MAX USTIMENKO v PRESCOT MANAGEMENT COMPAY LIMITED LRX/65/2004

UPPER TRIBUNAL

LANDS CHAMBER

LRX/65/2004

Case No LRX/65/2004

Between

MAX USTIMENKOApplicant

PRESCOT MANAGEMENT COMPAY LIMITEDRespondent

Before

His Honour Judge Michael Rich QC

Mr Peter Clarke FRICS

(in person) for Appellant

Venue Procession House, 110 New Bridge Street, London EC4V 6JL

Date 18 August 2005

Hearing 12th July, 2005

Property: Flat 88, 1 Prescot Street, London E1 8RL

Catchwords: Service charges – Reasonableness – Tenants’ Management Company – Reserve Fund – Insurance – Landlord’s agency – Commonhold and Leasehold Reform Act, 2002 S.175(6) – Unsuccessful Appellant’s application for costs refused

[1]This is an appeal against a decision of the Leasehold Valuation Tribunal (“LVT”) dated 28th July 2004, whereby the LVT determined that the amount payable by the appellant in respect of the service charge for his flat for the year 2003 was £2,436.38. This determination was made upon a claim for such service charge made in the Clerkenwell County Court being transferred to the LVT by order of District Judge Armon Jones dated 17th December 2003. That Order was made in a claim specifically for “Payment of the service charge in the sum of £3,751.35 owing for the period 1 January 2003 to 31 December 2003 in respect of apartment 88”.

[2]It appears from paragraph 10 of the LVT’s Decision that as a result of preliminary directions and exchange of statements between the parties, the amount of the claim in respect of 2003 was reduced to £2,436.38, but that it was agreed that claims for three earlier years totalling £814.97 should be considered by the LVT at the same time as the claim in the County Court proceedings. Accordingly disputes in respect of twenty three separate items were heard over a period of three hearing days. The LVT determined that a total of £3,251.35 was payable by the appellant in respect of the years 2000 to 31st December 2003. Whether judgement for that sum can be entered upon that determination without amendment of the County Court proceedings is not for the consideration of this Tribunal.

[3]The respondents are a management company of which all the lessees are shareholders. The LVT gave permission to appeal against their determination on the ground that in their opinion “this case involves issues of general significance as to the proper resolution of service charge disputes between tenants and tenants’ (managing) companies which should be addressed by a higher tribunal or court so that an authoritative ruling may be received” It appears from paragraph 27 of their Decision that the LVT were prepared to take a less stringent view of what should be accepted as reasonable in the expenditure of a tenants’ management company than in a case where the expenditure was made by or on the decision of a company which was not controlled by the tenants. There is however no point in their reasoning which identifies an item which they would have treated as unreasonable but for the fact that the expenditure was proposed by a company controlled by the tenants. It would therefore, but for the sensible cooperation of the appellant, have been necessary for this Tribunal to reconsider the parties’ cases in respect of all twenty three items of dispute, no doubt at a similar expenditure of time by the Lands Tribunal and costs by the parties as was spent in the LVT proceedings.

[4]Before this Tribunal the appellant, in order to limit the cost and scope of the appeal proceedings, agreed to limit his appeal to four matters in the estimate of expenditure for 2003 on which the disputed demand for service charge was based, as follows:(1) The reasonableness of an estimate for repairs in the sum of £65,000 in respect of which the appellant would be liable for .477%; 2

(2) The reasonableness of an estimate for insurance in the sum of £63,700 in respect of which the appellant would be liable for a like proportion;

(3) The reasonableness of an estimate for lift repairs and maintenance in the sum of £8,500 in respect of which the appellant would be liable for .528%;

(4) The reasonableness of provision for reserve funds for two categories of replacement of plant or machinery in the sum of £10,000 in respect of which the appellant would be liable for .477%, and in the sum of £20,000 in respect of which the appellant would be liable for .528%. He has, moreover presented his case succinctly and efficiently and thereby enabled the appeal to be disposed of with only a morning’s hearing. He put before the Tribunal a witness statement by Terence Whelan, who has experience in managing buildings. Mr Whelan was not available to give evidence during the hearing but we have read and considered his statement. Lease Provisions

[5]The appellant holds a lease of the flat for 999 years at a rent of £200 a year. The lease contains in paragraph 11 of the 4th Schedule, a covenant both with the landlord and with the respondent, which is a party to the lease and referred to in it as “the Company”, to pay the appropriate proportion of the “costs charges and expenses which the Company shall incur in complying with its obligations set out in .. the Sixth Schedule”. Different proportions are fixed in respect of the services in different parts of the building of which the flat forms part.

[6]Paragraph 12 (a) of the Schedule then contains a covenant as follows:

“to pay the Company on the first day of January in each year such sum as the Company shall estimate to be the amount prospectively payable under clause 11 of this Schedule … and until such time as the said expenses shall be calculated or estimated each of the said yearly contributions shall be in the amount of [£1,000] provided that:- (i) any sum received by the Company … shall be deemed to be held by the Company as bare Trustee for the Tenant to utilise .. towards the expenses incurred by the Company .. (ii) in this Schedule the expression “all costs charges and expenses which the company shall incur” shall include not only those costs charges and expenses which the Company shall have actually incurred or made during the year in question but also a reasonable sum on account of those items of expenditure which are of a periodically recurring nature (whether recurring by regular or irregular periods) whenever disbursed or made … including a sum .. by way of reasonable provision for anticipated expenditure in respect thereof as the Company may in its absolute discretion allocate to the year in question as being fair and reasonable in all the circumstances”

[7]Paragraph 13 of the Schedule requires the appellant to pay the difference if actual expenditure exceeds the estimate, and the respondents accept that the effect of proviso (i) to paragraph 12 is to oblige them to credit any excess in the estimated charge , for any year, save insofar as it is collected for the purpose of a reserve fund for expenditure in future years, so as 3 to reduce the estimate for the following year. Thus the second part of s.19(2) of the Landlord and Tenant Act 1985 which we have placed in square brackets in setting it out in the next paragraph of this Decision, is complied with. Statutory Provisions

[8]The challenge to the respondents’ claim for service charge in respect of the items listed was made on the ground provided under s.19(2) of the Landlord and Tenant Act 1985:

“Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is payable, [and after the relevant cost have been incurred any necessary adjustment shall be made by repayment, reduction of subsequent charges or otherwise.]”

[9]It was not disputed that this provision entitled the appellant to claim that the estimated service charge was not payable either if the estimate was not reasonable for expenditure which was properly to be incurred, or if the proposed expenditure was itself unreasonable to incur. Estimate for Repairs

[10]On 6th September 2004, the audited account of expenditure for the year 2003 was signed. This shows that actual expenditure for the year was £9,839.95. The LVT had been shown an unaudited statement in a higher sum. The appellant contended before this Tribunal that any sum claimed in the estimate of prospective expenditure in excess of the sum which is now shown in the audited account to have been expended, was unreasonable. That claim has only to be stated for it to be apparent that it is unsustainable. The question for the Tribunal has to be whether the estimate of prospective expenditure was a reasonable estimate of such expenditure before it had been incurred. If it turns out to exceed actual expenditure it leads to adjustment in the subsequent year, both as provided in the lease and required by s.19(2).

[11]The appellant however relies on the six-fold disparity between the estimate and the expenditure to show that the estimate was not reasonable.

[12]Mr Southern who appeared for the respondent both before this Tribunal and before the LVT accepted that the LVT had been told that the sum estimated was to be treated as a reserve fund in order to spread expected expenditure more evenly over future years, although it was not so identified on the estimate supporting the demand It seems that it was on that basis that the LVT said that the provision “was to be commended rather than criticised as unreasonable”. We have been told that the estimated sum was intended to be, as indeed the estimate says, of actual expenditure in 2003, and that the unexpended sums demanded have therefore been duly credited against the estimate for 2004.

[13]We have been told, by Mr Rykers, a director of the Company, and we accept that the figure was derived from a report dated 24th July 2002 by a firm of chartered building surveyors, Cardales. This report had produced a budget for building costs over 10 years from 1st January 2003. It showed expenditure in 2003 in the sum of £62,000. The figure included in the 4 estimate which the appellant challenges, is £65,000. This would have been too little, after allowing for VAT and fees, if the whole of the expenditure included in Cardales’ report had been undertaken for the sums proposed as budget figures in their report.

[14]In the event, savings were made both in the amount of work undertaken and in the cost of such work as was undertaken. In part this was achieved by the employment of a handyman rather than of contractors, which conforms with a recommendation by Mr Whelan as to what he would have considered doing. We are not satisfied however, that the achievement of such savings is any indicator that the estimate made before they were achieved was unreasonable. The savings arise from decisions made during the year which could not be anticipated when the estimates were made.

[15]Nor is the reduced expenditure evidence that the proposed expenditure would have been unreasonable to incur. The appellant has not, in our judgement, put forward any basis upon which we could conclude that an estimate which was based on appropriate professional advice which was, at the time of the estimate, accepted , was other than reasonable. Insurance

[16]Paragraph 4(a) of the 6th Schedule of the lease contains the obligations as to insurance, which the Company covenanted in Clause 5 of the lease, both with the landlord and with the tenant, to perform, the appropriate proportion of the cost whereof being the subject of the tenant’s indemnity under paragraph 11 of the 4th Schedule. The obligation is “To insure and keep insured in the names of the Landlord and the Company .. in some office of repute (through the agency of the Landlord .. and the Landlord will be entitled to retain any commission in respect thereof) the Block…” The estimated sum of £63,700 was based on the premium in fact paid for the year beginning 1st December 2002 to Norwich Union which is the company with which the Landlord. has effected the insurance.

[17]The appellant’s case which is not disputed is that similar cover could be obtained from AXA who are also insurers of repute for £50,893.25. The respondent maintains, none the less, that their estimate is reasonable because it reflects the likely cost of renewing the policy with the office of repute which the Landlord will effect as agent for the Company. In fact the estimate has proved to be less than the actual cost. The question is whether the Company could not discharge its obligation to insure, by insuring with some other company of repute than that selected by the Landlord.

[18]The appellant relies on clause 10(e) of the lease which acknowledges that “all rights given or reserved to the Landlord hereunder shall be deemed in addition to be given or reserved to the Company ..” but in our judgement this does not displace the obligation undertaken by the Company under the 6th Schedule. At most, it might be construed as entitling the Company to effect insurance 5 through an office of its choice, in addition to complying with the obligation to do so through the agency of the landlord. If the Company elected to do so and the sum it paid was recoverable as service charge it would only increase the tenants’ liabilities.

[19]The effect of a covenant in virtually identical form was considered by the Court of Appeal in Berrycroft Management Co Ltd v. Sinclair Gardens Investments (Kensington) Ltd

[1997] 1 EGLR 47

. The covenant in that case was likewise by a management company with both the Landlord and the lessees “to insure .. the building .. in some insurance office of repute and if directed by the landlord through a company nominated by the landlord and if required through any agency of the landlord in that company .. in the joint names of the landlord, the company and the tenant for their respective interests.” Beldam LJ , giving the judgement of the Court, at p.50A construed the reference to “a company nominated by the landlord” as referring not to the insurance office but to an agency, so that the effect of the two clauses is in our judgement the same, namely that the landlord’s nomination of the insurer is achievable only indirectly through the exercise of his agency. The Court of Appeal held that there was no term to be implied into such a covenant restricting the landlord’s right to effect insurance through whatever insurance office of repute the landlord may choose.. Thus in our judgement the LVT was right to hold that the respondent has no choice but to pay the premium for the policy which the Landlord determines to effect irrespective of whether a cheaper policy might reasonably have been obtained.

[20]The appellant suggested that the respondent should have challenged the reasonableness of the landlord’s decision by application to the LVT, but the Company is itself a “landlord” and not a “tenant” within the meaning of s.30 of the Act and therefore has no right to apply to the LVT against the landlord.

[21]It is a more difficult question whether the appellant could have applied against the landlord for a determination that the premium was not payable, because unreasonable. The LVT suggested in paragraph 23 of their Decision that this was the proper course for the appellant to pursue. As, however, Mr Southern pointed out in the course of argument before us, there are at least some observations of Beldam LJ at p.51 –2 as to the meaning of “relevant costs” which may put this course in doubt. The appellant did apply to this Tribunal that the landlord should be joined in this appeal, but upon investigation we were not satisfied, in spite of the appellants’ assertion, that the landlord had been joined in the proceedings before the LVT. In those circumstance we held that we had no jurisdiction to join the landlord and we have given no consideration as whether such alternative remedy would have been or would still be open to the appellant. Lift Repairs

[22]The estimate in the sum of £8,500 was in the event exceeded by the expenditure in fact incurred in the sum of £10,603.83. By hindsight therefore the estimate does not appear to have been excessive unless the expenditure was unreasonably incurred. The appellant made some unparticularised assertions as to the inadequacy of the lift maintenance and Mr Whelan’s 6 witness statement refers to, but does not produce a cheaper quotation for comprehensive lift maintenance. It would appear however that it is not even a quotation for the lifts at the subject premises because he concludes from it no more than that “the provision for the year should ideally be approximately £5,000” (our underlining). Even if one treats Mr Whelan’s evidence as an expert’s report, this would be a quite insufficient basis upon which to find that the respondent’s estimate of £8, 500 was unreasonable.

[23]We do not however dismiss this part of the appeal exclusively for lack of evidence. There has been placed before the Tribunal a lift maintenance agreement entered into on 1st June 2001 for a minimum period of five years at an annual charge of £5,100 with a requirement to make additional payments for call-outs out of normal hours. Unless the entering into such contract was itself unreasonable, its continuance would at least prima facie appear to be reasonable and an estimate based on it must likewise be reasonable. Reserve Funds

[24]The appellant’s primary submission is that the lease makes no provision for a reserve fund. It is true that it does not use such words., but the proviso (ii) to paragraph 12 of the 4th Schedule clearly defines costs charges etc to include “a sum by way of reasonable provision for anticipated expenditure”. In our judgement this clearly permits the Company to establish such fund as they regard as fair and reasonable in all the circumstances to allocate to the year in question.

[25]Of course the Company’s “absolute discretion” is itself subject to its satisfying the statutory test of being reasonable objectively. Reasonableness is not however an absolute standard, such that only one decision is reasonable and any other decision is unreasonable. There can be a whole range of decisions, any one of which would satisfy the requirement that a service charge is payable only if reasonable. In our judgement such range may well be wider where, as here, the judgement of what provision to make is entrusted to a tenants’ management company controllable and answerable to the tenants and therefore having, at least prima facie, an identity of interest with the tenants required to make payment than it would be in circumstances where there is a conflict of interest between those fixing the charge and those paying it.

[26]Such approach is not however determinative. The appellant in this case says that there is already adequate provision for future expenditure and any further provision should be based on proper assessment of needs. The evidence of Mr Rykers admitted that the two figures included in the estimate for 2003 derived from the recommendation of managing agents, who may well not have the same identity of interest with the tenants as has the Company itself. He admitted that these figures were not questioned or specifically considered by the Board of the Company before being incorporated into the estimates. If a discretion is to be reasonably exercised it is in our judgement necessary for the decision maker to consider relevant matters and to base his decision on such consideration. We are not satisfied that that was done before the estimate , upon which the demand for service charge was based,. was agreed by the Company. 7

[27]Nevertheless we have heard evidence from Mr Rykers which in our judgement does justify the decision made. He produced a schedule apparently prepared on 24th June 2004 , that is some 18 months after the estimate and six months after the end of the relevant year. In this, somewhat arbitrary assessments have been made of the cost of replacement and of the expected life of the items of plant and machinery for which the reserve funds are intended to make provision. It supports the proposition that the provision so far made, even if continued at the same rate, would be significantly less than the anticipated future expenditure.. Although that was not the basis upon which the estimate was prepared, that leads us to conclude that the provision made in the estimate was reasonable.

[28]Our decision is however upon the particular provision made in the estimate for 2003. It would not follow that such material could be relied upon as a reason for increasing or necessarily even continuing provision at the rate included in the estimate. The fact that it has been prepared without any professional assessment either of the costs of replacement or of the expected life of the relevant plant and machinery, may well justify doubts as to the reasonableness of further decisions., based upon it.

[29]In general, however, we accept that it is reasonable for a tenants’ managing company to make such provision as they think fit, provided only that it may properly be judged not to be disproportionate to future needs. We also accept that it is reasonable for such a company to make such judgement on such material as may be obtained without itself involving the company in disproportionate costs. In considering therefore whether a service charge should be held not to be payable because not reasonable, we would, in respect of such a company, need some convincing evidence that the decision which was challenged was beyond the range of decisions that were possible to a body given an absolute discretion to determine the level of contribution to be made to a fund to be held in trust for future expenditure. The larger the provision however the greater the need for professional assessment of the amount and timing of future expenditure, and in the absence of such evidence the more readily will it appear that a decision is not to be treated as within such range. Conclusion For these reasons the appeal is dismissed.

[31]As appears from paragraph 2 of this decision the LVT appear to have dealt with matters which were not the subject of the transfer from the Clerkenwell County Court. If therefore either party contends that the Tribunal’s order should be other than mere dismissing the appeal, application may be made in writing to the Tribunal before 4pm on 29th July, 2005. Otherwise, subject only to any question as to costs, a final order will be issued after that date.

[32]At the conclusion of the hearing both parties indicated an intention to apply for costs notwithstanding the very limited jurisdiction of the Tribunal under s.175(6) of the Commonhold and Leasehold Reform Act 2002 to order costs. Any such application must be made in writing to the Tribunal no later than 4pm on 29th Jul 2005, with a copy to the other party. The Tribunal in determining any such application will consider any response thereto 8 received by 4pm on 12th August, 2005, and in that event a final Decision on this appeal will be issued after that date.

[33]The respondents made submissions to the Tribunal as to the burden placed on other tenants by these proceedings which are, except in limited circumstances conducted in a costs- free regime. Such considerations could, in our judgement properly have been drawn to the attention of the County Court in opposition to the order transferring the proceedings to the LVT. They are not matters in respect of which we have any jurisdiction. Mr Southern also submitted to the Tribunal that the County Court should not transfer a dispute between a tenant and a tenants’ management company at least in respect of any matter of principle such as the size of reserve funds, to the LVT unless he has first exhausted his remedies within the Company. Again this is a matter wholly outside our jurisdiction, but it may be worth observing that under the Company’s Articles of Association “no member shall be entitled to vote at any general Meeting unless all moneys presently payable by him to the Company ..have been paid”. Accordingly the complaint does not appear to have relevance to this appeal. Dated 14 July 2005 His Honour Judge Michael Rich QC Peter Clarke FRICS ADDENDUM AS TO COSTS

[34]In our decision dated 14th July 2005, we gave the parties until 29th July 2005 to make applications as to costs. The successful Respondent notified the Tribunal that they do not 9 intend to apply. The unsuccessful Claimant has made application, to which the Respondent has made no response within the time limited in paragraph 32 of our Decision.

[35]By s175(6) of the Commonhold and Leasehold Reform Act 2002, the Lands Tribunal has no power to award costs to a party to an appeal unless it is of the opinion that the other party has “acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with the appeal”.

[36]The Claimant puts forward in support of his application for costs under that sub-section, complaints as to the Respondent’s alleged misconduct before the LVT. That is not action “in connection with the appeal” and we disregard it.

[37]Quite apart from the statutory restriction upon the power to award costs it would be inconsistent with the usual practice of the courts or this Tribunal, to award costs in favour of an unsuccessful Claimant. If, however, the Tribunal were satisfied that a party’s failure to comply with directions given by the Tribunal, had caused the other party costs that would not otherwise have been incurred, that would be a reason justifying an order for costs, even in favour of an unsuccessful party, restricted to such additional costs. It would then be necessary for the Tribunal to be satisfied that the conduct, giving rise to grounds for such an order was within the terms of the sub-section, so that the Tribunal had power to make the order.

[38]The application in this case has been put on the basis that “the conduct of the Respondent in these proceedings is such, that it may be very useful to issue a costs order, however small this order may be.” The Claimant then goes on to criticise the Respondent’s conduct in the appeal, which he characterises as unreasonable. Since, however, there is no identification of any additional costs incurred by the Claimant as a result of such alleged misconduct there is no basis for the Tribunal to make an order for costs in the unsuccessful Claimant’s favour, even if we accepted the characterisation of the Respondent’s conduct as unreasonable.

[39]It is therefore unnecessary for us to consider in detail whether the alleged misconduct amounts to misconduct within the terms of the sub-section. We are, however, not satisfied that the matters complained of, were deliberate attempts by the Respondent to disrupt the course of the appeal, although some of the steps taken were misdirected. We are further not satisfied that some modest delay in compliance with the Tribunal’s directions amounted to abusive or vexatious conduct.

[40]Accordingly we refuse this application for costs. Dated 18 August 2005 10 His Honour Judge Michael Rich QC Peter Clarke FRICS 11