[1]The appellant in this case is the landlord of six flats at Mill Lodge, 2 West Road, Shoeburyness, Essex. The tenants of five of the flats made applications to the Chiltern, Thames and Eastern Leasehold Valuation Tribunal, firstly, under section 19(2A) of the Landlord and Tenant Act 1985 for a determination of whether costs incurred by the landlord as managing agent for services, repairs, maintenance, insurance and management were reasonably incurred; and, secondly, under section 20C for an order limiting the landlord’s costs in future service charges.[2]In its decision of 16 October 2000 the LVT determined that amounts charged for each of the years 1994 to 1999 in respect of insurance costs, electrical works, building repairs, external redecorations, accountant’s fees and management fees were not reasonable and they stated the amounts that would have been reasonable. They determined that the landlord should not be permitted to add its legal costs relating to the application to the service charge. The landlord applied to the LVT for leave to appeal against its decision but leave was refused. Its application to this Tribunal for leave was granted on 1 March 2001, subject to the condition that the appeal be limited to the issue of management fees only.[3]On 13 June 2001 the appellant gave notice that it intended to withdraw its appeal. Efforts were made to agree the necessary consent order and on 22 August 2001 the proceedings were stayed until 15 October 2001 to enable the parties to resolve the matter. On 12 July 2001, the Court of Appeal gave judgment in R (on the application of Daejan Properties Ltd v London Leasehold Valuation Tribunal [2001] EWCA Civ 1095; [2001] 43 EG 187. In that decision the court held that the LVT’s jurisdiction under section 19(2A) is limited to service charges that remain unpaid by the tenant (subject, however, to payments made under an interim contractual arrangement for repayment if the charge is found to be excessive). In the light of this decision the appellant made application on 11 October 2001 for leave to appeal against the LVT’s determinations for each of the years 1994 to 1999 on the ground that before the LVT’s determination these elements of the service charges in these years had already been paid by the applicant tenants, so that the LVT had no jurisdiction to make its determination.[4]In view of the facts stated in this application, on 12 November 2001 I rescinded the condition on which leave to appeal had been given and granted leave to amend the grounds of appeal so as to include the contention on jurisdiction. I ordered that this matter be determined as a preliminary issue. At the hearing before me into this issue only the appellant appeared.[5]Mr Gallagher told me that, although at the time the further application for leave was made on 11 October 2001 the landlord’s instructions had been that all the elements of the service charges had been paid by all the applicant tenants, further investigation had shown that this was not in fact the position. Contrary to the landlord’s original instructions, the tenants had not paid the relevant sums in full. They had made part payments only. Moreover the position was further complicated in that not all the applicant tenants had been 3 leaseholders for the whole of the period in which the service charges were disputed, and no tenant would be liable for charges for a period during which he was not a leaseholder.[6]Eric Jacob, a director of the appellant company, in a witness statement relied on by the appellant, produced the certified accounts, entry listings from the company’s files and service charge invoices relating to each of the five flats. The entry listings presented the relevant debits and credits for each flat, and the balance relating to that account, on a continuous basis from 1 January 1994. With some exceptions the accounts were in deficit for the whole of the relevant periods of tenancy. Mr Gallagher acknowledged the difficulty that there was, where part payments for service and ground rent had been made, of showing that those payments had been appropriated to individual elements of the service charge. In order to make good the contention on jurisdiction it would be necessary to show that payment had been made in respect of the particular elements in dispute, whether or not as part of the payment for service charges generally.[7]Mr Gallagher said that the general legal principles applying to the appropriation of payments applied. He referred to Chitty on Contracts 29th Edn. and Snell’s Equity 30th Edn. and identified three propositions. Firstly, where a number of debts are outstanding from a single debtor, eg service charges and ground rent, or (except where there is a “single blended fund”) different elements of the service charge, the debtor has the right to appropriate any payment he makes to whatever debt that he chooses. This right must be exercised at the time of the payment, though it may be inferred from the circumstances. A mere inward intention on the part of the debtor is not sufficient. There needs to be evidence to find that there has been an appropriation: see Lesson v Lesson [1936] 2 K.B. 156. He said that there were only 8 instances in the case of these tenants where a particular payment was so closely related to a particular item of debt as to create the inference of appropriation by the tenant.[8]The second proposition was that in the event that the debtor makes no appropriation, the creditor may do so at any stage, even in the course of an action: see for example Seymour v Pickett [1905] 1 K.B. 715, in which the creditor exercised his right of appropriation in the witness box. On that authority Mr Gallagher submitted that, if this were a hearing at first instance, it would be open to the appellant landlord to now appropriate payments as he sees fit. However, he accepted that because this is an appeal, the Tribunal needs to consider what elements of the service charge had been paid as at the date of the LVT hearing (October 2000). The landlord had not at that time made any express appropriations of sums received from the tenants. The payments had, he said, been accounted for on the basis that the service charge and ground rent sums form a single unbroken account between the parties, ie a blended fund as shown in the entry listings.[9]Mr Gallagher’s third proposition, in view of the basis of accounting shown in these entry listings, was that the rule in Clayton’s Case applied. That rule applies where there is an unbroken account between the parties and its effect in that, in the absence of any express appropriation, each payment is impliedly appropriated to the earliest debt that is not statute- barred. In each case, therefore, said Mr Gallagher, the total amount paid since 1994 by each tenant on the service charge and ground rent account should be applied to such debts, starting in 1994 and working on in date order, as together totalled the same amount. On this basis it 4 could be seen by which tenants and for which years the service charge had been fully paid and thus those years in which a particular tenant had no right to apply to the LVT.[10]Mr Gallagher said that a further complication arose from the fact that the leases provide for an interim (on account) service charge contribution based on the estimated level of expenditure for the year. The interim charge is payable in two equal instalments on 1 January and 1 July and a balancing charge is payable or, as the case may be an amount may be credited, on the ascertainment of the actual expenditure. Mr Gallagher submitted that section 19(2A) applies to interim service charge demands in the same terms as Daejan held that it applied to service charges for expenditure that was already ascertained. However, for ease of calculation and as a concession, he said, the appellant did not seek to assert that service charges paid on an interim basis were to be treated as paid until final accounts were prepared for the relevant year.[11]Mr Jakob said that he personally prepared all accounts. In the first six months of each year he sent out to each individual flat and invoice for service charges for that year. The invoice stipulated that 50% of the charge was payable immediately and 50% on 1 June. (In fact the invoices show the second payment to be due on 1 July.) The tenants made payment throughout the year in varying amounts, at non-specific times and without stating where they payments should be apportioned. He then recorded these payments and paid them in to the bank account kept for each flat. The funds from the account were then used to pay for the elements of the service charge currently due. The service charge account was prepared approximately one to two months after the accounting period and was sent to the company’s accountants to be certified. A copy of the certified accounts was then sent to each tenant expressing as a credit or deficit the difference between the interim payments and the certified amount.[12]It does not seem to me, on the evidence of Mr Jakob and the documents produced by him, that the dealings between landlord and tenant were here conducted on the basis of an account that would bring the rule in Clayton’s Case into operation. It is true that the rule does not simply apply as between a banker and his customer. Mr Gallagher relied on In re Footman Bower & Co Ltd [1961] 1 Ch 443, in which Buckley J applied the rule in the case of two tradesmen whose dealings were arranged on the basis of an account between them kept as a current account. The sales ledger of one company and the bought ledger of the other company contained corresponding accounts. Goods were supplied from one company to the other from time to time and payments were made from time to time, but not in the respect of any particular debit or debits. The accounts recorded the supply of goods and the making of the payments. The ratio of the decision is to be found in this sentence from the judgment (at 451): “When, as in the present case, there is an account running between the parties which to the knowledge of both parties is of that kind and kept in that way, then, if the debtor makes a payment ‘generally on account’ it appears to me that he must be taken to be making it on account generally of whatever is owing on the balance of the account.” 5[13]The arrangements between the parties in the present case are, I find, substantially different in that the running account is kept by the landlord alone. It forms no part of the convention on which landlord and tenant conduct their affairs. As far as the tenant is concerned he receives from the landlord 6-monthly invoices related to the interim service charge due for that 6-month period, adjusted as necessary to reflect the deficit or surplus from the interim service charge for the previous year. He does not see the landlord’s running account.[14]Mr Gallagher advanced two arguments in support of his contention that, despite any formal mutuality of accounting, the rule in Clayton’s Case applied. Firstly, he said, the tenant’s liabilities arose under a lease, and thus had a greater permanency than liabilities arising in the course of business between traders; and, secondly, the entry listings showed that, for the most part, payments by tenants did not correspond with debit items, so that the inference was that the tenants were making payments on account for amounts outstanding generally.[15]I do not find these arguments persuasive. The obverse of Mr Gallagher’s argument that for the most part payments made by the tenants did not correspond with particular debit items is that on occasion there was such a correspondence, with a tenant making payment in respect of a particular item despite earlier debts remaining unpaid. Indeed Mr Gallagher says that there are some 8 instances where that was so. The crucial point, however, is that no running account was ever produced to the tenants, and there is no evidence of any of them keeping an equivalent account, so that the essential ingredient – a shared basis of accounting – is clearly lacking. The tenants were sent invoices relating to service charges for the particular year, and these were separate invoices for separate amounts. They made no reference to any amounts that might be owing for services charges in some earlier year.[16]Since, as I have concluded, the rule in Clayton’s Case does not apply, the question becomes one of actual appropriation. As Mr Gallagher accepted, however, it would have been sufficient to give the LVT jurisdiction in relation to a particular year’s service charges, or a particular item of charge, that there was at least one applicant tenant who had not made the relevant payment and so had the right to pursue his application. The reason for this is that the function of the LVT under section 19(2A)(a) is to determine “whether costs incurred for services [etc] were reasonably incurred.” Provided that there is one tenant who is able to dispute the level of his service charge and who makes application to the LVT, the LVT has jurisdiction to determine whether the costs on which the service charge were based were reasonably incurred. (It is, of course, the function of the LVT to determine the reasonableness of the costs and not the liability of the tenant to pay the service charge relating to them; and in this respect it is to be noted that the LVT went beyond its function when, at page 14 of its decision, it purported to identify the credit due to each tenant. How much credit, if any, is due to a particular tenant, in the sense of an amount that can as a matter of law be set off against an outstanding debt or can be reclaimed by him, is something for the county court to determine.)[17]It is clear on the material before me that Ms Shaw, the tenant of Flat A, has at no point made a payment or payments that can be seen to have been intended to discharge the total liability in respect of any of the years 1994 to 1999 or a particular item of charge. Mr 6 Gallagher pointed to only one instance where a payment by Ms Shaw matched a particular item of demand, and this was for the second part of the interim charge for 1996. As a part payment it did not discharge the liability for the year. There was thus no appropriation by her that had the effect of discharging a whole year’s liability or a particular item of charge, and there was no appropriation by the landlord. The absence of any such appropriation was sufficient to give the LVT jurisdiction. It is therefore unnecessary for me to make any findings in respect of the other tenants, although it is clear to me that in all years other than 1994 there was at least one other tenant who was similarly entitled to make an application in respect of all items of the service charge.[18]On this preliminary issue, therefore, I determine that the LVT had jurisdiction to make the determinations that it did under section 19(2A)(a), and the appellant’s appeal on this ground fails.[19]Having given an indication at the hearing that this was my decision, I asked Mr Gallagher whether the costs of this unsuccessful appeal would be visited upon the tenants as an additional amount in the service charge. It is manifestly wrong that they should be. Mr Gallagher, on instructions, was unable to say that they would not be. It is, however, open to the respondent tenants to apply to this Tribunal under section 20C for an order that the costs of this preliminary hearing should not be treated as relevant costs to be taken into account in determining any service charge payable by them.[20]The outstanding issue is that of the management fees. This will have to be the subject of a further hearing unless, as I would hope, the parties are able to reach agreement upon it. Dated 28 January 2002 George Bartlett QC, President 7