Case No. CCRTF 98/0911/2
Neutral Citation Number: [1999] EWCA Civ 3049
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CLERKENWELL COUNTY COURT
(MR ASSISTANT RECORDER THOMAS QC)

Royal Courts of Justice
Strand
London WC2A 2LL

Date: Monday 26 April 1999

B e f o r e:

LORD JUSTICE ROBERT WALKER
MR JUSTICE BLOFELD

- - - - - -

CHARLOTTE MARTIN
and
JONATHAN SEALE
Claimants/Respondents
- v -

MARYLAND ESTATES LIMITED
Defendant/Appellant
- - - - - -
(Computer Aided Transcript of the Palantype Notes of
Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 421 4040
Official Shorthand Writers to the Court)
- - - - - -
MR K LEWISON QC and MR M DRAY (Instructed by Messrs Malthouse Chevalier, London, SW18 4DX)) appeared on behalf of the Appellant.

MR S GALLAGHER (Instructed by Messrs Keeble & Passmore, Colchester) appeared on behalf of the Respondent.
- - - - - -
J U D G M E N T

LORD JUSTICE ROBERT WALKER:  This is an appeal from an order of an assistant recorder, Mr Christopher Thomas QC, made in the Clerkenwell County Court on 23 January 1998.  

The case is a landlord and tenant matter.  The appellant, Maryland Estates Limited ("Maryland"), is the landlord.  The respondents, Miss Charlotte Martin and Mr Jonathan Seale, are tenants of two of the three flats into which 24 Ribblesdale Road, London, N8 ("the house") has been converted.  The house was described by the judge as a "two-storey Victorian, end of terrace, traditionally constructed property, with a three-storey back addition .... built in about 1880 and converted into flats in about 1980." 

The three flats are known as the studio flat, the ground floor flat and the first floor flat.  The studio flat plays almost no part in this matter, except to explain the 16 per cent of the service charge not borne by the tenants of the other two flats.  Miss Martin has a lease of the ground floor flat for a term of 125 years from 24 June 1978, although her lease is not actually before the court.  Mr Seale has a lease of the first floor flat for a term of 99 years from 24 June 1978.  The leases are in similar form; that before the court is the lease of the first floor flat granted on 8 December 1978 at a premium of £8,500.  It contains the relevant provisions which are relevant for present purposes: 

1.  The main structural parts of the building (but not the windows) are reserved out of the demised premises to the landlord (clause 1).

2.  There is a ground rent, initially £25 a year rising by stages to £100 a year, payable quarterly (clause 1).

3.  The tenant is responsible for internal repairs and maintenance, including windows and window frames (clause 2(3)).

4.  The landlord has a right of entry for the purpose of carrying out repairs (clause 2(7)).  

5.  The tenant covenants to pay the yearly sum of £100 as a basic service and maintenance charge by half-yearly instalments (clause 3(b)).

6.  The amount of this charge is reviewable (clause 3(b)(iv)).  Clause 3(b)(iii) is in the following terms: 

	"If the expenditure incurred by the Lessors in any accounting period (as hereinafter mentioned) of twelve months in respect of the matters set out in the Second Schedule hereto (hereinafter called 'the annual cost') and after making a suitable transfer to a Reserve Fund in respect of future anticipated expenditure exceeds the aggregate amount payable by the lessees of all the Flats in the building in the accounting period in question (hereinafter called 'the annual contribution') together with any unexpended surplus as hereinafter mentioned and if a certificate of the amount by which the annual cost exceeds the annual contribution and any such unexpended surplus is served upon the Lessee by the Lessors or its Agents then the Lessee shall pay to the Lessors within twenty-one days of the service of such certificate forty two per centum (hereinafter called 'the excess contribution') of the amount of such excess shown thereon which shall be recoverable from the Lessee in case of default as if the same were rent in arrear PROVIDED THAT if in any accounting period as aforesaid the annual cost is less than the annual contribution the difference (being the unexpended surplus) shall be accumulated by the Lessors and shall be applied in or towards the annual cost in the next succeeding or future accounting period or periods as aforesaid." 

7.  The landlord covenants to carry out repairs to the main structure of the house, including the roof, and to carry out external decoration (clause 4).  

The matters set out in the Second Schedule mentioned in clause 3(b)(iii) include the cost to the landlord of complying with its obligations of complying with clause 4 as well as insurance and other matters.  

The case in the court below was largely concerned, and has in this court been wholly concerned, with the statutory provisions about service charges contained in sections 18 and following of the Landlord and Tenant Act 1985, to which I now turn.  Section 18 contains definitions of service charge and relevant costs.  I need not set those out in full.  Section 19(1) lays down an overriding general rule as to reasonableness.  I quote: 
"(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period-

(a)  only to the extent that they are reasonably incurred, and

(b)  where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;

and the amount payable shall be limited accordingly."

 The following subsections of section 19 contain ancillary provisions, including a provision giving the County Court jurisdiction to make declarations for the purposes of the section.   That was the jurisdiction which was invoked by Miss Martin and Mr Seale in their applications to the Clerkenwell County Court.  Maryland was respondent, but counterclaimed for money judgments and money relief, including possession.  

This court has been told that there have been other proceedings between some of these parties which have reached this court on a previous occasion.  Those proceedings were involved with the interaction of a landlord's claim for forfeiture with a tenant's claim to enfranchisement.  We are not concerned with them except as background.  Section 20, as substituted by the Landlord and Tenant Act 1987 and as since amended by statutory instrument, provides for estimates and consultation.  I quote subsections (1) and (2): 

"Where relevant costs incurred on the carrying out of any qualifying works exceed the limit specified in subsection (3), the excess shall not be taken into account in determining the amount of a service charge unless the relevant requirements have been either-

(a)  complied with, or
(b) dispensed with by the court in accordance with subsection (9);

and the amount payable shall be limited accordingly.

(2)  In subsection (1) 'qualifying works', in relation to a service charge, means works (whether on a building or on any other premises) to the costs of which the tenant by whom the service charge is payable may be required under the terms of his lease to contribute by the payment of such a charge."  

The limit under subsection (3), as amended and as now relevant, is £1,000.  Subsection (4) reads: 

"The relevant requirements in relation to such of the tenants concerned as are not represented by a recognised tenants' association are-

(a)  At least two estimates for the works shall be obtained, one of them from a person wholly unconnected with the landlord.

(b)  A notice accompanied by a copy of the estimates shall be given to each of those tenants concerned or shall be displayed in one or more places where it is likely to come to the notice of all those tenants.

(c)  The notice shall describe the works to be carried out and invite observations on them and on the estimates and shall state the name and the address in the United Kingdom of the person to whom the observations may be sent and the date by which they are to be received.

(d)  The date stated in the notice shall not be earlier than one month after the date on which the notice is given or displayed as required by paragraph (b).

(e)  The landlord shall have regard to any observations received in pursuance of the notice; and unless the works are urgently required they shall not be begun earlier than the date specified in the notice." 

Subsections (5), (6) and (7) apply where there is a recognised tenants' association, which is not this case.  Subsection (9) provides: 

"In proceedings relating to a service charge the court may, if satisfied that the landlord acted reasonably, dispense with all or any of the relevant requirements."

Maryland employs a company called Ladygate Management Limited ("Ladygate") to manage its properties, which appear to be extensive.  The two companies have a common director, Mr John Bebbington.  On 25 July 1994 a firm of chartered surveyors, Robertson and Co,  instructed by Ladygate, wrote to Mr and Mrs Yates, the tenants of the studio flat, enclosing a schedule of works described as "works of an external repairing and redecoration nature which are required under the terms of your lease".  The letter invited the tenants to make observations and put forward the name of any contractor whom they wished to be asked to tender.  The letter said that a formal section 20 notice would be served later.  
	
On 23 August 1994 solicitors in Colchester acting for Miss Martin wrote to the surveyors informing them of their interest and stating:

"Your letter dated 25 July has just been forwarded to us having been delayed by holidays.

Presumably you have also written to the other lessees in similar style."

The solicitors said that they were also acting for Miss Yates, the tenant of the middle flat (which must be another name for the studio flat).  The solicitors asked in their letter to be given more time to make comments, but made the immediate comment that the work seemed expensive and questioning whether it was really necessary. 

Ladygate replied promptly to that letter, stating: 

"It is not our intention to carry out any works which are not necessary for the good maintenance of the property."

The correspondence then seems to have gone into abeyance until 26 November 1994 when Ladygate gave notice, as it had said it would, under section 20, of its intention to carry out works identified in an enclosed schedule for which estimates had been obtained from two builders, G P Construction Limited, who had quoted £9,474.00 excluding VAT, and Lawrence Builders (London) Limited, who had quoted £8,165.00 excluding VAT.  The letter said that Ladygate proposed to accept the lower estimate, but that work would not begin before 1 March 1995.  

The estimates and the schedule of works on which they were based, were not, as the judge put it, "based on a worst case scenario".  The judge made the finding that that was not an unreasonable basis on which to obtain the estimates.  Indeed he went further and indicated that it would, or might have been, unreasonable to have put forward estimates on a worst case scenario.  

As often happens, the two estimates were not directly comparable because of the inclusion of contingency sums and other matters.  The works themselves were considered in great detail in the court below with the assistance of expert evidence from two surveyors which the judge found very helpful.  I need not go into that detail.  The court is primarily concerned on this appeal with two points of principle.  

On 24 February 1995 Ladygate instructed the selected builders to start work on 1 March.  It seems that nothing much further had been heard from the tenants or their solicitors, although there is some reference to a letter (not before the court) written on 7 February 1995 by Miss Martin to Ladygate.  On 2 March, after the builders had started to erect scaffolding at the house, there was a considerable burst of activity.  Miss Martin telephoned the builders, Mr Bebbington of Ladygate faxed a letter to Miss Martin's solicitors and half a dozen further letters were exchanged by fax during the course of that day.  The solicitors disputed whether Miss Martin had ever received the formal section 20 notice.  Mr Bebbington said that she had acknowledged the notice on 7 February.  

On 15 March, after some further correspondence, Miss Martin's solicitors sent a letter to which Mr Lewison QC, appearing with Mr Dray, for the appellant, attaches importance, stating that in their client's view it would be unreasonable for the landlord to proceed with any works.  The upshot was that the commencement of the work was delayed, but it proceeded on or about 21 March, despite protests that the majority of the tenants did not want the work done, especially in view of their right to acquire Maryland's freehold under the Leasehold Reform Housing and Urban Development Act 1993.  It seems that the work finished during the second half of May 1995, although the judge made no precise finding about that.  There has been, as I have mentioned, other litigation concerned with the tenants' rights under the 1993 Act.  

What is of central importance to this appeal is that, at a fairly early stage, it became apparent to the builders and to the surveyor that the state of the house, and in particular the state of its roof, was significantly worse than had been supposed when estimates were obtained otherwise than on a worst case scenario basis.  On 30 March 1995,  which is little more than a week after the work had started, the surveyor at Robertson and Co  wrote to Mr Bebbington:

"I enclose a series of photographs for your perusal which are indicative of the poor condition of windows and roof surfaces.  According to Ms Martin the property was in 'good order'.  

You will determine from Lawrence Builders' tender that extra over charges have been provided for complete roof recovering works and the additional expenditure has been authorised."

The additional work was eventually described formally and in detail in what was described as "Variation Order No 1" dated 12 June 1995.  There were 31 items in that variation order, three of which were simply omissions of works with nothing substituted.  The balance of additional costs was £7,318 excluding VAT.  Some of this work was on the replacement of windows and works associated with the replacement of windows for which the tenants were liable under clause 2(3).  On 27 June 1995, the surveyor wrote to Mr Bebbington:

"24 Ribblesdale Road, London, N8

I am concerned, and I am sure it has not passed your notice, that the final cost of works on projects generally are invariably in excess of the estimated cost of works that are reported to you from time to time.

To a degree, this arises as a result of the inability to make a sufficient inspection prior to the preparation of specifications, if one were to await the convenience of lessees who are suspicious to say the least, no works would be undertaken.

I am aware that if there is expenditure in excess of £1000 on a property it is necessary to reconsult with the lessees unless, it can be established that the resultant delays would make the works more costly.  When works are in progress with caution I provide supplementary instructions to contractors, but I am aware that a series of minor instructions can result in fairly substantial costs over and above those originally reported.

It is the contract in the above property which brings to my attention the problem.  This is a matter I feel where we should discuss a system so that you are readily briefed and are not placed in what may be an embarrassing situation with the lessees."

That letter shows that the surveyor was, as one would expect, well aware of the position under the Housing Act 1985.  In due course Ladygate prepared service charge computations and accounts, including the cost of the additional works.  It was, it seems, on 7 July 1995 that the tenants first became aware, at least formally, of the additional works and of their costs.  Miss Martin and Mr Seale issued proceedings in the Clerkenwell County Court in January 1996, seeking declarations that the cost of all the works was not reasonably incurred, and/or that the works were not of a reasonable standard, and/or that the service charge was not reasonable.  That is the effect of the complicated composite form of pleading that was used.  Maryland defended the proceedings and counterclaimed.  

The case was heard on 20 - 22 January 1998.  The judge did not make any declaration.  He awarded Maryland £6,129 plus interest against Miss Martin as against a claim for £8,042, and he awarded £3,417 plus interest against Mr Seale as against a claim for £5,146.  He ordered Miss Martin and Mr Seale to pay the costs and adjourned Maryland's claim for possession.  That outcome reflects the judge's findings that the costs of the surveyor had been reasonable and reasonably incurred, that the tenants were liable under clause 2(3) of their leases for the cost of replacing the windows, and, generally, that the works had been reasonable and necessary, and had been carried out in a reasonable manner and with reasonable expenditure.  

Essentially, therefore, the issues, and the only issues, which the judge decided in favour of the tenants rather than landlord are those on which the landlord now appeals to this court:  that is the judge's decision not to dispense with all or any of the statutory requirements under section 20(9) in relation to the additional works carried out (otherwise than on the windows) and his ruling on the £1,000 limit.  

As regards the additional works, the judge divided them into three categories, the first of which were items on which, as the judge found, the requirements of section 20 had been complied with, albeit in a somewhat roundabout way.  The second category was the windows for which the tenants were directly liable under their own repairing covenants.  There is no respondent's notice in respect of either of those matters.  

That left the third category of additional works not covered, as the judge held, by the original section 20 notice.  Section 20(9) it will be recalled gives the courts a discretion:

"....if satisfied that the landlord acted reasonably"

to dispense with "all or any of the relevant requirements". 

Mr Gallagher submits, and it seems to me plainly right, that section 20(9) does not create any general dispensing power in the court.  It is a two-stage process under which the court's discretion to dispense with all or any of the statutory requirements arises only if the court is satisfied that the landlord has acted reasonably.  The judge summarised the rival submissions of the advocates before him and expressed his conclusions as follows:

"I detect from Mr Bebbington's evidence and from Robertson & Co's letter to Mr Bebbington of 2nd June 1995 and the letters sending the Final Account that the Lessees were regarded as not co-operative and with a potential for obstruction, and that lack of action to communicate was deliberate, and deliberately in place by way of the operating of Robertson & Co and Ladygate.  The lack of awareness in fact by Ladygate for lack of consultation does not, in my judgement, in this case form a legitimate ground for effectively arguing that no action by way of consultation or communication constitutes a landlord acting reasonably for the purpose of Section 20(9).  Acting reasonably in my judgment requires to be advanced by the Respondent for the very reason that Section 20 was not complied with; so to say that to comply with the relevant requirements would have delayed the works and potentially increased the costs does not assist.  'Acting reasonably' is acting reasonably in all the circumstances where Section 20 is not complied with.

Actions may not be limited to the aspects in Section 20 but certainly would include them.  Here no action was taken by the Landlord to consult or communicate with regard to the additional works, and I have therefore reached the conclusion that the Landlord cannot be regarded as having acted reasonably within Section 20(9)."  

Accordingly the judge held that his discretion under section 20(9) did not arise at all.  He did not, therefore, have to consider how he should exercise it.  

Mr Lewison accepts that the ante-penultimate sentence which I have quoted ("'acting reasonably' is acting reasonably in all the circumstances where section 20 is not complied with") is the right test.  Mr Lewison does not challenge the finding of fact that Ladygate deliberately decided not to liaise with the tenants as regard the additional works because of their lack of cooperation and potential for obstruction.  

Nevertheless, Mr Lewison challenges the assistant recorder's conclusions on grounds set out in five paragraphs of the original skeleton argument, but capable of being summarised by reference to the tenant's failure to take the opportunity to make observations on the original works at either stage when they were consulted, either informally or formally.  Their negative attitude and obstructive behaviour generally would, it is said, have made any consultation exercise fruitless.  To that Mr Lewison has in his oral submissions added further criticisms of the judge's reasoning based on his discounting of the importance of delay; on his apparent forgetfulness (at this point in the judgment) of what he had previously said about the worst case scenario; and on his not taking into account the fact that the landlord was under a positive obligation to carry out these works.  

It seems to me that all those points would have been highly relevant had the section 20(9) threshold been crossed and the judge's discretion to dispense become exercisable.  However, the attitude taken on behalf of Maryland by Ladygate and the surveyor, although it may have been entirely understandable in human terms because of their perception of the tenants' attitude, is not one which can be regarded as reasonable for the purposes of section 20(9).  

The basic statutory purpose of section 20 is, as the sidenote indicates, consultation with tenants on estimates provided to them.  Parliament has recognised that it is of great concern to tenants, and a potential cause of great friction between landlord and tenants, that tenants may not know what is going on, what is being done, ultimately at their expense.  Here, the cost of the works was almost doubled by the work in the variation order, although Mr Lewison correctly points out that some were in respect of windows, and some (the category 1 works) were held to have been covered, at least indirectly, by the original section 20 notice.  

Nevertheless a sum of £3,200, or thereabouts, was on any view for works which were simply not covered by the original section 20 notice either directly or indirectly.  It was known from 30 March 1995 at the latest that further works were going to be necessary.  Nevertheless a deliberate decision seems to have been taken somewhere in the line of authority, for which Maryland must ultimately accept responsibility, not to inform the tenants, still less to seek any sort of consultation with them.  Even though it was no doubt impracticable to comply with all the requirements of section 20(4), that cannot be justification for a total disregard of all of them and a deliberate decision not to tell the tenants what was going on. 
It seems to me that the points made by Mr Lewison, although there would be some substance in them, would really go to the second stage of exercise of discretion if it ever became exercisable.  

Finally there is a short but not an easy point of construction as to the £1,000 limit under section 20(3) as amended.  The judge held at the end of his judgment:

"The Service Charge bill was presented as a whole, as a complete bill in relation to all the works.  Thus the excess relates to the cost above £1,000 and does not arise for separate consideration in relation to the additional works." 

In other words, the £1,000 was a limit covering the entire works carried out between 21 March and late May 1995 and was not separately available for the additional works.  Mr Lewison has submitted that that is the wrong approach.  The legislative purpose of the £1,000 limit, he submits, is not to provide a level of trivial or de minimis expenditure but to provide a margin of error.  Mr Lewison did not argue for an extreme fragmentation of works in a major scheme of refurbishment, which plainly would be absurd.  He did however urge that a commonsense approach would lead to the conclusion that there were here two distinct batches of qualifying works.

I readily agree that a commonsense approach is appropriate and necessary upon this point.  I would also agree, if such was Mr Lewison's submission, that Parliament has not made it entirely clear how one batch of qualifying works is to be divided from another.  The definition of "qualifying works" indicates what their quality is but not how one batch is to be divided from another.  

It seems to me, on what is I hope is a commonsense approach, that it is significant that the surveyor and the builder evidently regarded the additional work as a variation of the original contract.  The judge himself found that some of the "variation order no 1" works were in fact covered by the original section 20 notice.  

Mr Lewison submitted that the judge's approach on this point was inconsistent.  He suggested that if the further works were seen as part of the original batch of works, then the case was truly one of non-compliance with section 20 as regards the entirety of the works, which was not how the judge had seen it.  If on the other hand the further works were regarded as a new batch, then there was complete non-compliance with section 20 as regards that new batch,  but a further £1,000 limit should be available.  That is a subtle argument but I am not persuaded by it.

It seems to me that since Parliament has not attempted to spell out any precise test, a commonsense approach is necessary.  The judge was influenced by the fact that all the works were covered by one contract.  That would not to my mind always be a decisive factor but, on the particular facts of this case, that was the right approach.  The legislative purpose of the limit is to provide a triviality threshold rather than to build into every contract a margin of error which may in some cases, including this case, simply duplicate a contingency sum which has already been provided for.  

Although I do not completely accept the judge's reasoning on the second point, I do think that he came to the right conclusion on the second point also.  I would therefore dismiss this appeal.  

MR JUSTICE BLOFELD:   A landlord acting reasonably is simply a landlord doing what a reasonable landlord would do in all the relevant circumstances.  Here the landlord appreciated that these tenants were unhappy with the proposed repairs that were the subject matter of this section 20 notice.  The works started about the third week of March 1995.  Shortly thereafter the landlord was aware that substantial extra work would need to be done.  He took a deliberate decision not to inform the tenants as the learned assistant recorder found.  He did not inform the tenants until early July 1995.  The scheme envisaged by sections 18, 19 and 20 of the Landlord and Tenant Act 1985 is to require the landlord to give the tenant detailed information about the proposed extra works to be carried out by him, the landlord.  Here the extra works, reasonable and necessary as they were, and as the assistant recorder found, were themselves substantial both in themselves and in relation to the cost of the original specification.  Despite the tenants' earlier failure to respond to the landlord's communications and their later objection to the works proposed in the section 20 notice, I am satisfied that a reasonable landlord would in these circumstances have informed the tenant of the extra work it was proposed to carry out.  

I, too, agree with my Lord on this aspect of the case and would dismiss the appeal.  I also agree with him on the second aspect of the case and have nothing to add on that.  

Order:  Appeal dismissed.  Legal Aid taxation of appellants' costs.