Shinereach Ltd v No Respondent [2006] EWLands LRX 94&_97_2005 (02 October 2006) 

LRX/94/2005
LRX/97/2005

LANDS TRIBUNAL ACT 1949

SERVICE CHARGES – Landlord and Tenant Act 1985 s27 – landlord’s costs of application to LVT for declaration – appeal allowed – costs of £18,081.33 recoverable through service charge

IN THE MATTER of an APPEAL from a DECISION of the LEASEHOLD VALUATION TRIBUNAL of the MIDLANDS RENT ASSESSMENT PANEL

BY	SHINEREACH LIMITED	Appellant

Re: 1 – 11 and 12 – 29 Penny Court, Tower View Road,
Great Wyrley, Walsall, West Midlands
and
37 – 43 Tower View Road, Great Wyrley, Walsall, West Midlands

Before: P R Francis FRICS

Sitting at: Procession House, 110 New Bridge Street, London, EC4V 6JL
on
23 August 2006

Miss Camilla Lamont, instructed by Dawsons, solicitors of London WC2, for the appellant

The following cases are referred to in this decision:
Reston Ltd v Hudson [1990] 2 EGLR 51
Canary Riverside v Schilling[2005] LT ref LRX/65/2005 (Unreported)

	DECISION
1.	These are two appeals, heard together, from decisions of the Leasehold Valuation Tribunal of the Midlands Rent Assessment Committee (“the LVT”).   The appellant landlord, Shinereach Limited, is the freehold owner of two blocks of flats in Walsall, West Midlands.    1-11 and 12-29 Penny Court, Tower View Road, Wyrley, Walsall (“Penny Court”) together with 37-43 Tower View Road (“Tower View Road”).  They are, respectively, blocks of 30 and 12 flats all of which are let on long leases.  Miss Camilla Lamont of counsel appeared for the appellants and there were no respondents.   The appeals relate to the costs incurred by the landlord in applying for, pursuing, and obtaining declarations under section 27A of the Landlord and Tenant Act 1985 (“the 1985 Act”) in respect of major works to both properties.  Those costs amounted to £18,081.33 (inc VAT) but, in its decision of 7 April 2005, the LVT held that only £3,850 plus VAT should reasonably be paid by the respondent tenants, through the service charge.    Permission to appeal was granted by the LVT on 11 August 2005 on the grounds that the point was one of general public importance.
Background
2.	The appellant acquired the freehold of both blocks of flats on 1 October 1999 at which time they were suffering from lack of maintenance by the previous owner, and on 3 May 2002 South Staffordshire District Council gave notice under section 215 of the Town and Country Planning Act 1990 requiring extensive works to be carried out to the properties within 2 years of 28 June 2002 (the effective date).   Tecton Services Ltd were instructed to survey the premises, prepare schedules of works and undertake a full tendering process.   Following that exercise, tenders were accepted for a two-stage refurbishment of Penny Court at a cost, inclusive of Tecton’s 10% supervision charge and VAT, of £99,466.98 (subsequently amended to £101,534.99) and for Tower View Road at £41,721.56 inclusive.   The relevant consultation process with the tenants, required under section 20 of the 1985 Act, was completed by February 2004 and there was no issue in that regard.   
3.	There are two types of standard lease, those granted prior to the acquisition by Shinereach, and those granted subsequently.   The relevant sections of the Shinereach leases that deal with annual service costs are set out in clause 3.5, and (where relevant) provide that those costs shall include:
“3.5.1	the costs of and incidental to the observance and performance of each and every covenant on the part of the Landlord contained in clause 5 hereof (except the covenant in clause 5.1)   
3.5.5	all fees charges expenses and commissions payable to any solicitor accountant surveyor valuer or architect whom the landlord may from time to time employ in connection with the management and/or maintenance of the Building including the cost of causing to be prepared statements of the Annual Service Cost and Statements of each Tenant’s amount in respect thereof
3.5.14	any other sum properly incurred by the Landlord in connection with the management of the Estate
The relevant clauses of the older leases are 3(5)(a) and (c).
4.	In accordance with those provisions, service charge demands were issued to the tenants of Penny Court in the sums of £1,250 and £2,134.47 (two tranches) for advance payments, and £1,250 and £2,226.66 on the tenants of Tower View Road.   By August 2004 it was evident to the landlord that insufficient advance payments had been forthcoming to allow it to undertake the works; it did not have funds of its own to facilitate a bridging process, and there was only limited provision in the leases for the reimbursement of interest on borrowings.    As a result, on 2 August 2004, the landlord made applications under section 27A of the 1985 Act, and a pre-trial review was held before the LVT on 15 September 2004 at which the principal issues in dispute were identified.   Some of the tenants had raised substantial objections to the applications and directions were given for pleadings, experts’ reports and witness statements.  One of the directions stated that failure to comply [with these directions] may result in prejudice to a party’s case, as would, in particular, failure to provide evidence at the hearing before the tribunal.     The landlord duly produced witness statements from Mr Garwood (Shinereach) and Mr Woolley (Tectons) in respect of each property, together with all the consultation documents and a trial bundle.  As at October 2004, the reserve fund on Penny Court stood at £11,784.90 and on Tower View Road it was £6,226.32.
5.	In its decision, the LVT made a determination upon each of the areas in dispute and decided (a) that the nature and extent of works proposed were reasonable, (b) the consultation requirements had been complied with, (c) the cost of the works was reasonable, (d) the tribunal had no jurisdiction over the timetable, (d) an advance service charge payment was payable and interest on financing costs [if any were to be incurred] was not recoverable under the terms of any but the [latest] Shinereach leases.   
6.	On the question of costs (of the section 27A application) the LVT said:
“The Tribunal determined that whilst it was reasonable for the Applicant to obtain initial advice from its solicitors and for them to deal with the preparation and service of the application, a substantial element of the costs incurred since August 2004 were related directly to the preparation of the Applicant’s case and the protection of its interest rather than matters related directly to the management of the property.   The Tribunal does not accept the argument by the Applicants that the application was necessary as a result of the lessees being unwilling to pay for the proposed major works before the contract was placed.   The purpose of applying to the Tribunal prior to incurring the costs of major works of this nature is to minimise the potential of lessees subsequently challenging the recoverability of such expenditure as being reasonable.   That is a perfectly proper course of action for the lessor (in this case, the Applicant) to take in order to secure a declaration that the works have been properly procured and are reasonable in terms of both scope and cost.   Such a ruling by the Tribunal does not however place the lessees under any greater obligation to pay the appropriate proportion of such expenditure; that is something which is provided for in the leases (or not, as the case may be).   Consequently, the application must be considered as a measure principally designed to protect the Applicant’s interests, and as such, significant elements of the legal costs are not considered to be reasonably chargeable to the service charge or the Respondents.   In other words, while the Applicant may have quite properly regarded it as sensible to apply to the Tribunal for the determinations sought, the principal purpose was to protect themselves from the possibility of not being able to recover substantial monies spent on the refurbishment and repair of the subject property at some time in the future.   As such, it does not seem to the Tribunal reasonable that the lessees should bear the major part of the legal expenses involved in the process.”
They went on to award the applicants £1,975 for initial legal costs, £525 for the review of the leases and advice on their interpretation, and disbursements for photocopying, hearing fee and travel in the sum of £1,350, all totalling £3,850 plus VAT.    No application was made by the tenants under section 20C of the 1985 Act to make an order preventing the landlord seeking to recover its costs of the application as part of the service charge.
7.	In responding to the application for leave to appeal to this Tribunal, the LVT said it was not persuaded by the arguments advanced by the applicant’s solicitors, and stood by its initial decision.  They went on to say:
“Indeed, if the arguments put forward…are correct, it is possible to envisage a scenario under which a landlord could apply to the Tribunal for the type of confirmation sought in this case as a routine measure, secure in the knowledge that that even in the absence of any real dispute, its costs would be chargeable to the tenants.   It is not suggested that this was the case in the present instance, but it must be emphasised that there was no dispute from the Respondents regarding [a number of issues]…”
They continued:
“The principal decisions of the Tribunal relate to the reasonableness of the costs of the proposed works and therefore their recoverability under the contractual terms of the leases.   They do not represent any enhanced or separate grant of greater authority to secure payment…
…However, it is considered that this issue is one of much wider public interest and could have application in many other cases.  Consequently, the Tribunal grants leave to appeal.”
Appellant’s case
8.	The appellant’s case was that it had been justified in seeking a section 27A declaration as the lessees had been unwilling to pay the costs of the proposed major works in advance, although there was no material dispute at the LVT hearing about either the need for, or the estimated cost of the proposed works.   The LVT determined that the costs of the works to the two blocks were reasonable, that they were recoverable from the lessees and could be collected in advance of the works actually being undertaken.   The only matter being contested in this appeal was the LVT’s decision to limit the recoverability of the landlord’s costs associated with the application.  Miss Lamont submitted that the approach of the LVT in that respect was wrong as a matter of law.   It is axiomatic, she said, that the Tribunal would not have been able to reach the determinations that it had (in favour of the applicant) if the landlord had not complied with the directions that had been given at the PTR, and presented evidence at the hearing.   The LVT appeared to have applied some overarching concept of “reasonableness” to the exercise, and had concluded that the majority of the costs were not “reasonably chargeable”.   However section 19(1) of the 1985 Act does not require, or even permit, the tribunal to address whether or not the costs are reasonably chargeable.   The application of such a test interferes to an unjustified extent with the contractual bargain provided within the leases, and is contrary to the provisions of section 19.
9.	Once it was accepted, as the LVT must have done, to allow any of the costs associated with the application, the legal fees incurred in relation to it were properly recoverable in accordance with the construction of the leases as a matter of law, subject only to the requirements set out in section 9(1).   It was not suggested by the LVT, or any of the respondents, that the costs were not reasonably incurred and, both the original leases and those granted by Shinereach since they purchased the properties, clearly provided for their recovery through the service charges.   Indeed, the LVT had determined that to be the case.        
10.	Miss Lamont referred to Reston Ltd v Hudson [1990] 2 EGLR 51, and the more recent Lands Tribunal decision in Canary Riverside v Schilling (LT ref LRX/65/2005 (16 December 2005)(Unreported)) from which, she said, it was clear that the costs being sought should be recoverable.   The landlord had to take steps to recover advance service charge payments in order to carry out the works and to comply with its obligations.  Without that money, it did not have sufficient funds to allow the works to commence, and even if it had been able to borrow short-term in the financial markets, there was no provision in the older leases for recovery of the interest that would be incurred.  Even if the prime purpose was to recover the advance service charges, that was clearly a cost associated with the management of the buildings, Miss Lamont said, and it was misleading and irrelevant to have categorised the application as a measure designed to protect the interests of the landlord.   The LVT, she said, had no free-standing jurisdiction to decide whether costs were “reasonably chargeable” and its apparent reasoning that because the application essentially benefited the landlord, it was unreasonable to recover a significant proportion of the legal costs incurred, was indefensible as a matter of principle.   It was not correct for the LVT to have said that recovery of all the appellant’s costs might result in pointless applications in cases where there was no real dispute.  If that were the case, it could be said that the landlord had not reasonably made the application, and therefore the costs associated with it were not reasonably incurred under section 19.  In this case, the landlord’s actions were entirely reasonable.       
11.	Miss Lamont said that subsequent to the LVT hearing and its determination, the landlord has had to initiate proceedings against a number of the tenants in the County Court which demonstrated that its actions in seeking the declaration were justified.  
Conclusions 
12.	The sole issue for my determination is whether or not the LVT was right, in law, to reduce the amount of legal fees incurred by the landlord on the grounds that they were not “reasonably chargeable” and that to allow them might result in landlords being able to recover all their costs, as a matter of course, in fruitless or unjustified applications.
13.	Section 19(1) provides for the limitation of “relevant costs” in a service charge by reference to two tests: whether the costs are “reasonably incurred” and whether the services or works are “of a reasonable standard”.   It states:
“19(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.”
14.	The relevant provisions in Section 27A are:
“ (1)	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
(2)	Subsection (1) applies whether or not any payment has been made.
(3)	An application may also be made to a leasehold valuation tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to –
(a)	the person by whom it would be payable,
(b)	the person to whom it would be payable,
(c)	the amount which would be payable,
(d)	the date at or by which it would be payable, and
(e)	the manner in which it would be payable.”
15.	There is absolutely no question, in my judgment, that the costs claimed by the landlord in the sum of £18,081.33 were reasonably incurred, and I conclude that the LVT was wrong to have limited them for the reasons that it gave.  It is clear that Shinereach was perfectly justified in making its application due to the recalcitrance of the tenants, and the detailed directions made at the PTR suggest to me that there was no question of the application having been made frivolously or without merit.  Indeed, the LVT said in its decision relating to these costs (the relevant part of which I have set out above), that it was “a perfectly proper course of action for the lessor to take…”   The landlord was successful in its application and I see no reason why it should be penalised for any part of its costs.   As Miss Lamont said, the landlord was forced to prove its case in compliance with the directions that were given in the PTR and, particularly as there was no material dispute of the cost or need for the works, if the tenants had paid the advance service charges when they were demanded, the application would have been unnecessary, and the landlord would not have incurred the costs that it did.   As to the suggestion that the landlord was in part seeking to protect its interests, in my view, it could be argued equally that it was seeking also to protect the interests of the tenants.   It was not in a position to proceed with the essential and urgently required works until it was in funds, and it was therefore very much to the benefit of the tenants to have those works undertaken as soon as possible.  
16.	I am assisted in my conclusions by the cases referred to by Miss Lamont.   Reston was a case where there had been a question over whether the windows to the flats were demised to the lessees or formed part of the structure for which the lessor was responsible, and for which he could recharge through the service charge.  On redecoration of the exterior it had become apparent that they needed replacing, and the landlord considered that it would be cheaper to replace them than effect piecemeal repairs.  After complying with the requisite consultation procedures, he sought declarations as to the recoverability of such costs in accordance with the construction of the lease, and in respect of section 19(1)(a) and s20 of the 1985 Act ahead of undertaking the works.  He was successful, and His Honour Judge Hague QC (sitting as a High Court judge) said (at 52):
“…the common sense of the matter does seem to me to support the landlords’ proposals.   The course they took was first to circularise the tenants and tell them of the proposals.   As in any situation of this kind there are always a few people who object, and one of the points raised, I think, was that the service charge did not cover this kind of matter.  The landlords have therefore taken the precaution of coming to the court for an appropriate declaration as to whether the renewal of the windows comes within the service charge provisions.   I think that was undoubtedly a sensible course for the landlords to take in view of the unfortunate way in which the relevant provisions of the lease have been drafted.   Having regard to my decision, I will make an appropriate declaration…”
He went on to determine that the costs of the proposed works were being reasonably incurred and that the consultation procedures had been properly complied with.  On the question of the costs of the application, he set out the relevant clauses of the lease and said (also at 52):
“It seems to me that the landlords have reasonably incurred the costs of this application…”  
17.	In Canary Riverside, which was an appeal from an LVT decision determining that an item claimed under a service charge as ‘Landlords’ LVT costs’ was not payable, the Tribunal (His Honour Judge Rich QC) said, after dealing with a conclusion of the LVT relating to the incursion of fees in resisting an application to change the manager, said (at para 15):      
“15.	The LVT then went on to produce a different reason for saying that such expenditure was not to be treated as ‘in connection with management’.  They said: 

“In addition, the Tribunal was conscious that an application under Part II of the Landlord and Tenant Act 1987 in substance, as in this case, initiates hostile litigation: it must be preceded by a ‘fault’ notice, specifying the landlord’s or his manager’s breaches, like a s.146 notice in reverse.  It is unlikely that a landlord’s cost of defending, even successfully, a tenant’s action for damages for breach of management covenants could be recovered from tenants generally as a service charge incurred in connection with management etc.”

I confess that I am quite unable to understand why the LVT thought that unlikely.  Resisting such challenges is part of the ordinary cost of management, just as is the cost of collecting the service charge from tenants who fail to pay on demand.  Ordinarily such an action, if dismissed, would be dismissed with an order that the unsuccessful claimant pays the landlord’s costs, but providing the landlord reasonably incurred the costs, in so far as they are not recoverable from the complaining tenant they may surely be charged to the service charge as costs of management.”
Although not bound by other decisions of this Tribunal, I am satisfied that, from reading the relevant sections of these two cases, the first of which was very similar in nature to the current appeal, they lend considerable support to the conclusions that I have reached.       
18.	It follows that I accept Miss Lamont’s submissions in their entirety, and therefore determine that the sum of £18,081.33 shall be recoverable from the tenants through the service charges.    
19.	There being no respondents to this appeal, and no application having been made for a declaration under section 20C of the 1985 Act, I further determine that the costs of this appeal shall be recoverable through the service charge.
DATED 2 October 2006

(Signed) P R Francis FRICS