14 Harlow Court, Wray Common Road, Reigate RH2 0RJ CHI/43UF/LSC/2020/0087

FIRST-TIER TRIBUNAL
PROPERTY CHAMBER (RESIDENTIAL PROPERTY)
Case No CHI/43UF/LSC/2020/0087
Between
Jonathan and Maria BrettApplicantHarlow Court LimitedRespondent
Before
Judge E Morrison- for the ApplicantMs Hannah Daly instructed by Browne Jacobson LLP for the RespondentDate 25 May 2021Property: 14 Harlow Court, Wray Common Road, Reigate RH2 0RJType of application: Determination of service charges: section 27A Landlord and Tenant Act 1985

DECISION

[1]On 2 September 2020 the Applicant lessees applied to the Tribunal for a determination of service charges for years 2018/19, 2019/20 and 2020/21, pursuant to section 27A Landlord and Tenant Act 1985 (“the Act”). The Applicant also sought orders limiting recovery of the Respondent’s costs in the proceedings under Section 20C of the Act and/or paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002.[2]The Applicants have twice previously applied to the Tribunal in respect of the same property, and on referring to the decisions in those applications, the Tribunal was concerned that the present application raised issues already dealt with. A preliminary hearing was directed to consider the point. The parties served written submissions in support their positions, the Applicants also providing a bundle of documentation.[3]The first application, Case No. CHI/43UF/LIS/2018/0006, culminated in a decision dated 7 August 2018. It considered service charges demanded “for the years ending 2016 to 2019”, although this period might be more accurately described as service charge years 2015/16 – 2018/19, the year end being 31 March.[4]The decision explains that the only service charge demands issued by the Respondent in this period were on account demands, in the sum of £800.00 every six months. The parties accepted that the service charge machinery in the lease had not been complied with, and the Applicants confirmed they took no issue with this (Mr Brett had been a director of the Respondent, a lessee-owned company, during the earlier part of the period). The original lease dated 18 January 2010 provides for an end of year certificate of actual expenditure. If the actual costs are greater than the sums paid on account, the lessee must pay the difference; if the actual costs are less than the sums paid on account, the surplus paid should be applied towards future costs. During the period in question (and of course 2018/19 was not yet over) no end of year certificates had been prepared. The decision records that “Invariably insufficient funds were demanded through the on account demand to meet the annually recurring costs with the result that there was a deficit. However, rather than utilise the mechanism in the lease to recover the deficit from leaseholders, the Respondent dipped into a fund that was transferred to it when the freehold was purchased... Mr Brett stated that the intention had been to wind down this fund rather than charge the leaseholders additional service charges to make up any deficit”.[5]Against this factual matrix the Tribunal decided that it could only consider the on account demands. The Applicants contended that four heads of expenditure in the budgets were not payable under the lease. The Tribunal decided that two of these, namely accountancy fees and directors and officers insurance, fell within clause 7.2.3 of the New Lease dated 17 March 2014 , and could be recovered from the lessees via the on account demands. The other two heads, namely management and legal fees, were not recoverable as service charges under any provision in either the original or new lease. The sums budgeted for management and legal fees in the service charge years 2015/16 – 2018/19 were therefore disallowed. This decision was not appealed.[6]In the second application, Case No. CHI/43UF/LSC/2019/0064, the Applicants applied for a determination of the service charges “for years 2014 – 2019”. As there were still no end of year certificates for these years, the Tribunal noted it was again limited to considering on account demands, which issue had already been determined in the first set of proceedings for years 2016-2019, and therefore it could not be relitigated. As regards pre- 2016 years, the Tribunal found the application to be an abuse because the issues either were dealt with in the first decision, or should have been raised in the earlier proceedings.[7]The Applicants also contended that since the decision of 7 August 2018 there had been further on account demands that still sought to recover costs for management and legal fees, which the Tribunal had decided were not recoverable. The Respondent countered that all later demands had been split into two, one for service charge expenditure, and one for company costs covering those heads of expenditure payable by the lessees in their capacities as shareholders pursuant to the company’s Articles. The Tribunal said that if this was correct, there was no part of the service charge demand that was challenged, and accordingly the application was struck out. Again, this decision was not appealed.[8]The present (third) application seeks a determination in respect of the on account demands for years 2018/19 - 2020/21. On reading the application form it appeared to the Tribunal that the principal point being made was, once again, that the demands received following the Tribunal’s decision dated 7 August 2018 were still seeking to recover monies towards costs found to be irrecoverable as service charges.[9]The preliminary hearing took place by way of video conference, Mr Brett speaking for himself and his wife, and Ms Kim acting for the Respondent. The “company costs”[10]The following on account demands have been issued by the Respondent: Year 2018/19• 29 August 2018 - for half yearly service charge in the sum of £566.67• 29 September 2018 - for “half yearly administration charge (Company costs)” in the sum of £233.33 Year 2019/20• 22 May 2019 - for half yearly service charge in the sum of £729.44• 22 May 2019 - for “half yearly contribution towards company costs under companies Articles of Association” in the sum of £244.45• 4 September 2019 - for half yearly service charge in the sum of £729.44• 4 September 2019 - “half yearly contribution towards company costs under companies Articles of Association” in the sum of £244.45 Year 2020/21• 18 March 2020 -for “annual service charge” in the sum of £1569.00, subsequently amended to £784.50 for the first half year• 18 March 2020 - for “company costs” in the sum of £323.00[11]The Applicants’ submission was that all the costs noted in bold above had in reality been demanded as service charges, which the Tribunal had jurisdiction to determine under sections 19 and 27A of the Act, and that the Respondent’s submission in the second proceedings, namely that the costs had been demanded as company costs under the Articles, was incorrect.[12]In support of this submission Mr Brett relied on the following:(i) All the demands were accompanied by the Summary of Rights and Obligations which must be provided with service charge demands, pursuant to section 21B of the Act. It was said that this was an acknowledgement of the Tribunal’s jurisdiction.(ii) The costs in issue had been included in statements sent to the Applicants setting out what they owed in service charges.(iii) A letter from the managing agents dated 10 September 2018 referred to the company expense being requested from “the leaseholders”.(iv) These demands post-dated the first decision of 7 August 2018 and had not already been subject to a determination by the Tribunal because the second application was struck out on the basis (which the Applicants now disputed) that the costs had not been demanded as a service charge.(v) Until the Respondent’s Articles were amended, they did not permit the costs in question to be recovered from shareholders, and even after amendment, Mr Brett submitted the alteration did not bind himself or his wife. Therefore, it was argued, the costs must have been demanded as service charges.[13]In response the Respondent’s case was that all the demands in question were demands for company costs due from shareholders under the Articles. The Tribunal had, it was said, determined that accountancy fees , legal/professional costs and management fees were not recoverable under the lease as service charges, and the Respondent had acted accordingly. None of the subsequent demands in respect of these costs were service charge demands. They were clearly labelled company costs and demanded separately from the service charges. The inclusion of the s 21B Summary and other administrative practices by the managing agents, whose systems were based on service charges, did not alter the nature of the demands.[14]It was further submitted that the Tribunal had no jurisdiction as the issue had already been decided, or should have been taken up by way of appeal against the previous decisions, and that accordingly the application should be struck out. Determination in respect of the “company costs”[15]The Applicants’ case has an inherent illogicality, because it does not assist them. Even if the Tribunal were to accept that the costs had been demanded as service charges not previously been determined, so there was jurisdiction under section 27A of the Act, the inevitable result would be that the Tribunal reached the same decision as it did on 7 August 2018, and the Respondent would be left to argue - as they do now - that the costs can be recovered from the lessees as shareholders, pursuant to the Articles. A Tribunal decision that a cost has been wrongly demanded as a service charge does not prevent a landlord company from seeking to recover the same cost by other means, just as a lessee may seek to exercise rights both as a lessee and as a shareholder. See Morshead Mansions Ltd v Di Marco [2008] EWCA Civ 137; Houldsworth Village Management v Barton [2020] EWCA Civ 980.[16]In any event the Tribunal has no doubt that the costs in issue were not demanded as service charges. After the first decision of 7 August 2018 the Respondent’s managing agents wrote to the Applicants (and presumably to the other lessees) on 29 August 2018, explaining about changes to the service charges as a result of the decision. Apart from including accountancy fees within the irrecoverable service charges (see footnote 2), the explanation provided was correct, and the letter made it completely clear that costs found by the Tribunal to be irrecoverable as service charges would result in those costs being demanded as a “company cost” separately from the service charges. The accompanying budget also divided budgeted costs into either service charge or company costs.[17]All subsequent demands have followed this distinction. When new managing agents were appointed earlier in 2020, the format of the demands changed slightly, heading the company costs demand with “Freehold Company Funds – Application for Payment”, which simply insurance, they did fall within clause 7.2.3 of the new lease. That is why there were no sums disallowed in respect of these costs. They can be demanded on account, and are payable within 14 days of demand (see paras. 32, 42-43, 46 of decision dated 7 August 2018). reinforces the distinction between that demand and the accompanying “Service Charge Demand – Application for Payment”. The fact that this demand was issued by the “Service Charge Department” of the managing agents does not alter the nature of the demand.[18]When Mr Brett queried the letter of 29 August 2018, the managing agents replied on 10 September 2018 explaining, again, that certain costs would now be “recovered as a company expense in accordance with the memorandum and articles of association … from the leaseholders”. Mr Brett asks the Tribunal to conclude that because this letter refers to “the leaseholders” having to pay, rather than the shareholders, this demonstrates the demand is for service charges. This is semantics; the shareholders are the same people as the lessees. The Tribunal is in no doubt that any reasonable recipient of the managing agents’ letters would have clearly understood that the company costs were no longer going to be demanded as service charges, and that this was as a direct result of the decision of 7 August 2018. The point applies with much greater force to a recipient like Mr Brett who had been party to the proceedings leading to that decision.[19]Nor does the Tribunal accept that sending out the company costs demands with a section 21B Summary printed on the reverse can alter the characterisation of the demand. The reality is that the Respondent required the managing agents to issue, on its behalf, not only the service charge demands but also the company costs demands. If the managing agents sent out the company costs demands with the Section 21B Summary on the reverse, that is an administrative error, but that is all it is.[20]Finally, Mr Brett relies on the fact that he has been sent statements of account from the managing agents, setting out sums said to be due, which include the company costs demands. However, these statements clearly distinguish between debits for service charges and debits for company costs. The Tribunal comments below (see paragraph 31 below) on how the two funds should be differentiated, but the inclusion of both types of cost in a single statement sent to a lessee cannot alter the fundamental nature of the demands.[21]Accordingly, the Tribunal decides that the company costs have not been demanded as service charges and the Tribunal has no jurisdiction to consider their payability or reasonableness. Other issues[22]The Tribunal asked Mr Brett at the hearing whether there were any other issues he wished the Tribunal to consider as part of his application, so that matters can be finalised and further applications avoided. The end of year certificate of actual service charge costs in 2018/19 having been served in June 2020, he confirmed that he accepted all items of expenditure in that certificate. However, he contended that, having regard to a service charge credit of £1149.00 made as a result of the decision of 7 August 2018, the on account demands made in 2019-20, and perhaps also 2020-21, should have been for lesser amounts. He noted that the statement of account sent to him on 29 November 2018 showed a credit balance of £430.28.[23]The following comments are not part of the Tribunal’s decision but are provided in the hope that they will clarify certain matters and assist in bringing matters to a conclusion.[24]The reasonableness of an on account demand is based on facts known at the time it is made: Knapper v Francis [2017] UKUT 3 (LC). At the time of issuing the first on account service charge demand for 2019/20 in March 2019 the managing agents should have been aware that there was a credit/surplus of £430.28 on the Applicants’ account. Clause 3 (2) (e) of the original lease provides: [If] in any Accounting Period … the Maintenance Charge is less than the Interim Sum the difference (being the unexpended surplus) shall be accumulated by the Lessors and shall be applied towards the Annual Cost in the next succeeding or future Accounting Period or period as aforesaid together with any interest carried thereon in the meantime[25]It is therefore arguable that the sum of £430.28 should have been credited against the first on account demand for 2019/20, reducing it by that amount.[26]It is unclear exactly when the end of year certificate for the 2018/19 expenditure was produced but a copy appears to have been first sent to the Applicants on 14 June 2020. The overall expenditure is £21,652.00, which is £1202.88 per flat. According to the certificate, the total expenditure for the year exceeded total income. However, the Applicants paid £1366.57 on account for that year, so it would seem that, for their flat at least, the service charge account should credit the surplus paid of £163.69.[27]The Tribunal was told that the end of year certificate for 2019/20 will be available by 17 December 2020. The Applicants will then be able to consider whether any of the actual expenditure in that year is disputed, and it will also be clear whether there is a surplus or deficit to be applied to the service charge account for the Applicant’s flat.[28]However, it emerged at the hearing that the Applicants sold their flat in July 2020. Therefore, even if surpluses remain on their account and/or the Applicants were to be successful in challenging any of the actual expenditure for 2019/20, this Tribunal’s view is that it would not be of any practical benefit to them. This is because service charge monies are held, under section 42 of the Landlord and Tenant Act 1987, “on trust for the persons who are the contributing tenants for the time being”. The Applicants have never been able to require actual repayment to them of any surpluses – because the lease does not provide for that – and therefore any surpluses simply result in credits to be set against future costs. Even if the Tribunal were to find that some of the most recent on account demands were unreasonably high because they did not take into account surpluses which were or should have been credited against the sums demanded, this would not result in the Tribunal ordering the repayment of any sums . The credits would stand for the benefit of the current lessee.[29]In Gateway Holdings v McKenzie [2018] UKUT 371 (LC) the Upper Tribunal held that although a lessee could apply to the Tribunal in respect of service charge years before she acquired her interest, any reduction in the service charges for those years would be of no practical benefit to her because any repayment would be payable not to her, but to the previous lessee. However, in Gateway the lease simply provided that “the landlord shall give credit for [any] overpayment”, which the Upper Tribunal interpreted as meaning that overpaid sums were repayable to the specific tenant who had made payment. This contrasts with the lease in this case, which specifically says that overpayments are to be credited against future costs.[30]Even if the Tribunal is wrong as to the effect of section 42, and any credits are due to the Applicants, repayment cannot be ordered by the Tribunal. The Applicants would need to take further action in the county court and might find they are then faced with an argument that payment to them would constitute a breach of trust under section 42. The sums involved are unlikely to justify lengthy litigation.[31]One further point should be made. Service charge funds must be held on trust in a designated account: section 43 Landlord and Tenant Act 1987. The funds collected for “company costs” should be held entirely separately, so they are not intermingled with trust funds. The statements issued by the managing agents should therefore also, in the same way as the demands, be separated, so there is one statement showing the relevant entries and balance for the service charges, and a second statement showing the same for the company costs.[32]The parties are invited to consider these comments. If the Applicants contend, after receiving the 2019/20 end of year certificate, that there are any further matters on which they request a determination from the Tribunal, they must write to the Tribunal and the Respondent by 8 January 2021 stating what matters they wish to pursue.[33]If there is nothing further of a substantive nature to determine, this leaves only the applications in respect of costs, and any necessary directions in this regard will be given after 8 January 2021.[34]The time- limit for appealing against this decision (see below) will not start to run until the application is finally disposed of. Appeals[1]A person wishing to appeal this decision to the Upper Tribunal (Lands Chamber) must seek permission to do so by making written application to the First-tier Tribunal at the Regional office which has been dealing with the case.[2]The application must arrive at the Tribunal within 28 days after the Tribunal sends to the person making the application written reasons for the decision.[3]If the person wishing to appeal does not comply with the 28-day time limit, the person shall include with the application for permission to appeal a request for an extension of time and the reason for not complying with the 28-day time limit; the Tribunal will then decide whether to extend time or not to allow the application for permission to appeal to proceed.[4]The application for permission to appeal must identify the decision of the Tribunal to which it relates, state the grounds of appeal, and state the result the party making the application is seeking. ANNEX 2 Case Reference : CHI/43UF/LSC/2020/0087 Property : Harlow Court, Wray Common Road, Reigate RH2 0RJ Applicant : Jonathan and Maria Brett (email:jb.harlowcourt@gmail.com) Representative : - Respondent : Harlow Court Limited Representative : Brown Jacobson LLP Type of Application : Determination of service charges: section 27A Landlord and Tenant Act 1985 Tribunal Member(s) : Judge E Morrison Date : January 2021 FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) CASE MANAGEMENT DECISION and DIRECTIONS © CROWN COPYRIGHT This is a formal order of the Tribunal which must be complied with by the parties. The Tribunal Judge directs that the parties must comply with the Statement on Tribunal Rules and Procedure issued August 2020 and the Guidance on PDF bundles dated August 2020, which are enclosed with these directions (if not already provided). Due to the Covid 19 pandemic, communications to the Tribunal MUST be made by email to rpsouthern@justice.gov.uk. All communications must clearly state the Case Number and address of the premises.[1]On 25 November 2020 the Tribunal issued its decision following a preliminary hearing. At paragraph 32 of that decision the Applicants were directed to write to the Tribunal by 8 January 2021 stating whether “there are any further matters on which they request a determination from the Tribunal”.[2]Subsequently the Tribunal issued a further case management decision dated 10 December 2020, dismissing an application by the Applicants for disclosure. In that decision the Tribunal warned the Applicants that making applications which seek to reopen issues either already decided or outside the Tribunal’s jurisdiction may be regarded as unreasonable conduct, opening the door to an application for costs by the other party under Rule 13.[3]In purported compliance with paragraph 32 of the decision dated 25 November 2000, the Applicants have supplied a lengthy “Position Statement… not intended as a statement of case”. So far as can be understood, it appears that the Applicants still wish to challenge the reasonableness of on account demands made in 2018/19 onwards. They consider that service charge expenditure in 2018/19 and 2019/20 was “actually covered by surplus contributions from previous years which remain unaccounted for”, and so they should not have had to pay the later on account demands. This is the only cogent basis stated for challenging the demands.[4]In order to consider this, the Tribunal would need to determine the actual service charges in 2015/16 – 2017/18, to decide whether in fact those year(s) did result in a surplus. Yet the application in this case was limited to 2018/19 onwards. Thus, in effect, the Applicants are seeking to amend the scope of the application to include earlier years.[5]Previous decisions of the Tribunal in Case Nos. CHI/43UF/LIS/2018/0006 and CHI/43UF/LSC/2019/0064 determined the on account demands for the years 2015/16 through 2018/19. So far as the Tribunal is aware, there have been no service charge certificates or accounts prepared for the actual expenditure in the first two of those years. In 2017/18 the end of year certificate shows