Table Of Contents
Continuing HHJ Alice Robinson’s examination of many technical elements of the law relating to service charge demands…
You can read Part I of this decision and issues (1) and (2) of the appeal here. This post covers issues (3) to (7). My observations will follow in a third post.
Here Mr Roberts argued that the service charges for 2009 to 2015 were irrecoverable as there had been no valid demands for the 2009 to 2015 service charges, and those costs had been incurred more than 18 months previously.
Further, the landlord had not served a section 20B(2) notice.
In Hayes Point (LVT/CH/SC/32), a 2012 decision, the LVT listed the following elements of section 20B(2):
The service charge accounts satisfied the second and third of the above, but:
That the only demands ever made of the lessees were estimates, rather than demands based on actual costs. That was because the landlord’s budget had never been exceeded in the relevant years, and there was no need to raise a balancing demand.
No credits had been made to lessees’ accounts either, because the landlord had needed the extra income to fill a gap in its income where some lessees had paid nothing.
This is where HHJ Robinson’s decision becomes particularly exciting for me personally.
“In the Skelton case already referred to,” she said, “… the Court of Appeal held that s.20B applies to service charges in respect of costs to be incurred as well as costs that have been incurred. The landlord in that case had demanded on-account service charges and no balancing charge had subsequently been demanded. However, because the demands were not accompanied by an estimate as required by the lease, they were contractually invalid.
“At first instance, the Tribunal (His Honour Judge Huskinson) held that the demands were validated on the date the estimate was subsequently served and there was no appeal against that. However, he also held, relying upon the decision in Gilje v Charlgrove Securities Limited  1 All ER 91, that because s.20B(1) did not apply to costs to be incurred in the future, at the date the demands were subsequently validated, the tenant became liable to pay the on-account service charges, even though by then the demands related to costs to be incurred more than 18 months earlier. The Court of Appeal disagreed.
“Arden LJ (with whom Richards LJ agreed) held that s.20B(1) applied to the demands for on-account service charges and because by the date the on-account demands were validated the costs had been incurred more than 18 months earlier, the tenant was not liable to pay. Arden LJ said this:
“17. In my judgment, it is clear from the definition of “service charge” in section 18 that section 20B applies to service charges in respect of costs to be incurred as much as costs that have been incurred. In my judgment, the judge was wrong to hold otherwise on the basis of Gilje. In Gilje the landlord served demands for 1999 and 2000 before incurring any costs. The landlord had spent less than the amounts demanded, and there was no balancing charge. The argument was that none of the on-account payments was payable. Etherton J held that there was no “metamorphosis” from an on-account demand and a demand for actual costs once costs had been incurred. Section 20B did not apply where the tenants made on-account payments of their service charges, the landlord’s actual expenditure did not exceed the estimated amount on which the service charges were based and the landlord did not serve any further demand on the tenant. There was then no “demand for payment” after the incurring of costs to which section 20B could apply. But that reasoning does not assist in this case because the demand was only validly served after the costs were incurred.
“18. Further, in my judgment, it is not enough under section 20B that the tenant has received the information that his landlord proposes to make a demand. As Morgan J held in London Borough of Brent v Shulem B Association Ltd  EWHC 1663, , there must be a valid demand for payment of the service charge. In that case, the landlord had served several different demands for payment but they were all invalid because they did not comply with the terms of the parties’ contract. The content of the alleged demand did not comply with the service charge provisions of the lease. So there was no valid demand for the purposes of section 20B(1) of the 1985 Act…
“20. Ms Gourlay also draws to our attention that retrospective correction of a demand is possible in certain situations. Thus, in Johnson v County Bideford  UKUT 457 (LC), the landlord had failed to comply with the requirement in section 47(1) of the 1985 Act to provide his name and address. The Upper Tribunal held that, by serving fresh demands, the landlord had provided the information required by section 47(2) to validate the original demands. Section 47(2) allows for this possibility. Ms Gourlay submits that Johnson is about statutory validity not contractual validity. I agree. We have not been shown any authority for the proposition that as a matter of contract law the delivery of the estimate validated the demands in this case as of the date of the demand.
“21. If in the situation in this case, the tenant receives a windfall, that is the result of the landlord not having complied with the terms of the lease for service of a valid demand.””
The eagle-eyed amongst my readers will have guessed that the reason for my excitement is that I am referred to by name here. “Miss Gourlay” is me!
Moving on …
HHJ Robinson reviewed the facts in the case before her in the light of the above (very learned) citation:
“It follows”, said HHJ Robinson, “that s.20B does not apply in this case and provides no grounds for [Mr Roberts] not to pay the service charges in issue in this case”.
Having built up a head of steam and enthusiasm for the formal technicalities of service charge demands, and even though it was “not strictly necessary” for her to resolve the point, in case the appeal went further, and in deference to the submission she had heard, she moved on to whether the Statements of Account would have complied with section 20B(2).
Referring to London Borough of Brent v Shulem B Association Limited  1 WLR 3014, Ch, she noted that:
“Morgan J held that a demand for service charges that did not comply with the relevant terms of the lease is not a demand which complies with s.20B. In paragraph 54 Morgan J said this:
“… [s.20B(2)] requires the notification to relate to two matters. The first matter that must be notified is “that those costs had been incurred”. The second matter is “that [the tenant] would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge”. The parties do not agree as to the extent of the statutory requirements. In particular, they do not agree as to what information has to be given to satisfy the requirement that the tenant is notified “that those costs have been incurred”.
“He went to hold that the notice must specify the costs which have been incurred in sufficient detail that they can be related to the service charge demanded:
“… the subsection appears to require the lessor to identify the costs which have been incurred so that when one comes to apply section 20B(2) to the relevant notification one will be able to say whether the costs, which the lessor wants to take into account in determining the amount of the service charge, were notified to the lessee.”
“As to the second matter (that the tenant would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge), Morgan J held that it is not necessary for the notice to spell out how much the tenant will have to pay:
“Taken literally, this does not oblige the lessor to state the resulting amount of the service charge. On this reading, there will be a valid notification for the purposes of the subsection if the lessor notifies the lessee that it has incurred costs of £x on certain service charge matters without telling the lessee what sum the lessee will ultimately be expected to pay. It may be that in some cases, the lessee will know what proportion of the total costs it will have to pay. The lease in question may identify a fixed percentage of service charge costs. However, many leases do not specify a fixed percentage. It would no doubt be of more use to a lessee to be told what sum it will be expected to pay by way of service charge but, in my judgment, the words of section 20B(2) do not clearly so require.”
HHJ Robinson recorded that Mr Roberts’s lease did require him to pay a fixed percentage and applying the above principles to the present case:
Mr Roberts’s section 20B(2) argument therefore failed.
“For all these reasons”, quoth HHJ Robinson, presumably feeling rather technicalitied-out by now, “I consider that the LVT was correct to hold that s.20B of the 1985 Act did not prevent recovery of the service charges”.
Mr Roberts had not been alone in challenging the service charge demands in 2016: the lessee of 6 Coopers Court had also been before the LVT, and, as it transpired, only shortly before him.
The Coopers Court LVT had made findings about the reserve funds, electricity payments and the overall service charge payable. Mr Roberts argued that his LVT had not taken those findings into account:
At the appeal hearing, the landlord conceded all of those points.
Owing to a lack of clarity in the LVT’s calculations, HHJ Robinson directed that the calculation of the credit payable to Mr Roberts should be remitted to the LVT.
She was however clear that the LVT’s figures did not include any credit relating to reserve funds.
Despite the landlord’s concession in that respect, HHJ Robinson expressed her disapproval of the LVT in strong terms:
“This LVT wholly failed to explain … why it considered that no deduction should be made for the reserve funds and electricity credit as had been done in the Coopers Court decision. However, in my judgment it goes beyond a mere failure to give reasons. In my judgment, no reasonable LVT could have failed to make those deductions.
“Further, although the LVT says it has taken into account the Coopers Court LVT’s analysis of invoices, apart from saying it has “reviewed the financial information received”, no reasons are given for not adopting the same reduced general service charge figures as in the Coopers Court decision … from which the reserve funds and electricity credits must then be deducted”.
As a parting shot, she reminded the LVT that it would need to consider the general service charge figures for 2014 and 2015 having regard to the evidence because the Coopers Court decision does not cover the years 2014 and 2015.
The LVT made no reference to Mr Roberts’s challenges to the Dray House electricity charges, which were much higher than the charges for Coopers Court and Malt House, even though all three buildings contained the same number of flats.
Mr Roberts argued that some commercial electricity use was being charged to Dray House, and wrongly so.
The landlord countered that, following Georgiou (t/a Marios Chippery) v Customs and Excise Commissioners  STC 463, the LVT had made findings of fact that could not be overturned unless:
Those four points could not be satisfied by Mr Roberts.
Further, in 2013 the landlord, aware of the problem, had issued credits for 2013 and the years before; the commercial unit now had its own electricity meter, and the landlord planned to raise further credits for 2014 to the date when the electricity supplies were separately metered.
HHJ Robinson considered that the Coopers Court decision was broadly the answer. It dealt with the level of credit to be applied up to 2013, and if the LVT hearing this case decided to depart from those Coopers Court figures, it would be required to give proper reasons.
As to 2014 and 2015, which were not covered by the Coopers Court decision, the parties would be entitled to put their case as whether there should be a deduction for those years too.
From this issue flowed some tricky issues.
The LVT decided that Mr Roberts’s lease obliged him to pay 1/42 of the water costs. Mr Roberts argued that he was being was being overcharged for water for three reasons:
Only the first point was, in HHJ Robinson’s view, a point to be considered.
The second two raised same issues that had been covered in relation to electricity. The Coopers Court decision covered costs up to 2013; it was open to both parties to argue their cases in relation to 2014 and 2015 when the case was remitted to the LVT after the appeal.
Turning to apportionment, HHJ Robinson cited the Court of Appeal in Sheffield City Council v Oliver  EWCA Civ 225. She noted that section 27A(6) of the 1985 Act provides that:
“An agreement by the tenant of a dwelling… is void so far as it purports to provide for a determination –
(a) in a particular manner, or
(b) on particular evidence of any question which may be the subject of an application under subsection (1) or (3).”
In Oliver, the Court of Appeal approved Martin Rodger QC’s decisions in Windermere Marina Village Limited v Wild  UKUT 0163 (LC) and Gater v Wellington Real Estate Limited  UKUT 0561 (LC), in which he concluded that the effect of section 27A is to render void a clause which states that the landlord’s surveyor or other person shall decide the amount of the service charge.
In Oliver, the lease required payment of “a fair proportion to be determined by the City Treasurer” of the allowable costs and expenses.
The Court of Appeal held that the clause was void.
The difference between Oliver and Mr Roberts’s case however was that Mr Roberts’s lease contained two formulae: “one forty-second (1/42) or such other fair and reasonable proportion to be determined by the Landlord’s surveyor whose decision (save in the case of manifest error) shall be decisive”.
That, in HHJ Robinson’s view, was key.
In a paragraph that to my mind rather conflates sections 27A(4) and (6), she said:
“In my judgment the effect of s.27A(6) cannot be to render void the whole of the second part of the definition. The prohibition is designed to avoid ousting the jurisdiction of the First Tier Tribunal (or Leasehold Valuation Tribunal) but it does not oust “a matter which has been agreed or admitted by the tenant”, see s.27A(4)(a). The matter which the tenant has agreed is to pay (in the other cases) a fair proportion or (in this case) 1/42 or a fair and reasonable proportion”.
Mr Roberts could not argue that every cost should be based on a “fair and reasonable” assessment, because there would otherwise be no point in having a fixed fraction in the lease. That fixed figure must be the starting point, and the wording of the clause confirmed that the parties had agreed that 1/42 a fair and reasonable proportion.
Further, the parties would have known, at the grant of the lease, that electricity and water costs would be regularly incurred, and that some flats were bigger than others. They must therefore have considered that 1/42 would be a fair proportion despite the variable flat sizes. The “fair and reasonable” provision allowed for proportions to be changed if, for example, new flats were added to the development.
Apportionment was, concluded HHJ Robinson, a point that would require consideration by the LVT at the remitted hearing.
This issue, the last, is the most relevant to property managers and those handling service charge funds. It arose under a challenge under section 19(2) to the reasonableness of the on-account demands levied by the landlord.
The landlord accumulated a surplus each year, and did not provide the lessees with any credits against future years.
It did so because not all lessees paid their service charges, with the result that cash flow was a serious problem. The landlord was slowly recovering unpaid service charges from the non-payers, but it had to manage with limited funds in the meantime.
It therefore increased the service charge each year, so that it could recover enough money from the lessees who paid to fund the service charges, without having to rely on the lessees who did not pay.
Mr Roberts, who himself had not paid any service charges for several years, contended that the landlord should take recovery action against the non-payers, rather than increase the service charge budget to accommodate them.
HHJ Robinson returned to the lease:
The lessees were obliged to make on account payments based on estimated expenditure.
At the end of the year, the landlord was required to certify the amount spent. If that amount exceeded the estimate, the lessee was obliged to pay the difference.
If, conversely, the landlord had spent less than the estimate, the lease provided that: “the overpayment will be credited to the Tenant against the next payment of Service Charge”.
It was therefore clear that any payments or credits must be based on the estimated cost of providing the services.
HHJ Robinson was mystified as to why the landlord had not borrowed money to finance the unpaid charges, given that:
Taking the above into consideration, HHJ Robinson concluded that the LVT had been mistaken in accepting as reasonable the landlord’s on account service charge demands. The reality was that, in this case, the landlord’s service charge budget had included amounts designed to cushion it against cash flow issues if some lessees did not pay.
“Reasonableness has to be considered in the context of the contractual rights and obligations of the lease”.
“It cannot be reasonable for the landlord to charge on-account service charges for the purpose of providing a surplus to cover the costs of tenants who are in arrears of service charges because the lease does not authorise the recovery of a service charge for this purpose”.
That finding did not however liberate Mr Roberts from his liability to pay “a substantial sum in service charges”.
HHJ Robinson tied up her decision with some general remarks.
First, in her view, before the case went back to the LVT, the landlord should “retrospectively prepare service charge accounts” that were lease-compliant, complete with appropriate credits that would, over time, reduce to zero once all payments were up to date. That would give the LVT a “proper context” in which to assess the sums claimed. Indeed, as matters stood, so much time had now passed that the LVT could probably hear the case as a challenge to the actual costs, rather than to estimated costs.
Second, the excessive amounts demanded did not render them invalid.
“If that were the case,” observed HHJ Robinson, “any service charge demand which was found at a later date to include a sum that should not have been included would be invalid and not comply with s.20B(1).
“In fact, in the Shulem case, Morgan J envisaged that in order to comply with s.20B(1), it would be open to a landlord to err on the side of caution and include a figure which will enable it to comfortably recover all the anticipated costs.
“Therefore the service charge demands the subject of these proceedings remain demands which satisfy s.20B(1). In any event, I have also held that the Service Charge Statements of Account also satisfy s.20B(2)”.
Therefore no section 20B points arose.
And on that note, this magnum opus of an appeal drew gently to a close.
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