FORCELUX LIMITED LRX/33/2003

UPPER TRIBUNAL
LANDS CHAMBER
LRX/33/2003Case No LRX/33/2003
Between
FORCELUX LIMITEDApplicant
Before
His Honour Judge Michael Rich QCVenue 48/49 Chancery Lane, London WC2A 1JRDate 20 January 2004Hearing Friday 16 January 2004Property: Forest House,, Catherine Road,, Thundersley,, Benfleet, EssexCatchwords: Landlord and Tenant Act 1985 s.18 – Law of Property Act 1925 s.146 – Housing Act 1996 ss.81 and 82 – jurisdiction of LVT -- covenant to pay costs in preparing notices under s.146 – Meaning of “service charge” -- landlord’s costs of management -- Forcelux v Sweetman not followed
[1]This is an appeal by the landlords from the decision of the Leasehold Valuation Tribunal (“LVT”) (Chairman, Mr P.B.Langford MA, LLB) given on a preliminary issue on 13th June 2003. The LVT appointed the preliminary issue in the course of an application by three tenants holding long leases respectively of flats 3, 2 and 4 Forest House, for determination under s.19(2A) of the Landlord and Tenant Act 1985, whether the costs of preparing and serving notices under s.146 of the Law of Property Act 1925, alleging breaches of covenant in failing to pay service charges, were reasonably incurred and reasonable in amount. The preliminary issue was to determine the Landlord’s contention that the costs of each notice, being payable by the tenant upon whom it was served under an express covenant of the lease, distinct from the covenant to pay a due proportion of maintenance costs, did not fall within the definition of service charge in s.18 of the Act of 1985.[2]The LVT determined that the costs did fall within the definition. They accordingly proceeded to the consideration of the merits of the tenants’ application at the same time as they determined a number of other applications, including an application for the appointment of a Receiver. In regard to the cost connected with the s.146 notices they determined that the amounts charged were not reasonable, and reduced the amounts recoverable from more than £3,000 to £325 in each case. This appeal is brought, with the permission, given on 15th July 2003, of the LVT. They had expressed themselves in their decision on the preliminary issue as being “conscious of the fact that we are not following the decision of the Lands Tribunal in Forcelux Ltd v. Sweetman”.[3]None of the tenants has responded to the Appeal. Mr Gallagher, who had also appeared for the successful appellant in Forcelux v Sweetman [2001] 2EGLR 173 and on behalf of the tenants in a determination of the LVT (Chairman: Professor J.T.Farrand QC LLD) in Hadden v Dugdale Building & Development Co Ltd (LVT/SC/027/144), where he had successfully advanced the opposite contention, presented the arguments to the Tribunal with care and fairness, and assisted the Tribunal with additional research on the effect of sub-sections (3) and (12) of s.146 of the Law of Property Act, 1925, as to which I had raised questions in the course of the hearing. The Tribunal is indebted to him. COSTS THE SUBJECT OF DETERMINATION[4]The circumstances of the Landlord’s claim against each tenant were the same. In respect of Flat 3, the Landlord served a notice under s.146 complaining of the tenants’ breach of the covenant contained in clause 4(2) of the lease, to “contribute and pay to the Lessors annually one quarter of the costs, expenses, outgoings and matters mentioned in the fourth schedule [to the Lease]”. The alleged breach of covenant set out a balance of the service charges for 1998 to 2000 after allowing for payments on account of the sums demanded. The notice was accompanied by a solicitor’s letter dated 6th February 2001 in which it was said (inaccurately for reasons which I will explain in paragraph 8, below) that “failure to comply with the Notice 2 may result .. in our client forfeiting the Lease”. It was also asserted:
“You are also liable for the costs incurred by our client incidental to and in connection with the preparing and service of this Notice.”
On 16th April 2002, the solicitors wrote to the tenants “without prejudice” offering to waive the Landlord’s right to forfeiture if the tenant would pay an amended schedule of service charges up to the interim charge as claimed to be due to 2002, and “our clients’ legal costs .. pursuant to clause 3(1)(f) of the lease in the sum of £3,627.23.”[5]At no time has the Landlord otherwise demanded the payment of these costs. None the less, as Mr Gallagher conceded at the hearing before the Lands Tribunal, although he had contended otherwise at the substantive hearing of the LVT, the landlords, by that letter, alleged these costs to be payable, so as to entitle the tenants to apply to the LVT for a determination as to reasonableness in accordance with s.19(2A) of the Act of 1985, providing that they fall within the definition of service charge in that Act. The sole point in the preliminary issue the subject matter of this Appeal, was therefore, whether the legal costs so alleged to be payable under Clause 3(1)(f) of the lease are within the definition of “service charge” in s.18(1) of the Act of 1985.[6]At the substantive hearing before the LVT, Mr Gallagher did raise a further objection to the jurisdiction of the LVT, namely that, on a true construction of paragraph 6 of the 4th Schedule to the lease these costs are subject to an arbitration agreement, and accordingly the application should not have been allowed to be made, by reason of s.19(2C)(b) of the Act. The LVT rejected that submission in its substantive decision. No application has been made to appeal that decision of the LVT, and this matter is not part of my consideration. PROVISIONS OF THE ACT AND OF THE LEASE[7]S.18(1) of the Act of 1985 defines “service charge” to mean “an amount payable by a tenant .. as part of or in addition to rent—(a) which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management, and(b) the whole or part of which varies or may vary according to the relevant costs.”[8]Clause 3(1)(f) of the Lease is a tenant’s covenant “to pay all expenses (including Solicitors costs and Surveyors fees) incurred by the Lessors incidental to the preparation and service of a notice under Section 146 of the Law of Property Act 1925 notwithstanding forfeiture is avoided otherwise than by relief granted by the court.” By section 81 of the Housing Act 1996, a landlord of residential premises is, however, forbidden to exercise a right of re-entry or forfeiture for failure to pay a service charge unless the amount has been agreed or determined. The service charges referred to in the notice under s.146 served in this case had not been either agreed or determined. That is exactly why the tenant had made only a payment on account. This is also why I observed at paragraph 4, above, that the Landlord’s solicitors’ claim that failure to pay might result in forfeiture, was inaccurate; and, in my judgement it follows, at least prima facie, that costs incurred in the service of such a notice before the amount of the charges is agreed or determined, must be unreasonably incurred. None the less, S.82 of the 1996 Act specifically provides that “Nothing 3 in section 81 .. affects the power of a landlord to serve a notice under section 146(1) of the Law of Property Act 1925 ..” Service must, therefore, be effective as a preliminary to forfeiture proceedings once the service charges have been agreed or determined, and presumably has any other consequences provided by the Lease, such as liability under clause 3(1)(f), or statute.[9]One of the statutory consequences of incurring costs in the preparation and service of a s.146 notice is the provision of s.146(3) of the Act of 1925 that:
“A lessor shall be entitled to recover as a debt due to him from the lessee .. all reasonable costs and expenses properly incurred by the lessor in the employment of a solicitor .. or otherwise, in reference to any breach giving rise to a right of re-entry or forfeiture which, at the request of the lessee, is waived by the lessor, or from which the lessee is relieved, under the provisions of this Act.”
[10]Clause 3(1)(f) of the Lease, as drafted, covers circumstances not provided for in s.146(3) of the Act. Although it makes no reference to costs being reasonable or properly incurred, I am indebted to Mr Gallagher for his research which directed me to an unreported decision of the Court of Appeal in Fairview Investments Ltd v Sharma and Saitts [14th October 1999] CCRTI 1999/0335/B1 where Chadwick LJ said in respect of a similar covenant that:
“the word “all” does not enable or entitle the lessor to recover costs and expenses which are unreasonably incurred or which are unreasonable in amount; for the reasons explained by this court in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No2) [1193] Ch 171”
Nonetheless the Lease covenant would apply when forfeiture is avoided either because prohibited by s.81 of the 1996 Act or because the Lessor decides to waive it other than at the request of the lessee. That circumstance could make the covenant capable of use as a means of oppression, although it might be rendered ineffective in such use by the construction Chadwick LJ put upon it.[11]Such construction makes it unnecessary to consider whether the effect of s146(12) of the Act of 1925 renders of no effect such provision of the covenant as goes beyond the provisions of s.146(3). Subs. (12) provides that “This section has effect notwithstanding any stipulation to the contrary”. In my judgement it would only be if the covenant were construed to provide for the payment of costs which were not reasonably incurred or were unreasonable in amount that one would construe it as a provision to the contrary of subs. (3).[12]Schedule 11 of the Commonhold and Leasehold Reform Act, 2002, which was not yet in force when the notices the subject of this appeal were served defines “administration charges” to include “an amount payable by a tenant of a dwelling … (d) in connection with a breach (or alleged breach) of a covenant … in his lease” It now gives jurisdiction to the LVT to determine the reasonableness of such administration charges. Such specific provision makes any decision on this appeal unimportant for the future. 4 It would also seem to indicate that Parliament did not think that such administration charges already fell within the definition of “service charge” in the Act of 1985, but, as Mr Gallagher accepts, the Act of 1985 must be construed according to its own words and not according to the presumed understanding of Parliament in passing the Act of 2002.[13]Clause 4(2) of the Lease, which contains the covenant alleged in the s.146 notice to have been breached, refers to the “costs expenses outgoings and matters mentioned under in the fourth schedule”. Paragraph 5 of that Schedule refers to:
“all fees charges and expenses payable to any solicitor … or other professional adviser whom the Lessors shall from time to time reasonably employ in connection with the management and/or maintenance of the Building and/or the Estate … and in or in connection with enforcing the performance observance and compliance by the Lessee and all other Lessees of flats in the Building … demised under long Leases of their obligations and liabilities under this Clause including the collection of Maintenance charges ”
In spite of some ambiguity as to what “this Clause” refers to, no one has doubted, and Mr Gallagher accepted, that this provision would entitle the landlords to include in the Maintenance charges to which the tenants are bound to contribute one quarter each under Clause 4(2), the cost of preparing and serving notices under s.146 to enforce the payment of Maintenance charges. Moreover Mr Gallagher accepted that if they had been so included, the LVT would have jurisdiction to determine their reasonableness under s.19(2A) of the Act of 1985. The costs alleged to be payable in this case had not however been so included. THE APPELLANTS’ ARGUMENT[14]It is clear that the sums alleged to be payable in this case vary directly according to the costs incurred by the landlords in preparing and serving the notices under s.146. They thus satisfy paragraph (b) of s18(1) of the 1985 Act providing such costs are relevant costs. In spite of the admission that when such costs are included in the Maintenance charges, to which the tenants are bound to contribute equally, they do fall within the definition of service charges in s.18(1), Mr Gallagher submitted that when they are claimed only against the individual tenant against whom they have been incurred they do not fall within the meaning of “the landlord’s cost of management” which I accept is the only relevant phrase from paragraph (a) of the sub- section falling for consideration.[15]In his statement of case for this appeal, Mr Gallagher submitted that “an essential characteristic of a service charge is the concept of pooled contributions, whereby tenants contribute in accordance with their stipulated shares”. This submission has the attraction of being consistent with the familiar use of ordinary language. But, as he was forced to agree there are no words in the section which support such limitation on the definition contained in s.18(1). On the contrary further consideration of the Act shows that in s.20 there is defined a particular class of service charge where extra words are used to provide that it is indeed an essential characteristic of that particular class of service charge. Subs.(2) of s.20 defines “ ‘qualifying works’ in relation to a service charge”. It means “works ..to the costs of which the tenant by whom the service charge is payable may be required ..to contribute ..” If it was 5 an essential characteristic of all service charges that it was something to which the tenant contributed a share, it would only have been necessary to say “works the cost of which are included in the service charge which the tenant is liable to pay”. I do not think that the choice of language is conclusive, but, in the absence of any words in the relevant definition which support Mr Gallagher’s submission, I must reject it.[16]Once that submission is rejected, it is impossible for the appeal to succeed, except on the basis that Mr Gallagher’s concession that such costs would be part of the service charge within s.18 if included in the shared Maintenance charges, is wrong. Mr Gallagher was unable to suggest any reason why they should form part of “the landlord’s costs of management” in the one case and not in the other.[17]In the Forcelux case before Mr Paul Francis FRICS, sitting as a member of this Tribunal, Mr Gallagher again had no respondent and the issue as to s.146 costs was a very small part of the appeal. It appears to me that there is a misprint in the report where it is said at p.7 that “the LVT had determined that it had jurisdiction to deal with the question of these costs [amounting, apparently to £130 a tenant] but had dismissed the appellant landlord’s claim.” If, as I think must have happened it was the tenants’ claim that £130 was unreasonable that was dismissed, I am doubtful that the landlord could properly appeal against the LVT’s reasons for its favourable decision. Let that, however, be as it may, for I do not have to show that Mr Francis was not properly adjudicating the issue at all: his decision is not binding on another Member of the Tribunal, and, if, as I have done, I find myself respectfully forced to the conclusion that it was wrong, I should not follow it. The argument which Mr Francis accepted was that because the respondent lessees had specifically and separately covenanted to pay the landlord’s costs of service of a section 146 notice, such costs could not be deemed a part of the service charges which were dealt with elsewhere in the leases, (see p.7 of the Report). Of course, they were not part of the service charges dealt with elsewhere in the lease. That does not however mean that they do not fall within the definition of service charges, contained in s18(1) of the Act.[18]For this reason I conclude that the LVT in Haddon’s case was right to allow itself to be persuaded by Mr Gallagher in that case not to follow Mr Francis’ decision in Forcelux v Sweetman. I agree with their analysis at p.9 of their decision that “all that is required .. for there to be a service charge is an “amount payable by the tenant .. for.. the landlord’s costs of management … which varies .. according to the relevant costs” (s.18(1)).”[19]This is the conclusion drawn from consideration of the Section itself. There is no further authority on the construction of the Act. If, however, there were authority that such costs were not part of the costs of management for the purpose of construing the contractual provisions of a lease, I would certainly wish to follow it. Mr Gallagher drew my attention to three Court of Appeal authorities, where consideration has been given to whether legal costs fell within the particular provisions of the leases there being considered. It is important, before referring to them however, to make the general point that the question whether the particular covenant of a lease charges the tenant with particular costs of the landlord, depends entirely upon the particular wording of the covenant falling to be construed. The construction of any such covenant is a different matter from the question under the Act, whether costs which the tenant is liable to pay are excluded from the definition of “service charge” in the Act, by reason of the 6 restrictiveness of a definition, which at least on the face of it, appears to have been drawn as widely as possible.[20]In Iperion Investments Corporation v Broadwalk House Residents Ltd [1995] 2EGLR 47, Peter Gibson LJ said at p.4 that he saw the force of the submission that what Mr Neuberger described as the costs “of defending an unlawful and unenforceable re-entry and in opposing an application for relief in respect of the very valuable .. lease [which had been in issue] were ‘properly incurred in the proper and reasonable management of Broadwalk House’. ” The words which I have placed in quotation marks are taken from the covenant of the lease, which fell to be construed. He, however, held that “all costs properly incurred in the proper and reasonable management of the property” were recoverable under the covenant. The decision is more important as a decision on the scope of what is “proper and reasonable”; but, insofar as it is authority on the meaning of “management” it supports the conclusion at which I have arrived on the proper reading of the Act.[21]In Sella House Ltd v Mears [1989] 1EGLR 65, the Court of Appeal held that the covenants of the lease which fell to be construed in that case, did not entitle the landlord to recover the solicitor’s costs in recovering rent and service charges from other tenants. The covenants did not specifically refer to such costs and Taylor LJ said at p. 6:
“Nowhere in clause 5(4)(j) is there any specific mention of lawyers, proceedings or legal costs. The scope of (j)(i) is concerned with management. In (j)(ii) it is with maintenance, safety and administration. On the respondent’s argument a tenant, paying his rent and service charges regularly, would be liable via the service charge to subsidise the landlord’s legal costs of suing his co-tenants, if they were defaulters. For my part, I should require to see a clause in clear and ambigous terms before being persuaded that that result was intended by the parties.”
The sub-clause which Taylor LJ referred to as being concerned with management, referred to employing Managing Agents and discharging “all proper expenses payable by such agents or such other person who may be managing the Building including the cost of collecting the rents and service charges”. As to whether this might include the solicitors’ costs Dillon LJ said at p.6:
“I have had a certain hesitation on this point, in the light of the argument in relation to the position where solicitors are instructed by the managing agents. It does not appear from the evidence whether that was actually the case. On the whole, however, I have come to the conclusion that the judge was right in his view that the fees of solicitors and counsel are outside the contemplation of either limb of clause 5(4)(j) of the lease.”
I do not think that this decision can be taken as depending upon a restricted meaning of the word “managing” still less of “management” which does not appear in the covenant. Taylor LJ’s concern as to the effect of his decision would certainly not have led him to say that such costs, if they were otherwise recoverable, were outside the limitations in Act of 1985. I derive no assistance from this authority.[22]In St Mary’s Mansions Ltd v Limegate Investment Co Ltd [2003] 1EGLR 41 the Court of Appeal also held that legal costs incurred in recovering service charges and ground rent were 7 irrecoverable as service charges. Again however, in my judgement the decision in that case is of no relevance to the issue which I have to decide. The provision in the lease which the Court of Appeal had to construe is set out at paragraph 15 of the judgment of Ward LJ as follows:
“The reasonable and proper fees of the Lessor’s auditors and the reasonable and proper fees of the Lessor’s managing agents for the collection of the rents of the flats in the said Buildings and for the general management thereof”
The reason why Ward LJ held that such clause did not include such legal costs is given at paragraph 61 of his judgment as follows:
“Once again, the ordinary, natural meaning of the clause is to provide for the reasonable and proper fees of the lessor’s auditor as one category and, as the other, the reasonable and proper fees of the lessor’s managing agent, both for the collection of rents in the buildings and for the general management thereof.”
Thus the decision is not that such costs are not costs of management, but that they are not fees of the lessor’s managing agent. CONCLUSION[23]For the above reasons I would therefore dismiss this appeal. Dated 20 January 2004 (Signed) His Honour Judge Michael Rich QC 8