TROYBEST (HOLDINGS) LIMITED LRX/61/2003

UPPER TRIBUNAL

LANDS CHAMBER

LRX/61/2003

Case No LRX/61/2003

Between

TROYBEST (HOLDINGS) LIMITEDApplicant

Before

The President

Claire Cunningham (instructed by Challinors Blizzard of Birmingham) for Appellant

Venue Finance and Tax Tribunal, 2nd Floor, Priory Court, 33 Bull Street

Date 20 October 2004

Hearing Tuesday 19 October 2004

Property: Premises known as, Greenlawns, St Marks Road, Tinton, West Midlands DY4 OSU

Catchwords: SERVICE CHARGES – reasonableness – professional fees – whether capable of inclusion in service charge under terms of lease – Landlord and Tenant Act 1985 section 20C – LVT costs disallowed – appeal dismissed

[1]This is an appeal by the landlord against part of a decision of the Birmingham Leasehold Valuation Tribunal arising on the landlord’s application under section 19(2B) of the Landlord and Tenant Act 1985. The appellant is the freehold owner of Greenlawns, St Mark’s Road, Tipton, West Midlands, which consists of 4 blocks of maisonettes and flats, 64 units in total. The tenants, none of whom gave notice of intention to respond to this appeal, have 99 year leases from 1986, which are in the same terms. The application was made on 17 September 2002 and it sought the determination of the reasonableness of service charge expenditure for the period 24 June 2002 to 23 June 2003. Thus, at the time of the application, the period had nine months more to run. The estimated total service charge expenditure referred to in the application was £52,723.50. By the time the case came to be heard by the LVT, on 6 June 2003, the period had all but ended. At the hearing the appellant provided revised figures for expenditure incurred or to be incurred during the relevant year, and these totalled £28,063.70. The reason for the reduction was that the landlord had cut back substantially on the services provided because the leaseholders had refused to pay the service charge demands. The LVT determined that expenditure amounting to £23,717.50 was reasonably incurred. The major part of the reduction from the appellant’s figure was accounted for by one of the eleven items that went to make up the total, that relating to professional fees. The LVT concluded that only £5,000 of the £7,847.17 for which the appellant contended was reasonably incurred. It is in relation to this conclusion that the appellant now appeals.

[2]The appeal is made in relation to two elements of the LVT’s conclusion. Firstly it is said that the LVT erred in law in disallowing an amount (which, although unidentified in the decision, the appellants suggest is an item of £286.41) in respect of professional fees in connection with the service of a notice on a tenant under section 146 of the Law of Property Act 1925. That sum is said to be part of the reduction to £5,000. Secondly it is said that the rest of the reduction, which was made pursuant section 20C of the Landlord and Tenant Act 1985 on the basis of a determination that the applicant’s costs before the LVT should not be regarded as relevant costs for the purposes of the service charges, was wrongly made. The LVT granted permission to appeal on the first matter and I granted permission on the second. I will consider them in turn. Before I do so, however, I should note that Miss Claire Cunningham for the appellant prefaced her submissions by saying that of the £7,847.17 of professional fees the appellants now claimed that only £2,879.53 was reasonably included in the service charge. The reason for the reduction was that £4,183.72, which related to legal fees incurred in proceedings against the tenant of flat 111, had been paid off by the tenant’s mortgagees. It had been paid off on 23 May 2003 (two weeks before the LVT hearing) but those instructing Miss Cunningham had only become aware of this shortly before the present hearing. I will come back to this later.

[3]The first matter raises a point on the proper construction of the leases. Covenant (3) of the lessee’s covenants, set out in the Sixth Schedule to the lease, is to “indemnify and keep the Lessor indemnified from and against the Lessee’s Proportion of the Lessor’s Expenses.” The “Lessor’s Expenses” are defined in clause 1.14 as “the monies actually expended or reserved for periodical expenditure by or on behalf of the Lessor at all times during the term hereby granted for the purpose of fulfilling the obligations as specified in the Eighth Schedule hereto.” By clause 1.15 the “Lessor’s Proportion” of these expenses is to be calculated by reference to 2 the provisions of the Ninth Schedule. The Lessor’s covenants are set out in the Seventh Schedule. They include as (7) a covenant to “do all such acts and things as are set out in the Eighth Schedule.”

[4]The conclusion of the LVT that the appellant had no power under the lease to include in the service charge fees charged in connection with proceedings under section 146 or 147 was based on its interpretation of two particular provisions. The first was paragraph (27) of the Sixth Schedule, under which the lessee covenanted:

“(27) To pay to the Lessor its proper legal costs and Surveyor’s fees incurred by it in connection with any acts or things required or reasonably to be done by it or its Agents by virtue of this Schedule and in particular to pay all costs charges and expenses (including legal costs and fees payable to a Surveyor) incurred by the Lessor in or in contemplation of any proceedings or the service or any notice under Section 146 or 147 of the Law of Property Act 1925 including the reasonable costs charges and expenses aforesaid of and incidental to the inspection of the Demised Premises or any part thereof the drawing up of schedules of dilapidations and notices and any inspection to ascertain whether any notice has been complied with and such costs charges and expenses shall be paid whether or not forfeiture for any breach shall be avoided otherwise than by relief granted by the Court.”

[5]The second provision was paragraph 17 of the Eighth Schedule. The Eighth Schedule covers:

“Money actually expended or reserved for periodical expenditure by or on behalf of the Lessor at all times during the term hereby granted in or for carrying out such of the following works and things as may from time to time be necessary during the term hereby granted:-…. (17) Enforcing or of attempting to enforce the observance of the covenants on the part of any lessee of a flat forming part of the Development.”

[6]The LVT expressed its conclusion on these provisions at paragraph 52 of its decision: “In relation to fees charged in connection with (or in contemplation of) proceedings under section 146 or 147 of the Law of Property Act 1925, the Tribunal finds that each of the respondent leaseholders has specifically and separately covenanted under paragraph 27 of the Sixth Schedule to the lease to pay such costs; and that the obligation of the leaseholders to reimburse the service charge expenditure is dealt with elsewhere in the lease (in the Eighth Schedule). The Tribunal holds that paragraph 17 of the Eighth Schedule does not affect its finding that the two categories of costs are the subject of separate and mutually exclusive provision. It follows therefore that costs incurred in respect of legal fees in connection with (or in contemplation of) proceedings under section 146 or 147 of the Law of Property Act 1925 do not form part of the service charge expenditure; and that the question whether those costs were or would be reasonably incurred is outside the jurisdiction of the Tribunal.” 3

[7]Miss Cunningham submits that the LVT was wrong to conclude that these two provisions made separate and mutually exclusive provision for two categories of costs, so that paragraph (17) did not cover legal or surveyors fees in connection with proceedings under section 146 or

[147]She says there is no justification for treating them as making mutually exclusive provision. It is, she says, in the interests of all the tenants as well as the landlord that the landlord should enforce each tenant’s covenants under the lease. Normally the landlord would seek to recover from the tenant any legal costs incurred in such enforcement, but where that was not possible he should be able, as a fallback, to include such costs in the service charge. Paragraph (17) of the Eighth Schedule enabled him to do this.

[8]I agree with Miss Cunningham that the two paragraphs relied on by the LVT do not make mutually exclusive provision for the recovery of particular categories of costs. The first part of paragraph (27) is in general terms – “To pay the Lessor its proper legal costs and Surveyor’s fees incurred by it in connection with any acts or things required or reasonably to be done by it or its Agents by virtue of this Schedule ….” To pay costs in connection with proceedings under section 146 or 147 is one particular obligation within this generality. If the lessor, instead of proceeding under section 146 or 147, were to take proceedings for an injunction to serve the lessee’s compliance with his covenants, the costs of such proceedings would clearly be recoverable under the provision. Costs that may be incurred by the lessor in enforcing or attempting to enforce the lessee’s covenants are, in my judgment, covered by the provision, whatever the method of enforcement.

[9]In the light of this conclusion either paragraph (17), covering as it does the costs of enforcing or attempting to enforce the lessee’s covenants, is additional to the right to recover such costs from the lessee under paragraph (27), or, if it is not, it is redundant. The former alternative is obviously to be preferred. It makes sense, as Miss Cunningham suggests, that the landlord should be entitled either to recover such costs from the lessee who is in breach of his covenants or to include them as part of the service charge. Where, however, they are included as part of the service charge, the reasonableness of their inclusion, in my judgment, can be challenged by a tenant under section 19(2A) or (2B) of the 1985 Act in the same way as other costs that are included as part of the service charge; and of obvious materiality to the question of such reasonableness is the power of the landlord to recover such costs from the offending tenant. In general the right course for the landlord would be to seek to recover the costs from the offending tenant, so that it would not be reasonable to include the costs in the service charge unless he had made every reasonable attempt to achieve that recovery. I accept, as Miss Cunningham urged, that it might sometimes be reasonable for the landlord to include the costs in the service charge without having sought to recover them from the lessee – for instance where the costs were so small that the expenditure of money on their recovery would not be justified. But in general, as I have said, it would not be reasonable for a landlord to include the costs in the service charge without having made every reasonable attempt to recover them from the offending tenant.

[10]The LVT accordingly, in my judgment, erred in concluding that it had no jurisdiction to consider for the purposes of section 19(2B) legal fees incurred in connection with section 146 or 147 proceedings. The question then arises whether it ought to have concluded that the inclusion of such fees was reasonable. It is for the appellant to make out its case on this – to show that the decision of the LVT was wrong in this respect and that it should have determined 4 that the fees should be regarded as relevant costs when determining the service charge. Miss Cunningham says that there is nothing to show that the sum of £286.51, which is shown on an itemised account of the chartered surveyors Woolley Pritchard & Co and related to breaches of covenant by the tenant of flat 85, was not reasonably incurred. She invites me to conclude that the sum was so small that the appellant could reasonably have taken the view that it was not cost-effective to pursue the tenant for it. Since there was no requirement under the lease to go after the tenant first it was reasonable to include it in the service charge.

[11]I recognise that the amount was small (although it is fair to add that it seemed large enough to the appellant to justify going to the lengths of appealing to this Tribunal) but I do not accept that it was self-evidently reasonable for the appellant to add the amount onto the service charge without having sought it first from the tenant. I can quite see that, if a tenant failed to pay a very small amount demanded of him pursuant to paragraph (27), it would be reasonable for the landlord to consider whether it was worth pursuing the matter with him further or whether the amount should not be added to the service charge, but there is nothing to suggest here that any demand of the tenant was made. The appeal accordingly fails in relation to this first matter.

[12]The second matter was dealt with in paragraph 52 of the LVT’s decision in these terms:

“Pursuant to the jurisdiction of the Tribunal under section 20C, expressly reserved by the Tribunal following the withdrawal of the leaseholders’ own application, the Tribunal determines that costs incurred by the applicant in connection with the proceedings before the Leasehold Valuation Tribunal are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the leaseholders.”

[13]In refusing permission to appeal, the LVT amplified its reasons on this matter in its rejection of the appellant’s contention that its application had been substantially successful. It said: “(a) The Tribunal rejects the submission that the applicant was ‘substantially successful’ before the Tribunal. The applicant issued a schedule of estimated service charge expenditure totalling £52,723.50; and that figure was only amended to £28,063.70 at the hearing and following the invitation of the Tribunal. In the view of the Tribunal, the determination of reasonable costs at £23,717.50 is therefore properly to be compared with the original figure and represents less than 45% of that figure. (b) Contrary to the submission of the applicant, therefore, the Tribunal is of the view that it was the respondents who were ‘substantially successful’ before the Tribunal; and that the explanation for its discretion under section 20C was therefore apparent by inference from the circumstances (indeed, the ‘obvious circumstance which Parliament must be taken to have had in mind in enacting section 20C’): see Iperion Investments Corporation v Broadwalk House Residents Ltd

[1995] 2 EGLR 47

at p 49.” 5

[14]Miss Cunningham submits that the LVT was wrong to conclude that the appellant had not been substantially successful, in particular, she says, because it was incorrect to use the figure of £52,723.50 as the starting figure for comparison with the LVT’s determination of £23,717.50. The LVT had determined three preliminary issues, raised by the tenants, in the appellant’s favour, and of the 11 categories of costs considered, it had made reductions in the appellant’s figures in only 5 of them. The determination was at 84.5% of the amount contended for by the appellant at the hearing, and very substantially above the amount that acceptance of the tenants’ contentions would have led to. In addition the LVT had determined that a reasonable amount for the tenants to pay towards the cost of external repairs and redecoration before those costs were incurred would be £750. The appellants had contended for £1,000. The tenants had said that nothing should be allowed.

[15]In a case like the present, where the LVT’s decision under section 20C is challenged but there is no significant challenge to the LVT’s other conclusions, the Lands Tribunal will not substitute its own discretion for the discretion exercised under this provision by the LVT. It will look to see whether the LVT erred in principle in making its determination. Approaching the matter on this basis, I cannot accept Miss Cunningham’s contention that the LVT was wrong to use the original application figure of £52,723.50 as the starting point when assessing the degree of success. It was only at the hearing itself, at the invitation of the tribunal, that this figure was reduced to £28,063.70. Had this figure and its make-up been communicated to the tenants at some earlier stage, so that they would have had time to consider their position in relation to it, a different approach to the comparison would no doubt have been appropriate, certainly in relation to costs incurred after provision of the revised figure. While I accept that the cause of reduction – that the provision of services had been cut-back – and the other matters relied on by Miss Cunningham – the success on the preliminary issues, the degree of success on the individual categories as ultimately contended for, and the success on the advance payment – are all matters that could well have led another tribunal to exercise its discretion in a different way, I am unable to conclude that the tribunal that determined these proceedings erred in principle. The appeal accordingly fails in relation to the second matter.

[16]There are three further things that I need to deal with. Miss Cunningham said that the appellant’s costs relating to the LVT proceedings amounted to £14,068.60. The amount that the LVT had been asked to consider for the purposes of section 20C was, I think, rather under £3,000, and the additional amount was contained in bills that were not at the time available for submission to the LVT. It is clear that I have no jurisdiction in relation to these additional amounts since they were not before the LVT. They will need to be considered by the LVT if the tenants make application under section 20C in respect of them. In determining any such application the LVT will not be bound to come to the same conclusion as it did in its decision on section 20C in the current proceedings but will have to exercise its discretion afresh, taking account of all the evidence and submissions before it at the time.

[17]Secondly, there is the question of the £4,183.77 that had already been recovered before the time of the LVT hearing and so should not have been included in the £7,817.17 that the appellant contended for in relation to professional fees. Under section 175(4) of the Commonhold and Leasehold Reform Act 2002 the Lands Tribunal may exercise any power which was available to the LVT. The error in relation to the £4,183.77 needs correcting, and I am satisfied that I am able under this provision to make the necessary correction. The £5,000 6 determined by the LVT as reasonable in relation to professional fees must therefore be reduced by £4,183.77 to £816.28 and the total costs found by the LVT to have been reasonably incurred in respect of the period 24 June 2002 to 23 June 2003 must in consequence be reduced to £19,533.73.

[18]Finally, Miss Cunningham raised with me the question of costs in relation to the Lands Tribunal proceedings and it is right that I should deal with this. The Tribunal has power under section 3(5) of the Lands Tribunal Act 1949 to order that the costs of one party be paid by any other party. Since, however, there is no respondent to this appeal there is no one against whom costs could be ordered. But in any event, since the appeal is dismissed, no order would have been made in the appellant’s favour. It would be open to the tenants to apply to the Lands Tribunal under section 20C for an order that the costs of the appeal should not be regarded as relevant costs for the purpose of any service charge, but it is to be expected that, in view of this decision, the appellants will make clear to the tenants that they will not include such costs in the service charge. Dated 20 October 2004 George Bartlett QC, President 7