Shellpoint Trustees Ltd & Anor v Barnett & Ors [2012] UKUT 375 (LC)

IN THE MATTER OF AN APPEAL AGAINST A DECISION

UT Neutral citation number: [2012] UKUT 375 (LC)

Venue OF THE LEASEHOLD VALUATION TRIBUNAL, FOR THE LONDON RENT ASSESSMENT PANEL

Between

Shellpoint Trustees Ltd & Anor

Barnett & Ors

Howard Lederman , instructed by Teacher Stern LLP for the Appellants

The Respondents appearing in person

[10]“10. The principles applicable to challenges of the Tribunal’s decision are not unique to this Tribunal, but since several cases in relation to its decisions were cited I summarise their effect. First, proper and adequate reasons must be given, so that they are intelligible and deal with the substantial points that have been raised, and the reasons should deal, in short form, with the substantial issues raised in order that the parties can understand why the decision has been reached : S v Special Educational Needs Tribunal and the City of Westminster

[1996] ELR 102

at 112; The Queen on the application of B v Vale of Glamorgan CBC

[2001] ELR 529

, 536: Crean v Somerset CC

[2002] ELR 152

, 164 to 165. Secondly, and as a result of the first principle, the absence of reasons to explain why a case was rejected may make the decision appear irrational: Crean at 167. Thirdly, where reasons are inadequate, it is not normally appropriate that the reasons should be amplified on the appeal to the High Court: Oxfordshire CC v GB

[2002] ELR 8

, at 11 (C.A.). 11. Fourthly, a decision must be sufficiently specific and clear as to leave no room for doubt as to what has been has been decided: London Borough of Bromley v Special Educational Needs Tribunal

[1999] ELR 260

, 297 (C.A.)…”. 55. Those principles are broadly consistent with the three authorities considering the nature and extent of the duty of the judge to give reasons to which we were referred. In Flannery v Halifax Estate Agencies Limited

[2000] 1 WLR 377

the Court of Appeal said at 381G to 382C:

“We make the following general comments on the duty to give reasons. (1) The duty is a function of due process, and therefore of justice. Its rationale has two principal aspects. The first is that fairness surely requires that the parties especially the losing party should be left in no doubt why they have won or lost. This is especially so since without reasons the losing party will not know (as was said in Ex parte Dave ) whether the court has misdirected itself, and thus whether he may have an available appeal on the substance of the case. The second is that a requirement to give reasons concentrates the mind; if it is fulfilled, the resulting decision is much more likely to be soundly based on the evidence than if it is not. (2) The first of these aspects implies that want of reasons may be a good self-standing ground of appeal. Where because no reasons are given it is impossible to tell whether the judge has gone wrong on the law or the facts, the losing party would be altogether deprived of his chance of an appeal unless the court entertains an appeal based on the lack of reasons itself. (3) The extent of the duty, or rather the reach of what is required to fulfil it, depends on the subject matter. Where there is a straightforward factual dispute whose resolution depends simply on which witness is telling the truth about events which he claims to recall, it is likely to be enough for the judge (having no doubt summarised the evidence) to indicate simply that he believes X rather than Y; indeed there may be nothing else to say. But where the dispute involves something in the nature of an intellectual exchange, with reasons and analysis advanced on either side, the judge must enter into the issues canvassed before him and explain why he prefers one case over the other. This is likely to apply particularly in litigation where as here there is disputed expert evidence; but it is not necessarily limited to such cases. (4) This is not to suggest that there is one rule for cases concerning the witnesses’ truthfulness or recall of events, and another for cases where the issue depends on reasoning or analysis (with experts or otherwise). The rule is the same: the judge must explain why he has reached his decision. The question is always, what is required of the judge to do so; and that will differ from case to case. Transparency should be the watchword.” 56. As was put by Lord Phillips MR (as he then was) in English v Emery Reimbold & Strick Ltd [2002] 1 WLR 2409 : “We would put the matter at its simplest by saying that justice will not be done if it is not apparent to the parties why one has won and the other has lost”

. In South Buckinghamshire DC v Porter (No 2)

[2004] 1 WLR 1953

the House of Lords, considering the adequacy of reasons for a planning decision, said at paragraph 36:

“The reasons for a decision must be intelligible and they must be adequate. They must enable the reader to understand why the matter was decided as it was and what conclusions were reached on the “principal important controversial issues”, disclosing how any issue of law or fact was resolved. Reasons can be briefly stated, the degree of particularity required depending entirely on the nature of the issues falling for decision. The reasoning must not give rise to a substantial doubt as to whether the decision-maker erred in law, for example by misunderstanding some relevant policy or some other important matter or by failing to reach a rational decision on relevant grounds. But such adverse inference will not readily be drawn. The reasons need refer only to the main issues in the dispute, not to every material consideration. Decision letters must be read in a straightforward manner, recognising that they are addressed to parties well aware of the issues involved and the arguments advanced…”

. Discussion and decision Did the LVT err, and did it give adequate reasons? 57. We have carefully considered the various submissions and arguments made by the appellants, and the conclusion we have reached is that when viewed in the light of the applications, the evidence adduced before the LVT and the case as put to it, the Decision properly, intelligibly and adequately addresses the central issues sufficient for any of the parties, including this Tribunal, to understand what its decision is and why it has reached that decision consistent with the above-cited authorities. 58. In our judgment, it is clear from the Decision that the LVT found, on the basis of the evidence before it and the case put to it by the applicants’ then counsel, Mr Gallagher, that there was a single object to be achieved by the proposed variations to the Leases. Although Mr Gallagher makes passing reference in paragraphs 25 and 32 of his original submissions to what Mr Goldreich described as the “non-consequential” amendments, those submissions are almost wholly concerned with the issue of the heating and hot water system. By the time of Mr Gallagher’s supplemental submissions in November 2010 this emphasis is even more pronounced. Indeed the parenthesis in paragraph 2 of those submissions refers to a single object of the proposed variations, see paragraph 41 above. The LVT proceeded to assess the proposed variations, as it was entitled to do, by reference to this single object. 59. Mr Goldreich’s evidence sought to “clarify and explain” the non-consequential variations which he had drafted. He said that the landlords’ professional advisers:

“wished to address certain deficiencies in the flat leases which were affecting their management of the Etons.”

But Mr Goldreich’s non-consequential variations, which, in our judgment mostly failed to achieve the landlords’ intention (for reasons that we give below), were presented in the context of a single objective, namely to replace the communal heating and hot water system with individual boilers. This was the objective that Mr Gallagher spoke to in his supplemental submissions, and was clear to all concerned. That was the commercial deal or compromise reached by the parties. There was no, or no sufficient, evidence of any other object to be achieved by the non-consequential variations. 60. Having carefully considered all of the written evidence before the LVT and the submissions before us, we are not surprised that that was the common position of all parties by the end of the hearing before the LVT, however it might have been put or explained at the outset. Whilst the LVT could have expressly and deliberately considered each of the possible objects of the non-consequential variations as now submitted to this Tribunal by Mr Lederman, it did not, and did not need to, because by the end of the hearing it was clear to all concerned that there was but one single object to be achieved. 61. That the LVT found a single object is in our judgment clear from paragraph 7 of the Decision, which is carried through and consistent with the rest of the Decision, especially paragraphs 47 and 48 where the LVT tests the proposed variations against that “object” and gives its reasons as to why it will not exercise its discretion and grant the non-consequential variations sought. 62. When viewed in that light, the effect of paragraphs 47 and 48 is that the object could be achieved without the non-consequential variations. That, Mr Lederman accepted, was correct as they were all wholly unrelated to replacement of the communal heating and hot water system save in one respect, namely, without new clauses 5(ii) and paragraph 12/13 the communal heating and hot water systems could not be achieved or satisfactorily achieved. That, as the Refusal Decision notes, was not an argument put forward before the LVT. Neither was it the subject of any evidence. Nor was it accurate as the Leases all have adequate, standard-form covenants enabling the landlords to recover the service charges and there was no evidence of past difficulties in service charge collection. 63. Paragraphs 47 and 48 have been subjected to lengthy critique and analysis suggesting that the LVT was impermissibly analysing, commenting on, disagreeing with and substituting its own views for the commercial wisdom or solution proposed by the compromise which the landlords and the majority of tenants had reached. At the same time, Mr Lederman submitted that while each variation should be tested against its separate and distinct object, any substantial prejudice caused by the non-consequential variations was balanced out by getting the communal heating and hot water system replaced. 64. We do not accept these arguments. In our judgment, when properly understood, the LVT in paragraph 47 goes through each of the three non-consequential variations and concludes that replacement of the communal heating and hot water system can be achieved without any of those proposed variations. Although it has not slavishly followed the statutory wording, that is the substance of its Decision: the landlords have used the replacement of the communal heating system to obtain the non-consequential variations which are not required to achieve that object and, whilst it and the majority of tenants are fully entitled to reach such an agreement, if they can not point to any other object to be achieved by those variations they fail to satisfy the requirements of section 37(3) and the applications fail. 65. In the alternative and in any event, the LVT goes on to say in paragraph 48 that the non-consequential variations are likely to substantially prejudice the respondents and others and are not reasonable in the circumstances. In stating that the landlord has got more than is justified the LVT is balancing the various aspects of the case against each other. 66. With no disrespect to Mr Lederman, what has happened in this appeal is a complete re-working of the case without a full and proper analysis and understanding of the evidence and the issues. Indeed, as will become apparent, it was with some surprise that this Tribunal was told that the appellants did not understand the full nature and effect of the non-consequential variations sought and that had they got what the applications in fact asked for it would have been “wrong”. It may well be that had the appellants properly understood the true nature and effect of the non-consequential variations asked for they would have more readily understood why the LVT refused to grant them. 67. We will now embark upon a fully reasoned decision and exposition addressed to each of the issues now raised by Mr Lederman. We adopt his approach of considering each of the non-consequential variations by reference to the related evidence such as there was. It will become clear that in reality there was only one object. We will also address, as appropriate, the various arguments aired before us, conscious that many were not advanced before the LVT because, as we have already said, it is clear to us on the evidence before us that there was but one object. 68. In embarking upon this lengthy exposition we are conscious that it might be said that that of itself proves that the Decision is insufficient. We do not accept that argument. We are doing so because we must address the central arguments presented to us and give as full an explanation as is necessary to explain why we dismiss the appeal. It was not necessary for the LVT to do so because most of these arguments were not addressed to them – since, as we have stated, this was treated by all as a “single object” case. 69. We make clear that had we concluded that the LVT had erred such that the Decision must be set aside, we would have reached the same conclusion and our reasoning would have been as set out below. What follows should therefore be treated in the alternative as our reasons upon a review for refusing to allow the non-consequential variations. There are however two factors which have made it difficult to treat this as a straightforward appeal or review. Firstly, the appellants misunderstood, and did not want or intend, what they had in fact asked the LVT for. Secondly, it seems – but remains a little unclear – that the appellants have modified their position before the LVT, namely that without the non-consequential variations they would not replace the communal heating and hot water system, to one where they have not reached a final decision. Detailed reasons 70. The first question to address under section 37 is: what is or are the “object” or objects to be achieved by the non-consequential variations? As a matter of statutory construction, there may be single or multiple objects. In many respects, the object of a variation will be self-evident from the content of the variation itself. But it does not follow that that is necessarily the object, or purpose, of the variations. We accept Mr Lederman’s submission that it is for the applicants, not the tribunal, to identify the “object” or purpose which, broadly speaking, may be of infinite variety depending upon the facts and circumstances relating to the leases, buildings and flats in question. 71. What the object is is a question of evidence to be adduced by the applicants: what are they trying to achieve by the variations, and why? What problems or deficiencies are there or have there been in running the blocks and enforcing the leases? What is the purpose of the variation(s)? Without this information, or evidence, the tribunal can not make any findings as to the “object” to be achieved, nor can it properly exercise its discretion, which includes an evaluation of the proposed variation. Whilst the section 37 jurisdiction is wider than and distinct from that of section 35, there is room for overlap. For example, where there are unsatisfactory provisions relating to recouping the costs of repairs or maintenance an application can be made to remedy those deficiencies where there is a sufficient supporting majority of tenants under section 37 and, if not, under section 35. We accept the submission of Mr Lederman that it is not for the tribunal to determine whether they approve of the object, but it is for the tribunal to make a finding, based upon the evidence, of what the object is. 72. The second question is : can the “object” be satisfactorily achieved by the proposed variation without varying all the Leases (we summarise, but do not lose sight of, the statutory wording)? There are two questions here: does the proposed variation achieve the object, and if so do all of the leases need to be varied to satisfactorily achieve that object? These of course presuppose that the leases do not already have sufficient or satisfactory provisions: if they do it is obvious that they need not be varied as there will be no object, or purpose, to the variation. Or, as Mr Barnett tersely put it, “if it ain’t broke don’t fix it”. 73. These are questions of evidence to be adduced by the applicants: how do the proposed variations achieve that object or objects? Can that only be satisfactorily achieved if all the leases are varied? The nature and extent of the evidence will of course depend upon the variations sought. It is also a question for legal argument: as a matter of law do the variations achieve the object or are they capable of doing so? We accept Mr Lederman’s submission that it is for the applicants, not the tribunal, to select the solution or variation from what will frequently be one of a number of different options and if the majority of tenants are supportive then it is not for the tribunal to second guess them although, of course, the tribunal would be at liberty to make suggestions. 74. For convenience, we consider these questions and the related evidence together. We should say however that we do not accept Mr Lederman’s submission that the majority view should prevail unless the section 38(6) grounds are made out. In our judgment, the purpose of section 37 is to enable the majority to apply to the tribunal for a variation to achieve a particular object: if they can not bring themselves within those requirements, then there is no jurisdiction to entertain the application or consider it further. The jurisdiction is relatively narrow, and is not intended to allow rewriting of leases merely because that is the will of the majority and in many cases may well seem sensible. 75. New clause 6(8)(b) : Mr Lederman drew attention to the annexure to the applications where the stated object of new clause 6(8)(b) is lumped together with the heating-related variations which are described as being one of the “further changes relevant to Individual Heating Systems”: that is plainly wrong as it has nothing to do with the replacement of the communal heating and hot water systems. 76. It was the evidence of Mr Goldreich that the non-consequential variations generally were to remedy deficiencies in the leases. New clause 6(8)(b) was, he said, to enable “reciprocal enforcement of covenants between lessees”. This was echoed by Mr Gallagher in his opening skeleton argument. Mr Lederman quite properly accepted that new clause 6(8)(b) did nothing of the sort: it enabled a lessee to require the landlord to enforce a covenant against a fellow tenant at the ultimate cost of all tenants via the service charge. 77.

(b) :

“placed an unreasonable and disproportionate burden on a complainant lessee and the change is therefore intended to be for the benefit of the body of the lessees as a whole. It also introduced the safeguard that enforcement action was to be for the reasonable protection of the flat in order to prevent abuse by either an unreasonable lessee or an unreasonable landlord”. 78. In the absence of any evidence that the existing clause 6(8)(b) had inhibited Shellpoint tenants from requiring the landlord to enforce covenants or that it had in any way caused problems in the management of the Etons or that anyone regarded it as placing an unreasonable or disproportionate burden on a complainant tenant, Mr Goldreich’s comments amount to no more than a theoretical observation of a possible opinion as to the practical effect of this clause. An alternative view advanced with some force by the respondents, particularly Miss Zographos, is that the existing clause contains within it an important brake on tenants making unnecessary and unreasonable complaints by requiring them to take the risk of enforcement especially where the complaint is flat-specific (such as a noisy upstairs neighbour) and does not affect anyone else. It also discourages landlords from initiating enforcement proceedings unless well founded as they can only recover their costs from the tenant in breach. The contractual intent of the original parties should not be altered without good reason or sound evidence of which there was none. 79. Notwithstanding that Mr Goldreich did not in his witness statement distinguish between the Shellpoint and Anston Leases, those comments only apply to the Shellpoint Leases. In relation to the Anston Leases, there was no evidence that the absence of any covenant similar to clause 6(8)(b) had caused any problems in the enforcement of covenants or the management of the Etons. As the respondents argued, it does not follow from the absence of such a provision that there have been any problems or that the covenants have not been enforced by the landlords who have ample tools in their armoury to enforce covenants against tenants in breach and which, of course, one would expect a reasonable and responsible landlord to do. If successful the landlords’ costs can be recovered from the tenant in breach. Again, the contractual intent of the original parties should not be altered without good reason or sound evidence. 80. Mr Lederman submitted that the absence of any such evidence did not prevent the LVT or this Tribunal from finding that section 37(3) had been satisfied, and that great weight should be put on the fact that the overwhelming majority of tenants supported the new clause 6(8)(b) from which it could be inferred that they recognised there was a problem which needed to be resolved, and that this was the appropriate resolution of that problem. It was therefore not to address a purely theoretical problem but was something which the applicants, on advice, had agreed to and that it was unreal, impractical and unsatisfactory in an estate comprising 365 flats for all leases not to contain the same provision, at any rate, upon an application to vary. 81. That is a significant inference to be asked to make and it is not a suggestion that was put to the LVT. Had we been making our own decision by review, we would not have been prepared to so infer. In any event, if Mr Goldreich’s evidence is taken at face value, there being none other, the object to be achieved by new clause 6(8)(b) was to enable reciprocal enforcement of covenants between lessees . If the tenant applicants have taken that at face value, they would (wrongly) be thinking that under the new clause one tenant could directly enforce a covenant against another tenant without resorting to the landlord. We do not think we are taking too pedantic an approach: sight must not be lost of the fact that a section 37 application is a serious matter affecting as it does the contractual rights of others for the remainder of long lease terms (in many cases more than 950 years) and so should be soundly based on evidence. 82. In our judgment, in the absence of evidence, the LVT was right to conclude as it did in the last two sentences of paragraph 47 that the existing provisions of the Leases are conventional and perfectly adequate and it was not “necessary” for the landlord ( i.e. Shellpoint) to extend its powers of recovery of costs by substituting or inserting, as the case may be, new clause 6(8)(b). It was not necessary or required to achieve replacement of the communal heating and hot water systems. 83. Were we to be considering this aspect of the applications afresh by review, we would reach precisely the same conclusion but with slightly different reasoning. We would have found that if the object of new clause 6(8)(b) was to achieve reciprocal enforcement it failed to do so. There was insufficient evidence to support any finding other than the object of the clause being (part of the deal) to replace the communal heating and hot water system; but it did not in fact achieve that object as it was unrelated to it. There was no evidence or explanation that the object, whatever it may be, could not be “satisfactorily achieved” without modification or insertion of the new clause into all Leases when, on the evidence, there was nothing to indicate that the existing arrangements in which the Anston Leases had not clause 6(8)(b) had caused any problems or difficulties. We accept that great weight must be given to the views of the majority, but if they have failed to adduce even rudimentary evidence to satisfy the requirements of section 37(3) the applications must fail. Neither, for completeness sake, do we find the wording of existing clause 6(8)(b) (it not unusually puts the onus or risk upon the complainant tenant) or its absence from the Anston leases to be deficient or unsatisfactory. 84. New clause 5(ii) and paragraph 12/13 : Mr Lederman again drew attention to the annexure to the applications which states that the “object” of new paragraph 12/13 was to “improve management of estate” and new clause 5(ii) is bundled in with all of the other variations described as being one of the “further changes relevant to Individual Heating Systems”. 85. Mr Goldreich said in his first witness statement that these variations were to resolve the other main deficiency of “the lack of clauses enabling effective recovery of service charge arrears from individual non-paying lessees”

. This was echoed by Mr Gallagher in his opening skeleton argument. Mr Lederman quite properly accepted that this was not right as all Leases contain standard form covenants enabling the landlord to sue the tenant for non payment of service charge (clause 2(2)) failing which he must pay interest on arrears (clause 2(4)) and ultimately forfeit his lease (clause 5). Nothing more is required to enable legally effective enforcement. 86. In paragraph 8(1) of that witness statement, Mr Goldreich went on to elaborate:

“This clause [5(ii)] imposes upon the landlord the requirement to make reasonable and economically viable efforts to recover legal costs in proceedings against the defaulting lessee. Thereafter, unrecovered costs may be applied against the service charges provided that no Section 20C order is made against the landlord and that the costs are subject to a detailed assessment with a capped solicitors charging rate on the basis that those costs could be charged as service charges on an interim basis pending such recovery. “The purpose of this clause was both to permit and encourage landlords to seek recovery of legal costs against non-paying lessees rather than relying upon recovery through the service charge to the benefit of the general body of the lessees as a whole. This clause provides a safeguard in that it requires the landlords to “use all reasonable and economically viable endeavours” to recover their costs against individual defaulting lessees on the basis that only non-recoverable costs can be finally applied against the service charges and those will be subject to detailed assessment.” 87. In paragraph 8(4), he briefly refers to new paragraph 12/13 as defining “the service charge elements necessary to give effect” to the other new clauses and that it contains safeguards such as “reasonable” and “proper” and so on. 88. As already noted, there was no evidence that the absence of any provisions enabling the landlords to recover their unrecovered costs of enforcing covenants via the service charge has caused any problems in the past or was even an issue, and no evidence as to the nature, ownership or financial standing of either landlord, that their financial position had made it difficult or impossible to enforce the covenants or otherwise manage the Etons. There was therefore no evidence of any practical difficulties of enforcing the covenants which is often the case, for example, where the landlord company is owned by the tenants and has one asset (the freehold), one source of income (rent from the leases), and one source of money to pay for managing and maintaining the property and enforcing the covenants (the service charge provisions) as was the case in Thirlway v Troy [2012] UKUT 302 (LC) ; LRA/57/2012. 89. Mr Lederman submitted that the object of these new provisions was principally to improve the management and administration of the Etons but was also linked to replacement of the communal heating and hot water systems by strengthening the provisions for recovery of the service charge inevitably due in respect of those works. The absence of any evidence was not an obstacle as great weight should be put on the fact that the overwhelming majority of tenants supported these new provisions and they had been drafted by NERA’s lawyer, Mr Goldreich, who, in paragraph 10 of his first witness statement, had explained that he was there “to draft and negotiate the wording of those new clauses as fairly as possible in order to safeguard the interests of all the lessees at the Etons”

. There was also the already recited evidence of Dr Rankin that the variations “are to the benefit of the lessees as well as the landlords”. Again, appropriate inferences can be drawn. 90. When pressed, Mr Lederman was unable to advance any explanation of, or justification for, the width of these new provisions. Rather, and with commendable frankness, he said that neither he nor, on instructions, his client landlords had understood these new clauses to be quite so far reaching. They intended that only (a) the costs of tenant-initiated complaints under the new clause 6(8)(b) and (b) the legal costs of recovering sums due in respect of the service charge ( i.e. enforcing clause 2(2)) should be recoverable from all tenants via the service charge. He accepted that, in consequence, certainly in so far as his clients were concerned, the applications had sought more than was wanted or, presumably, they thought had been agreed with the majority tenants. Had the LVT made the ordered variation of the Leases by insertion of the new clauses it would have been, as Mr Lederman put it, “wrong”. 91. This puts a quite different perspective on the applications and also upon the evidence before the LVT and therefore us. Quite how the landlords got so much more than they bargained for is unclear, especially as Mr Goldreich regarded himself as protecting the interests of the lessees rather than prejudicing them. Whether Mr Goldreich understood what he had drafted is unclear, although it seems reasonable to infer that he did as the wording of these new clauses is straightforward and was well understood by the respondents and, we have no reason to suppose otherwise, the LVT. Indeed, it appears to us that Mr Goldreich did understand the width of what he had drafted because in paragraph 9 of his first witness statement he addresses the respondents’ concerns thus:

“9. In their written witness statements, the opponents to the changes [the respondents] have characterised the proposed non-consequential variations as effectively giving the landlords ‘a limitless pot of money’ and ‘long-term open-ended costs’ and ‘no downside from taking legal action’ and ‘unnecessary legal and professional costs’. Contrary to those contentions I would ask [the LVT] to accept that the proposed new clauses do impose a system of checks and balances on the landlord by requiring them to act reasonably and properly and in an economically viable way. The recovery of costs through the service charge will, of course, remain subject to the provisions of Section 20C and to the discretion accorded to the courts or the LVT by the requirement of for detailed assessment subject to capped charging rates. These clauses will also not affect the rights of the lessees to seek adjudication of the reasonableness of their service charges including legal costs in the LVT in accordance with the provisions of Section 27A nor have I seen any wish on the part of the landlords during my involvement in this process to interfere with those rights.” 92. Whether the width of the new provisions had been accurately explained to the tenants in the ballot is also unclear as the supporting information was not in evidence. If the landlords misunderstood these new provisions, it may well be that the majority tenants did as well, in which case it may call into question the validity of the ballot (something challenged by the respondents before but rejected by the LVT which of course did not know about the fundamental misunderstanding made by landlords about the width of the non-consequential variations). If the width of these new provisions was understood by the tenants and their adviser (including Mr Gallagher) it would be relevant to the exercise of the jurisdiction to know why the majority tenants thought that such open-ended and far ranging variations would, as Dr Rankin put it, be to the benefit of the tenants. It may well be, we do not know, that the supporting tenants did not really want these variations at all but were prepared to swallow a bitter pill as the price of getting the communal systems replaced. If so, the parties have ended up in the position that the pill was far bitterer than expected. Or there may be some other reason. 93. Drawing those strands together, we are left in some doubt as to precisely what Mr Goldreich was saying the object of these variations was and how they achieved that object. If, as he says, it is to enable effective recovery of service charge arrears from individual non-paying lessees, it does not achieve that objective because there are already covenants enabling legally effective recovery by clauses 2(2) and 5 of the Leases and also clause 2(4) enabling the landlord to be compensated by payment of interest to the extent that it is out of pocket for having to fund the non-paying tenant’s service charge contribution. If he means it is to be viewed from a purely practical point of view, to relieve the landlords of the financial obligation or risk of enforcing the covenants, no evidence to justify or otherwise explain the same had been adduced. 94. In those circumstances, in our judgment, the LVT was right to conclude as it did in paragraph 47 that the “original provisions of the Lease, certainly insofar as the ability of the lessee to ask the landlord to enforce covenants, is conventional and perfectly adequate”

. This sentence refers not just to the existing clause 6(8)(b) but also to the normal, and standard-form enforcement provisions in the Leases which we have already referred to. It must be read back to the fourth sentence, where the LVT does “not see the need to expand the provisions at [paragraph 12/13] … beyond that which is contained in the existing Lease”. A counsel of perfection would have been for the LVT to specifically refer to and cite them, but in our judgment the provisions are so conventional that it is satisfactory for the LVT to have in effect “taken them as read”. It is only had they been unusual that it would have been necessary for them to be recited verbatim. It was not necessary or required to change these provisions to achieve the object of replacing the communal heating and hot water systems. 95. Were we to be considering this aspect of the applications afresh by review, we would reach precisely the same conclusion but with slightly different reasoning. We would have found that if the object was to enable “effective recovery of service charge arrears from individual non-paying lessees” it was not made out as all Leases contained legally sufficient provisions and there was no evidence indicating any practical difficulties of recovery of service charge. Furthermore, new clause 5(ii) and paragraph 12/13 covered far more than was required to achieve that limited object. There was insufficient evidence to support any finding other than the object being (part of the deal) to replace the communal heating and hot water system and, for the reasons already stated, that object could be “satisfactorily achieved” with making the proposed variations to any, let alone all, of the Leases. Neither, for completeness sake, do we find anything deficient or unsatisfactory in the wording of the present provisions. 96. We would have reached the same conclusions even if we were to adopt Mr Lederman’s submission that these variations were to achieve the wider object of improving the management and administration of the Etons. We would have gone further. We can not see how enabling the landlords to recover their costs of enforcement of all covenants could be sensibly regarded as an “improvement”. Whilst it greatly improves or enhances the landlords’ position, it can not properly be regarded as an improvement for the tenants. It is more likely, as Miss Zographos submitted, to worsen the tenants’ position because it shifts all financial risk from landlord to tenant, the landlord (and its agents) now having an incentive (or no disincentive) to enforce, rather than reach a consensual agreement or otherwise, knowing full well, as they would, that all costs would be contractually recoverable from the tenants via the service charge whose flats would be at risk of forfeiture for non payment. 97. Whilst the reasonableness of the decision to enforce, the costs of enforcement and any settlement would be open to challenge under sections 19 and 20C of the Landlord and Tenant Act 1985 (“the 1985 Act”) in the LVT, that is a recipe for litigation and for the landlord to run up further costs which would themselves be recoverable under the new provisions unless challenged under the said sections. As is well known, the section 20C jurisdiction is not intended to displace the contractual right of the landlord to recover his costs of enforcement and the discretion of the LVT under that section may only be exercised where it is “just and equitable in the circumstances” which is not a results-driven jurisdiction: see for example Schilling v Canary Riverside Development PTE Limited LRX/26/2005 (Lands Tribunal). It frequently results in tenants having to pay the landlords’ and their own costs because the landlord can not be shown to have acted unreasonably. Indeed, sections 19 and 20C were in part introduced to ameliorate the rigours of the contractual right of a landlord to recover its costs via the service charge. 98. The present contractual certainty of the landlords not being able to recover their costs from tenants through the service charge would be replaced by a certainty that they would be recoverable from all tenants subject to successful challenge under the 1985 Act. It follows, as again submitted by Ms Zographos and also Mr Barnett and Mr Clyne, that this would fundamentally alter the relationship between landlord and tenant, particularly where neither landlord is owned nor controlled by the tenants. As Mr Lederman acknowledged, the new provisions go beyond what the appellants intended or thought they had agreed with the majority tenants. The proposed variations may well be appropriate where the landlord is a single asset company owned and controlled by the tenants with no source of revenue other than the service charge and rent. But there was no evidence to justify this here. 99. In our view, the fact that the proposed variations go beyond what the appellants wanted or thought they had agreed with the majority tenants of itself indicates that the landlords do not regard these provisions as being required to achieve the object otherwise they would actually have asked for them. Weight should of course be given to the fact that the majority of tenants support these new provisions. However, for the reasons already stated, there is certainly a doubt in our minds as to whether or not they properly understood the full nature and extent of the new provisions when casting their ballots. Whilst there are only three active respondents, there were 17 opponents, 48 unreturned and 1 neutral. Even if they did understand what they were asking for, there is no explanation or evidence as to why they are requesting more than the landlords want. 100. We can not help but observe that the progress of these applications and the appeals offer a vivid illustration of why in this case the variations should not be permitted. In fact, the applications are the second attempt to vary the Leases, the first attempt having been aborted after issuance. These applications however have been most unfortunate: whilst strongly based in respect of replacing the communal heating and hot water systems, in our judgment they have been poorly based and ill thought out in respect of the non-consequential variations. If the variations were already in place, the landlords would have a contractual right to recover all of its costs from the tenants. That right, we consider, would be of substantial value to the landlords. The tenants (or the minority tenant respondents) would then only be able to challenge those costs under sections 19 or 20C of the 1985 Act. The success of such a challenge may well be difficult and would trigger more litigation. It was also unfortunate that Mr Goldreich referred to the wrong clause numbers in the Leases, and that the wrong clauses were reproduced in the annexures to the applications. 101. Conclusions on the first and second questions : In our judgment the appellants failed before the LVT and, had we been deciding the matter by review, would have failed before this Tribunal to discharge their burden of proving the object or objects to be achieved by the non-consequential variations; that the variations achieve such object or objects; or that whatever the object or objects are they can only be satisfactorily achieved by varying all of the leases. 102. On analysis, and in reality, it was apparent to the LVT and is apparent to this Tribunal that the only real object of the non-consequential variations was to get the communal heating and hot water systems replaced. In that respect, we respectfully agree with the observations of the LVT that the non-consequential variations went far beyond what was justified by, or necessary to achieve, replacement of the communal heating and hot water system. We also agree with the observations of the LVT that it is “inappropriate” for landlords to use such circumstances as an opportunity to substantially improve its contractual position – i.e. to demand new covenants unrelated to and not consequent upon achieving the object. In the rest of paragraph 47, the LVT was properly considering the thinking or reasoning behind that state of affairs, and concluded that replacing the communal system was not just in the tenants’ but also in the landlords’ interests, a sentiment from which Mr Lederman did not dissent save to say that it was up to the parties what compromise deal was reached, and a sentiment which on the basis of the evidence before the LVT is well founded. 103. As we have said, Mr Lederman urged upon us that great weight should be placed on the will of the majority, and the view of the minority should not be able to thwart that will unless there were truly exceptional circumstances. Once, as here, the applicants have proved that they have the requisite section 37(5) majorities, it is for them to adduce evidence to prove that the variations satisfy section 37(3). Merely saying they agree to them is insufficient: the jurisdiction does not provide a statutory framework for implementing majority decisions or compromises with landlords but to vary leases in order to satisfactorily achieve a given object or objects. If the applicants fail to make a case out under section 37(3), their will has not been defeated by the minority: the majority (and landlords) has failed to bring itself within the statutory jurisdiction. 104. For the sake of completeness, we will briefly state what our decision would have been had we found that the applicants, or appellants, had satisfied the requirements of section 37(3) in relation to the non-consequential amendments. There would then be three further questions to determine. 105. The third question : would the proposed variations be likely substantially to prejudice the respondents to the applications (all non-supportive tenants) such that it can not be adequately compensated by an award under section 38(10) (section 38(6)(a))? 106. In our judgment, they would. Sight must not be lost of the fact that variations to leases interfere with the contractual bargain which the original parties reached and form the basis upon which their successors (landlords and tenants) acquired and will continue to acquire their respective interests. One of the singular aspects of these Leases is that the landlords have covenanted to repair and maintain the Etons but at the cost of the tenants. How, when, by whom and at what cost the work is done is decided by the landlords over whom the tenants have no control as (so far as we are aware) the tenants do not own them. The landlords decide how to spend the tenants’ money. At common law there is little control or basis for complaint by the tenants. As already observed, statute has intervened to fill the gap to some extent by, principally, sections 19, 20 and 20C of the 1985 Act. We say “to some extent” because whilst the 1985 Act ameliorates the rigours of the law of contract, the source of the rigour is the landlord’s contractual right to recover costs from the tenants and that base-line right is not altered by the Act. 107. It is in our judgment a quite exceptional, and substantially prejudicial, thing to enable the landlords to recover its costs not only of recovering the service charge but also of enforcement of all of its covenants from all tenants through the service charge, particularly where the landlords are not owned or controlled by the tenants and there is no evidence that the landlords can not afford to do so or that the absence of such covenants has caused any difficulties in the past or will or is likely to in the future. It would enable the landlords to decide how, when, by whom and at what cost they should enforce covenants. That would shift all the financial risk and liability from the landlords to the tenants whose only control would be proceedings via the LVT and all the time, trouble, cost and uncertainty that that involves. The appellants have put forward no justification for such a major risk and liability transfer and all that that entails. In our view the proposed variation would significantly affect the way in which the landlords, given virtual financial impunity (subject to any 1985 Act challenge), make future decisions about whether to enforce and pursue breaches of covenants. 108. If new clauses 5(ii) and paragraph 12/13 were allowed, it is difficult to see why new clause 6(8)(b) would be required. In any event, enabling tenants to require the landlords to institute proceedings without the tenants taking personal financial liability as envisaged would, we agree with the respondents, serve to shift the risk from the complainant tenant to all other tenants even where the complaint had nothing to do with them and was specific to the complainant. The landlords would have little incentive to refuse. 109. If the object or objects of the non-consequential variations is or are separate and distinct from the replacement of the communal heating and hot water system, they must be considered separately and the fact of substantial prejudice prevents these variations being granted, the language of section 38(6) being mandatory. If their object is the replacement of the communal heating and hot water systems, the result is the same as there is substantial prejudice. We doubt whether that prejudice should be weighed or balanced against the undoubted and substantial benefit of providing individual heating and hot water systems because section 37(3) is not directed at endorsing essentially commercial agreements or compromises between landlord and majority tenants, but even if it were to be so weighed or balanced the non-consequential variations should still not be allowed because they are not required to achieve that object and their prejudice, long term and wide ranging as it is, outweighs the benefits of individualisation of the communal heating and hot water systems. 110. Either way, in our judgment an award of compensation would not afford adequate compensation. Whilst there was no evidence (valuation or otherwise) on the point, we are of the view that this sort of prejudice is not capable of financial compensation, affecting as it does the most important aspect of leasehold property and the attendant costs not just on a one off basis but for the remainder of the unexpired Lease terms, many of which exceed 950 years. 111. We should say that we have been concerned by, and given thought to, the absolute and now somewhat modified position of the landlords. As we ventilated at the hearing in discussions with Mr Lederman, it seems to us that if the landlords were now to refuse to go forward with the proposal to provide the tenants with individual boilers, which we understand would be cheaper and save the tenants a large amount of money in the future, that would afford the tenants the grounds to apply to the LVT for a pre-emptive order under sections 19 et seq of the 1985 Act that abandoning the proposals and simply replacing the communal system was unreasonable so that any costs over and above those incurred in providing individual boilers would be unrecoverable. Alternatively the tenants could make a similar application after the works had been completed. We simply mention this for completeness, without making any further observations. 112. The fourth question : is there any other reason it would not be reasonable in the circumstances for the variations to be effected (section 38(6)(b)? On the evidence before the LVT, it was unnecessary to make any finding under this sub-section. Mr Lederman submitted that the sort of things this provision was addressed to was a situation where there were grounds for serious concern that say the ballot had been procured by fraud, undue pressure or the tenants had otherwise been misled. 113. Were we making our own decision by review, the fact that the evidence to the LVT and, initially, to this Tribunal, described the nature and extent of the non-consequential variations inaccurately, whether wittingly or unwittingly, we would have found that it would not have been reasonable in the circumstances to allow these variations. We would make this finding because such inaccuracy casts doubt upon the reliability of the ballot and precisely what it was the majority tenants in fact thought they were agreeing to. This conclusion is buttressed by the landlords’ apparent shift in intention from not proceeding with the provision of individual boilers at all if they did not get the non-consequential variations they demanded to possibly doing so: had the majority tenants so realised and been balloted accordingly, perhaps they would not have voted for the non-consequential variations, remembering, of course, that there was no separate vote for them because all the variations were put to them as a “take it or leave it” package. We would therefore refuse to exercise the discretion on this ground alone. In making these findings we bear in mind that any such decision would be by review only, which does not permit the adduction of new evidence. However, in our judgment that does not prevent us from taking cognisance of the landlords’ misunderstanding and change of position. 114. The fifth question : in all the circumstances, should the Tribunal exercise its discretion and make an order varying the Leases? The only point we make here is that even if a tribunal is not prohibited from making an order by a section 38(6) finding, it must still exercise its discretion. If there are no section 38(6) factors, it may well conclude that the variations should be allowed. But not necessarily so. Given our previous conclusions this question does not arise in this appeal. Conclusion 115. For the reasons we have given above we are not satisfied that the object to be achieved by the non-consequential variations can not be satisfactorily achieved unless all the Leases are varied to the same effect. If we are wrong in that conclusion we would not make an order varying the Leases because it appears to us that the non-consequential variations would be likely to substantially prejudice the respondents and other persons who are not parties to the application and that an award under section 38(10) would not afford them adequate compensation and in any event it would not be reasonable in the circumstances for the variations to be effected. In our opinion the LVT’s Decision was sufficient and correct and we dismiss the appeal. Reasons for refusal of application to amend the Application 116. On the second day of the hearing, Mr Lederman applied for permission to amend the applications so that if the Decision was set aside this Tribunal should reach its own decision but based upon the non-consequential variations limited to recovery of the appellant landlords’ legal costs of recovering the service charge and of enforcing covenants pursuant to the new clause 6(8)(b) through the service charge. 117. We refused this application for the following reasons. Firstly, it would in our judgment be grossly unfair to the respondents to have to now deal with what in effect was a completely new application especially where they as, albeit sophisticated, lay persons had prepared evidence for and addressed their minds to the applications in their original form. Secondly, the respondents should have time to take legal advice on the nature and effect of the new non-consequential variations. Thirdly, the majority tenants would need to be informed of developments: they may now seek to adopt a different position now the landlords may not require the non-consequential variations as the price of replacing the communal systems; or they may wish to support the non-consequential variations in their current form in which case it would be important for their reasons to be before the tribunal. Fourthly, there comes a time in litigation where it really is too late for a party to amend its pleadings. And this is just such a case. It is in our judgment an unacceptable position for the landlords to have made applications to the LVT and then appealed its refusal to grant variations which the landlords neither understood nor wanted. All of the evidence and submissions had been addressed and prepared on the basis of the original variations. It is neither appropriate nor fair to allow the appeal to be heard on a new basis or indeed to adjourn to allow further evidence to be put forward. If the appellants wish to obtain the non-consequential variations in a reduced form, they will have to start again. Dated 8 October 2012 His Honour Judge Nigel Gerald A J Trott FRICS

Shellpoint Trustees Ltd & Anor v Barnett & Ors [2012] UKUT 375 (LC)

(b) :

Cited in 8 later judgments