Table Of Contents
In this post, we have arrived at the BIG issues and my (rather grumpy) observations.
Was provision of the accountants’ certificate a condition precedent to payment?
I have the impression that Martin Rodger QC relished this point.
Section 27A, he observed, required a determination of when service charges were payable. Although the lessees had not raised the issue, Urban Splash’s appeal was predicated on the FTT’s failure to make a complete section 27A determination, and the issue was accordingly live before him.
Urban Splash’s case was twofold.
First, that the service charge accounts did what the certificate was supposed to do, and therefore complied with the lease. Martin Rodger QC gave that argument short shrift.
I will not dwell on his reasons because the second limb of Urban Splash’s argument is, frankly, the more interesting.
That second limb was that production of the certificate was not a condition precedent to a lessee’s liability to pay. It referred to three cases:
“was reached because the provision for certification was described in the lease as being “without prejudice” to the primary obligation to pay the service charge on written demand, and because copies of the certificates were only to be supplied by the management company to the tenant on written request. These features indicated to the Tribunal that the certificates were not critical to the tenant’s liability to pay, but were simply “machinery”.”
He concluded however that none of the above established “any principle of general application”.
The textbooks did not help either:
“the provision of certified accounts will not generally be a condition precedent to liability to pay service charges.”
“Where a lease provides for the amount payable to be certified by the landlord’s surveyor or accountant, the issue of a valid certificate will usually be a condition precedent to the tenant’s liability to pay.”
Martin Rodger QC’s view was that Emmet was – ahem – wrong to draw a principle from the case law: the specific wording of each lease is key to each case.
He therefore allowed himself a little time to think things over.
Pendra Loweth and Elysian Fields showed that liability to make on-account payments was less likely to be conditional on certification of past expenditure. On-account payments generally looked to future expenditure.
Rexhaven Ltd v Nurse and Alliance & Leicester Building Society (1996) 28 HLR 241 showed however that a certification condition might apply to on-account payments.
“In every case the function and significance of the certificate will depend on the terms of the agreement”.
So saying, Martin Rodger QC turned to the lease before him. He dealt first with the lessees’ liability to pay balancing, as opposed to on-account charges. The lease provided that:
The purpose of the certificate was to reconcile payments made on account by the lessee with actual service charge expenditure, so as to establish whether the lessee should make a balancing payment or receive a credit.
The lessee’s obligations pay any shortfall between total on-account contributions and the total service charge depended on the certificate.
No certificate: no obligation.
The FTT had therefore been wrong to say that service of the accountant’s certificate was not a condition precedent to the liability to pay.
On the other hand, the lessees’ liability to make on account payments depended on the lessee being notified of the landlord’s surveyor’s estimate of annual expenditure.
The accountant’s certificate had no impact on that liability.
Urban Splash’s woes did not end there.
As the FTT had decided that the certificates did not dictate liability to pay, they did not measure them against the requirements of the lease.
Martin Rodger QC did. He found them wanting.
Consequently, none of the balancing charges demanded had yet become payable by the lessees, and would not fall due until service of a compliant accountant’s certificate.
Again, liability to make the on-account payments was unaffected.
Martin Rodger QC introduced the fifth issue thus.
“A substantial grievance underlying the respondents’ application to the FTT for a determination of their service charge liability was the practice of the appellant’s agents in adding fees and charges to the respondents’ statement of account whenever it wrote requiring payment of disputed sums”.
This issue related solely to the administration charges levied by RMG, the managing agents who had taken over on 01 November 2010.
RMG had added the following fees to the lessees’ account:
Those were not service charges. They were, if anything, administration charges, as defined in Schedule 11 to the Commonhold and Leasehold Reform Act 2002.
The FTT has the power to determine the payability of administration charges in much the same way as it does service charges.
In this case, it held that the charges were not payable, because the management agreements between RMG and Urban Splash had never been signed and there was therefore “no unequivocal evidence” that Urban Splash was required to indemnify RMG.
Yes. An odd, not to say unsustainable, reason.
To start with, the FTT set the standard of proof too high: it is not to the “unequivocal”.
Next, although the management agreements had never been signed, it seemed common ground that RMG had provided services to Urban Splash on the terms of the agreements and had been paid the management fee specified in those agreements.
The FTT should have considered whether the (unsigned) management agreements entitled RMG to apply the charges of which the lessees complained.
Martin Rodger QC put on his wellingtons and waded in.
The management agreements entitled RMG to claim from Urban Splash sums “in respect of costs and expenses incurred by [it, RMG] in performing its duties under the Agreement”.
Between 2011 and 2015, those duties included:
After 2015, RMG’s management fee included its costs of “using [its] best endeavours to collect current and on-going routine service charge arrears but not action requiring legal work or tribunals”.
Given that analysis, it was probable that the reminder fees and administration charges fell outwith RMG’s entitlement. The management agreement did not impose any obligation on Urban Splash to indemnify RMG against those charges, which, at the very least, required a proper explanation.
As to the other fees – HM Land Registry; legal and court fees – Martin Rodger QC was unable to determine their recoverability. Two points needed to addressed:
He reminded himself – and his audience – of the county court and the FTT’s wider powers over variable administration charges for cases issued after 06 April 2017. Rather than simply determine the reasonableness of a variable administration charge, the court/tribunal how has the power to reduce or extinguish a tenant’s contractual liability if it considers it just and equitable to do so.
He then indulged in a little postulation.
“If”, he said, “it transpires that costs were incurred in pursuing the respondents for service charges which they were not yet liable to pay, because the appellant had failed to have the amount of the Service Rent certified as required …, so that proceedings in respect of which the legal and court fees were incurred were premature, any charge is likely to have been unreasonable”.
There are no prizes for deducing the outcome of this ground of appeal.
The FTT made a section 20C order, protecting Mr Ridgway and Ms Cunningham from any liability to pay costs incurred by Urban Splash in the proceedings through the service charge.
It described Urban Splash’s conduct, including the failure to execute a written management agreement with RMG, as “tantamount to it washing its hands of the development to the detriment of the owners”.
It expressly excepted RMG from its criticism.
Urban Splash complained that the order was too harsh.
Martin Rodger QC did not agree.
“In my judgment”, said he, “the FTT was entitled to make the order it did for the reasons it gave, although I would not myself attribute weight to the failure to conclude a written management agreement with RMG. Because I have set aside parts of its substantive decision it is necessary that I reconsider whether the order is still appropriate, but having done so I am entirely satisfied that it is”.
Even though the FTT’s decision had been set aside on some issues, that had not always been to Urban Splash’s advantage:
Martin Rodger QC was not happy with Urban Splash:
“This inconclusive state of affairs”, he observed, “is profoundly unsatisfactory.
“Three days of hearings have been devoted to these proceedings in this Tribunal and in the FTT, not to mention the very substantial time and expense committed to preparation by the parties. Responsibility for the state of uncertainty which persists lies very substantially with [Urban Splash], which failed to procure the certificates required by the lease and failed to provide the evidence required to substantiate its case.
“In all these circumstances it is just and equitable that the respondents should not be liable to contribute towards [Urban Splash’s] costs incurred before the FTT”.
As I say, not happy.
In making a section 20C order, the FTT took into account Urban Splash’s failure to collect “exit fees”. These were sums payable when flats were sold, and paid into the sinking fund for pay for major works.
Urban Splash argued that it was not obliged to collect exit fees.
The FTT agreed, but determined that the failure to collect exit fees was evidence of mis-management. Had Urban Splash collected the exit fees, the sinking fund would have been more buoyant.
It could not determine the amount by which the buoyancy would have increased because, it said, the lessees had not produced any evidence of the amount that Urban Splash should have collected.
Not so, said Martin Rodger QC:
Given those three points:
“It is not clear to what evidence the FTT was referring [when it held that the lessees had produced no evidence of the shortfall], nor is it clear why the respondents were not given the opportunity to adduce such evidence in the way that the appellants were given that chance in relation to the issue of certification”.
And that was not all that was not clear.
It was “far from clear” to him that Urban Splash had a discretion as to whether to collect the exit fees. Under Mr Ridgway and Ms Cunningham’s lease Urban Splash had covenanted:
If Urban Splash did not collect the exit fees therefore, it was not clear either why it should not:
“take the sums it had voluntarily foregone into account when determining what contribution it could reasonably expect the continuing leaseholders to make towards the major works”.
Having vented those thoughts, Martin Rodger QC reined himself in. The lessees had not sought permission to appeal the FTT’s decision on the exit fees and “I therefore express no further view on it”, said he.
Save that he could not quite resist…
“… the sum which [Mr Ridgway and Ms Cunningham] may be required to contribute towards expenditure on the major works in future years will require to be considered on its own merits; if the matter comes back before the FTT it should address the terms of the lease and the evidence provided by [Mr Ridgway and Ms Cunningham] in greater detail”.
I cannot help thinking that he regretted not having the opportunity to do so himself in this appeal.
It was time to review the result of the appeal:
I have written about evidential poverty in the past. I bewail it again here, not, I suspect, for the last time.
I may be feeling rather jaundiced at the moment – evidence, particularly in relation to cladding, is not my favourite subject just now – but I found it, well, surprising that the FTT decided to grant the landlord permission to re-apply for a determination once it had all of its evidential ducks in order, so to speak.
Martin Rodger QC described the decision as “generous”. I will be bolder, and say that it runs contrary to principle. Finality in litigation is important: see for example Henderson v Henderson (1843) 3 Hare 100 and Johnson v Gore Wood & Co (No1)  UKHL 65.
In this case, Urban Splash issued the county court claim. It is not unreasonable to assume that at the date of issue, it considered that it had sufficient evidence to see the case through to a successful conclusion.
And yet it was unable to produce the further evidence required, which brings me on to my second set of observations.
It would appear, at least partly, that Urban Splash was unable to produce the relevant evidence because it was caught in that change-of-managing-agent twilight zone that so often results in the disappearance of documents.
In my experience, it is regularly the case that managing agents struggle through dense financial and management fog when they take over management of a building, and yet the RICS has produced a guidance note on handing over service charge information. It applies to commercial property, but why limit its scope? It’s no fun for anyone to flounder in figures that cannot be substantiated.
Further, it must be possible to build into a management agreement provisions that relate to the end of the relationship and the handover of meaningful information. A form of pre-nuptial agreement for landlords and their agents, if you will.
This is a question that has not been fully examined in the Upper Tribunal, so far as I am aware. Martin Rodger QC comes close to it in this case, interpreting as he does certain costs as falling under a collective, service charge liability as opposed to an individual, administration charge liability.
There is however a problem in distinguishing service charges from administration charges on the basis of collective rather than individual liability. Neither section 19 of the 1985 Act nor Schedule 11 of the 2002 Act make a distinction between a cost to which the collective contributes, or one for which an individual is entirely liable.
A service charge is not defined as a cost borne by the many, and an administration charge is not defined as a cost borne by the individual.
Where there is an overlap therefore, how is the distinction to be drawn?
This was, as I noted at the outset of my first post on this case, the paradigm landlord and long lessee dispute. It covers:
To my mind, it also contains a practical warning for everyone involved in matters leasehold:
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