CANARY RIVERSIDE PTE LIMITED and Others v DR & MRS SCHILLING and Others LRX/65/2005

UPPER TRIBUNAL
LANDS CHAMBER
LRX/65/2005Case No LRX/65/2005
Between
CANARY RIVERSIDE PTE LIMITED and OthersApplicantDR & MRS SCHILLING and OthersRespondent
Before
His Honour Michael Rich QCVenue 110 Procession House, 110 New Bridge Street, London EC4V 6JLDate 16 December 2005Hearing 8 – 11 November 2005 and 28th November 2005Property: 32-48 Westferry Circus, Canary Wharf E14Catchwords: SERVICE CHARGES –Costs before leasehold valuation tribunal - Whether payable under Lease – Effect of Paragraph 10(4) of Schedule 12 of Commonhold and Leasehold Reform Act 2002 – Unfair Terms in Consumer Contracts Regulations 1999 - jurisdiction of LVT’s – how it should be exercised - Significant imbalance in parties’ rights - Reasonableness of legal costs - Comparison with assessment under Civil Procedure Rules.
[1]This is a Landlord’s appeal against the Decision of the Leasehold Valuation Tribunal of the London Rent Assessment Panel (“the LVT”) dated 30th May 2005 whereby they determined under s. 27A of the Landlord and Tenant Act 1985, that an item claimed as Service Charge under the description “Landlords’ LVT Costs” was not payable.[2]The costs claimed were the costs of resisting an application which Dr and Mrs Schilling had made to the LVT on 18th February 2003 for the appointment under s.24 of the Landlord and Tenant Act 1987 of a Manager of the premises of which the Flat of which they were the Lessees formed part. That application had been dismissed by the Decision of a differently constituted LVT, dated 5th January 2004. On the same date Dr and Mrs Schilling made an application (“the Service Charges application”) for a determination under s.27A of the Act of 1985 that certain costs included in the Service Charges for the period 17th December 1999 to 31st March 2005 were not reasonable.[3]The demand for the apportioned part of the costs was served on 19th March 2004 whilst the LVT was considering the Service Charges application. The same LVT heard “the Costs application” as heard the Service Charges application although on a later date, and issued a separate decision. Permission to appeal was given both in respect of the Service Charges decision and the Costs application and the appeals were listed before the Lands Tribunal at the same time, and heard together. An appeal against a determination under s.20C in respect of the costs in the Service Charges application was agreed to be stood over until after the Decision on the appeal in those cases, and the appeal against a similar decision in respect of the Costs appeal has likewise been left to be determined after the Decision on that appeal.[4]As I have explained in the Decision which I have issued in respect of the Service Charges appeals, I have found it convenient to issue separate decisions on the Service Charges appeals and on this Costs application appeal. This Decision is therefore concerned only with the appeal against the LVT’s determination that the service charge based on the landlords’ costs of resisting the s.24 application is not payable.[5]The LVT so held on what they classed as three separate grounds, namely:(i) that the Landlord had not established a contractual entitlement to be paid service charges including the costs in question;(ii) that recovery was barred by Paragraph 10(4) of Schedule 12 to the Commonhold and Leasehold Reform Act 2002;(iii) that the lease provisions relied on by the Landlord were unenforceable by reason of the provisions of the Consumer Contracts Regulations 1999. 2 In fact the first ground had two separate parts. The LVT not only held that the relevant provisions did not entitle the landlord to recover such costs at all, but also that in any case the Landlord had failed to comply with the procedure required to make such additional service charge payable. I shall in this Decision deal first with this procedural point, where, in my judgement the LVT reached the correct conclusion, before dealing with the other issues, upon which I have been asked, having heard argument, to express my views even though they are not necessary for the determination of this appeal.[6]The LVT went on to determine what would have been a reasonable amount for the Landlord to incur in respect of the costs, in case they were wrong as their recoverability. The Landlord also appealed against their determination of the amount, but it was agreed that, in the first instance such appeal should be by way of review only. I have been asked to express my views on the appellants’ grounds of appeal in respect of this aspect of the LVT’s Decision, and again, having heard argument, I shall do so.[7]Accordingly in this Decision, I will deal first with the Landlord’s failure to comply with the procedure required by the Lease. I will then deal with each of the three reasons which the LVT gave for holding that the costs could not be recovered by way of service charge at all. Finally I will review the LVT’s reasons for holding that the amount expended exceeded the sum that should reasonably have been incurred. Procedural Requirements of Lease[8]By clause 23.2 of the underlease granted to Dr and Mrs Schilling in respect of their flat 131 Eaton House, which has been assumed to be in standard form, the Tenant covenants to pay : “.2 the Building Service Charge Percentage of the Estimated Building Expenditure in advance by equal half yearly instalments on the Half Yearly dates [which are defined to mean 1st April and 1st October in any year] .. and .3 (if the Estimated Building Expenditure is revised) within 14 days after written demand that part of the Building Service Charge Percentage of the revised Estimated Building Expenditure which exceeds the figure previously notified to the Tenant” (my underlining).[9]Clause 23.1.1 contains the definition of “Estimated Building Expenditure” which is to be notified to the Tenant for the Building Financial Year and makes provision for its revision as follows: “provided that the Landlord may from time to time during any such Building Financial Year notify the Tenant in writing of a revised figure for the Estimated Building Expenditure”. (again my underlining) What the Landlord’s managing agent, Gross Fine, in fact did, was to send to the Tenant on 19th March 2004, that is during the year, a demand for the relevant percentage of these costs without preparing or notifying a revised figure for the Estimated Building Expenditure. Such revision of that which had been estimated, and its notification, were clearly necessary preliminaries to the 3 service of a demand making payment due under clause 23.2.3. A revision may well have caused some other item to be reduced at the same time as the Estimate for legal costs for the year was increased.[10]The LVT, in my judgement rightly, took the point. Mr Fancourt QC is reported by the LVT as dismissing the matter as a mere formality, but before this Tribunal he accepted that it was a condition which had to be observed in order to make a proportion of a revised estimate payable. On this ground the appeal must be dismissed, but since dismissal on this ground will not prevent the costs being included in the service charge demanded for future years, I have been asked by both parties to go on to review the other grounds on which the LVT also held that this sum was not payable The Lease Provisions[11]The “Building Expenditure” of which the Tenant covenants to pay the relevant percentage is defined in clause 23.1.3.1 to include:
“all costs fees expenses and outgoings whatsoever (whether or nor of a recurring nature) incurred in respect of or incidental to … (2) the costs and expenses set out in Part Five Subsection BIII (whether or not the Landlord is obliged by this Lease to incur the same) and (when the expenditure incurred is reasonably attributable to the Building and other premises) the proportion of such expenditure which is reasonably attributable to the Building as determined from time to time by the Building Surveyor” the “Building Surveyor” is defined by clause 23.1.6 to mean “a chartered surveyor or firm of chartered Surveyors appointed or employed by the Landlord or any management company to perform the functions of the Landlord’s surveyor under this Lease.”
Although the matter was not canvassed before the LVT or this Tribunal, it may well be that Gross Fine were so appointed, although, in so far as the costs sought to be recovered had been incurred in relation to premises other than the Building, that is the residential blocks in which the Flats are contained, as the LVT in reviewing the amount of the costs properly incurred held to be the case, there is no sign of their having determined the proportion reasonably attributable to the Building.[12]Before the LVT, a number of different provisions in Part Five Subsection BIII of the Lease were relied upon as referring to the costs of resisting the Schillings’ application under s.24 of the Act of 1987. Before this Tribunal clause 24.3.7.1 was primarily relied on. Since I accept that it does cover the costs sought to be included in the Service Charge, it is unnecessary for me to consider the other clauses in the Subsection, the more so as I agree with the LVT’s conclusion that they were not applicable.[13]Clause 24.3.7.1 lists under the head of “Management” the following: 4 “ The proper and reasonable fees and disbursements of managing agents solicitors counsel surveyors …. employed or retained by the Landlord for or in connection with the general overall management and administration and supervision of the Building.” The LVT, at paragraph 23 of its Decision said:
“ .. initial difficulty was experienced in accepting Mr Gavaghan’s submission that clause 23.3.7.1 did not apply. Whilst it was plain enough that the Tribunal proceedings themselves did not constitute “general overall management and administration and supervision of the Building” (i.e. within the clause), Mr Fancort’s submission that the proceedings were “in connection with” management etc.of the Building had not been refuted.”
By this I take them to mean that they accept what seems to me to be plainly right, namely that incurring fees in resisting an application to change the Manager of the Building is in connection with such management and if the fees are proper and reasonable they fall within the costs chargeable to the Service Charge.[14]The LVT however, apparently without argument, went on to draw a distinction which seems to me to be equally plainly false. They said:
“However, on further consideration, the Tribunal formed the view that the proceedings were not connected with management etc as such but were essentially about who should be undertaking the managing.”
That the question of who manages a Building is not directly connected with the management of the Building would seem to me unarguable if the LVT had not provided an example of what they had in mind. They continued:
“For example, had a landlord been undertaking management without managing agents, the costs of negotiating and effecting a transfer of the reversion to a new person as both landlord and manager could hardly come within the clause despite the obvious connecting factor.”
What professional fees the LVT had in mind as being involved in such a transfer I find it hard to imagine, but if they meant the conveyancing fees on the transfer of the reversion, it is clear that they are not in connection with the management as opposed to the ownership of the Building. If, on the other hand professional fees were incurred in appointing a manager they would equally clearly be recoverable, although it is hard to imagine what they would be. It is more likely that costs other than fees would be incurred. It is, no doubt, for that reason that the Landlord’s own costs are provided for by sub-clause 24.3.7.2 as follows: “A reasonable fee to the Landlord in connection with the management of the Building provided that the Landlord will not charge a fee insofar as such management is carried out by its managing agents and remunerated under the provisions of clause 24.3.7.1”. 5[15]The LVT then went on to produce a different reason for saying that such expenditure was not to be treated as “in connection with management”. They said “In addition, the Tribunal was conscious that an application under Part II of the Landlord and Tenant Act 1987 in substance, as in this case, initiates hostile litigation: it must be preceded by a “fault” notice, specifying the landlord’s or his manager’s breaches, like a s.146 notice in reverse. It is unlikely that a landlord’s cost of defending, even successfully, a tenant’s action for damages for breach of management covenants could be recovered from tenants generally as a service charge incurred in connection with management etc.” I confess that I am quite unable to understand why the LVT thought that unlikely. Resisting such challenges is part of the ordinary cost of management, just as is the cost of collecting the service charge from tenants who fail to pay on demand. Ordinarily such an action, if dismissed, would be dismissed with an order that the unsuccessful claimant pays the landlord’s costs, but providing the landlord reasonably incurred the costs, in so far as they are not recoverable from the complaining tenant they may surely be charged to the service charge as costs of management.[16]There seems to me therefore no basis for the LVT’s conclusion that “proceedings taken to replace a landlord’s defaulting manager with another manager can properly be regarded as not connected with the management itself within 24.3.7.1”. The slightly tendentious use of the phrase “defaulting manager” may give the conclusion an appearance of merit, but it is quite unnecessary to reach what seems to me to be an unjustified construction of clause 24.3.7.1 in order to protect the service charge payers from having to pay costs where it would be inequitable that they should do so. That is within the power of the Tribunal which hears the proceeding, but in this case the LVT which heard the Schillings’ application under s. 24 refused to make an order under s.20C of the Landlord and Tenant Act 1985. barring the Landlord from treating the costs as relevant costs for the purpose of calculating service charge.[17]The LVT went on in their Decision to admit “It is true, of course, that whether or not this constitutes the correct construction of this clause for present purposes is not clear beyond argument.” For the reasons which I have given and because of the plain meaning of the words, I differ from them in thinking that it is beyond argument that their construction can possibly be right. But on the basis that their construction was arguable, they went on to say “However, this indicates that it fails the Gilje test ..” They there referred to what Laws LJ had said in Gilje v Charlegrove Securities Ltd [2001] EWCA Civ 1777 at para. 27 as follows:
“The landlord seeks to recover money from the tenant, On ordinary principles there must be clear terms in the contractual provisions said to entitle him to do so. The 6 lease, moreover, was drafted or proffered by the landlord. It falls to be construed contra proferentem..”
The approach which Laws LJ adopted in rejecting the implication of a term that the service charge should include a notional rent for a caretaker’s flat which the landlord covenanted to provide, cannot, in my judgement justify the seeking out of a possible alternative construction of a clause which is clear, although wide, in order to cut down its effect.[18]Mr Gavaghan who made clear and helpful submissions on every aspect of this appeal where he was able to put forward an arguable case was quite unable to support the LVT’s conclusion except by a simple submission that they were right. Having sought to analyse their reasons for reaching a conclusion contrary to their own first reaction, I have concluded that their construction of Clause 24.3.7.1 is unsupportable, and, if it arose, this ground of appeal against their Decision would have to be upheld. Paragraph 10(4) of Schedule 12 to the Commonhold and Leasehold Reform Act 2002[19]Paragraph 10(4) of the 12th Schedule to the Act of 2002 provides as follows:
“A person shall not be required to pay costs incurred by another person in connection with proceedings before a leasehold valuation tribunal except by a determination under this paragraph or in accordance with provision made by any enactment other than this paragraph”
. The Landlords claim that the covenant in the underlease whose effect I have considered above, requires the tenants of the flats subject to service charge to pay an appropriate percentage of the costs incurred by the Landlords before the LVT which considered the Schillings’ application under s.24 of the Act of 1987. The Landlords do not rely on any determination under paragraph 10 of the Schedule or on the provision of any other enactment as excepting them from the prohibition contained in the sub-paragraph. The LVT, therefore felt bound by “the literal meaning of an unambiguous provision in legislation otherwise generally protecting tenants as against landlords” to conclude, albeit, as they record in paragraph 41 of their Decision, by a majority, that the Landlords are precluded by this paragraph from recovering the costs in question from their tenants as service charges.[20]If this conclusion is right, then a management company wholly owned by the tenants in a block of flats against whom one tenant takes proceedings before a leasehold valuation tribunal would be unable to meet the costs of representation from the service charges which would constitute its sole source of income. An example of such a company would be a Right to Manage Company, for the establishment of which, it is one of the objects of the Act of 2002 to make provision. This is a surprising and far-reaching effect of the provision included in a Schedule headed merely “Leasehold Valuation Tribunals: Procedure”. It is one which His Honour Judge Levy QC sitting in the Central London County Court on 1st September 2005 rejected in Staghold Limited v Takeda. As I follow his judgment, however, he did so only on the ground that, as he thought, that cannot have been the intention of Parliament rather than as a result of any analysis of the statutory provisions as enacted in 2002. 7[21]I have had the benefit of careful submissions setting out the history of the statutory provisions for and restriction upon the recovery of costs in leasehold valuation tribunals, for which, as I understand, Mr Sefton, who appeared with Mr Fancourt QC for the Landlords, is particularly to be thanked. I think that, even although the Act of 2002 is not a Consolidating Act, that history is relevant in order to understand the mischief at which this provision was aimed, as an aid to its proper construction. Such mischief can only be discovered by such means, because no parliamentary papers such as would be admissible under the rule in Pepper (Inspector of Taxes) v Hart [1993] AC 593 shed light on it. The Explanatory Notes issued with the Act said only this about paragraph 10 of Schedule 12:
“Paragraph 10 is a new provision which enables a LVT to determine that a party shall pay costs incurred by another party where an application has been dismissed on the grounds set out in paragraph 7 or where that party has acted unreasonably during the proceedings. The costs shall not exceed £500, or such higher amount as may be specified by regulations…”
The absence of any parliamentary explanation does reinforce surprise that the provision was intended to have the far-reaching effect, which the LVT has held that it did.[22]Leasehold valuation tribunals were first constituted by s.142 of the Housing Act 1980 to exercise the jurisdiction which until then, the Lands Tribunal had exercised under the Leasehold Reform Act 1967. The Lands Tribunal had power to award costs under the provisions of 3(5) of the Lands Tribunal Act 1949. The power to act as leasehold valuation tribunals was given to the Rent Assessment Committees, which had already been established to determine fair rents under the Rent Acts. When constituted to determine matters under the Leasehold Reform Acts, they were called leasehold valuation tribunals. Neither the Rent Assessment Committees nor the LVTs constituted out of them, had any power to award costs, and it appears to have been Parliament’s intention that such litigation should proceed thenceforward, at least initially, in a costs-free environment, for it was further provided by paragraph 5 of Schedule 22 to the Act of 1980 that although the costs of enfranchisement under the Act of 1967 were ordinarily payable as part of the cost of enfranchisement “The costs which a person may be required to bear under section 9(4) or 14(2) of the 1967 Act (matters the cost of which are to be borne by person giving notice of his desire to have the freehold or an extended lease) do not include costs incurred by a landlord in connection with a reference to a leasehold valuation tribunal”. Appeals from the LVTs, however, lay to the Lands Tribunal, which continued to have power to award costs in such matters in respect of the proceedings before the Lands Tribunal although not, of course those before the LVT.[23]The statutory restriction on the recovery of service charges in respect of costs unreasonably incurred began with s.19 of the Landlord and Tenant Act 1985. The limitation of the amount payable under that section could be pleaded as a defence to a claim for service charges made in the County Court, which of course has statutory power to award costs. 8[24]The Landlord and Tenant Act 1987 introduced various rights for long leaseholders to acquire their landlords’ interest or to control his management of leasehold property. Where it gave jurisdiction in respect of such matters to the Rent Assessment Committees, sitting as LVTs, it was in a costs-free regime (see for example s.13(4) as originally enacted).[25]Section 41(1) and paragraph 4 of the 2nd Schedule of the 1987 Act put beyond doubt the tenant’s right to seek declarations for the purpose of s.19 of the Act of 1985. It inserted s.20C into the Act of 1985 as follows:
“A Tenant may make an application to the appropriate court for an order that all or any of the costs incurred, or to be incurred, by the landlord in connection with proceedings are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or persons specified in the application; and the court may make such order …as it considers just and equitable in the circumstances.”
The appropriate court did not at that time include a LVT . Ordinarily it was the County Court, which, of course, had power to award costs upon such an application.[26]The Leasehold Reform Act 1993 again split jurisdiction in respect of further rights of leasehold enfranchisement between the County Court and LVTs, but provided in s.33(5) for the exclusion of costs incurred before LVTs from costs for which a nominee purchaser should be liable on purchase of the landlord’s interest. Where matters were heard partly before the LVT and partly before the County Court, s.91(8) specifically provides that “No costs which a party to any proceedings .. before a leasehold valuation tribunal incurs in connection with such proceedings shall be recoverable by order of any court (whether in consequence of any transfer under subsection (4) or otherwise).” Thus it was thought necessary in such circumstances to make provision to maintain the costs- free regime before the LVT, notwithstanding the proceedings continuing before the Court.[27]It was by the Housing Act 1996 that the LVTs were given concurrent jurisdiction with the County Court under s.19 of the Act of 1985, at the same time as in regard to other new matters introduced by that Act. Such matters might also be referred to the LVT by the County Court by virtue of what has become s.31C of the Act of 1985. This provides that “when the tribunal has determined the question, the court may give effect to the determination in an order of the court”. Accordingly in order to maintain the costs-free regime before the LVT, s.83(3) in effect reproduced the provisions of s.91(8) of the Leasehold Reform Act 1993 for the purposes of service charge, by inserting into the 1985 Act, s.31A (4) to this effect: “No costs incurred by a party in connection with proceedings under this Act before a leasehold valuation tribunal shall be recoverable by order of any court.” 9 At the same time s.83(4) amended s.20C of the 1985 Act to extend to the LVT the power previously belonging only to the Courts, to make orders depriving the landlord of the right to recover the costs incurred in connection with LVT proceedings by way of service charge. In the absence of such order an appropriately worded lease would enable the landlord to recover such costs, and it would not seem to me that s.31A(4) can be construed to disable a Court from giving judgement for service charges including such costs. If it had that effect the simultaneous amendment of s.20C would have been inconsistent.[28]Of even greater significance in the context of the present dispute as to the right to include in the service charge the costs incurred before the LVT in resisting an application under s.24 of the Act of 1987, is the inclusion of a sub-section in identical terms to s.31A(4) of the 1985 Act, in the 1987 Act as s. 24A (5) of that Act. This was likewise effected by s.86(5) of the Act of 1996 on the transfer of jurisdiction as to the appointment of managers to the leasehold valuation tribunals. In my judgement, the LVT’s assumption that that provision would have prevented the recovery of such costs by way of service charge, so that what the LVT have held to be the effect of the 2002 Act had already been enacted in 1996, is wrong, unless identical words in s 86(5) and s.83(3) of the 1996 Act are to be held to have different meanings. That, of course, would not be an acceptable mode of statutory construction.[29]Mr Gavaghan’s submission was rather that the result contended for arose from the effect of the Act of 2002. The Commonhold and Leasehold Reform Act 2002 did include many substantial reforms. I would not dissent from Mr Gavaghan’s submission that at least in the creation of “commonhold” and “the Right to Manage”, it constituted a radical reform of property law. I do not entirely accept that, as he also submitted, such reform was exclusively directed to what he called “the protection of tenants”. The Act is more even-handed than that implies. For example, in contrast to the provisions excluding costs before the LVT from recovery as incidents of the costs incurred on enfranchisement, a Right to Manage Company whose application fails, may be made liable for costs before the LVT (see s. 88(3)), as also may the persons promoting it (s.89(3)). The provisions of Paragraph 10 of Schedule 12 themselves may be said to have shifted the balance of provision as to costs in favour of landlords.[30]Meanwhile the position under the 1967 Act (referred to in paragraph 21 above), was confirmed by adding sub-s.(4A) to s.9 and sub-s.(2A) to s.14 to the effect that the relevant section “does not require a person to bear the costs of another person in connection with an application to a leasehold valuation tribunal.” I note the reference is to “a person” rather than to a party, which may be apt in the first use of the word, because the purchase may be made by an assignee of the tenant who appeared before the LVT, but is less clearly the appropriate word so far as its second use is concerned. 10[31]The later chapters of the Act are more administrative in character, than those which introduce the radical reforms. It is under Chapters 5 and 6 that the jurisdiction of the LVT was significantly extended. In regard to service charges, the insertion of s.27A into the Act of 1985 gives the LVT concurrent jurisdiction with the Court to determine not only the reasonableness of service charges, but also whether they were payable and by whom, to whom and so on. Other extensions of the jurisdiction of the LVTs, both concurrently with or instead of the County Court need not be noted, save that they made it convenient that the procedural provisions as to leasehold valuation tribunals in the earlier Acts to which I have referred should be collected up. To this extent the 2002 Act performed a consolidating function, and it must, in my judgement be construed having regard to such function even if it is not formally a Consolidating Act..[32]Accordingly, schedule 14 repealed the procedural provisions as to LVTs which had been inserted by s.83(3) of the Housing Act 1996, into the 1985 Act as ss.31A to 31C, as well as ss.24A and 24B of the 1987 Act which had been inserted into that Act by s. 86 of the 1996 Act. In their stead s.174 gave effect to Schedule 12 headed “Leasehold Valuation Tribunals: Procedure”.[33]The Schedule, in paragraph 3, made provision in regard to transfers of matters where the LVT has concurrent jurisdiction with the Court in terms identical to the provisions of s. 31C(1) and(2) of the 1985 Act:
“(1) Where in any proceedings before a court there falls for determination a question falling within the jurisdiction of a leasehold valuation tribunal, the court- (i) may by order transfer to a leasehold valuation tribunal so much of the proceedings as relate to the determination of that question, and (ii) may then dispose of all or any remaining proceedings pending the determination by the leasehold valuation tribunal as it thinks fit. (2) When the leasehold valuation tribunal has determined the question, the court may give effect to the determination in an order of the court.”
As to enforcement paragraph 11 also further provides:
“Procedure regulations may provide for decisions of leasehold valuation tribunals to be enforceable, with the permission of a county court, in the same way as orders of such a court”
[34]No doubt, it was at least in part in recognition of the effect of the extension of the jurisdiction of the LVTs, that they were no longer to remain a totally costs-free regime. Paragraph 10(1) provided that 11 “A leasehold valuation tribunal may determine that a party to proceedings shall pay costs incurred by another party in connection with the proceedings in any circumstances falling within sub-paragraph (2).” Those circumstances are limited to the vexatious or otherwise unreasonable conduct of the party. Sub-paragraph (3) then limits the amount to £500.[35]At the same time, the power to award costs previously entrusted to the Lands Tribunal, to whom appeals are made from the LVTs with permission, was curtailed to the same extent by s. 175 (6) and (7), which apply the provisions of sub-paragraphs !0(2) and (3) of Schedule 12. The provisions of sub-paragraph 10(4), to which I must return, are not however similarly applied to the Lands Tribunal.[36]The mischief at which it appears to me that that sub-paragraph was aimed was the risk that a procedure of enforcement of the LVT’s determinations by the County Court might appear to give to that Court jurisdiction to include in its orders costs before the LVT, other than such as the LVT had itself ordered under its own limited jurisdiction. Provision in respect of such risk had been made in the 1996 Act by inserting s.31A(4) into the 1985 Act and s. 24A(5) into the 1987 Act, in the form set out in paragraph 26 above. In that paragraph, I accepted that the words used could, if construed literally, have been held to have the meaning which the LVT has attributed to paragraph 10(4) as now enacted. I am clear, however that neither it nor s.24A(5) of the 1987 Act did have that effect for the reason which I there gave, namely the simultaneous extension of the provisions of s.20C to the leasehold valuation tribunals. In the re-enactment in the 2002 Act of the effect of these provisions, it was necessary for the draftsman to allow for the new powers of the LVT to award limited costs in limited circumstances. It was therefore not possible to repeat the formula “no costs incurred by a party in connection with proceedings .. before a leasehold valuation tribunal shall be recoverable by order of any court.” The formula used in paragraph 10(4) “A person shall not be required to pay costs incurred by another person in connection with proceedings before a leasehold valuation tribunal ..” allows for the exception to the general rule to be inserted following those words:
“.. except by determination under this paragraph or in accordance with provision made by any enactment other than this paragraph.”
[37]It does seem to me to be proper in construing this reformulation, to have regard to this legislative history and to consider whether the different words require a different meaning going well beyond the context of the Schedule in which it is contained. In so construing the sub-paragraph, the continuance of s.20C in force, unaffected by the 2002 Act, cannot be ignored. The LVT gave some reasons for suggesting that it might not be otiose even on their construction of the sub-paragraph. I find them fanciful, and indeed the LVT’s resort to the 12 speculation that s.20C was preserved in case of future legislation shows their own lack of confidence in their reasons for saying that the sub-paragraph construed as they construe it would not render s.20A otiose.[38]I do, none the less, recognise that to exclude the application of the sub-paragraph from affecting the contractual provisions of leases does involve, if not re-writing the statutory provision, at least the cutting down of its application in a way not expressly enacted. I had been troubled by the use of the word “person” rather than “party” which might have been thought more appropriate and had been used in the predecessor sections deriving from the 1996 Act, but I was satisfied by Mr Fancourt QC that it was arguably more apt because by reason of sub-paragraph 9(3) it is not until a person pays a fee that he becomes a party. Moreover, if the word used had been “party”, it might have been argued that even if other tenants might be liable to pay such costs by way of service charge, the tenant who was a party to such proceedings should be exempted. Such a result would certainly be anomalous if it applied to a tenant who was a party, even although he failed on application to obtain an order under s.20C, or even had an order made against him under sub-paragraph 10(1) of Schedule[39]I have therefore come to the conclusion that the application of sub-paragraph 10(4) is to be limited by its context and the title of the Schedule to the Procedure of the Leasehold Valuation Tribunals and the enforcement of their determinations, and that properly construed, it does not prevent the recovery of costs incurred before leasehold valuation tribunals which are otherwise recoverable by way of service charge. Application of Unfair Terms in Consumer Contracts Regulations 1999[40]There is no dispute about the LVT’s acceptance that these Regulations may apply to regulate the provisions of a lease (see R. (Khatun and others) v London Borough of Newham [2005] QB 37). Nor is there any dispute that the terms of Dr and Mrs Schilling’s underlease had not been individually negotiated, so that Reg. 5(1) applied as follows:
“A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer [that is the tenant]”
Regulation 8 provides for the effect of an “unfair term” as follows: “(1) An unfair term in a contract .. shall not be binding on the consumer. (2) The contract shall continue to bind the parties if it is capable of continuing in existence without the unfair term.” 13[41]The Applicants had sought to invoke the provisions of these regulations in the course of the application which they made in respect of the service charges for the years 2000 to 2004, which I have referred to as the “Service Charges application”. Upon the LVT allowing the issue to be raised, the Landlords brought proceedings for a declaration in the High Court, as to the applicability and effect of the Regulations. The LVT thereupon adjourned the determination of the Service Charges application until those proceedings had been determined. In the event, the applicants then decided not to rely upon the Regulations for the purpose of that application. The Service Charges application was, therefore, duly determined without reference to the Regulations (although there was an attempt to revive the issue both before the LVT and this Tribunal, to which I have referred in the course of my Decision on the Service Charges appeal, which as explained in paragraph 3 of this Decision, was the subject of appeal to this Tribunal heard at the same time as this Costs application appeal).[42]When the issue was raised in the course of the Costs application, Mr Fancourt QC submitted that the LVT had no jurisdiction to consider the matter. But s. 27A of the Act of 1985, inserted by s.155 of the Act of 2002 provides, without limitation that “an application may be made to the leasehold valuation tribunal for a determination whether a service charge is payable”. Mr Fancourt raised both before the LVT and before this Tribunal a number of examples of issues which it would hardly be appropriate for the LVT to undertake to determine, at least if another more appropriate tribunal was seized of the matter. This, however does not mean that Parliament has not also given the LVT jurisdiction to determine such issues.[43]No doubt, if a party to proceedings before a LVT takes proceedings for the determination of such an issue before what the LVT accepts is a more appropriate court, the LVT will, as it did in the course of the Service Charges application adjourn its proceedings pending such determination. It has power so to do under its inherent jurisdiction to regulate its own procedure. That this would be a reasonable and proper course if an issue were raised, to take Mr Fancourt’s examples, as to voidability for mistake, forgery or misrepresentation, I do not doubt. Such matters are better determined under Court procedures and by judges, rather than by specialist tribunals, encouraged to adopt comparatively informal procedures.[44]I should take the same view where the LVT has jurisdiction to determine only one aspect of a matter better determined as a whole. The LVT, although, as I think, entitled to decide whether a term is not binding because unfair, has no jurisdiction thereupon to make a determination whether the lease shall continue in existence without the alleged unfair term. It may well therefore regard it as convenient, if other proceedings are brought to determine whether service charge is payable under a term said not to be binding because unfair, to adjourn an application within its jurisdiction, pending such determination[45]I can see no basis, however, for saying that the LVT lacks jurisdiction to determine any issue not expressly the subject of some other tribunal’s exclusive jurisdiction, if determination of that issue is essential, to determining whether “a service charge is payable.” That is the issue which s.27A gives the LVT jurisdiction to determine. That must include any issue necessary for or incidental to such determination. I therefore agree with the LVT that 14 they did have jurisdiction to determine the issue of the effect of the 1999 Regulations, although I think they might have been wiser to encourage the Landlords to follow the course which they had adopted in regard to the Service Charges application, and to seek a declaration from the Court.[46]In considering the LVT’s decision as to the merits of the challenge, I seek first to identify “the term” which is said to be unfair and therefore not binding. That must mean some covenant in the lease. The covenant to pay the costs incurred before the leasehold valuation tribunal is, or will be, when the sums are included in some “Estimated Building Expenditure”, the covenant under clause 23.2 “to pay .. the Building Service Charge Percentage” of that Expenditure. Mr Fancourt submitted that such term provides for the price of the services supplied, so that by Reg.6(2) “the assessment of fairness shall not relate (b) to the adequacy of the price”. I do not think, however that such analysis properly identifies the term said to be unfair. It is not the amount to be paid that is said to be unfair, but the requirement to make payment at all.[47]Nor is it the requirement to pay for services that is said to be unfair. It is the definition of Expenditure to which that requirement applies which is said, in the words of Reg.5(1) “to cause a significant imbalance in the parties’ rights and obligations”. As I have pointed out at paragraph 11 above, the definition of “Building Expenditure” includes “the costs and expenses set out in Part Five Subsection BIII “ of the lease. The term which must therefore be said to be unfair is that part of the definition, which, as I have held at paragraph 13 of this Decision enables the Landlord to recover the costs incurred before the LVT as service charge, namely clause 24.3.7.1.[48]I do not think that it is or could be said that there is anything unfair in the Manager of a Building being entitled to recover from those who benefit from management, the cost of management. I think that the LVT’s finding of unfairness is dependent upon their reasoning at paragraph 52 of their Decision:
“ ..the costs in question .. did not themselves constitute management ..the costs were incurred “in connection with” management. In practice, a landlord’s LVT costs are always likely to be incurred not in managing the premises for tenants or in supplying services to tenants but in adversarial proceedings against tenants.”
I think that the LVT was right thus to identify the particular term said to “cause a significant imbalance in the parties’ rights and obligations”. The definition does not, however include only LVT costs. It includes any “proper and reasonable fees and disbursements .. in connection with the general overall management and administration and supervision of the Building”, although the requirement that they be “proper and reasonable” is cut down by the possibility of including such costs “whether or not the Landlord is obliged by this Lease to incur the same” (Clause 23.1.3.1). 15[49]Regulation 5(5) refers to Schedule 2 of the Regulations as containing “an indicative and non-exhaustive list of terms which may be regarded as unfair”. Mr Gavaghan relied on paragraph (q) of that Schedule; “excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy ..” and is reported to have put the point thus:
“This case speaks for itself. If the Respondents’ construction of the lease is correct it contains a significant imbalance in the parties’ rights. The Landlord can take part in proceedings and claim his costs from the service charge fund. The tenant who opposes him cannot. He thus faces someone who can bring in the “Big Battalions” against him. This imbalance is unfair. Furthermore while it does not exclude the tenant’s right to take legal action it can be seen to hinder it. He can be met with the threat of large fees payable by him and his neighbours if he dares to step out of line.”
The LVT at paragraph 53 said:
“.. the Tribunal accepts Mr Gavaghan’s submissions for the Applicants. Any term which entitles a landlord on one side to recover from tenants its costs of proceedings against tenants, without conferring any reciprocal rights, must cause a significant imbalance in the parties’ rights and obligations arising under the lease/contract within reg 5(2) of the 1999 Regulations.”
[50]It seems to me that this conclusion shows a surrender to rhetoric which a more careful appraisal of the real position would have avoided. Of course tenants in the Schillings’ position, even if supported by ten or more others out the 280 flats, are likely to lack what is nowadays called “equality of arms” against a major landlord. But that is not an imbalance caused by the provision that the Landlord can recover the costs of and connected with management (at least if properly and reasonably incurred). A reciprocal right would give a tenant who entered into dispute with his Landlord a right to be reimbursed his costs by his fellow tenants. Although the 1999 Regulations could not be relied upon, unless, perhaps, the mechanics of such “reciprocal right” were to operate through the service charge, once that is appreciated, it is hard to conceive of an arrangement more unfair to all the other tenants than that which the LVT said was necessary in order to make a provision such as this, binding.[51]This reflection on the LVT’s proposition does highlight the reason why the illustration included in paragraph (q) of Schedule 2 of the Regulations does not stop at the point to which I quoted it. To be fair to Mr Gavaghan and the LVT they both set out the paragraph in full, but perhaps without giving proper consideration to the extent to which it gives direction to the apparently wide words which I quoted: “… particularly by requiring the consumer to take disputes to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with the other party to the contract.” 16 I do not think that the draftsman of this paragraph would have expected it to be relied upon to prohibit the “supplier” from relying on general provisions as to service charge, not otherwise unfair, in order to recover from the “consumer” 0.33% of his costs incurred in the proceedings initiated by the “consumer”, wherein the LVT had refused an order under s.20C because it did not think such recovery was other than just and equitable.[52]The LVT referred to the decision of the House of Lords in Director General of Fair Trading v First National Bank Plc [2002] 1AC481 where some consideration was given to the meaning of “the requirement of good faith”. Lord Bingham of Cornhill said at paragraph 17 that “The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps.” I have differed from the LVT in thinking that the term impugned was clear. I see nothing to justify a conclusion that its imposition was “contrary to the requirement of good faith”, nor did the LVT offer any reasons for so concluding. It does not appear to me, in the context of the bargain which the underlease contains as a whole, that the term impugned does cause any significant imbalance between the parties. In my judgement the provisions of the 1999 Regulations do not assist the Schillings’ case and I would have allowed the appeal on this issue. Reasonableness of Costs Incurred[53]The additional service charge demanded from Dr and Mrs Schilling was calculated by the LVT to be their due percentage of £180,142. The Landlord claimed to have reasonably incurred £182,251.20 as costs before the LVT on the Schillings’ application under s.24 of the 1987 Act. This indeed was said to be only part of the total of the costs which they claimed to have incurred, amounting to nearly £400,000 in all. The LVT determined that if such costs were recoverable as part of the service charge, the sum to be treated as relevant costs, should be reduced to £50,580.[54]The LVT arrived at this figure by a double reduction of a figure which they took as £180,000. Firstly they reduced the sum by a half for the following reasons given in paragraph 72 of their Decision:
“the Tribunal considers that the protection of profits on sale .. was the real purpose of much of the expenditure. To the substantial extent to which it became disproportionate in consequence of this purpose, the expenditure cannot properly be treated as costs reasonably incurred by the landlord in connection with the management of the residential parts of the Estate. Doing the best it can in the circumstances, the tribunal has attributed 50% of the approximately £180,000 claimed to the uplift in expenditure incurred in order to protect the Respondents’ interests as developers.” 17 Secondly, the resulting £90,000 was further reduced for the following reason: “The Applicants’ landlord does not have any right to manage the estate but only has a right .. to charge for managing “the Building”, … Also “when any expenditure is incurred in relation to the Building and other premises”, the tenant’s liability is to pay 0.33% of a reasonable proportion. In practice 56.2% …”
[55]These reasons are made intelligible by the history of the Application to appoint a Manager. The “Building”, in respect of which the under-lessees were liable for “Building Expenditure” was in fact managed by a manager who managed also the rest of the Estate of which the four mainly residential buildings, so described, formed a part. That included four other commercial premises each let on a separate lease. The services of the whole Estate were however sufficiently integrated as to make it necessary for provision to be made for the head-lessee to share the costs of the Estate Expenditure (in respect of common parts of the Estate as a whole) and of the Car-park Expenditure, which were to be incurred by the head- lessor, a company associated with the under-lessor, in proportions fixed under the head-lease. The under-lessees then paid their fixed percentage of the head-lessee’s expenditure under such heads. Other expenditure incurred in respect of the Building and other premises on the Estate, not within the definition of “common parts” was to be apportioned as was “reasonably attributable” to the Building and such other premises.[56]In those circumstances the advocate for the Applicants had on the first day of the hearing for the appointment of a Manager under s.24, asked that such Manager should be appointed over the whole Estate, because, as he accepted, it needed to be managed as an entity. On its being objected, on behalf of the Landlord, that the LVT had no jurisdiction to appoint a manager except over the premises held by the underlessor, namely the Building, issue was joined as to whether it could be “just and convenient” for the purposes of s.24, to appoint a manager so limited. On the third day of the hearing the LVT dismissed the application on the ground that it could not be “just and convenient” to do so. The head- lessor was not one of the respondents to the application, but evidence was given by officers of the joint venture company which had promoted the development of the whole Estate in partnership with the head-lessor. Their interest, the LVT held, was firstly to protect the commercial reputation of the promoters of the development and secondly to safeguard the proper management not only of the Building, but also of the Estate as a whole.[57]The appeal against the LVT’s decision as to the amount of the costs which were reasonably incurred has been heard in the first instance by way of a review only. The LVT’s decision was itself made only in case an appeal were allowed. Although the Appeal stands dismissed, their Decision is material, in case the Landlord claims to base a future demand for service charge on these costs. I have therefore accepted that it is desirable for me to give my conclusions on the arguments which I have heard as to the LVT’s Decision, although I could not reach a conclusion as to the amount that I would hold to have been reasonably incurred without a re-hearing. 18[58]The evidence before the LVT included expert evidence on both sides, as the LVT recorded it, “as to the amount of the costs incurred which would be allowed by a Costs Judge in respect of High Court litigation”. The LVT held however that it “did not find the expert evidence of what would be allowed on a taxation of costs in the High Court of any significant assistance. Instead, the Tribunal considered whether or not the costs claimed by the respondents were reasonably incurred in the light of the judicial approach to service charges [which they derived from observations by Cairns LJ in Finchbourne Ltd v Rodrigues [1976] 3 All E.R. 581 at p. 587 and Blackburne J. in Fluor Daniels Properties Ltd v Shortlands Investments Ltd [2001] 2 EGLR 103.][59]The LVT heard these witnesses being cross-examined and it appears to me that they would have been entitled, if they so concluded, to find that the evidence was not of significant assistance to them in determining at what figure a Costs Judge might have assessed the costs. I think moreover that they were encouraged to take such a view, by submissions made on behalf of the Landlord as to why the LVT should not treat itself as a costs judge or try to do a detailed assessment as if in the Supreme Court Costs Office.[60]It seems, however that what they were saying was rather that the answer to that question, even if properly posed, could not have been of significant assistance in determining, for the purposes of s.19 of the Landlord and Tenant Act 1985, whether the costs had been reasonably incurred. As to that I think that they are in error. It appears to me that the amount of costs which would be allowed on assessment by a Costs Judge, for different purposes, must, if ascertainable, be of significant assistance in determining at least the amount of the costs that a Landlord could reasonably incur, albeit that it would not determine whether he acted reasonably in incurring them at all.[61]The experts on each side were concerned only with the amount and the items of costs. They had both been asked to assess the costs on an indemnity basis, but as between party and party. That differs from the standard basis of assessment of party and party costs, in that the court does not, on the indemnity basis, consider the proportionality of the costs incurred and will resolve any doubt as to whether the costs incurred were reasonably incurred or were reasonable in amount, in favour of the receiving party (see CPR Part 44.4(3)) It seems to me that in a case, such as the present, where the proportionality of the costs incurred in the litigation was in issue, it would have been more helpful to have received evidence as to an assessment on a standard basis. The amount which a Costs Judge would assess, on that basis, as having been reasonably incurred as between parties to the litigation must, at the least, be a starting point as to what a landlord may reasonably incur by way of costs in litigation, which, as between him and the tenants liable for service charge, it is reasonable for him to conduct. Any challenge for the purpose of s. 19 of the 1985 Act would then be limited to the reasonableness of incurring costs on the litigation at all. Any costs in excess of costs assessed on a standard basis would need justification having regard to the proper extent of the landlord’s discretion in carrying out his functions. 19[62]The LVT seems however, to have thought that the assessments were made on the basis that it was to be presumed that costs incurred had been reasonably incurred and were reasonable in amount. That is a presumption which arises under CPR part 48.3(1) (referred to by the LVT at paragraph 64 of their Decision). It applies, for example, in the case where a mortgagee is entitled to recover costs from a mortgagor. Under Part 44.4(3) there is no such presumption: it is a matter of how doubt is to be resolved rather than of presumption.[63]In deciding what more it might be reasonable for a landlord to incur by way of costs, in excess of what would be recoverable from another party on a standard basis, it would seem to me that, at the highest, the presumption which would operate on an assessment of costs between a solicitor and his own client under Part 48.8(2) should apply. In circumstances where the “client” will not have had opportunity to give any express approval either as to incurring or the amount of costs:
“costs are to be assessed on the indemnity basis but are to be presumed .. (c) to have been unreasonably incurred if – they are of an unusual nature or amount”
Had evidence on such basis been available to the LVT, they should, in my judgement have done their best to assess the items of costs which it was reasonable to incur and the amount which it was reasonable to incur in respect of such items.[64]Without the benefit of such evidence the LVT attempted to review the proportionality of the costs incurred, by adopting what Mr N.J. Rose FRICS described as “a robust approach” in his reduction of the amount of costs which he allowed to a landlord for successfully resisting a tenant’s application for permission to appeal (see Barrington Court Developments Ltd v Barrington Court Residents Association [2001] 29 EG 128. In that case, however the Lands Tribunal was itself charged with the task of assessing costs to be paid by the unsuccessful party to litigation to the successful party. In such assessment the Member had a discretion to do what was just in the circumstances. The task upon which the LVT was engaged was not to award costs, but to determine whether the costs proved to have been incurred were reasonable in amount to be paid under a contractual liability.[65]I think that they were entitled, as they did at paragraph 60 of their Decision, to say that “the costs claimed seemed, at first sight, to be manifestly excessive for tribunal proceedings”, and therefore put on the Landlord the task of justifying them. The justification offered was the complexity of the issues which the Schillings had raised in their Application. The LVT held that the issues raised were neither “complex” nor “disparate”. They do not however explain how that is consistent with the Schillings’ having found it appropriate to support their case with a Scott Schedule containing 32 widely varying allegations, including breaches of statutory and fiduciary duties, such as to justify a time estimate for the hearing of 7 to 8 days. It does appear to me that the LVT failed to keep in mind that it was only the fact that the Application was dismissed on what emerged on the first day as a preliminary point, that enabled it to be disposed of in three days. This, in my judgement meant that the LVT, if it was minded to reduce the costs recoverable on grounds of disproportionality, should have attempted to distinguish whether the allegedly disproportionate costs were incurred in 20 preparing for the expected trial, or merely appeared disproportionate in the circumstances of the collapse of the application.[66]In the absence of evidence specifically directed to the proportionality of particular items of costs, and in circumstances where the experts had apparently excluded such consideration from their evidence, such distinction might well have been impossible for the LVT to make except on some very broad brush basis. If, in such circumstances, the LVT was satisfied on the balance of probabilities that costs which were unreasonable in amount had been incurred, they would have little choice but to give effect to their conclusion on a “robust” basis. It seems to me however that the necessity to resort to such basis gives rise to doubt as to the justification for their conclusion as to disproportionality. If it had been necessary to determine the appeal on this ground, and I had been satisfied that the LVT had reduced the amount recoverable for this reason, I should have felt compelled to allow a re- hearing.[67]In fact, however, as I set out in paragraph 54 above the LVT did not reduce the amount of costs, which it allowed as “relevant costs”, on the basis of their being disproportionate in the sense used in the Civil Procedure Rules. They accepted the Landlord’s starting figure, albeit rounded down to £180,000. In reducing it, they used the word “disproportionate”, but they did so on the ground that much of the real purpose of such expenditure was said to be the protection of profits on sale. This appears to me to be a conclusion that it was not incurred in connection with the management of the Building, but for some other purpose.[68]Although Mr Fancourt has submitted that such conclusion is the same as the reason given for the further reduction by 43.8% and therefore the LVT has been guilty of double counting, I do not think that this is so. The halving, I take to be a reduction to reflect excess expenditure prompted by the desire of the promoters to protect their commercial reputation. The 43.8% reduction is to reflect the extent to which the rest of the Estate benefits from the Building not being managed by a separate manager appointed under s.24 of the Act of 1987.[69]If there was double counting, it arose, in my judgement, at the earlier stage when the LVT observed that the costs above £180,000, which the Landlord had not claimed (which, as I follow their Decision, the LVT put at nearly £220,000) had not been excluded “on a gesture of goodwill to the service charge payers”, but because they were advised that they had no entitlement to recovery. If that is so, it appears to me to follow that the £180,000 starting point already allowed for a reduction to reflect the interests of the promoters of the development and probably also of the head-lessor.[70]In the absence of explanation as to how the LVT arrived at its figures, and any specific identification of how individual items of cost are said either not to have been properly incurred or to have involved amounts which were excessive by comparison with some identifiable standard, or were incurred, not in connection with the management of the Building, but, presumably by someone other than the Underlessor, for some other purpose, it 21 is not possible to reach a proper conclusion on whether the LVT’s assessment of the sum “reasonably incurred” is, or is not, justified. If the Landlord seeks to recover these costs, or some part of them, as part of some future service charge, their reasonableness, if challenged, ought not, therefore, to be determined by the LVT’s Decision, the subject of this appeal. Outstanding Matters[71]As recorded in paragraph 2 of the Service Charge Appeal decision and paragraph 3.of this Decision there remain outstanding appeals against the LVT’s determination of applications under s.20C. The Schillings have also given notice of their intention to make an application under that Section in respect of the respective appeal proceedings. No applications for costs have been received, but if made, must be considered. The parties are invited to write to the Tribunal no later than 13th January 2006 with any proposals for directions as to any further hearings which are required. If it is possible to agree such proposed directions that will be welcomed by the Tribunal. Dated: 16 December 2005 His Honour Michael Rich QC 22