Westleigh Properties Ltd v Mrs J S Grimes [2014] UKUT 0213 (LC)

18 Winner Street in Paignton, Devon, contains four flats, of which one occupies a former printers shop on the ground floor, and the remainder are spread over the first and second floors, accessed through a separate ground floor hallway.

The landlord issued a claim for unpaid service charges in the Southend County Court for the years 2004 – 2010. The relevant parts of the claim were transferred to the LVT, which determined them. It then transpired that the lessees had not had notice of the hearing. The determination was set aside.

It would appear that at about the same time, Mrs Grimes also made an application to the LVT for a determination of her liability to pay service charges for the years 2002 – 2012.

Her application was heard at the same time as the transferred County Court proceedings. No one put in any evidence pre-dating 2004 and the LVT made no determination about the costs of 2002 and 2003.

The remainder of the application was split between the years 2004 and 2012. Gateway Property Management Ltd were the managing agents between 2009 and 2012.

The service charge accounts disclosed a limited number of heads of expenditure: insurance, electricity, water, management, accountancy and bank charges. The management fee ranged between £740.25 and £950 per year.

The LVT disallowed Gateway’s management fee. It was “unconvinced that any representative … ever inspected the property until prior to each of the two hearings”.

The landlord appealed.

Martin Rodger QC – for ‘tis he at the coal face again – adopted a different approach. He took the lease and gave it a thorough examination.

It was rather wanting: there was no mechanism by which the service charge was to be calculated or collected. The only reference to any form of service charge payment was a covenant to contribute, when the landlord asked, one quarter of the “costs, expenses and outgoings and matters contained [in the landlord’s repairing, maintenance and redecorating covenants]”.

There was absolutely not the slightest sniff of a mention of managing agents in those covenants. In Martin Rodger QC’s words: “No function is described which is to be performed by any agent of the Lessor”.

Services for which the lessees covenanted to pay

Martin Rodger QC described the lease as “unusually limited” in:

• The services for which payment was to be made by the lessees, and
• In the machinery by which the service charge was to be calculated and paid.

“Nonetheless”, he said, “as the lease is the only relevant agreement between the parties, any liability on the part of the [lessee] to contribute towards costs incurred by the [landlord] in connection with the property must be found in the lease itself… their agreements must be read and understood in the proper context, as they would be understood by any objective reader of the lease who was aware of the circumstances in which it had been entered into”.

The services for which the lessee was obliged to pay under the lease were practical ones: maintenance, renewal, repair and five-yearly redecoration of the internal and external parts.

Logic dictated therefore that the lessee was not obliged to contribute towards the costs of dealing with insurance, collecting rent, preparing service charge accounts or enforcing covenants.

So far so clear. But did the obligation to contribute to the maintenance and renewal costs include an obligation to contribute towards a managing agents’ costs of having that work carried out?

Martin Rodger QC turned to Waverley BC v Arya [2013] UKUT 0501 (LC), in which he had held, after a review of the authorities, that:

“… the costs incurred by a local authority, or by any other landlord, in arranging for the provision of services, and managing their delivery is properly regarded as part of the cost of providing the service which may be recovered from its tenants through an appropriately framed service charge covenant. The same is true of the overhead costs incurred in connection with the management and provision of services. In both cases it is necessary to respect any limits which the parties may have imposed on the categories of expenditure to which the service charge may relate”.

It followed therefore that the costs of commissioning, administering and/or supervising the (limited) services to which the lessee was obliged to contribute under the lease were recoverable from the lessee. Any costs of commissioning, administering and/or supervising any other services – for example collecting rent or preparing service charge accounts – were not.

On stand-by?

Martin Rodger QC agreed with the landlord that management and associated professional fees were capable of being an integral part of the landlord fulfilling its obligations under the lease. He did not however accept “that the appointment of a managing agent automatically entitles the [landlord] to recoup the costs incurred in that appointment, whatever the tasks the agent actually undertakes”.

He continued: “I do not accept the submission on behalf of the [landlord] that the managing agent is permanently ‘standing by’ ready to attend to any repairs which might be required, and that the cost of its preparedness is part of the cost of performance by the appellant of its repairing and redecorating obligations”.

The managing agents’ activities

For the years at issue in the appeal, there were no repairs or redecorations to the building.

That is not to say that the managing agents were idle. Martin Rodger QC anticipated that they would have demanded and collected ground rents and service charges; dealt with payment for insurance and electricity, and provided information for the annual accounts.

The point was however that the cost of all that activity was not recoverable from the lessees because of the narrow terms of the lease.

A flat management fee was therefore inappropriate: in years where both recoverable and irrecoverable management fees were incurred, they must be apportioned according to the service to which they related. If the parties could not agree on the appropriate apportionment, an application to the FTT under section 27A would have to be made.

Beware general application

Martin Rodger QC was at pains to emphasise that the lease in this case specifically required the lessees to pay for some services and not others. It was in that respect “unusually restrictive”.

He was not assisted by the other FTT decisions on which the landlord sought to rely, since each lease must be considered in the light of its own terms.

Having determined that the management fees for the years in question were not recoverable, albeit for different reasons to those contained in the LVT’s decision, Martin Rodger QC dismissed the appeal.

Some leases – I think it is probably fair to say modern leases in particular – will confer an express entitlement on a landlord to engage a managing agent, and will impose a corollary obligation on the lessees to pay for that service. This decision does not in my view affect those leases.

It does however have ramifications for leases where the landlord has no obvious right to recover its managing agent’s fees. Where the lessee is required to pay for a given service:

• On the whole it would appear that the costs of commissioning, managing and/or supervising that service are recoverable even in the absence of an express covenant requiring the lessee to pay those costs; however
• The lessee is limited to paying for the commissioning, management and/or supervision costs of the service to which s/he is obliged to contribute under the lease – and no other.

In that situation, a delicate unpicking operation needs to be performed on managing agents’ fees if the lease, like Mrs Grimes’s, allows for the recovery of some services, but not others. A flat management rate for all of the services provided by the managing agents cannot work – each task will need to be costed so that the appropriate sum can be recovered from the lessee.

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