Ditton Place School, Brantridge Lane, Balcombe, West Sussex RH17 6JR CHI/45UG/LVM/2019/0011
FIRST-TIER TRIBUNAL
PROPERTY CHAMBER (RESIDENTIAL PROPERTY)
Case No CHI/45UG/LVM/2019/0011
Between
Gerard Burton and Michael Rosenfield (Flats 4,7,10,12)ApplicantLorraine Nunes-Carvalho and Others (list on page 2) Legal Representatives : Mr Christopher Heather QC instructed by Fladgates LLP for Mr Urwick/Ms Yrazu-Bajo Ms Claire Whiteman,Dean Wilson LLP for Mr G PickardRespondent
Before
Judge E MorrisonJudge M Tildesley OBEMrs J E Coupe FRICSGerard Burton for the ApplicantDate 2 March 2020Property: Ditton Place School, Brantridge Lane, Balcombe, West Sussex RH17 6JRType of application: Variation of management order: section 24(9) Landlord and Tenant Act 1987
DECISION
[7]Ditton Place Management Company Limited (Freeholder of part) William Lynch and Kelly Lynch (The Lodge) Spencer Carter & Michelle Carter (Bungalow 1) Robert Taylor and Susan Taylor (Bungalow 2)[11]Ian and Joanne Broomfield (Bungalow 3) 12.Gary Pickard (Tribunal- appointed Manager) Ditton Place Freehold Company Limited[1]At the conclusion of the hearing on 24 January 2020 the tribunal communicated its decision not to extend the term of the management order. Directions were issued requiring the parties to exchange proposed directions for the winding-up of Mr Pickard’s management, with any submissions in support, and listing a further hearing on 2 March 2020. The parties were directed to seek to agree matters so far as possible.[2]Written submissions were received from Mr Burton, Mr Heather QC on behalf of Mr Urwick/Ms Bajo and Ditton Place Freehold Company Limited, Mr Tanney on behalf of the manager, and some of the house-owners: Mr Taylor, Mr and Mrs Roche, Mr and Mrs Price. There was no significant degree of agreement between the position advocated by Mr Heather and the views of the other parties.[3]On 20 February 2020 Ditton Place Freehold Company Limited (“DPF”) was joined as a party to the application as requested by that company and by the manager.[4]On 2 March 2020 the tribunal heard a full day of submissions as to what winding-up directions should be made. In reaching its conclusion as to what is required and proportionate, a number of principles have guided the tribunals’ consideration. Firstly, we have considered the position of the owners of the six freehold houses on the estate. They were made subject to the management order because the freeholder, Ditton Place Management Company Limited (“DPM”) was responsible both for the buildings comprising the twelve flats and their private grounds, and the amenity area which benefits all those on the estate. However, the house-owners are not responsible for the extensive and expensive litigation which has ensued as a result of the lessees’ enfranchisement, and should not have any liability to meet the costs incurred in connection with that litigation.[5]Secondly, in the Order of 13 January 2020 the Deputy Chamber President of the Upper Tribunal, in refusing the appellants’ request for a section 20C order against the manager, stated: The respondent is a tribunal appointed manager, appointed on the application of the leaseholders of the Ditton Place development, including the appellants. He has discharged his responsibilities in that capacity on behalf of the leaseholders and freeholders. It has not been suggested that he has acted improperly in relation to these proceedings and it cannot sensibly be suggested that he should be personally responsible for the costs incurred. By one route or another [emphasis added] he is entitled to be indemnified in respect of the reasonable costs incurred.[6]At the hearing on 2 March 2020, Mr Heather conceded the effect of this was that the manager’s legal costs in relation to both the second First-tier tribunal hearing in March 2019 and the appeal to the Upper Tribunal should be recoverable through the service charge. In our view there is no reason why the same principle should not apply to the First-tier tribunal hearing in November 2018. This was the hearing of an application by the lessees who had participated in the enfranchisement, and it arose wholly as a result of it. We come to the same conclusion in relation to the hearings on 24 January 2020 and 2 March 2020. We note that paragraph 4 of the management order explicitly provides that the manager is entitled to recover legal costs through the service charge.[7]Thirdly, we do not accept Mr Heather’s submission that, apart from the concession mentioned above, the lessees cannot be required to pay management fees or to reimburse the manager for other costs incurred for the enfranchised land in relation to the post-enfranchisement period. The manager carries out his functions “in his own right as a court-appointed official”: Maunder-Taylor v Blaquiere [2002] EWCA Civ 1633 at [41]. Until the Upper Tribunal decision of 12 November 2019 the manager was acting with the full sanction of the tribunal, a stay pending appeal having been requested and refused. He is entitled to be paid for his work, and to be reimbursed/indemnified in relation to other reasonable expenditure/liabilities he has incurred during this period. Aside from the lessees the only other persons to whom the manager can look for reimbursement are the house-owners. Recourse only to them would be unconscionable; the majority of the general management tasks have been directed to the enfranchised land, and we have explained at paragraph 4 why the house-owners should not be burdened with the litigation-related costs.[8]Fourthly, we take into account how the present difficult circumstances have come about. Mr Heather puts forward no solution to procure funds to meet the manager’s liabilities. We consider that in attempting to provide a solution to that problem it is right to acknowledge the following:• Mr Urwick, who owns the largest flat and is liable for the greatest proportion of service charges, was the lead lessee in applying for the appointment of a manager. He, and another of the lessees who made the application, Mr Keith Sellers, have the greatest service charge arrears in relation to the periods prior to the manager’s appointment.• Mr Urwick’s advisers drafted the management order. It was flawed, in that it wrongly placed responsibility for registration of the restriction on the respondent DPM, whose alleged mismanagement was the basis for the application. It is this very error which has been exploited by the lessees.• Having obtained a management order some of the lessees, led by Mr Urwick and Ms Carvalho, did not support him, and increased costs by making continual challenges and complaints.• Mr Urwick made allegations of fraud and misappropriation of funds by the previous management, resulting in a very expensive forensic accounting exercise (which found no evidence of misappropriation)• Mr Urwick and Ms Carvalho were the prime movers in bringing about the enfranchisement, which was itself a breach of the management order and the purpose of which was to evade it• Mr Urwick has financed the lessees’ litigation consequent upon the enfranchisement• Mr Urwick and Ms Carvalho are the principal debtors in relation to service charges demanded by Mr Pickard.[9]Fifthly, it is essential to bring about finality and avoid further satellite litigation in respect of the winding-up and the manager’s liabilities. Mr Heather’s suggestion that the parties simply revert to the contractual position does not solve the real issues and creates continuing uncertainty.[10]With those principles in mind we turn to specific areas addressed in the winding up directions and explain our reasoning. Preparation of outstanding service charge accounts[11]There are no accounts for the period of the management order; they must be prepared without delay as part of the winding-up, keeping costs to a minimum. Mr Heather’s suggestion that DPF should prepare the accounts for the enfranchised land for the period 23 March 2018 onwards is rejected because (as explained below) these service charges are to include costs which Mr Urwick/DP Freehold object to paying. Apportionment of general management fees (and associated legal advice) – excluding the cost of the tribunal proceedings[12]There has been no agreement on the apportionment of these costs. The variations to the management order made on 5 April 2019 provided that pending any determination of apportionments due or until further order the manager could continue to collect charges in accordance with an attached schedule of apportionments. That schedule did not specify management fees but they were understood to fall under a category marked “shared equally – 1/18th each”. It was the tribunal’s understanding that the purpose of the schedule was to note concessions finally made by Mr Urwick regarding other aspects of apportionment , and to set out a basis for future interim demands which it was hoped would persuade people to start paying.[13]Mr Heather proposes that the costs should be recovered on a 1/18th basis in accordance with that schedule. We disagree. This is neither the contractual nor a reasonable position.[14]Schedule 6-3.12 and 3.15 of the lease provide that the costs of employing persons to carry out the landlord’s obligations under the lease, administering the Main House and the Coach House, and performing and preparing service charge accounts are recoverable through the service charge. The landlord’s obligations extend to the entire estate. The service charge is payable by the lessees in specified proportions which add up to 100%. There is a proviso to clause 1.1.19 of the lease that the amount payable is net of any contributions from the owners of the freehold units on the estate.[15]The freehold transfers provide for payment of a rent-charge. The Fifth and Sixth Schedules include provision for each transferee to pay a proportion of the transferor’s expenses of carrying out its obligations with respect to the Amenity Areas, including (at 1/10th each) the costs of employing managing agents and paying persons in connection with the upkeep of the Estate and the Amenity Areas. The “Amenity Areas” are defined as all parts of the Estate not contained within individual Transfers intended for the communal use of the residents on the Estate. The Estate is defined as the land now or formerly comprised in Title WSX275988. The house transfers, except in one instance, pre-date the leases of the flats.[16]The tribunal takes the view that, notwithstanding the wide definition of Estate in the transfers, the combined effect of these provisions is that the lessees pay all costs of management in relation to what is now the enfranchised land, and the lessees pay (in their specified proportions) 40% of the management costs in relation to the amenity land, the house-owners paying the remaining 60%.[17]Clause 5(vi) of the management order gives the manager the power to ascertain the correct proportions of the estate costs to be recovered from lessees and owners of the freehold units.[18]Where one person is managing the whole estate the costs will need to be apportioned between services which are provided only for the lessees, and those provided for the amenity land. It is noted that in the accounts recently prepared by Carpenter Box for years 2013-2016 on the instructions of the manager, the fees of the former managing agents have been apportioned 2/3 to the Main Building and Coach House and 1/3 to the Amenity Areas. The same approach has been used in the accounts for 2010-2012. This appears entirely reasonable and therefore the tribunal directs that this be used in the accounts to be prepared for the period 1 January 2017 – 24 January 2020. The result is that the lessees will pay 2/3 of the management fees and will pay 40% of the remaining 1/3 of the management fees, all in their respective proportions as set out in their lessees. The house-owners will pay 60% of 1/3 of the management fees (10% each as set out in the transfer deeds).[19]Further, as set out above at paragraph 7, the tribunal finds that the lessees remain liable for these costs even if incurred post-enfranchisement. If justification for this needs to be found in the management order, we refer to clauses 4 and 10 (vi) thereof. The management order did not cease to apply to the lessees post-enfranchisement. Payment of manager’s and legal fees in relation to the tribunal proceedings[20]For the reasons set out at paragraphs 5 and 6 above we direct that these costs are to be recovered from the lessees through the service charge. Payment of outstanding liabilities[21]The tribunal has been told that the outstanding liabilities of the manager are as follows: £39,707.94 as set out on schedules provided by the manager to the tribunal (including management fees) £1900.00 for removal of scaffolding on the Main House and Coach House following major works £31,949.41 for heating oil supplied to lessees purchased by the manager on a credit card £820.00 owed to Carpenter Box £84,212,22 unpaid legal fees incurred by Dean Wilson LLP (excluding the fees in relation to the request for permission to appeal and appeal notice in the Court of Appeal) £12,978.30 fees incurred by the manager specifically in relation to the tribunal proceedings These figures total £171,567.87. The tribunal determines that this if the final sum for which provision must be made.[22]The funds potentially available to meet these liabilities comprise general service charge funds totalling £29,976.86, a major works fund of £12,939.09 (relating to the lessees’ buildings), accountancy fees fund of £14.57 and over-collection reserve of £184.66. There is also £50,818.01 remaining in a fund set up pursuant to the tribunal’s order of 5 April 2019 specifically to fund recovery of arrears.[23]DPF has stated it will take responsibility, subject to sight of the invoices, for the following items which are comprised in the schedules of creditors: Cleaning - £788.50 Boiler maintenance - £874.46 Door entry system - £84.00 Common parts light and power - £411.77 In addition DP Freehold has paid the insurance premium of £2875.21 for the enfranchised land. If DPF pays the above bills totalling £5033.94, this reduces the liability to general creditors to £34,674.00.[24]All the available funds, aside from the ring-fenced debt recovery fund, may be retained by the manager to meet these liabilities. Clearly there will be insufficient monies to meet those liabilities in full. The only way to make good the deficit is to give the manager the right to recover arrears of service charges. Right to recover arrears of service charges and rent-charges[25]The tribunal heard submissions from Mr Heather and Mr Tanney as to who had the right to pursue non-payers for arrears. Both counsel referred to the recent Upper Tribunal decision in Chaun-Hui & Others v K Group Holding Inc & Others [2019] UKUT 0371(LC). In that case the management order expired in 2013. In 2016 the maintenance trustee (who was the landlord for the purpose of recovering service charges) sought to recover arrears of service charges demanded by the manager. No directions had been given by the tribunal as to recovery of those arrears and the lessees contended that the maintenance trustee had no right to collect them. The central argument was whether demands made by a manager were “service charges” (answered in the affirmative), but there was also an issue as to whether there should have been an assignment of the right to sue. At paragraph 63 Judge McGrath said “In my view, the arrears that are “service charges” accrued to the maintenance trustee when the management order… came to an end… there was no need for a Deed of Assignment…”.[26]Mr Heather submitted that Chaun Hui was therefore authority for saying that the right to recover arrears vests in the appropriate contracting party once the management order ends. Thus in this case the right to recover any arrears accruing up to 22 March 2018 had re-vested in DPM, and the right to recover arrears accruing after that date vested in DPF for the enfranchised land and in DPM for the amenity land.[27]Mr Tanney argued that the passage referred to by Mr Heather was not central to the Upper Tribunal’s decision and was not fully argued. Furthermore, the facts at Ditton Place were very different. In Chaun - Hui the management order had expired without any request for winding up directions and recovery of arrears was first attempted some years later. The manager had no outstanding liabilities. In this case Mr Pickard is exposed to substantial liabilities and unless he is able to recover arrears he will be left financially exposed to a significant degree. Mr Tanney said that the tribunal had the power to authorise this, not only in relation to demands he had issued as manager, but also in relation to the historic arrears otherwise recoverable by DPM. It was DPM’s failure to register the restriction that had resulted in expenditure that could not be met from available funds.[28]Mr Heather then accepted that Chaun Hui was addressed to a situation where there had been no tribunal intervention. He conceded that the tribunal’s winding-up jurisdiction could extend to directions regarding the recovery of arrears, but urged us not to adopt this route. Collection of arrears might be met with many defences and it could take years.[29]This tribunal agrees with Mr Tanney and finds that it does have the power to make winding-up directions regarding the collection of arrears. Chaun Hui was concerned with the default position if no directions are given. At paragraph 62 of that decision it is noted that winding up duties can be set without limit of time, until properly discharged. Here Mr Tanney has requested directions that the manager should be permitted to pursue all arrears.[30]It cannot be right that the manager, appointed by the tribunal, is left out of pocket for services and works reasonably provided. We decide that the proportionate approach is to give the manager the right to pursue service charge and heating oil arrears arising during his period of management, to include arrears of service charges demanded after enfranchisement. These proceedings may be funded by the lessees’ contributions to the debt recovery fund. The contributions made to that fund by the house-owners should be returned to them. If any lessee has not paid the previously ordered contribution of £3000.00 towards the debt recovery fund, the manager may also sue to recover this sum. Heating oil[30]This is not a service charge. Under schedule 4-4.7 of the leases each lessee is responsible for their own utilities including oil. A variation made to the management order made on 5 April 2019 provided that sums due were to be paid to the manager on demand. If the lessees do not pay the sums invoiced to them the manager may issue proceedings for recovery, and may use the debt recovery fund to fund the proceedings. Directions[31]These are annexed to the Decision. Judge E Morrison 23 March 2020 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. WINDING – UP DIRECTIONS DPF: Ditton Place Freehold Company Limited DPM: Dittton Place Management Company Limited Accounts[1]The service charge accounts for years ending 31 December 2013 – 31 December 2016 were signed off by the manager on 4 November 2019. They fulfil the requirements of the leases and paragraph 7.10 of the RICS Service charge residential management code 3rd ed. The manager need take no further action with respect to these accounts. No queries raised of the accountants or the manager need be addressed unless the attendant costs are paid in advance by the person raising the query.[2]Service charge accounts for the period 1 January 2017 – 24 January 2020 are to prepared by the manager by 18 May 2020. This is in accordance with the Schedule of functions and services in the management order. The accounts must fulfill the requirements of the leases and paragraph 7.10 of the RICS Code. The accountants must be instructed that their fees must not exceed £2500.00 + VAT.[3]To reduce costs, and for convenience and practicality, the accounts shall be drawn up for two periods only. The first period will run from 1.1.17 – 22.3.18 and shall clearly distinguish between costs in relation to the land which is now comprised in Title No. WSX 398297 (“the enfranchised land”) and land now comprised in Title No. WSX 275988 (“the amenity land”). General management fees and legal costs not associated with any of the proceedings before the First-tier Tribunal and Upper Tribunal shall be apportioned 2/3 to the enfranchised land and 1/3 to the amenity land, consistent with the apportionment applied in the previous four years.[4]The second period will run from 23.3.18 – 24.1.20 and separate sets of accounts for(i) the enfranchised land and(ii) the amenity land must be prepared. The manager’s general management fees and legal costs not associated with the proceedings as above are to be apportioned as above. The manager’s time costs and the legal fees incurred in connection with all the tribunal proceedings are to be apportioned to the enfranchised land.[5]The accountancy fees for preparing these accounts are to be apportioned as stated at paragraph 3 above and included in the accounts for the second period. The manager shall not be entitled to recover any costs for his work in preparing these accounts as this is covered by the standard management fee already charged. Liabilities of the manager[6]The manager is owed £ 31,949.41 (as of 2 March 2020) for heating oil he has purchased on behalf of the lessees. Invoices have been issued by the manager to the lessees and they are payable on demand. If not paid the manager may issue legal proceedings for recovery as set out at paragraph 10 below. No further interest is to be added to the debt, other than pursuant to the County Courts Act 1984.[7]The manager is owed £39,707.94 (as of 2 March 2020) for service and rent-charge expenditure in respect of which he has a personal liability to third parties or in respect of his own management fees. Subject to sight of the original invoices DPF has agreed to take responsibility for £5033.17 of this sum as set out in the accompanying decision.[8]Such of the sum of £39,707.94 as is not met by DPF within 28 days, together with the sum of £820.00 owed to Carpenter Box, is to be met by the monies held in the general service/rent-charge funds, which stood at £29,976.86 as of 2 March 2020. The remaining balance shall be met from any other service charge funds operated by the manager, including the major works fund as a last resort.[9]The additional sum of £1900.00 owed to contractors for removing the scaffolding to the coach house is to be met from the major works fund which stood at £12,939.09 as of 2 March 2020.[10]The manager has also incurred substantial legal fees which remain unpaid in the sum of £84,212.22 and his own fees of £12,978.30 for dealing with the tribunal proceedings, which are additional to the liabilities already mentioned. Any remaining funds in the service charge accounts may be applied towards these costs. He shall also have the right to take proceedings to recover service charge arrears and unpaid heating oil charges relating to the period 1.1.17 –24.1.20 against any one or more of the lessees as he sees fit, and shall have the power to charge his reasonable costs of recovery (including legal costs, costs of and incidental to making any demand, and his time costs) to the debtor as if the same were an administration charge owed to him by the debtor in accordance with paragraph 4-14 of the lease. In order to limit the scope of any objections to payment, he may limit his claim to the sum required to reimburse him, and should seek to recover the costs of proceedings from the debtor. The lessees’ contributions to the debt recovery fund may be used by the manager to fund the recovery proceedings, but must be reimbursed to the extent that the costs are otherwise recovered. The manager must consider and pursue recovery in the most cost –effective manner. Any surplus funds recovered over and above the amount required to meet the manager’s liabilities must be paid over to DPM in the first instance, or if all DPM arrears are recovered, to DPF.[11]The manager may also issue proceedings against any lessee who has not made the ordered contribution to the debt recovery fund. The debt recovery fund[12]The manager shall return in full the contributions to the debt recovery fund made by the house-owners by 20 April 2020, the expenditure already made from the fund to be equally apportioned between the lessees.[13]Any lessee in arrear who pays in full prior to issue of proceedings against them will be entitled to a return of their contribution to the debt recovery fund, less costs already expended on the recovery of that lessee’s debt. Entitlement to credit[14]Any lessee or house-owner who has paid more than they owe in service charges or rent charges will entitled to a credit (from DPM or DPF as the case may be) against future charges. Recovery of arrears by DPM and DPF[15]No assignment being necessary, DPM has the right to recover arrears of service charges and rent charges in respect of all periods up to 31 December 2016.[16]Once any proceedings commenced by the manager are finally determined, the manager shall execute:(i) a deed of assignment to DPM of all his rights to recover service charges and rent charges for the period 1 January 2017 – 22 March 2018 and of his rights to recover such charges in respect of the amenity land for the period 23 March 2018 – 24 January 2020(ii) a deed of assignment to DPF of all his rights to recover service charges for the period 23 March 2018- 24 January 2020 in respect of the enfranchised land. Handover of funds and documents[17]Subject to the above directions, the manager shall procure that any credit balances in the bank accounts he has operated are transferred to DPM as the principal creditor in relation the historic service charge arrears.[16]The manager shall by 4 May 2020 deliver to DPF and DPM identical copies (electronic copies wherever possible instead of paper copies) of all accounts, draft accounts, bank statements, books, papers, memoranda, records, computer records, minutes, correspondence, emails, facsimile correspondence, certificates, invoices, demands, notices, contracts and all other documents as are relevant to the management of the Estate that are in his possession, custody or control including (for the avoidance of doubt) copies of all documents which were supplied to Carpenter Box and/or referred to within the accounts prepared by Carpenter Box, but excluding any document to which legal professional privilege or confidentiality applies. Manager’s proposed appeal to Court of Appeal[17]If the manager elects to pursue his proposed appeal against the decision of the Upper Tribunal he will do so at his own expense and risk as to costs and shall not be entitled to seek any reimbursement from the lessees.[18]The parties should consider a compromise whereby any potential objections to the reasonableness and payability of service charges are waived in return for the manager withdrawing his notice of appeal. Removal of Restriction at Land Registry[19]Any restriction registered against Title Nos. WSX 398297 or WSX 275988 further to paragraph 15 of the management order is to be cancelled. 23 March 2020