PAS Property Services Ltd v HAYES [2014] UKUT 0026 (LC)

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE

UT Neutral citation number: [2014] UKUT 26 (LC)

Venue LEASEHOLD VALUATION TRIBUNAL FOR THE, NORTHERN RENT ASSESSMENT PANEL

Between

PAS Property Services Ltd

HAYES

MR & MRS S D HAYES Respondents

Graeme Wood instructed by JB Leitch Solicitors for the Appellants

The Respondents in person

[1]This is an appeal from a decision of the Leasehold Valuation Tribunal for the Northern Rent Assessment Panel (“the LVT”) dated 1 October 2012 in which it held that the cost of gas supplied to a common heating system could not be recovered by way of a service charge from the lessees of 33, 36, 49 and 68 White Croft Works, 69 Furnace Hill, Sheffield, South Yorkshire, S3 7AF.

[2]PAS Property Services Limited (“the Landlord”) acquired the freehold of White Croft Works in about August 2009. The applicants to the LVT (respondents to this appeal) are Mr and Mrs Hayes (“the Tenants”) who are the joint lessees of the four apartments the subject of this appeal pursuant to leases granted on various dates between 2007 and 2008. The lease before the LVT relates to apartment 33 and was granted on 25 April 2008 for a term of 125 years from 1 January 2007 (“the Lease”). It was agreed that the leases of the other apartments are on similar terms.

[3]The Landlord sought to recover by way of service charges for the cost of gas supplied to a common heating system which heats apartments 33 and 36 but not apartments 49 and 68. The Tenants disputed the basis on which the Landlord was entitled to recover this cost and applied to the LVT for a determination as to their liability to pay for these and other costs for the service charge years 2007 to 2012. There is no appeal against the LVT’s decision in respect of any other costs.

[4]Permission to appeal to the Upper Tribunal (Lands Chamber) was granted by Her Honour Judge Karen Walden-Smith on 30 April 2013. The appeal was ordered to be dealt with by way of review. Factual background

[5]White Croft Works was constructed during 2007 and 2008 and comprises the refurbishment of an existing building to provide 26 apartments and a new building comprising 44 apartments, a ground floor shop unit and car park. Apartments 33 and 36 lie within the new building and apartments 49 and 68 lie within the refurbished building.

[6]Heating and hot water is provided to apartments in the refurbished building in a conventional manner through boilers in each individual apartment pursuant to contractual arrangements between individual occupiers and a third party utility supplier. Heating and hot water is provided to apartments in the new building through a common heating system (“CHS”). There is a boiler in the basement of the new building to which gas is supplied pursuant to a contract between the Landlord and a third party gas supplier. Water heated by that boiler is then pumped around the new building on a continuous loop through individual apartments. The pipes feed hot water into radiators in the apartments which provide air heating. The hot water also passes through a coil pipe in individual water tanks in each apartment in order to heat water. The hot water from the CHS then passes out of the apartment and continues around the new building. Thus the CHS is known as a closed system, none of the hot water supplied is drawn off by occupiers of the flats.

[7]Each apartment contains a thermostat and timer which enables the occupier to stop hot water from the CHS coming into the flat when it reaches a certain air temperature. In this event hot water from the CHS simply by-passes the flat until the thermostat indicates that heating is again required. The timer enables the occupier to choose times of the day and days of the week when hot water from the CHS is to be supplied or to turn it off completely. The supply of hot water from the CHS to individual water tanks can be similarly controlled.

[8]In addition, each apartment in the new building has a Switch2 meter (see paragraph 12 below) which was installed at the time of construction that enables the quantity of heat supplied to the apartment through the CHS to be measured. However, at present the meters are not being monitored.

[9]Hot water from the CHS is also supplied to radiators in the common parts of the new building in order to provide air heating.

[10]There is no dispute that at the date the Tenants entered into contracts for the leases the nature of the heating arrangements to the new and refurbished buildings described above was clear either from inspection or plans.

[11]Initial bills for service charges did not include any item for gas supplied to the CHS. After the Landlord acquired the freehold it sought to claim by way of service charge from all lessees in the new building and refurbished building for the cost of gas supplied to the CHS in the new building.

[12]On 31 October 2011 the Landlord obtained a quotation from ENER-G Switch2 Limited (“Switch2”) for the monitoring of the meters in the apartments in the new building. Switch2 would bill and be paid by individual occupiers for the heat consumed in their apartment as measured by the meter and then forward the money to the Landlord. The Landlord would be responsible for obtaining gas from a third party supplier and paying for it from the money recouped by Switch2. Although Switch2 operate a credit control process, they act as the Landlord’s agent and recovery of any unpaid bills remains the responsibility of the Landlord. Switch2 would charge a set up fee of £1,500, an annual charge which works out at £77.17 per apartment and additional fees for any debt collection work. No contract with Switch2 has been entered into by the Landlord because it did not want the ultimate responsibility for recovering the cost from lessees. The LVT decision

[13]The Tenants’ case before the LVT was that there was no provision in the Lease enabling the Landlord to recover the cost of gas supplied to the CHS through the service charge which is levied on all apartments at White Croft Works, without distinguishing between those in the new building and refurbished building. They submitted that the cost of gas supplied to the CHS should only be paid for by the lessees of apartments in the new building as those in the refurbished building derived no benefit from it at all, having their own heating systems. Further, it was said that lessees of the new building should only be charged for the cost of heat to each individual flat as measured by the meter and billed directly from a third party gas supplier.

[14]The Landlord’s case before the LVT, as before this Tribunal on appeal, was that by virtue of various provisions in the Lease the Landlord was entitled to claim the cost of gas supplied to the CHS by way of service charge levied on all apartments in White Croft Works, even though that was unfair because only some of the lessees derived a benefit from it

[15]The LVT accepted the Tenants submissions that there were no provisions in the Lease enabling the Landlord to recover for the cost of gas supplied to the CHS through the service charge. It said this:

“55. The starting point for the Tribunals deliberations was the terms of the leases. Was it a clear term of the leases that the Landlord would provide a communal heating system or district heating system to be fuelled by gas? Was it a clear term of the leases that this system would only heat the interior of the apartments in the new build area, but that the cost of the provision of that system should be divided amongst all the apartments on the complex, even apartments that derived no benefit from that system? 56. There is no clear term in the leases that provides for such a system. The words communal heating or district heating are not mentioned. The only mention of gas is in clause 1.1.5.6 upon which the Landlord seeks to rely. This is a very general “sweeper clause”. 57. The Tribunal reminded itself that in the case of Investors’ Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 , at 912H to 913F, Lord Hoffman had set the rules for interpretation. “The principles may be summarised as follows: Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.” 58. Taking this approach it is clear to the Tribunal that these leases do not convey to a reasonable person that they would be expected to pay through a service charge for the cost of heating leaseholders’ apartments by way of paying towards a communal heating or district heating scheme. This view is enhanced when taking into account the additional information available to the leaseholder at the time of the contract, namely, the Sales Handbook and service charges budget, neither of which made any reference to such a scheme. 59. Further, it is evident from the physical features and subsequent actions that the Landlord did not intend to recover these costs as service charges. He installed Switch 2 monitoring equipment to enable billing of actual consumption directly to the occupants of each apartment; no provision was made to recover the costs within the original budget. No costs were included in the service charge accounts for the early years. 60. The Landlord now seeks to rely upon a very general sweeper clause. The Tribunal reminded itself as to the approach to be taken to such clauses. They will usually be narrowly construed. Lloyds Bank Plc v Bowker Orford [1992] 2 EGLR 44. Especially so where the Landlord seeks to recover costs not specifically referred to elsewhere. Jacob Isbicky and Co v Goulding and Bird [1989] 1 EGLR 236. 61. The communal heating system and Switch 2 monitoring meters were not added at a later stage, they were planned as part of the development. 62. Further there is guidance provided in the RICS Service Charges 2 nd Edition published in 2008 by the RICS where at 1.7.2 the following is written, “A sweeper clause cannot be used to make good a drafting defect in the lease nor can it be used to create an additional obligation on the part of the tenant to pay for a service that was in contemplation at the date of the grant of the lease but was not included within the service charge provisions. 63. The Tribunal decided that there is no clear and unambiguous term of these leases that authorises the Landlord to charge for the gas used in a service charge. The sweeper clause referred to and the whole of the lease was considered by the Tribunal and the Tribunal decided that there was no provisions that could make such a service charge payable.”

The Law

[16]The LVT has jurisdiction to determine liability to pay service charges by virtue of s.27A of the Landlord and Tenant Act 1985 (“the 1985 Act”), subsection (1) of which provides as follows:

“An application may be made to a Leasehold Valuation Tribunal for a determination whether a service charge is payable and, if it is, as to – (a) the person by whom it is payable, (b) the person to whom it is payable, (c) the amount which is payable, (d) the date at or by which it is payable, and (e) the manner in which it is payable.”

[17]The 1985 Act also makes provision for service charges to be paid only to the extent that they are reasonably incurred and where they are incurred on the provision of services and works which are of a reasonable standard, see s.19. However in the present case, no question of reasonableness arose, the LVT determining pursuant to s.27A(1) that no service charge was payable pursuant to the Lease.

[18]There was no dispute between the parties as to the correct legal approach towards interpretation of the Lease. In Investors Compensation Scheme Ltd v West Bromwich Building Society

[1998] 1WLR 896

Lord Hoffman set out the following general principles of construction at pp.912-913:

“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the “matrix of fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. (4)The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 . (5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v Salen Rederierna A.B [1985] AC 191, 201: “If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.””

[19]The Tenants emphasised the importance of construing the Lease as a whole against the factual background which existed when the leases were granted in accordance with Sheldon Square Residents Association v St George North London Ltd

[2011] UKUT 13 (LC)

paragraphs 46 and 47. For its part, the Landlord emphasised that it is not the function of a court or tribunal to rewrite the bargain which the parties have made relying on Arnold v Britton

[2013] EWCA Civ 902

in which Davies LJ said this: “The court cannot properly, under the guise of a process of interpretation, introduce new and other terms to mend a bad bargain: which is, in reality what the court is being asked to do. To do so would involve distortion of all correct legal principles. Whatever the hopes and aspirations of these lessees, understandable though they may be, the court cannot simply come up with some “fair” results irrespective of the terms of the contract and in the absence of any claim for rectification.” paragraph 56. The Lease

[20]In order to understand the LVT’s decision and the parties’ submissions it is necessary to look at the terms of the Lease in a little detail. The demised premises are referred to as the Apartment and the demise includes the rights set out in the second schedule including:

“2. The right… to use such facilities (if any) within the Building and/or the Estate that may from time to time be designated by the Landlord for use (with or without others) by the tenants of the Building in general.”

The Estate is defined in clause 1.1 as the land comprised in a title number and shown on a plan (which identifies the whole of the development at White Croft Works) and continues:

“being the pathways forecourts boundary walls and the Communal Bin Store gardens and grounds surrounding the same for use of the owners and occupiers of the Building… but excluding (i) the Apartment (ii) the Common Parts and (iii) those parts of the Building which are from time to time demised to a tenant or occupied by a tenant”

The Building is defined as “the building constructed on or within the Estate of which the Apartment form part shown edged green on Plan B.” This plan shows the green edging embracing both the new building and refurbished building. Accordingly “the Building” for the purposes of the Lease means both the new building and the refurbished building.

[21]The tenant’s covenants are set out in the Fourth Schedule. The covenants as to payment of rent etc are as follows:

“1. Rents To pay without any deduction set off or abatement whatsoever the Rent the Service Charge the Insurance Rent and all other payments due on the dates and in the manner set out in this Lease by banker’s standing order or direct debit as the Landlord shall require. 2. Outgoings 2.1 To pay and discharge all existing and future rates taxes and assessments and outgoings of whatever kind (whether Parliamentary parochial local or otherwise) now or to be hereafter during the Term imposed or charged on the Apartment or on the Landlord or the Tenant or any owner or occupier in respect thereof except such as may relate exclusively to the reversion of the Landlord or the receipt of rents. 2.2. To pay forthwith on demand a fair and proper proportion (to be determined by the Landlords Surveyors acting reasonably) of any outgoings expenses or assessments which may be imposed or assessed on the Apartment (or any part thereof) together with any part or parts of the Building and/or the Estate (such sum to be deemed to be additional rent and to recoverable as such) 2.3 (Without prejudice the generality of the foregoing) to pay and discharge the cost of all water electricity gas and telephone (including all meter rents) used or consumed in the Apartment.”

The phrase “Service Charge” is defined in clause 1.1 as having the meaning given to it in paragraph 1.1.10 of the Eighth Schedule.

[22]Paragraph 1.2 of the Eighth Schedule contains a covenant on the part of the Landlord that he shall “subject to the payment by the Tenant of the Service Charge perform the Services throughout the term.” The Services are defined as the Part I Services and the Part II Services (paragraph 1.1.4). The Part I Services are set out in paragraph 1.1.2 and comprise matters such as repair, maintenance, cleaning, lighting, refuse disposal relating to the Estate. The last Part I Service is:

“1.1.2.8. any other services relating to the Estate or any part of it reasonably provided by the Landlord from time to time during the Term and not expressly mentioned.”

[23]The Part II Services are defined in paragraph 1.1.3 and include matters as repair, maintenance, cleaning, lighting, refuse disposal from the Building and Common Parts. The last of the Part II Services is defined as: “1.1.3.12. any other services relating to Building and the Common Parts or any part of them reasonably provided by the Landlord from time to time during the Term and not expressly mentioned.

[24]The Eighth Schedule goes on to define “Additional Items” in paragraph 1.1.5 which largely comprise professional fees incurred in the performance of the Services but also includes the following: “1.1.5.6. the cost of the supply of electricity gas oil or other fuel and water for the provision of the Services and for all purposes in connection with the Estate and/or the Building and/or the Common Parts or any part thereof.

[25]The Eighth Schedule then defines Annual Expenditure, meaning all reasonable and proper costs expenses etc incurred by the Landlord in the provision of the Part I Services, the Part II Services and the Additional Items. Provision is then made for payment of the Service Charge which is defined as 1.25% of the Annual Expenditure, paragraph 1.1.10. In fact the percentage payable has been altered by agreement after it was discovered that the total of the percentages specified in the leases of all the apartments exceeded 100.

[26]Reference was also made in argument to paragraph 1.4.1 which provides:

“The Landlord may withhold add to extend vary or make any alteration in the rendering of the Services or any of them from time to time provided that the same complies with the principles of good estate management and is reasonable in all the circumstances.”

[27]It is evident from the structure of the service charge provisions that the cost of providing services to the whole of White Croft Works is aggregated and the lessees obligation is to pay a fixed percentage of those total costs. Thus the service charge provisions do not differentiate in any way between the cost of services provided for the benefit of apartments in the new building and those provided for the benefit of apartments in the refurbished building. Thus, by way of example, lessees of apartments in the refurbished building are required to contribute towards the costs of cleaning and lighting the common parts of the new building. The appeal

[28]Mr Wood, counsel on behalf of the Landlord, submitted that the LVT had misconstrued the Lease and that the Landlord was entitled to recover the cost of gas supplied to the CHS pursuant to three separate provisions. He relied upon the Fourth Schedule paragraph 2.3, the Eighth Schedule paragraph 1.1.3.12 and the Eighth Schedule paragraph 1.1.5.6. He submitted that given the dependence of the apartments in the new building on the supply of hot water through the CHS, it was obvious that there should be (and was) an obligation on the part of the Landlord to supply that hot water and a correlative obligation on the part of the lessee to pay for it.

[29]As to the Fourth Schedule paragraph 2.3, Mr Wood submitted that gas was used in the Apartment even though not consumed there. He submitted that the provision was wide enough to impose an obligation on the Tenants to pay the cost of water etc provided by third parties but also to reimburse the Landlord if they were paid for by him. However, he conceded that if the Landlord’s entitlement to charge for gas consumed by the CHS was dependent on this provision, the Landlord could only recover the costs from lessees in the new building as no gas would be used in Apartments in the refurbished building. Mr Wood also conceded that in this case there was an implied term of the Lease that the Landlord would supply hot water through the CHS to apartments in the new building.

[30]The argument based on Schedule 4 paragraph 2.3 was not raised before the LVT and it was common ground that a claim for payment on this basis could not be through the service charge. The Landlord’s claim for payment of gas supplied to the CHS which was the subject of the Tenants’ application to the LVT was squarely based on the service charge provisions. It follows that if the Upper Tribunal concludes that the cost may able be recovered through this provision in the Lease and not the service charge, the appeal must fail. However neither party suggested that it would be inappropriate for me to decide this issue as they both recognised it was important for them to have guidance as to how these costs could be recovered, if at all.

[31]As to the Eighth Schedule paragraph 1.1.3.12, Mr Wood submitted that the provision of gas to the CHS fell clearly within the wording “any other services” and that the service was supplied to “the Building and the Common Parts or any part of them” which included the apartments. In support of that submission he relied upon a previous LVT decision dated 15 October 2010 between the Landlord and the lessee of apartment 17 which is in the new building. In that case the LVT decided that the cost of supplying gas to the CHS could be recovered pursuant to paragraph 1.1.3.12 and 1.1.5.6 of the Eight Schedule to the Lease. After referring to paragraph 1.1.3.12 the Tribunal said this:

“16. The Tribunal considers this provision to be sufficiently broad to include the provision of heating and hot water for the benefit of the individual apartments and the common parts…”

After referring then to paragraph 1.1.5.6 the LVT continued:

“17. It follows that if (as the Tribunal has found) the Services may include the provision of heating and hot water, the Additional Items may include the cost of gas consumed for this purpose, and that cost may be attributed to the service charge provided that it was reasonably and properly incurred.”

The LVT went on to decide that although it would fairer if only lessees of apartments in the new building could be required to pay for gas applied to the CHS, the effect of the service charge provisions was that the costs were recoverable from the lessees of all the apartments.

[32]As to paragraph 1.1.5.6, Mr Wood submitted that if the supply of gas to the CHS was a service falling within paragraph 1.1.3.12, then the first part of 1.1.5.6 included the cost of supplying gas for the provision of that service as an Additional Item. However, he also submitted that, even if 1.1.3.12 did not apply, paragraph 1.1.5.6 contained a free-standing right for the Landlord to recover the cost of gas supplied to the CHS. That paragraph refers to the cost of supplying gas etc “for the provision of the Services” and “for all purposes in connection with… the Building… or any part thereof.” An obvious central purpose of supplying gas to the building would include the provision of space and water heating. Further, the supply of gas for the purpose of heating the Apartment was made clear by the reference to the words “any part thereof” in relation to the Building.

[33]As to the LVT’s decision, Mr Wood submitted that it had started off by asking itself the wrong question in paragraph 55 and that what matters is what the words found in the Lease mean when considered fairly and purposefully in their context. It was not necessary for the Lease to refer expressly to the CHS in order for the cost of gas supplied to it to be recoverable and one would not expect a Lease to descend to the level of detail which the LVT envisaged The fact that the precise amount of heat supplied to individual apartments could be monitored did not mean that this was the only means by which costs were recoverable. Paragraph 1.1.5.6 of the Eighth Schedule could not described as a “sweeper clause” to be narrowly construed as it was explicit that the cost of gas was included.

[34]Mr Hayes did not dispute that the cost of supplying gas to the CHS to provide heating to the apartments in the new building could be recovered by the Landlord. However, he submitted that it could only be recovered pursuant to the Fourth Schedule paragraph 2.3 and not via the service charge. He accepted that gas supplied to the CHS is “used or consumed” in the apartments in the new building for the purposes of paragraph 2.3. Further, paragraph 2.3 was without prejudice to the generality of paragraph 2.2 so that the amount which could be recovered was a ‘fair and proper’ proportion. He submitted that the combined effect of these provisions, properly construed in the factual matrix, was that lessees could only be charged for the cost of heat actually used in each apartment as measured by its meter. He recognised that the total costs would be more than if the meters were not used and the cost was apportioned in another way e.g. by floor area, but he submitted that the total cost would still be less than if each apartment had its own heating system because of the efficiencies of the CHS.

[35]As to the Eighth Schedule, Mr Hayes submitted that the CHS was not mentioned anywhere in the Lease nor was the supply of gas to it referred to in the definition of Services or Additional Items. He supported the LVT’s characterisation of paragraph 1.1.3.12 as a sweeper clause and submitted that it could not be used to charge for a service which is not mentioned anywhere else. In so far as paragraph 1.1.5.6 was dependent on paragraph 1.1.3.12 it did not assist. Further, the reference to the cost of supplying gas “for all purposes in connection with the ….. Building” had to be read in the context of the Lease as a whole and in the factual context, relying on Sheldon Square Residents Association . The factual context was that each apartment in the new building was provided with a Swtich2 meter which enabled precise monitoring of heat consumed in the apartment. That this was the intended method by which gas supplied to the CHS should be paid for was supported by the fact that the Legal Handbook provided to prospective purchasers of the apartments contained an indicative service charge schedule which did not include gas and that as a matter of fact service charge demands had not included gas until the Landlord acquired the freehold. Again, paragraph 1.1.5.6 could not be used to charge for a service which is not mentioned anywhere else. Furthermore, it did not make business commonsense for an apartment in the refurbished building to have to pay for gas consumed in the new building from which it received no benefit.

[36]Mr Hayes was not prepared to concede that the cost of heating the common parts in the new building through the CHS could be recovered through the service charge. However, he indicated that he would not object to paying a fair proportion of those costs.

[37]He also relied on a letter dated 20 April 2009 from the former managing agents which states:

“The system, when commissioned, will allow for the charging of gas based on each individual unit’s consumption. It is envisaged that this system will be implemented within the next 6 months. For the period since practical completion of the development and the end of March it has been necessary for us to recharge consumption based on the most equitable way which is a rate per sq ft based upon each individual unit size.”

He also relied on a more recent letter dated 13 August 2013 from the current managing agents to the effect that the Lease provides that the cost of supplying gas to the CHS is to be raised as a rent not a service charge. That was not before the LVT and Mr Wood opposed the application to admit it in evidence. In my judgment it does not take the case any further and it is not necessary for me to refer to it any further.

[38]Mr Hayes submitted that when considering the question of business commonsense, this strongly indicated that lessees should only pay for heating actually consumed as measured by the meters which would provide an incentive to be economical. He drew attention to the observation of the LVT in paragraph 17 that the whole area of the new building was uncomfortably hot. The Landlord’s method of attempting to recover the costs through the service charge encouraged excessive use of heat giving rise to significant additional financial and environmental costs.

[39]As for the previous LVT decision, Mr Hayes submitted that the Tribunal had misunderstood the factual position and did not appreciate that flats in the refurbished building had individual separate heating systems and were not supplied with heat through the CHS as evidenced by the reference in paragraph 18 to not all apartments being equipped with functioning gas meters. However he prayed in aid the Tribunal’s indication that it would be desirable to move to a system of individual metering as soon as practicable. Decision

[40]As the basis of the Landlord’s attempts to recover the cost of gas supplied to the CHS to date has been through the service charge and it was to this that the LVT decision was directed I consider this issue first. The purpose of a service charge is to enable a lessor to recover the cost of works and services supplied for the benefit of more than one lessee where buildings (or estates) are in multiple occupation. When considering the meaning which the service charge provisions of a 125 year lease of a residential apartment in a block of 68 apartments would convey to a reasonable person I consider that the lessee would not normally expect to pay for the costs of services supplied to individual occupiers as opposed to services supplied for the benefit of more than one lessee. Gas, water, electricity etc consumed in individual apartments is normally supplied direct from a third party provider with whom the occupier enters into an individual contract. While leases commonly include in the demise the right to use service media in the building (as here, see the Fourth Schedule paragraph 3), they do not generally impose an obligation on the lessor to provide the gas, water or electricity itself.

[41]This general expectation is reflected in the definition of Services in the Eighth Schedule to the Lease. The Part I Services relate exclusively to the Estate and the Part II Services relate exclusively to the Building and Common Parts. Although, unlike the definition of the Estate, the definition of the Building does not expressly exclude the apartments demised to individual lessees, it is clear that the Part II Services are not intended to include services provided within individual apartments. They include maintaining the main structure of the Building, service media, the lift, alarms, CCTV, bins etc. For example, paragraph 1.1.3.6 refers to “cleaning, treating, polishing and lighting the Building and the Common Parts to such standard as the Landlord may from time to time reasonably consider adequate”. Neither party suggested that this included the cleaning and lighting of individual apartments. Where it is intended that the obligation should extend to an apartment it is specifically mentioned, as in paragraph 1.1.3.10 which states:

“cleaning as frequently as the Landlord shall reasonably consider adequate the exterior of all windows and window frames in the Common Parts and in any apartments within the Building where the same cannot reasonably be accessed from the interior of any apartment within the Building”

[42]It is in this context that “the Building” in paragraph 1.1.3.12 has to be construed. In my judgment the reference to “any other services relating to the Building and Common Parts or any part of them” would not lead a reasonable person to conclude that it embraced the provision of heat to individual apartments through the CHS. In my judgment the LVT’s characterisation of this provision as a ‘sweeper clause’ is correct. Notwithstanding its apparently wide language, such a clause has to be construed in the context of the suite of provisions of which it forms part, as in Lloyds Bank v Bowker Orford

[1992] 2 EGLR 44

at p. 45K-M. There Mr David Neuberger QC, as he then was, held that the phrase “any other beneficial services which may properly be provided by the lessors” did not embrace repair or redecoration of common parts because the immediately preceding provisions of which it formed part had the character of services rather than physical works.

[43]On the other hand, in my judgment the provision of heat to the common parts in the new building is a service which properly falls within the ambit of paragraph 1.1.3.12. This would relate only to the common parts rather than individual apartments and be of benefit to all the lessees in the new building. It would be in keeping with the nature and provision of the services to which paragraph 1.1.3 as a whole relates. I recognise that the lessees of apartments in the refurbished building would have to contribute towards it as well even though they derive no benefit from it. However, this is a common feature of a number of the Services described in the Eighth Schedule and is an inevitable consequence of the decision to characterise White Croft Works as a single entity for the purpose of the Lease. For example, the Part I Services include the provision of and lighting to a lift which is in the new building from which occupiers of the refurbished building derive no benefit.

[44]As for paragraph 1.1.5.6, the first part only includes the cost of supplying gas for the provision of the “Services” which are specifically defined in paragraph 1.1.4 to mean the Part I Service and the Part II Services. If the provision of heating to individual apartments does not fall within paragraph 1.1.3.12 as a Part I Service (and no other Part I or Part II Service was relied upon) then the cost of supplying gas for that purpose lies outside the first part of paragraph 1.1.5.6. Further, the fact that gas might be required to provide one of the defined services does not lend support to the argument that paragraph 1.1.3.12 can be read widely as the Landlord argues for the reasons already given.

[45]Turning to the reference to supplying gas “for all purposes in connection with the… Building or any part thereof”, however widely this expression is construed, in my judgment it cannot include the cost of supplying gas to heat individual apartments. The character of most of the “Additional Items” is that they are ancillary or consequential to the Part I and Part II Services rather than freestanding. There are exceptions, for example rates and the cost of dealing with statutory requirements (paragraphs 1.1.5.5 and 1.1.5.9). In my judgment, insofar as an “Additional Item” is a freestanding cost of a different character it must be clearly identified. Further, the second part of paragraph 1.1.5.6 has to be construed in the context of the first part. It does not mean that the Landlord may supply and charge for the cost of electricity, gas and oil to any individual apartment and in my view the phrase “for all purposes in connection with” means, in effect, in connection with the management of the Estate, Building and Common Parts. It does not embrace a service is supplied to individual apartments for which no provision is made anywhere else in the Eighth Schedule.

[46]Mr Wood placed some reliance on paragraph 1.4.1 of the Eighth Schedule which permits the Landlord to vary the Services from time to time. I do not consider that this takes the matter any further. This provision should again be construed in the context of the definition of the Part I and Part II Services. The supply of heat to individual apartments from the CHS is not a service relating to the Estate (Part I Service) or to the Building or Common Parts (Part II Service) construed in the way I have explained. Any new or additional service provided pursuant to paragraph 1.4.1 would have to be of a similar character.

[47]This is not to say that provision may not be made for the recovery of the cost of a CHS by way of service charge. However, in my judgment clear words will be required to do so. For example, in Levitt v London Borough of Camden

[2011] UKUT 366 (LC)

a dispute arose as to the nature of a lessee’s liability to contribute towards the costs of a CHS. However, in that case there was a specific covenant on the part of the landlord to supply hot water for domestic purposes to the flat by means of the boiler and installations serving the block. The lessee then covenanted to pay a service charge which included the cost of providing all of the services the landlord was required to provide under the terms of the lease.

[48]I do not consider that the previous LVT decision should be accorded much weight. I note from paragraph 3 that it was determined by the written representation procedure and as such, the members of the Tribunal did not have the benefit of detailed oral argument as to the proper construction of the service charge provisions as I have had. Further, I concur with Mr Hayes analysis of paragraph 18 of the decision which to my mind indicates clearly that the Tribunal were under the misapprehension that the CHS covered all of the apartments and not merely those in the new building. Further, the analysis in paragraphs 14 to 17 of the decision concentrates exclusively on the wording of paragraphs 1.1.3.12 and 1.1.5.6 of the Eighth Schedule and does not consider the meaning of those provisions in the context of the Eighth Schedule and the Lease as a whole.

[49]Nevertheless, it is evident from what I have already said that the Landlord is entitled to recover from the lessees the cost of the supplying gas from the CHS in order to heat the common parts as a Part II Service within paragraph 1.1.3.12. However, I do not consider that that avails the Landlord in this appeal. The service charge demands do not purport to identify the cost of providing such heating. In some circumstances it might be possible for the LVT on a rehearing to form its own judgment as to the appropriate proportion of the heating costs, for example by reference to floor area. However, Mr Hayes informed me and it was not disputed by Mr Wood that the provision of heating to the common parts had been turned off for some time. Further, as Mr Hayes also pointed out, heat is provided to individual apartments for the purpose of heating air as well as water, whereas it is only provided to the common parts for the purpose of heating air, so the common parts are likely to use a smaller proportion in terms of floor area than the apartments. In addition it appears from the Switch2 quotation that the common parts do not have a meter. For these reasons I have concluded that it would be impossible for the LVT in this case to identify a proper or fair proportion of the cost of supplying heat to the common parts. I also note that, in the event that I found that only the cost of heating the common parts is recoverable by way of service charge, Mr Wood did not wish the case to be remitted to the LVT.

[50]Turning to paragraph 2.3 of the Fourth Schedule, as I have already said it was common ground between the parties that this enables the Landlord to recover the cost of gas supplied to the CHS to heat individual Apartments. I agree. Although covenants to pay outgoings often relate to a lessees obligation towards third parties, it is clear that paragraph 2.2 requires the lessee to reimburse the Landlord in respect of the outgoings to which it refers. This is clear from the reference to payment of a fair and proper proportion which is to be determined by the Landlord’s Surveyors who would have no remit to determine how much should be paid to a third party. Paragraph 2.3 starts with the phrase “without prejudice to the generality of the foregoing” indicating that the requirement in paragraph 2.2 to pay a proportion of “any outgoings, expenses or assessments” is intended to include, amongst other things, the matters for which provision is made in paragraph 2.3. This imports two matters, first, the requirement to reimburse the Landlord as opposed to being a covenant only to pay a third party and second, that the amount to be reimbursed should be a fair and proper proportion as determined by the Landlord’s Surveyors acting reasonably.

[51]The dispute between the parties was as to how the amount charged should be calculated. The covenant in paragraph 2.3 is to pay ‘the cost of all gas used or consumed in the Apartment.’ As a matter of language, that is not apt to embrace the cost of gas used or consumed in other apartments. Not only does paragraph 2.3 refer to meters but as a matter of fact each apartment in the new building has, and at the time the Lease was granted had, a meter through which it is possible to calculate precisely how much heat and therefore gas has been used or consumed in that apartment. Although identification of a fair and proper proportion of the gas used or consumed in each apartment is a matter for the Landlord’s Surveyor, acting reasonably, as things stand at the moment there is no means of calculating such a fair and proper proportion other than by monitoring consumption through the meters. That is because there has been no attempt to date to assess how much heat each apartment uses, whether through monitoring of meters or otherwise. Simply apportioning the cost by floor area would not be a fair and proper proportion because it would not necessarily bear any relation to the amount of gas used or consumed in an individual apartment. This will relate to matters such as the number of occupants (more people use more hot water), whether an apartment is occupied all of the time and personal choice as to the level of heating required. Therefore, on the basis of the evidence before me, the only reasonable decision which the Landlord and his Surveyor could take is that a fair and proper proportion of the gas used or consumed in each apartment is the amount of heat measured by the meters.

[52]However, it is important to note that the decision under the Lease as to what is a fair and proper proportion is one for the Landlord’s Surveyor, acting reasonably and not the court. Provided the decision is reasonable, it does not matter that other reasonable decisions could have been taken, see Westminster City Council v Fleury

[2010] UKUT 136 (LC)

at paragraph 10. The fact that, on the basis of the evidence before me, the only reasonable decision would be to charge on the basis of consumption measured by the meters does not necessarily mean that will always be the case. For example, it may be that after monitoring consumption through meters for a while, it appears that fluctuations in use even themselves out over time or can be related to other factors so that dividing the total cost by some other factor, such as per person in occupation, provides a reasonable assessment of the heat used in each apartment. It would plainly be in the interests of the lessees for a fair method of dividing the cost to be identified which does not require use of the meters because of the additional cost entailed.

[53]It is right that if consumption is monitored through the meters the total cost associated with the CHS will increase because by virtue of the costs charged by Switch2. Mr Wood submitted that this was a reason why the Landlord should not be required to charge for the gas through a Switch2 contract. However, this was the method envisaged at the time of construction of the new building and grant of the leases which require the charge to be a fair and proper one for gas used or consumed in each apartment. Unless and until an alternative reasonable method of calculating that is devised, the monitoring of the meters is the only method available. Where alternative reasonable methods of calculating a fair and proper proportion of gas used or consumed in each apartment do exist, it would clearly be open to the Landlord to take into account the relative costs of each in deciding which method to use.

[54]Further, it was not suggested that these additional costs could not be recovered. Paragraph 2.3 of the Fourth Schedule states that the lessee is obliged to pay the cost of all meter rents, which would include the administrative costs associated with their monitoring. Further, Switch2 costs could also be described as expenses for the purposes of paragraph 2.2. Such costs would again be restricted to a fair and proper proportion determined by the Landlord’s Surveyors acting reasonably.

[55]For all the above reasons this appeal is dismissed.

[56]A letter concerning costs accompanies this decision, which will become final when the question of costs is decided. The parties attention is drawn to rule 10 of The Tribunal Procedure (Upper Tribunal)(Lands Chamber) Rules 2010 (SI 2010 No.2600) as amended by The Tribunal Procedure (Amendment No.3) Rules 2013 (SI 2013 No.1188). In addition, any representations as to costs should deal at this stage with s.20C of the 1985 Act. Dated 27 January 2014 Her Honour Judge Alice Robinson

PAS Property Services Ltd v HAYES [2014] UKUT 0026 (LC)

Cited in 4 later judgments