MARYLAND ESTATES LIMITED v PATSYANNE LYNCH and DAVID WILSON LRX/57/1999

UPPER TRIBUNAL

LANDS CHAMBER

LRX/57/1999

Case No LRX/57/1999

Between

MARYLAND ESTATES LIMITEDApplicant

PATSYANNE LYNCH and DAVID WILSONRespondent

Before

P R Francis FRICS

Venue 48/49 Chancery Lane, London WC2A 1JR

Date 5 February 2003

Hearing 29 November 2002

Property: Front Basement Flat & Flat 2, 128 Christchurch Road, London SW2 3DF

Catchwords: SERVICE CHARGE – reasonableness of surveyor’s additional fees in respect of contract of works – costs under s.20C, Landlord and Tenant Act 1985 as amended – no LVT jurisdiction to determine reasonableness of fees paid by contractor as liquidated damages – discretionary award of 50% of landlords costs in LVT hearing

[1]This is an appeal under s.19 of the Landlord and Tenant Act 1985 (“the 1985 Act”) as amended by the Housing Act 1996 (“the 1996 Act”), with leave of the Tribunal given on 9 December 1999, against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel (“the LVT”) issued 22 March 1999. The appeal relates to 128 Christchurch Road, London SW2 3DF (“the subject property”).

[2]Miss Catherine Taskis of counsel appeared for Maryland Estates Limited (“the appellant”) and called Mr Harold John Bebbington, Managing Director of the appellant company who gave evidence of fact. Mrs Patsyanne Lynch appeared for herself and Mr David Wilson (“the respondents”), with permission of the Tribunal. Factual Background

[3]The subject property comprises a house converted into seven flats, the respondents being the long-leasehold occupiers of two of them, with the appellant having the benefit of the head leasehold reversion. In 1996, following a notice under section 20C of the 1985 Act served upon the lessees, the appellant awarded a contract to Allard and Saunders Ltd for external redecoration and repairs. The works commenced in 1996 and, following severe delays, were eventually completed in 1997. They were supervised by a surveyor, whose fees were to be calculated at 15% of the final contract price.

[4]Two of the 7 lessees (the respondents to this appeal) made an application to the LVT for determination, under section 19 (2A)(a) and (b) of the 1985 Act as amended, of the reasonableness of(1) the surveyor’s fees,

(2) additional costs and

(3) management fees. In addition, they sought an order under section 20C of the 1985 Act as amended preventing the landlord including his costs in respect of the LVT proceedings within the service charge. It is only the LVT’s determination in respect of (1) and the costs under s.20C that are in issue in this appeal.

[5]The LVT, in its decision dated 22 March 1999, determined that £2,465 of the total fees of £8,638.65 paid to the surveyor were unreasonably incurred, leaving £6,173.65 as reasonable. It also concluded that:

“the proceedings were justified not only by the determination made as to the surveyor’s fees but also by the confused and complicated service charge figures, involving apparently inexplicable adjustments, produced on behalf of the landlord”

. In the circumstances, it said, it was “just and equitable… to make the order sought that none of the landlords costs of these proceedings be taken into account for service charge purposes”. Grounds of Appeal

[6]The appellant, following leave being granted by this Tribunal on 9 December 1999, has appealed on two points: 1) The reduction in the cost of surveyors fees by £2,645 plus VAT, and 3 2) The order made pursuant to section 20C of the Landlord and Tenant Act 1985 Appellant’s case

[7]Mr Bebbington explained that the actual work carried out by the contractor was valued at £24,005.25 plus VAT of £4,200.93, making a total of £28,206.18, after taking into account all additions to, and omissions from, the original contract price. Within that figure was a sum of £3,205.61 plus VAT of £560.98 (total £3,766.49) relating to window repairs which were payable directly to the contractor by the lessees of the individual flats. Whilst the contractor was paid the £3,766.49 through the service charge account as part of his overall bill, the account was credited with that sum on 11 December 1997, to balance.

[8]However, the contractor was only actually paid a total of £23,212.44, the difference of £4,993.76 (£4,250 plus VAT) being liquidated damages. These damages related to the amount of extra costs that had been incurred as a direct result of the contract overrun, including additional surveyors fees of £3,527.50 plus VAT of £617.31, totalling £4,144.81. The difference of £848.95 was treated as compensation to the lessees, and credited to the service charge account.

[9]It was, Mr Bebbington said, only the surveyors additional fees that had been seriously challenged (as noted by the LVT in its decision), but with those fees having been paid by the contractor and not charged to the lessees, the LVT had no jurisdiction to reduce them, as it did, by £2,645 to £1,062.50. The LVT had said, at para 4: “4. The only serious challenge was to item 4 and the Tribunal accepts that all the other items were reasonably incurred. As to item 4, the surveyor had dealt with and achieved a reduction in the contractor’s bill because of delayed completion amounting to £4,250. Consequently his percentage fee had been reduced by (ie 15% of £4,250 = £637.50). To compensate him for this reduction and for the unanticipated extra work involved, he had received £3,527.50 (ie 83% of the £4,250 saved). The Tribunal considers that this compensatory fee was, in the circumstances, patently excessive and. so far as the tenants are concerned, unreasonably incurred. Instead it is determined that a fee of £1,062.50 would be reasonable, being a restoration of the 15% reduction plus a further 10% in respect of the additional work. This means that the total accepted as reasonably incurred for surveyor’s fees is reduced by £2,645 from £8,638.65 to £6173.65”.

[10]It was obvious that the LVT had been confused by the situation, as the additional surveyors fees were not based upon 15% of anything, but had been calculated on an hourly basis purely in connection with the additional works that he had had to undertake in connection with the contract overrun. As he said, those fees had not been paid by the lessees, but by the contractor, and could not therefore be described as a compensatory fee chargeable to the lessees.

[11]Mr Bebbington accepted that the fees had appeared in the service charge statement supplied to the lessees, but the fact was that the amount actually paid to the contractor was 4 £4,993.76 less than the final value of the works; this, along with the £848 credit to the lessees serving to balance the figures out. The schedule of expenditure was an income and expenditure account which actually reflected such, and, Mr Bebbington said, to have recorded the details any other way would have been inaccurate.

[12]As to the section 20C application, Mr Bebbington did not accept the LVT’s statement that referred to “the confused and complicated service charge figures involving apparently inexplicable adjustments”. He said that all the lessees’ queries had been responded to and, he thought, sorted out prior to the LVT hearing. Indeed, in a letter he had written to Mr Wilson on 4 April 1998 he said:

“…In any event, part of the surveyor’s fees were incurred in connection with services not directly concerned with the actual works such as meetings with the lessees’ surveyor to agree the extent of the works and in connection with the window repairs which the lessees had failed to carry out. Furthermore, the cost was less than the original s.20 notice and, allowing for the s.20 limit of £1,000, the fees charged by the surveyor were less than 15% of the final contract sum. Finally, the fee chargeable at 15% under the original s.20 notice was £5,227.04 whereas the surveyor’s fee actually charged to the lessees was only £5,146.67,the balance being paid to the surveyor by the contractor by way of liquidated damages. Therefore, contrary to your assertion, a s.20 notice has been served for the surveyors fees charged to the lessees.”

[13]Mr Bebbington said that there was no mention in the appellants’ statement of case about confusion in their minds, and neither did they raise the point at the LVT hearing. Mrs Lynch had become confused in respect of some calculations she had been doing during the hearing, but that had been simply resolved by the respondent’s witness who pointed out that she had failed to allow for VAT. Mr Wilson also said he was confused by the amounts shown in the respondent’s figures, but had not been specific as to any particular item. The application to the LVT had been made by the lessees on the basis of the level of surveyor’s fees, and neither of them had referred in that application to complicated and confused service charges.

[14]It was also important to note, Mr Bebbington said, that at no time during the LVT hearing did its members detail any matters relating to confusing accounts. The question of “inexplicable adjustments” was not understood, the respondent not having made any either to the applicants or to the LVT.

[15]Setting out the provisions of s.20C, and the reasoning behind it, Mr Bebbington said that in Clause (ix) of part 4 of the Schedule to the leases relating to the subject property, the tenants agree to contribute and pay a proportion of the expenses incurred by the landlord in managing and administering the building. The appellant’s costs of instructing its solicitors in connection with the application to the LVT were, he said, reasonably and necessarily incurred in connection with the management and administration of the building, and the LVT was therefore wrong to make an order to the effect that none of the landlord’s costs could be recoverable through the service charge. 5

[16]Referring to Iperion Investments Corporation v Broadwalk House Residents Ltd

[1995] 2 EGLR 47

, Mr Bebbington said that that case resulted from a tenant carrying out alterations without consent (when such consent was required). The landlord purported to forfeit the lease of a flat by peaceable re-entry. The tenant applied for relief and obtained a declaration that the forfeiture had not been valid, and damages for unlawful re-entry and nuisance. The landlord was granted an injunction requiring the tenant to reinstate its unlawful alterations. The tenant was awarded half its costs from the landlord, and the High Court also made an order under s.20C preventing the landlord from recovering its costs of the litigation by way of the service charge.

[17]The Court of Appeal held that:(1) the relevant part of the service charge in the lease allowed a landlord to recover the costs properly incurred….;

(2) the recoverable costs should not be restricted to the costs of successful (as opposed to unsuccessful) action taken by the landlord in its management. Costs properly incurred in the proper and reasonable management of the property included the cost of unsuccessful proceedings properly brought in managing the property. The landlord had not acted improperly in bringing the proceedings and the costs were, prima facie, within the scope of the service charge.

(3) the purpose of s.20C was to avoid a situation where the tenant had been successful in litigation against the landlord and yet the costs of the proceedings were recoverable from the tenant through the service charge. Peter Gibson, LJ said, at 49H: “ To my mind, it is unattractive that a tenant who has been substantially successful in litigation against his landlord and who has been told by the court that not merely need he pay no part of the landlord’s costs, but has had an award of costs in his favour should find himself having to pay any part of the landlord’s costs through the service charge”.

[18]In the LVT case from which this appeal stems, Mr Bebbington said that the landlord had been 87% successful - 87% of the costs in dispute being considered reasonable. It was not right therefore for the LVT to have concluded that the landlord’s reasonably incurred costs, or at least 87% of them, should not be recoverable through the service charge. For the reasons he had given, the lessees were not justified in bringing the action, and the landlord should not be penalised for having incurred costs in defending it.

[19]In cross examination, Mrs Lynch asked why it was that if there was provision for liquidated damages in the builder’s JCT contract of £450 per week over-run and the contract was 23 weeks late, the £4,250 that had been referred to only amounted to 9.5 weeks worth. Mr Bebbington said that it was only additional costs that had been actually incurred that, in law, were realistically recoverable, and that was what had been achieved. Miss Taskis submitted, on that point, that if it had been a penalty clause in the contract, rather than provision for liquidated damages, the full amount might have been recoverable. 6

[20]Mrs Lynch pointed out that the credit that had been referred to had not actually appeared in the service charge accounts, but Mr Bebbington insisted that the matter had been resolved by correspondence prior to the LVT hearing. Respondents’ Case

[21]Mrs Lynch said that the crux of their case was that it appeared that the lessees had been charged surveyor’s fees far in excess of the 15% that had been agreed. In the end, the surveyor was paid fees that amounted to 36% of the contractor’s final price and in the respondents’ view, how those fees were apportioned was irrelevant. The landlord was not entitled to claim them as they exceed what had been set out in the (amended) section 20 notice. Any excess fees (over and above the 15%) that had been paid to the surveyor were, in any event, a result of the landlord’s negligence in failing to properly manage the contract.

[22]If the reduction in the contractor’s final account had been used to pay the surveyor rather than to compensate the lessees for the inconvenience that they had been caused, that, in the respondent’s view, could not be right. There were serious questions over the landlord’s competence in respect of the management of the works contract, and it would be, Mrs Lynch said, an injustice if the lessees could not be compensated for that aspect.

[23]It would also be an injustice if the lessees were forced to pay any or all of the landlord’s costs, by virtue of the order under s.20C, as their application to the LVT had been fully justified. The landlord had continually misled the lessees as to the costs of the contract, and had quite clearly, despite what the LVT said, exceeded its authority in respect of the amount of surveyors costs paid. Perhaps if the landlord had acted more reasonably in explaining costs issues, work over-runs and the like, the respondents would not have found is necessary to appeal. The landlord should, therefore, be obliged to bear his own costs. Closing submissions

[24]Miss Taskis said that whilst it was accepted that the situation in Iperion was different, that case was helpful in setting out the court’s interpretation and understanding of the discretion that could be used in determining an application under section 20C. In Tenants of Langford Court v Doren Ltd (2001) (LT) LRX/37/2000 (Unreported), a cautious approach had been urged before determining that a landlord should be deprived of his ‘property right’ to recover costs as part of the service charge. Nevertheless, if I were to allow the appeal relating to the surveyor’s costs, it would mean that the lessees had been unsuccessful in respect of the whole of their application, and would have failed to achieve any reduction in the service charges. It would be all the more incongruous, therefore, if I were to determine that the appellant should not be able to receive his costs of the LVT hearing through the service charge. There should, she said, be no question of discretion where that were the case – to exercise it would not be just or equitable. 7 DECISION

[25]It was clear from Mr Bebbington’s evidence that the additional surveyor’s fees which were the subject of the LVT application were not charged to the lessees, although it is quite understandable how confusion might have arisen because those additional fees were shown as expenditure in the ‘Schedule of Expenditures’ forming an appendix to the 1997 service charge statement. The stage payments to the contractor were spread over a two year period (payments 1 and 2 not showing on the 1997 statement) and it would therefore not have been easy for the lessees to pick up the fact that the builders had, in reality, received less than the original contract value. Certainly, just looking at the 1997 expenditure schedule, it does appear that the lessees have been charged for those additional fees and, as I have said, the ‘offset’ is not clear.

[26]I have no alternative, therefore, but to conclude that the LVT did not have jurisdiction to reduce the surveyor’s additional fees on the grounds that they were unreasonable, and in that regard, the appeal succeeds. However, I have some sympathy with the respondents and can understand the concerns that drove them to taking the matter to the LVT. It took a detailed and, in my view, relatively complex statement from Mr Bebbington to clarify the situation, this backed up by schedules of payments that would not have formed part of the service charge statement.

[27]Whilst it may be right that the respondents did not specifically refer to confusion in the service charge accounts in their statement of case to the LVT, it was evident from Mr Bebbington’s statement that, despite what he said, there had been reference to those very concerns at the LVT hearing both by Mrs Lynch and by Mr Wilson. I do not accept the appellant’s pleas before me that because the areas of confusion were not specifically detailed in the respondents’ written statements, I should not accept them. It was clear to me that the whole reason for their application to the LVT on the subject of the surveyor’s fees was because they were genuinely concerned that the surveyor was being paid, by them, a fee that was out of all proportion to what it should have been, and was significantly more than had been set out in the s.20 notice. I am sure that if the actuality of the situation had been made clear, and the respondents had fully understood, then the application (on that issue) could have been avoided.

[28]I accept that Mr Bebbington did explain the situation prior to the LVT hearing (in his letter of 4 April 1998), but, to a lay person, the reference to the payment by the contractor of the surveyor’s additional fees by way of liquidated damages might not have been particularly clear – especially, as I have said, as all the surveyor’s payments actually appeared in the expenditure schedule to the service charge statement.

[29]Therefore, the question of the s.20C order needs, in my judgment, careful consideration. Miss Taskis was, of course, technically correct when she said that if the appellant succeeded on the appeal relating to the surveyor’s fees, the respondents would achieve nothing. Why therefore, she said, should the landlord be deprived of its costs? Even though the appellant has technically ‘won’, I do think it would be unjust if the respondents, in the circumstances, were penalised to the extent that they became obliged to pay, through the service charge, all the appellant’s costs of the LVT application. 8

[30]As I have said, the LVT appear to have confused the surveyor’s costs issue, and from the evidence I have seen, that was understandable. Miss Taskis referred to discretion and in particular to Doren. In that case the Member, (HH Judge Rich QC) said, under the heading ‘Principles upon which discretion should be exercised’: “28. In my judgment the only principle upon which the discretion should be exercised is to have regard to what is just and equitable in all the circumstances. The circumstances include the conduct and circumstances of all parties as well as the outcome of the proceedings in which they arise”.

[31]In my view the circumstances of this case dictate that it would be neither just nor equitable for the respondents to have to pay the whole of the appellant’s costs in relation to the LVT proceedings. However, it is a fact that the respondents have not succeeded. I propose, therefore, to use the discretion I have, and determine that the respondents shall pay 50 per cent of the landlord’s costs under s.20C, through the service charge. Those costs to be determined by the Registrar if the parties fail to reach agreement thereon.

[32]This determines the substantive issues in this appeal, and the decision will take effect when the question of costs is determined. A letter accompanying this decision sets out the procedure for written submissions on costs. DATED 19 December 2002 (Signed) P R Francis ADDENDUM ON COSTS

[33]I have received submissions on costs from the parties. The appellant reiterated that it had succeeded in the appeal in respect of surveyors fees, although acknowledged that recovery of its costs under section 20C had been restricted to 50% in respect of the proceedings before the LVT. It sought an order that the respondents do pay the costs of this appeal.

[34]Mr Wilson, for the respondents provided a comprehensive submission which effectively re-stated their full case before the LVT despite the fact that this appeal related solely to the subject of the surveyors fees and the section 20C order. In that regard, he said it would be inequitable for the lessees to pay any of the appellant’s costs. 9

[35]Had the appellant acted reasonably in terms at the previous LVT hearing, this hearing, he said, would not have been necessary. In addition he sought his own costs, estimated at £9,325.

[36]It is a fact that the appellant was successful in this appeal and, whilst under rule 52(1) of the Lands Tribunal rules 1996 costs shall be in the discretion of the Tribunal, it is normal for costs to follow the event. In respect of the section 20C costs relating to the LVT hearing I referred, in para 31 above to Doren and quoted a brief passage from it.

[37]In my judgment, bearing in mind what I said, it would be equitable that the costs of these proceedings should be dealt with on the same basis as the LVT costs. I therefore award the appellant 50% of its costs in this appeal, such costs, if not agreed to be subject to a detailed assessment by the Registrar. DATED 5 February 2003 (Signed) P R Francis