By section 38, “dwelling” means a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, outhouses and appurtenances belonging to it or usually enjoyed with it.

In Ruddy v Oakfern Properties Ltd [2007] Ch. 335, the Court of Appeal held that a “tenant of a dwelling” could include:

  • An intermediate landlord;
  • A lessee one of more than one “dwelling”, and
  • A lessee of part or all of a building containing more than one “dwelling”.

Limits on the recoverability of service charges

The six sections that follow section 19 impose certain restrictions on a landlord’s ability to recover service charges.

Section 20B: the eighteen-month rule

Section 20B restricts the recoverability of service charges by reference to time:

“(1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to sub-section (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.

“(2) Sub section (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge.

It is key to know the date on which any cost is “incurred”. If it is incurred more than eighteen months before service of a demand that includes that cost, a lessee is not liable to pay that element of the demand unless the landlord has served a notice in accordance with section 20B(2).

OM Property Management v Burr [2013] 1 W.L.R. 3071 is the leading case on identifying that key date. This is how Martin Rodger QC summarised it (with some input from Lord Dyson):

“Approving the decision of the Tribunal that it is the cost that must be incurred, the Court explained (at [8]) that a liability to pay for a service does not become a cost for the purpose of section 21B(1) until it is made concrete, “either by being met or paid or possibly by being set down in an invoice or certificate”.

“At [13] Lord Dyson (with whom Moses LJ and Pill LJ agreed) said:

“the incurring of costs entails the existence of an ascertained or ascertainable sum which is capable of being adjusted by repayment, reduction etc. The mere provision of services or supplies does not without more entail anything which is capable of being adjusted in this way.””

Section 21: Obtaining a summary of the relevant costs

By virtue of section 21 of the 1985 Act, lessees and Recognised Tenants’ Associations are entitled to certain information about costs that have been incurred.

The first step, in section 21, is for a request to be made of the landlord for a written summary of the service charge costs incurred in the immediately previous accounting period, whether “payable or demanded as payable in that or any other accounting period”.

Section 21(4) sets out the time frame within which the landlord must comply, that being either:

  • Within one month of the request, or
  • Within six months of the end of the last accounting period,

whichever is the later.

Section 21(5) obliges the landlord to include in the summary details of costs for which the landlord has not received any demand for payment in that previous accounting year. Martin Rodger QC was of the view that the obligation covered costs incurred after the year in relation to which the demand had been made.

Finally, if the service charge is payable by the tenants of more than four dwellings the summary must be certified as a fair summary by a qualified accountant (section 21(6)).

Section 22: inspecting documents

A landlord’s obligation to disclose information does not stop at section 21.

Section 22 provides that a lessee who has received a summary of the relevant costs under section 21(1) may inspect the “accounts, receipts and other documents supporting it”.

The request to inspect must be made within six months of obtaining the summary. The landlord must make inspection facilities available no later than one month after the inspection. They must remain available for two months.

Section 23: information about relevant costs from superior landlords

At section 23, Martin Rodger QC encountered superior landlords, and the procedure to be followed on receipt of a section 21 or 22 summary or inspection request where costs have been incurred by a landlord higher up the chain than the tenant’s own landlord. That procedure enables the transparency required of immediate landlords to apply equally to superior ones.

Consequences of non-compliance with sections 21 and 22

Pursuant to section 25(1), it is an offence if there is failure, without reasonable excuse, to comply with a request under either sections 21, 22 or 23.

The Upper Tribunal’s decision

Westmark was represented at the appeal. The lessees represented themselves.

Martin Rodger QC reminded himself that in OM Property Management Ltd v Burr, the Court of Appeal held that a cost was incurred when a landlord received an invoice from its supplier or contractor.

“As a result”, he said, “the section provides less protection against stale claims than if the period of 18 months began at the earlier date when the service itself is provided”.

Conversely however, there were real practical difficulties for lessees wanting to sell their flats during the delay resulting from superior landlords wrangling their differences behind closed doors.

If a lessee could not quantify his/her service charge liability, s/he may struggle to find a purchaser; may have to accept a discount on the asking price, or may be asked to provide an indemnity against those unquantified charges.

It was important therefore that the scope of section 20B should be clear. How much protection was it intended to provide?

Parliament & the Nugee Committee

The original recommendation to Parliament by the 1985 Nugee Committee was that there should be a twelve-month time limit on demanding service charges, but that the county court should have the power to disapply that limit.

Instead however, section 20B was inserted into the 1985 Act by the Landlord and Tenant Act 1987. No real explanation was given for the divergence from the Nugee Committee’s recommendation.

Statutory interpretation

Happily, Parliamentary policy was not the starting point for Martin Rodger QC’s analysis of section 20B.

The correct starting point was, in his words: “the natural or ordinary meaning of the language in which that policy is expressed”, although, as noted by Parker LJ in Oakfern v Ruddy, where the natural or ordinary meaning of the language would lead to anomalies:

“In such circumstances, it seems to me that the right approach must be to attempt to construe the relevant statutory provision in its legislative context, and having reached a provisional conclusion as to what it means, to test that meaning to see whether it would, if adopted, lead to such absurd consequences in practice that Parliament cannot possibly have intended it. If the provisional conclusion would lead to absurd consequences, then it may be necessary to revisit it.”

The service charge sections of the 1985 Act

Martin Rodger QC began by considering the statutory context of section 20B.

He made two points.

Superior landlords and the 1985 Act

It appeared that Parliament was aware of cascading interests and liabilities where “services might be provided by a superior landlord and paid for ultimately by a tenant several links below it on a chain of title, as happens in this case”.

  • In section 18(1), a service charge is an amount payable “directly or indirectly”…;
  • In section 18(2), relevant costs are costs incurred or to be incurred “by or on behalf of the landlord, or a superior landlord”;
  • Section 23 envisages responses to lessees’ requests for information about costs being passed up the chain of title ultimately to the landlord who incurred the cost(s) which is/are the subject of the request.

Time to calculate

It also appeared that Parliament understood that accounts cannot always be prepared speedily because a landlord had at least six months after the end of the annual accounting period in question to provide a summary of the costs incurred in the period that was subject to a section 21(1) request.

It may therefore be the case that some of the costs on a summary of costs had been incurred up to eighteen months before they were disclosed to the tenant following a section 21 request.

“It may not be a coincidence that the same period, 18 months, is included in section 20B(1) as the maximum allowed for a landlord to present a demand for payment of a service charge taking such costs into account”, he observed.

So far as section 23 – superior landlords and requests up the chain of title – was concerned, Martin Rodger QC noted that section 21(4) allowed the normal six-month period to be extended by “such further time, if any, as is reasonable in the circumstances”.

Parliament therefore anticipated that there may be situations where a landlord needed more than six months after the end of the accounting period in order to obtain information needed to comply with a section 21 or 22 request.

Section 20B

So much for the landscape surrounding section 20B. What of the wording of the section itself? Broadly, said Martin Rodger QC:

“Its effect is to provide a time limit running backwards from the date of a demand and to relieve the tenant from liability in respect of so much of a service charge as “reflects” “relevant costs … incurred more than 18 month before” the demand which were “taken into account in determining the amount of” the service charge”.

“Landlord” does not appear anywhere in section 20B. Only “tenant” appears, plainly meaning the tenant who receives the demand.

“Relevant costs”, a phrase lifted from section 18, was not defined by reference to the landlord who incurs them, but rather to costs that are reflected in, or are taken into account in, determining the amount of the service charge that is the subject of the demand.

The use of “reflects” further reinforced the point that a service charge may be an amount payable to a landlord “directly or indirectly”.

In other words, both sections 18 and 20B allowed for a gap between the provider of the service and the person entitled to receive payment for its provision.

“In the context of a service charge payable by the tenant referred to in section 20B(1), on whose liability the 18 month time limit might bite, relevant costs therefore include costs incurred by a superior landlord”, observed Martin Rodger QC.

“Reading the definition of relevant costs in section 18(2) into section 20B(1) (omitting, for the sake of simplicity, the references to estimated costs or costs to be incurred) produces the following result :

““If any of the [costs … incurred by or on behalf of the landlord, or a superior landlord] taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.””

That reading supported the FTT’s decision because it meant that the costs incurred by the superior landlord that were incurred over 18 months before the immediate landlord’s demand of the tenant would be time-barred by section 20B.

Do not be deceived – it ain’t over yet.

Costs to both landlords

At this stage, Martin Rodger QC changed direction, as if a fresh line of argument had suddenly occurred to him.

At Queen Square, the Management Company not only passed on costs incurred by Epic and passed on to it by Westmark: it also incurred its own costs in looking after the residential common parts, and charged those to the lessees.

There were therefore two sets of costs:

  • One originating with Epic, the superior landlord, and
  • One incurred by the Management Company, the immediate landlord.

All of those costs fell within the meaning of “relevant costs” for the purposes of section 18(2).

So, said he:

“The critical question is whether costs incurred by the Management Company in discharging its liability to Westmark in respect of services provided by Epic, are to be treated for the purpose of section 20B as being the same costs as those incurred by Epic itself”.

Contractual liabilities

Each party in the chain of title bore a different liability, depending on its position and the terms of its lease:

  • Epic was liable pay its contractors;
  • Westmark was liable to Epic for some of the latter’s costs;
  • The Management Company was under a different liability again, this time to Westmark for a proportion of that company’s costs.

Packing the demands into the 1985 Act

Each time a demand for payment was made of the paying party, that cost was “incurred” for the purposes of section 20B.

Further, the money demanded of Westmark and the Management Company was a service charge within the meaning of section 18:

  • It was payable “directly or indirectly for services…”;
  • The sums demanded of the Management Company by Westmark were “relevant costs” because they were “incurred by a superior landlord in connection with the matters for which the service charge was payable, namely the services provided by Epic”;
  • The amount demanded varied according to the relevant costs;
  • Westmark and the Management Company were each a “tenant of a dwelling” as decided in Oakfern v Ruddy.

Looking at it another way: if one party in the chain did not demand payment from the party below, the latter would not incur any costs because it would have no obligation to pay anything.

So, concluded Martin Rodger QC:

“There therefore seems to me to be no reason to treat the costs incurred by Westmark and the Management Company as if they were costs incurred at any earlier time than when each of those companies received a demand for payment from its superior landlord. In particular there is no reason to treat the relevant costs incurred by the Management Company as if they had been incurred when Epic received invoices from its contractors and suppliers”.

Section 20B and a lack of flexibility

Settled onto the home straight, Martin Rodger QC drew support for his conclusion by the absence of any leeway in section 20B for the eighteen-month deadline to be extended. If one eighteen-month time limit was to be applied, it was surprising that Parliament had not legislated for that limit to be extendable or dispensable where there was an intermediate landlord.

By contrast, section 23(1) made such an allowance in relation to the provision of the summary of costs and inspection of underlying documents.

In relation to that section, Parliament had therefore taken into account the fact that it may take longer to obtain documents from a superior landlord than where the costs of providing services were incurred directly by one landlord.

“The fact that no such accommodation was allowed suggests to me that Parliament did not intend to place the intermediate landlord in the precarious position the FTT’s construction of the section would create”, observed Martin Rodger QC.

“A new relevant cost arises at each stage, notwithstanding that at each stage the new cost is payable in respect of the same service provided by Epic and its contractors. It follows that my provisional view on the issue of construction is that section 20B(1) has a renewed effect at each level in the chain of liabilities”.

Relative hardships

Given his conclusion that a new relevant cost was incurred on each demand down the chain, Martin Rodger QC asked himself whether that conclusion was so absurd that it should be rejected.

This was a case where both sides could be susceptible to “potentially harsh and probably unforeseen consequences”:

  • Lessees might find themselves faced with demands for payment for works and services provided many years before, resulting in damaging uncertainty, but
  • Intermediate landlords however ran the more serious risk, because through no fault of their own, they might not be able to recover money that had been demanded of them by their own landlord, and which had been spent on services benefiting the lessees.

The risks to both sides could be ameliorated by the normal practice of collecting payments on account.

Section 20B(2)

Section 20B(2) removes the eighteen-month time limit if the landlord serves a notice containing certain information, including a quantification of the costs incurred.

It is effectively a notice that allows a landlord to dispense with the eighteen month rule, and can therefore give an intermediate landlord some comfort.

What to do however if the landlord did not know how much it had incurred? Brent London Borough Council v Shulem B Association Ltd [2011] 1 WLR 3014 is authority for the proposition that a landlord must include a figure in its section 20B(2) notice.

In Brent, Morgan J suggested that the landlord could “include a figure which it feels will suffice to enable it to recover in due course its actual costs, when all uncertainty has been removed.”

By erring on the side of caution, the landlord could avoid raising a balancing charge once the actual figures were known, especially because Morgan J was of the view that such a balancing charge would be irrecoverable if demanded more than eighteen months after the cost was incurred.

Martin Rodger QC was of the opinion that Morgan J.’s approach did not assist intermediate landlords: they would have no way of knowing how much had been incurred by their own landlord – or any superior landlord further up the chain.

So, he concluded, section 20B(2) does not help an intermediate landlord who is liable to pay a demand but entitled to pass it on to its own leaseholders.

Other routes to compliance

Were there other ways in which an intermediate landlord might be able to comply with a single eighteen-month time limit for demands or at least serve a reasonably accurate section 20B(2) notice?

In a word: no. An intermediate landlord:

  • Would be consulted for major works or qualifying long term agreements, and
  • Was entitled to require a summary of costs and to inspect the underlying documents by virtue of sections 21 and 22;
  • Was entitled to make make section 27A applications for a determination of the amount payable by them.

These routes were however available to both lessee and intermediate landlord, and therefore contributed nothing to the resolution of the appeal.

“My conclusion is therefore that none of the anomalies or policy considerations identified by the parties requires that a different construction be given to section 20B(1) than that which seems to me to emerge most clearly from the language”.

“For the purpose of section 20B(1) a relevant cost is incurred when an intermediate landlord receives a demand for payment from its own landlord for services provided by it or a superior landlord, and not on the earlier d ate on which the superior landlord incurs its own separate cost of providing those services”.

Disposal

Allowing the appeal, Martin Rodger QC applied his conclusion to the facts:

“The date on which costs were incurred for the purpose of the time limit was the date on which they were incurred by the Management Company when it received a demand from Westmark, and not when costs were incurred by Epic”.

Afternote

One of the issues before the FTT was the validity of demands dated 30 November 2015, served on the lessees by the Management Company.

In relation to the costs said to have given rise to those demands, the FTT determined that, as a matter of fact, no valid demand had been served by Epic on Westmark, nor had Westmark served any valid demand on the Management Company.

That being the case, Martin Rodger QC held that the Management Company had not incurred any costs to pass to the lessees.

As a result, the lessees bore no liability to pay its demands.

They may have lost the appeal on the law, but the financial outcome was nonetheless positive.

Observations

A little devilment

The mischievous part of me cannot help but think that the reasoning about section 20B in this case was not actually required for the resolution of the appeal, because the lessees’ liability to pay service charges ultimately turned on the existence and service of service charge demands further up the chain.

There being no valid demands, there was nothing on which section 20B might bite.

Technically therefore it might be said that Martin Rodger QC’s analysis of section 20B carries, er, little weight: in other words, it is obiter.

Back in the real world however, there can be little doubt that this will be a Really Useful decision, even if it does raise issues of general concern and creates practical challenges.

The evidential challenge

I anticipate that evidence will pose one of the key challenges if a dispute arises about the quality of a service provided, for example, five years ago.

In Yorkbrook Investments Ltd v Batten (1986) 52 P&CR 51, a case I have referred to before, Wood J. said:

“The court will reach its conclusions on the whole of the evidence. If the normal rules of pleadings are met, there should be no difficulty. The landlord in making his claims for maintenance contributions will no doubt succeed, unless a defence is served saying that the standard or the costs are unreasonable. The tenant in such a pleading will need to specify the item complained of and the general nature—but not the evidence—of his case. No doubt discovery will need to be ordered at an early stage, but there should be no problem in each side knowing the case it has to meet, providing that the court maintains a firm hold over its procedures. If the tenant gives evidence establishing a prima facie case, then it will be for the landlord to meet those allegations and ultimately, the court will reach its decisions”.

That principle was most recently seen in action in Cos Services Ltd v Nicholson, Willans [2017] UKUT 0382 (LC).

General concern I: section 21 & 22 requests – real or hollow power?

Ms Peddle and her fellow lessees told the Upper Tribunal that there had been no meaningful response to their many section 21 requests.

Given the Court of Appeal’s decision in Di Marco v Morshead Mansions Ltd that the only remedy for failure to comply with sections 21 and 22 is a prosecution punishable on conviction by a fine, they therefore had no means of enforcing compliance with their requests. They could not therefore take the initiative and try to assess for themselves the amount of money that was being spent on their behalf.

General concern II: accessibility & a meaningful result

The FTT is regularly described as an informal/less formal forum than court for resolving disputes.

Even so, the lessees in this case said that they had found the process daunting, and the procedures were not straightforward.

They had made the section 27A application in order to resolve the dispute, but even so, that application had not resulted in disclosure of details of demands passing between Epic and Westmark.

That was relevant because they were liable to pay a proportion of expenditure for which Westmark was liable in respect of the residential parts.

A determination of the total costs incurred by Epic in providing services to the whole development would not therefore enable them to calculate their own liability.

How quickly can service charge accounts be prepared?

Finally, and in full expectation of howls of protest from property managers, surveyors and accountants, I have to ask how long it actually takes to prepare a set of service charge accounts.

In this appeal, Westmark argued that it may be contractually impossible to deliver service charge accounts within a very short period of time, because delays can be caused by complex apportionments, or certification procedures that need to be completed.

But can that really be the case? A public limited company is required to file its company accounts within six months of its year end. Are any service charge accounts more complex than, say, British Airways plc’s company accounts?

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