Urban Splash Work Ltd v Ridgway, Cunningham [2018] UKUT 0032 (LC)

Mark Andrew Tudor Roberts v Countryside Residential (South West) Limited [2017] UKUT 0386 (LC), observations
8th March 2018
Urban Splash Work Limited v (1) Gary Ridgway (2) Mary Bridget Cunningham [2018] UKUT 0032 (LC), Pt II
9th April 2018
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This might be said to be the paradigm landlord/long lessee dispute. The facts are relatively unremarkable: I suspect that everyone who deals with service and variable administration charges will recognise one or more of the issues.

There is however so much good practical stuff in this appeal – in addition to some groovy legal points – that I have divided my review into two parts.

That said, Martin Rodger QC’s decision does not always make for easy reading for those of us who appear regularly in the Tribunals, whether as landlords, managing agents or advocates. His observations also left me with the clear impression that there were several points that he would have liked to have seen raised on behalf of the lessees, but which – well – weren’t.

Our learned Deputy President of the Upper Tribunal (Lands Chamber) is not a judge who sits in an eyrie in London. Here he travelled to Liverpool for this appeal concerning Loft Nine, Concert Square Apartments, 34 Wood Street, Liverpool L1.

Romantically as they are named, it transpires that the Concert Square apartments were originally a warehouse, being converted into nine “loft-style” apartments in the mid-1990s. It shares some services with another building in the same ownership, the name of which Martin Rodger QC does not divulge.

Urban Splash was the freeholder. Mr Ridgway and Ms Cunningham were the original lessees under a 125 year lease from 1994.

On 31 October 2010, there was a change of managing agent. The old agent, Trinity, was replaced by RMG.

It inherited a dispute with Mr Ridgway and Ms Cunningham, who had not paid all of the charges demanded of them.

As so regularly happens, the amount in dispute spiralled because, in Martin Rodger QC’s words, RMG:

“levied a succession of fees, charges and incidental expenses for corresponding about the dispute or pursuing the [lessees] for the recovery of the disputed sums, which the [lessees] also refused to pay and which were added to their quarterly service charge statements”.

Those fees, as Martin Rodger QC observed, were not service charges, but variable administration charges.

The FTT has similar powers to its section 27A powers to determine the recoverability of variable administration charges under section 158 and Schedule 11 to the Commonhold and Leasehold Reform Act 2002.

Section 27A

Martin Rodger QC began with a handy summary of section 27A of the Landlord and Tenant Act 1985. It empowers the FTT to determine:

  • Whether a service charge is payable, and, if it is,
  • The amount which is payable,
  • The person who is liable to make the payment and
  • The date on which the sum is payable.

A party may also seek a determination as to future service charges where the costs:

  • Have not yet been incurred, or
  • Are not payable until a contractual pre-condition is first met.

The landlord’s claim

The landlord issued a claim for £8,702.24 in the county court.

The lessees acknowledged service and made a section 27A application to the FTT for a determination of charges:

  • Incurred for the years 2010-2016, and
  • Demanded on-account for 2017.

The county court proceedings joined them in the FTT.

The FTT’s decision

Service charges

The FTT’s decision addressed the amount of service charge payable:

  • For the years ending 2012 to 2015;
  • On account for the first two quarters of 2016-17.

There were however omissions. There was nothing in the decision:

  • About the years ending 2010, 2011 and 2016, nor
  • As to whether the on account service charge was actually payable.

It made no decision about the year ending 2010 because it considered that it did not have enough evidence to do so. Instead, it granted Urban Splash permission to re-apply when it could provide that evidence. A second bite at the cherry, if you will.

Variable administration charges

The FTT held that the administration charges were not payable.

Section 20C

The FTT criticised Urban Splash’s conduct and made a section 20C order.

Permission to appeal

Urban Splash’s grounds of appeal were very general. The FTT, it said:

  • Had failed to determine all of the issues that it was required to consider under section 27A, and
  • Had been wrong to make an order under section 20C.

The issues

There were no less than six issues before the Upper Tribunal:

  • (1-3) Determination of the service charges payable for the years ending 2010, 2011 and 2016;
  • (4) Whether provision of an accountant’s certificate was a condition precedent to liability to pay. It was agreed that no such certificate had been prepared until after the FTT proceedings had begun.
  • (5) Recoverability of the variable administration charges;
  • (6) Section 20C;

Martin Rodger QC raised a seventh – exit fees – which was not the subject of the appeal, but he clearly could not resist the temptation. It’s good to know that even Deputy Presidents struggle with willpower from time to time.

The service charge

The lessees were liable to pay a service charge, described as “service rent”, plus a contribution to a sinking fund.

The amount of service charge payable was a “fair proportion” of the cost of providing various services and of providing for future capital expenditure.

Those costs included the fees of the landlord’s managing agents for the collection of rents and for the general management of the Building.

The relevant clause permitted the recovery of the costs of:

  • “Generally managing and administering the Building”,
  • “Employing and paying a firm of managing agents” and
  • “(In so far as the lessor shall reasonably think fit) enforcing … the observance of the covenants on the part of any individual lessee”, amongst which were the collection of service charges and rents.

The service charge machinery

Service charge machinery so often appears to be the work of an aspiring labyrinth designer: the reader ends up chasing all over the lease to establish the what, when and how of payment.

So it was here.

At clause 3, as a condition of the demise, the lessee covenanted to pay the service rent “at the times and in the manner stipulated in the Fifth Schedule.”

Before rushing to the Fifth Schedule however, it behoves the reader to cast an eye over clause 4, in which the Lessee covenanted to pay the rent, the service charge and sinking fund contribution:

“in full without any deduction counterclaim or set off against any payments due to the Lessor hereunder at the times and in the manner aforesaid.”

Now the time is right to turn to the Fifth Schedule. The first paragraph stated that the service charge:

“shall be an amount determined as hereinafter provided and payable at the times and in the manner hereinafter mentioned.”

Determining the “service rent”

I simplify.

Step 1: the landlord’s surveyor prepares an estimate and serves it on the lessee.

Step 2: the lessee makes on account payments quarterly in advance. The service charge year runs from 1 November to 31 October.

Step 3: an independent qualified accountant certifies the amount of the service charge payable. The certificate gives credit for any payments on account.

Step 4: the landlord’s surveyor gives a copy of the certificate to the lessee.

Step 5: if there is a difference between the amount paid on account by the lessee and the amount shown in the certificate, the balance is redressed by a credit to or a payment from the lessee.

At a case management conference, the FTT directed that the landlord provide the certificates required under the lease.

It later transpired that the landlord had not prepared any of the certificates until directed to do so.

The sinking fund contribution

It is here that the lease diverged from the norm. This lease required that, each time that the flat was sold:

“the Lessee must pay 0.25% of the sale price of the Lease for each year it has been owned by the Lessee, subject to a minimum contribution of 1% of that price”.

Issue 1: service charges for 2010

The FTT treated the years 2010 and 2011 together. They straddled the tenure of the two managing agents.

There were three issues here on the appeal:

  • An unexplained balance of £3,894.50 that appeared on the lessees’ service charge account at the end of the 2011 service charge year;
  • A credit claimed by the lessees for £946.31 that they had spent on repairs to a flat roof, and
  • Legal and referral fees of £726.53.

The £3,894.50 balance

As is often the case on a change of managing agent, the new agent, RMG, was unable to provide any meaningful information here, because the claim pre-dated its tenure.

All it was able to produce was a running statement of account for the period 2002 – 2011 showing an arrears balance of £3,894.50. There was no accountant’s certificate for the year ending 2010.

The FTT concluded that it could not determine the issue. Instead, it granted the landlord permission to produce further evidence to substantiate its case.

The landlord appealed on the basis that the FTT should have decided whether the costs were recoverable.

Martin Rodger QC rather bared his teeth:

“Where a tenant does not dispute that expenditure has been incurred on services within the charging provision in the lease, but raises some other challenge, there may be no reason to require a proper explanation of the expenditure itself”, he said.

“But where a tenant has, from the outset, questioned the basis of a charge, as the respondents have done in this case regarding the sum of £726.53 identified only as “other DR charges”, a burden falls on the landlord of explaining what that charge is for.

“It is not enough for the landlord to assert simply that the appearance of the sum on an account prepared by its managing agents is sufficient to establish an entitlement to it. Similarly, where the tenant shows that a discrepancy exists between the sum claimed and the sum suggested by the landlord’s running account … it is for the landlord to provide an explanation”.

However …

Deductions and set-offs

The lessees sought to set off the cost that they had incurred of repairing a roof after Trinity had failed to respond to their requests.

Martin Rodger QC turned to Woodfall: Landlord & Tenant for this statement of the law:

“Where the tenant carries out work of repair which falls within the express or implied obligations of his landlord, he has an ancient common law right to recoup his expenditure out of future rents payable by him to the landlord. The right arises only in relation to a sum certain which the tenant has paid, and in circumstances in which the landlord cannot really dispute its amount.”

The ancient common law right, known as equitable set off, entitles a lessee to reduce a liability for rent or service charges by the amount of his/her expenditure.

The leading modern authorities are:

  • Lee-Parker v Izzet [1971] 1 W.L.R. 1688, and
  • British Anzani (Felixstowe) v International Marine Management (U.K.) [1980] Q.B. 137.

The wording of a lease can however exclude a right of set off.

The court held that the right was excluded where a lease contained a covenant to pay “without any deduction or set off whatsoever” in:

  • Electricity Supply Nominees Ltd v IAF Group Ltd [1993] 2 E.G.L.R. 95 and
  • Star Rider v Inntrepreneur Pub Co. [1998] 1 E.G.L.R. 53.

Here, the lease required service charges to be paid “in full without any deduction counterclaim or set off against any payments due to the Lessor” (my emphasis).

The lessees were not therefore in a position to set off the cost of repairing the roof against their service charge liability, and as the FTT’s powers do not extend beyond determining service charges, the lessees would therefore have to bring a separate claim in the county court.

Managing agents’ fees

The fees listed on the lessees’ service charge account included “referral  fees”, connected with referring the case to solicitors due to service charge arrears.

The landlord asserted that it could recover those fees under the following, unpunctuated clause. Do not read it aloud in one breath.

“To keep the Lessor indemnified from and against all loss damage actions proceedings claims demands costs and expenses of whatsoever nature and whether in respect of any injury to or the death of any person or damage to any person moveable or immoveable or otherwise howsoever arising directly or indirectly from the repair or state of repair or condition of the Premises or from any breach of covenant on the part of the Lessee herein contained or from the use of the Premises or out of any works carried out at any time during the Term to the Premises otherwise than by the Lessor or out of anything now or during the Term attached to or projecting from the Premises otherwise than by the Lessor or as a result of any act or neglect or default by the Lessee or by the Lessee’s respective servants or agents or by any persons in the Premises with the actual or implied authority of any of them.”

That clause, held Martin Rodger QC, was mainly intended to cover claims made against the landlord by third parties. He continued:

“It is at the very least questionable whether it could cover costs incurred by the landlord by its own voluntary decision to take legal action against the tenant who gives the indemnity. In any event, such covenants are liable to abuse”.

The point was not however argued, and the Deputy President focused his energies differently, saying:

“Where a managing agent adds … a charge to the tenant’s account [it must be] demonstrated that an additional cost has actually been incurred by the landlord and, if so, that the amount of the charge is reasonable (as required by paragraph 2 of Schedule 11 to the Commonhold a Leasehold Reform Act 2002).

There were two points to be made.

First, there was no evidence that the former managing agent was entitled to charge the landlord the fee charged to the lessees. The tribunal needed to see the management agreement to establish the position between landlord and managing agent.

Secondly, under the lease, fees for collecting arrears of service charge, managing the building and “enforcing the observance of the covenants on the part of any individual lessee” were recoverable as part of the service charge. They should not therefore be charged to individual leaseholders.

Conclusion, 2010

The FTT had been correct to say that it could not determine the amount payable.

It had, in Martin Rodger QC’s view, been “generous in allowing the appellant the opportunity to restore the application for further consideration if further evidence became available”.

That generosity was to no avail: the landlord could not produce any further evidence.

Accordingly, Martin Rodger QC held that the £3,894.50 was irrecoverable.

Issue 2: service charges for 2011

The amount claimed by Urban Splash was £3,281.37, in addition to the £3,894.50 from 2010.

The FTT’s decision here was odd.

It had a certificate for 2011 – albeit one signed on 08 December 2016 – in the bundle. It referred to the certificate in its decision, but decided that it did not have enough evidence to determine the amount of service charge payable. Why it reached that conclusion was a mystery.

The lessees raised two challenges to charges made in 2011:

  • A failure to collect sinking fund contributions from lessees who sold their flats, and
  • The £3,894.50 charge dealt with above. It was applied to the lessees’ account in 2011.

Given that the first of these did not affect the recoverability of “routine service charge items”, and the second had been determined in relation to 2010, Martin Rodger QC held that the amount of £3,281.37 was payable for the year ending 2011.

The date when it became payable was a different question addressed as issue 4.

Issue 3: service charges for 2016

The FTT declined to determine the service charges for 2016 because, even though it had seen the accounts, it said that it had not seen an accountant’s certificate for that year.

In that case, said the landlord on the appeal, it should at least have determined the amount of on-account service charges payable.

Not so, said Martin Rodger QC: the FTT had been asked to decide the amount of actual service charge payable. It declined to do so because it had not seen the accountant’s certificate for that year. It could not be criticised on appeal for not having done something different.

Happily, the certificate was included in the appeal bundle before Martin Rodger QC. Even so, he refused to determine the amount payable.

In his view, if the certificate had not been available to the FTT, it may well not have been available to the lessees either.

In any event, the lessees raised four challenges to the 2016 service charges. I take them in a different order to Martin Rodger QC.

First, the incurring and apportionment of water charges.

Secondly, VAT. It appeared that the landlord was applying VAT to charges that should be exempt.

These first two caused Martin Rodger QC to remit to the FTT determination of the amount payable for 2016. The third and fourth challenges he dealt with himself.

The third challenge was the inclusion of the 2015 year-end balancing charge of £438.35. They sought an explanation for what they described as a “deficit”.

Martin Rodger QC explained:

  • The landlord was entitled to raise a balancing demand where the amount paid on account was less than the amount actually spent in a given year, and
  • The balancing sum was not in fact part of the 2016, but the 2015 service charge year. It could not be invoked therefore as part of a challenge to the 2016 year.

Finally, the lessees challenged the sum of £1,300-odd that had found its way onto the their account. The charges were raised as:

  • Administration fees;
  • Legal fees;
  • Court fees;
  • A reminder fee and
  • A land registry search.

The £1,300 was charged only to Mr Ridgway and Ms Cunningham. Martin Rodger QC postponed his examination of the amount to another later investigation, this time of administration charges generally.

Coming up in Part II – conditions precedent; variable administration charges; section 20C orders and exit fees. Big stuff.

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