|
UPPER TRIBUNAL
(LANDS CHAMBER)
|
|
|
UT Neutral citation number: [2011] UKUT 264 (LC)
Case
Number: LRX/38/2010
TRIBUNALS,
COURTS AND ENFORCEMENT ACT 2007
LANDLORD
AND TENANT – variation of lease – covenant proposed by lessor providing for
payment by lessees of fee of managing agent – lease otherwise remaining the
same – held existing provision not unsatisfactory – decision of LVT reversed – Landlord
and Tenant Act 1987 ss 35(2)(e) & (f)
IN
THE MATTER OF A NOTICE OF APPEAL AGAINST
A
DECISION OF THE LEASEHOLD VALUATION TRIBUNAL
FOR
THE LONDON RENT ASSESSMENT PANEL
BETWEEN Appellants
(1) EDMUND
CLEARY
(2) DAPHNE
ELIZABETH ROBERTSON
(3) RAE
JANETTE FEATHER
and
LAKESIDE
DEVELOPMENTS LIMITED Respondent
Re: Flats
1, 3, 4 and 5,
44
Oakley Street
London
SW3 5HA
Before:
The President
Sitting
at 43-45 Bedford Square, London WC1B 3AS
on
28 June 2011
Mr Edmund Cleary, appellant, in
person
Mr Nils Christiansen for the
appellant Miss D E Robertson
Justin Bates instructed
by Dale & Dale, solicitors of Kingham, Oxfordshire, for the respondent
The following cases are referred
to in this decision:
Mahmood v Sinclair Gardens Investments (Kensington) Ltd LRX/59/2007
Flats 1-8 Baden House
CH1/OOAH/LVT/2006/0005 (LVT)
London Borough of
Brent v Hamilton LRX/51/2005
The following further cases were
referred to in argument:
Gianfresco v Haughton
LRX/10/2007
DECISION
Introduction
1.
This is an appeal against a decision of a Leasehold Valuation Tribunal
under section 38 of the Landlord and Tenant Act 1987 varying the terms of the
leases of four flats at 44 Oakley Street, London SW3 5HA by the addition of the
following provision to the lessee’s covenants:
“(25) to pay on demand as part of
the service charges hereunder any reasonable management fee of any Managing
Agents, Surveyors or agents duly appointed by the lessor in connection with the
performance of the lessor’s covenants under this lease together with value
added tax thereon at the appropriate rate.”
2.
The appellants are the lessees of three of those four flats. The
respondent is the freehold owner of 44 Oakley Street, a terraced house on
basement, ground and four upper storeys, divided into flats, one on each
floor. The flats were the subject of individual leases granted at various
dates in 1965 for a term of 99 years from 29 September 1964 at an annual rent
of £90. Each lease provided for the payment by the tenant of an additional
rent equal to one-sixth of the annual insurance premium for the building, and
each lessee covenanted to pay one-sixth of the cost incurred by lessor in
observing and performing its covenant to repair. The lessee of flat 1, the
basement flat, covenanted to pay £15 per annum towards cleaning costs; and each
of the other five lessees covenanted to pay 20% of the cleaning costs and 20% of
the costs of lighting the common parts and providing an entry-phone.
3.
Three of the leases have been varied. By a surrender and lease dated 31
August 2006 Flat 1 is now held for a term of 99 years from 29 September 2006 at
a higher rent than before but on what for present purposes are the same
covenants. The lease of Flat 2 was varied by deed on 31 August 1984 by the
inclusion of two new covenants, one of which was a lessee’s covenant as
follows:
“2(25) that the lessee will pay to
the lessor a reasonable deemed management fee charged by the lessor in
performing the covenants under Clause 3 hereof.”
4.
The lease of Flat 6 has been varied by deed on two occasions, first on
11 February 1969 in terms that are not material for present purposes, and then
on 9 December 2002 by the insertion of two new provisions, one of which was a
lessee’s covenant in these terms:
“2(25) to promptly pay as part of
the service charge hereunder any reasonable management fees of any Managing
Agent, Surveyor or agents duly appointed by the lessor in connection with the
performance of the lessor’s covenants under this lease together with value
added tax herein at the appropriate rate.”
5.
On 5 November 2008 the present respondent, Lakeside Development Ltd,
applied to the LVT under section 35 of the 1987 Act for the variation of the
leases of Flats 1, 3, 4 and 5 by the addition of two clauses. One of them is
that set out in paragraph 1 above. The other was a lessee’s covenant to pay
legal charges incurred by the lessor in connection with the performance of its
covenants under the lease. On 11 November 2008 the LVT sent a copy of the
application to each of the lessees and gave notice of a pre-trial review to be
held on 9 December 2008. At the pre-trial review, statements of case were
ordered to be served. On 12 January 2009 Lakeside’s statement of case was sent
to leaseholders. On 26 January 2009 Mr Cleary filed a statement of case, and
on 16 February 2009 Miss Robertson did so too. :Neither of the other lessees
filed a statement of case. Lakeside prepared trial bundles, and these were
sent to Mr Cleary and Miss Robertson 8 days before the hearing. The hearing
took place on 26 February 2009. Mr Cleary appeared in person. Miss Robertson
did not appear, owing to ill-health. She had previously applied for a
postponement of the hearing, but a differently constituted tribunal had refused
her application.
6.
Lakeside’s case for the variations that it sought was based on
paragraphs (e) and (f) of section 35(2). Section 35, so far as relevant for
present purposes, provides:
“35 Application by party to lease for variation of
lease.
(1)
Any party to a long lease of a flat may make an application to a
leasehold valuation tribunal for an order varying the lease in such manner as
is specified in the application.
(2)
The grounds on which any such application may be made are that the lease
fails to make satisfactory provision with respect to one or more of the
following matters, namely –
(a)
- (d) …
(e)
the recovery by one party to the lease from another party to it of
expenditure incurred or to be incurred by him, or on his behalf, for the
benefit of that other party or of a number of persons who include the other
party;
(f)
the computation of a service charge payable under the lease.
(g)
…
(3)
…
(3A) For the purposes of subsection
(2)(e) the factors for determining, in relation to a service charge payable
under a lease, whether the lease makes satisfactory provision include whether
it makes provision for an amount to be payable (by way of interest or
otherwise) in respect of a failure to pay the service charge by the due date.
(4)
For the purpose of subsection (2)(f) a lease fails to make satisfactory
provision with respect to the computation of a service charge payable under it
if –
(a)
it provides for any such charge to be a proportion of expenditure
incurred, or to be incurred, by or on behalf of the landlord or a superior
landlord; and
(b)
other tenants of the landlord are also liable under their leases to pay
by way of service charges proportions of any such expenditure; and
(c)
the aggregate of the amounts that would, in any particular case, be
payable by reference to the proportions referred to in paragraph (a) and (b)
would either exceed or be less than the whole of any such expenditure.
(5) – (8) …”
7.
The tribunal gave its decision on 30 September 2009, some 7 months after
the hearing. It expressed its conclusions on the management fees variation
quite shortly:
“23. The two variations sought in
the present case concerned the recovery of service charge costs in relation to
managing agents and legal fees. With regard to management fees, there were
grounds for varying the lease. The landlord was a corporate body and the
leases in respect of flat 2 and 6 already make provision for the recovery of
service charges in respect of employing a management agent. The circumstances
of the case therefore fell within section 35(2)(e) [recovery of expenditure
incurred by one party for the benefit of the other party] and section 35(2)(f)
[computation of service charges] because flats 2 and 6 were liable to pay the
charges. Ample support for such a construction of sections 35(2)(e) and (f)
could be found in the decision of Mahmood and Another v Sinclair Gardens
Investments (Kensington) Ltd LRX/59/2007 where a property was divided into
two flats but only one was obliged to pay management fees. In that case His
Honour Judge Huskinson varied the leases to as to ensure uniformity.”
8.
The LVT rejected Lakeside’s application in respect of the proposed
covenant on legal fees. It then went on to deal with compensation:
“29. With regard to the issue of
compensation no proper evidence was advanced by the respondents to show first
that clause 2(25) would necessarily result in the diminution in value of the
Respondents’ leasehold interests or secondly, as to the extent of such
diminution in value. Neither was any evidence advanced to show the extent of
any further pecuniary loss on any alternative basis. In those circumstances
the tribunal would not make any award of compensation. In the present case had
there been any retrospective claim by the landlord as to the cost of managing
agents, then the Tribunal in its discretion may have assessed compensation on
the basis of such costs to the tenants of flats 1, 3, 4 and 5 to ensure that
the tenants would not suffer prejudice as a result of the variation. However
no such entitlement has been advanced by the applicant.
9.
Three of the lessees, Mr Cleary of Flat 3, Miss Robertson of Flat 4 and
Miss Fletcher of Flat 5, applied to the LVT for permission to appeal to this
Tribunal. They advanced three grounds. The first was a point of procedure.
They said that under the Leasehold Valuation Tribunal (Procedure) (England)
Regulations 2003 notice of the proposed variations should have been given to
the lessees by the landlord, but instead it was given by the LVT; and the LVT,
had no jurisdiction to dispense with the requirement of service by the
landlord. The second ground that was advanced was that the LVT had been wrong
to conclude that the circumstances of the case fell within paragraph (3) and
(f) of section 25(2). They said that it fell within neither and that the LVT’s
approach to applying paragraph (e) was in any event erroneous in a number of
respects. Thirdly they said that the LVT erred in law in dismissing the
lessees’ claim for compensation because of the absence of any, or any proper,
evidence. In addition they contended that the LVT had failed to give adequate
reasons for its decision to order the variation and to refuse compensation.
The LVT granted permission to appeal. In doing so it said:
“The Tribunal has considered the
applicant’s request for Leave to Appeal dated 26 October 2009 on behalf of the
third, fourth and fifth respondents and determines that Leave be granted to
Appeal to the Lands Tribunal. Although the legal arguments now raised by the
respondents were not put to the Tribunal at the hearing they raise important
issues of principal upon which the Lands Tribunal should give further
guidance.”
10.
Mr Cleary and Mr Christiansen, who appeared for Miss Robertson, pursued
all three grounds of appeal before me. I will consider them in turn, starting
with the point on procedure.
11.
Regulations 4(1) and 5(1) of the LVT Procedure Regulations 2003 provide
as follows:
“4(1) The applicant shall give notice of an application
under Part 4 of the 1987 ACT (variation of leases) to the respondent and to any
person who the applicant knows, or has reason to believe, is likely to be
affected by any variation specified in the notice.”
“5(1) On receipt of an
application, other than an application made under Part 4 of the 1987 Act, the
tribunal shall send a copy of the application and each of the documents
accompanying it to each person named in it as a respondent.”
12.
Before the LVT Mr Cleary contended, as he does now, that there had been
a failure to comply with regulation 4 and the tribunal had no power to dispense
with its requirements. At paragraph 3 of its decision the LVT said that it was
“satisfied in relation to all the material before it that the respondents have
received notice of the application from the Tribunal and in particular that all
of the respondents have received a copy of the directions made by the Tribunal
on 9 December 2008 and therefore the hearing could proceed.” In the section of
its decision headed “Determination” the LVT said:
“25. So far as the requisite
provision of notice is concerned, under this particular head the Tribunal did
not consider that any prejudice had been caused to the respondents.”
13.
Paragraph 25 related to the proposed management fees covenant. The
tribunal went on, with respect to the other proposed covenant:
“26.
With regard to the proposed clause 2(26) this was a more controversial
variation and the respondents ought to have been given independent notice of
this variation so that they could seek advice well before any application to
the Tribunal. Here there was real prejudice to the respondents. The tribunal
would have refused the application on this ground alone but for the fact that
the application fails in any event…”
14.
Mr Cleary argued that it was internally inconsistent for the tribunal to
decide that the application for the legal charges covenant should be refused on
this ground and to conclude despite this that the failure to give independent
notice did not prejudice the respondents in relation to the management fees
covenant. The tribunal, he said, had no power to dispense with service. Under
regulation 3(7) and paragraph 6(1) of schedule 6 to the regulation where an
application for the variation of a lease is made it must include the “names and
addresses of any person served with a notice in accordance with regulation 4.”
That clearly assumed that notice under regulation 4 will have been given before
the application is made. The application contained the names of all those who
were required to be given notice under regulation 4(1) i.e. the respondents and
persons who the applicant knew, or had reason to believe, likely to be affected
by any variation specified in the application. No notice had, however, been
given at the time of the application.
15.
The application thus failed to comply with regulation 3(7), since the
names given were not those of persons who had been given notice until
regulation 4. Under regulation 3(8), however,
3(8) Any of
the requirements in the preceding paragraphs may be dispensed with or relaxed
if the tribunal is satisfied that –
(a)
the particulars and documents included with an application are
sufficient to enable the application to be determined; and
(b)
no prejudice will, or is likely to, be caused to any party to the
application.
16.
It is clearly the case in my judgment that the particulars and documents
(here, the draft variations) included with the application were sufficient to
enable the application to be determined; and no prejudice would be caused to
any party by the fact that the applicant did not itself send a copy of the
application to each of the lessees. A copy of the application was sent each of
the lessees by the LVT. Each of the respondents thus received the notice that
paragraph 4 provided for, except that he or she received it from the LVT rather
than from the applicant (an immaterial difference) and by letter sent on 11
November 2008 rather than one received by the date of the application, 5
November 2008 (which in the context of the sequence of events was also
immaterial). The breach of regulation 4 did not invalidate the application,
and since in all the circumstances none of the respondents had been prejudiced
by it, it presented no impediment to the determination of the application by
the LVT. And the LVT was entitled to dispense with the requirement in
regulation 3(7) and paragraph 6(1) under regulation 3(8). The first ground of
appeal therefore fails.
17.
The second issue is whether the LVT erred in law in determining that the
lessee should be varied by the insertion of the management fees covenant and
whether its reasoning on this was inadequate. The LVT accepted the case for
the landlord that the variation fell within both paragraph (e) and paragraph
(f) of section 35(2) and that it was appropriate that it should be made.
18.
The variation does not in my view fall within paragraph (f) (“the
computation of a service charge payable under the lease”), however, and Mr
Bates agreed that this was so. For (f) to apply the requirements of section
35(4) must be met. The first requirement, (a), is that the lease provides for
a service charge to be a proportion of expenditure incurred, or to be incurred,
by or on behalf of the landlord. None of the leases the subject of the
application, however, provides for a proportion of the management fees to be
payable as a service charge.
19.
The application for the variation could thus only succeed on ground (e),
therefore; and for this it would be necessary for the landlord to show that the
lease failed to make satisfactory provision for the recovery by it of
expenditure incurred by it on management.
20.
The case for the landlord, as recorded at paragraph 7 of the LVT’s
decision was that the leases of flats 1, 3, 4 and 5 failed to make satisfactory
provision for the recovery of such expenditure “in that they fail to make any
provision for the payment of management fees despite the fact that flats 2 and
6 are liable to pay those fees and despite the fact that the applicant, as a
corporate body, does in fact employ a managing agent.” The lessor’s statement
of case in the LVT said: “The current arrangement means that the costs are
apportioned between the landlord and two of the leaseholders, yet all the
leaseholders receive the benefits.” It said that a manager was in fact
employed at a cost of £200 per unit, and a long list of his tasks was set out.
The decision also recorded that Mr Bates, appearing for the landlord, relied
for support on two decisions, one of an LVT, Flats 1-8 Baden House
CH1/OOAH/LVT/2006/0005, and one of the Lands Tribunal, Mahmood v
Sinclair Gardens Investments (Kensington) Ltd LRX/59/2007.
At paragraph 11 the LVT recorded Mr Bates as saying that the variation would
facilitate any further attempt on the tenants’ part to exercise the Right to
Manage or collective enfranchisement since in either case it would be necessary
for the RTM company or nominee purchaser to recover all its costs if it was to
avoid insolvency; and that the failure to include such a clause would
inevitably mean that a landlord would pursue recovery of each costs in the
county court rather than the LVT.
21.
Mr Cleary’s case, as before the LVT, was that there was nothing before
the LVT to show that the new covenant would be of benefit to the lessees. It
mattered not to the lessees whether the functions of management were performed
by the lessor itself or by a managing agent. The fact that the lessor was a
corporate body was irrelevant. The cost of delegating management functions to
an agent should fall on the lessor. Neither of the cases relied on by the
lessor in support of its case justified the LVT in reaching the decision that
it did, and a substantial part of the functions listed in the lessor’s
statement of case were for its benefit and not for the benefit of the tenants.
Miss Robertson’s case was that she had purchased her flat in full knowledge
that the lease did not include provision for management charges. She had paid
a premium for the lease with this in mind. Mr Christiansen said that the
application was simply an attempt to transfer value from the lessees to the
lessor. Each lessee bought his or her lease knowing what the lease provided
for. To change this position created a transfer of value between the parties.
22.
Mr Bates submitted that the lack of limiting words in section 35(2)(e)
showed that it was not a limited power. It was for the LVT to determine as it
saw fit whether a variation should be made on this ground having regard to all
material circumstances. The relevant circumstances in the present case were
(i) that the leases of flats 1, 3, 4 and 5 make no provision for the recovery
of the costs of management; (ii) that flats 2 and 6 are liable to contribute
towards those costs; and (ii) that the landlord does in fact employ a manager,
at a cost of £200 a year per unit, who carries out a wide range of tasks. It
was open to the LVT having regard to these circumstances to conclude that the
variation should be made.
23.
Mr Bates said that it was not an irrelevant consideration that the
landlord was a body corporate. The fact was that a body corporate can only
discharge management functions through agents or employees, and he referred by
way of example to London Borough of Brent v Hamilton LRX/51/2005.
24.
Paragraph 23 of the LVT’s decision, which contains its reasons for
directing the variation, was in terms confined to determining that it had power
under both paragraph (e) and paragraph (f) to make the variation. It was, as I
have said, in error in relation to paragraph (f), which did not apply on the
facts of the case. As regards (e), the LVT gave no explanation as to why the
two facts that it referred to – that the landlord was a corporate body and that
the leases of two of the flats contained a covenant for the payment of the
lessee’s expenditure on management fees – meant that the other leases failed to
make satisfactory provision for such expenditure. Nor did it address the
question whether as a matter of discretion it was appropriate to make the
variation sought. Neither of the two facts that it mentioned, however, was
conceivably sufficient, in my judgment, to justify the making of the variation.
25.
Mr Bates urged that the LVT’s conclusions should be read as accepting
the case for the lessor, so that these should be treated as reasons for the
decision.
26.
What the LVT had to be satisfied about was that that each of the four
leases failed to make satisfactory provision with respect to the recovery by
the lessor of expenditure incurred by it for the benefit of the lessee. The
case for the lessor was that at present the cost to the lessor of employing a manager
are borne by the lessor, with contributions from two of the lessees. It is
this which is said to be unsatisfactory and the new provision is designed to
change. It is important to note that it was not part of the lessor’s case that
the lessor was entitled by implication to include the management fees as part
of the tenant’s one-sixth share of the insurance and repair costs or the 20%
share of the cleaning and lighting costs. Had that been the case, there would
have been an argument, in my view, that, by leaving it to implication, about
which there could be disagreement, the lease was unsatisfactory and an explicit
provision was appropriate. But it was not part of the lessor’s case that the
management fees reflected what the lessor was entitled to charge in any event.
The list of tasks produced went far beyond those associated with the
performance of the covenants in respect of which the lessor was entitled to
charge.
27.
The case for the lessor, as I have said, was that at present the cost to
the lessor of employing a manager are borne by the lessor, with contributions
from two of the lessees. There is, however, nothing unsatisfactory about that
in itself. It is the result of the contractual arrangements freely entered
into between lessor and lessees. In the case of two flats the lessor and the
lessees have agreed, in provisions expressed slightly differently, that the
lessee should be obliged to pay a contribution towards the cost of management.
But it is notable that in the most recent lease modification, that contained in
the surrender and lease of flat 1, no such provision was included despite the
fact that the lease provisions were substantially altered in other respects. If
the absence of a management fee provision was unsatisfactory Lakeside could
have ensured that it was included. The surrender and lease was entered into on
31 August 2006, two years only before the application was made to vary its
terms and the terms of the other three leases. There is, in my judgment, nothing
arguably “unsatisfactory” in the fact that two lessees pay a contribution to
the lessor’s costs of management and four do not. It simply reflects different
contractual provisions that do not appear to cause any difficulty in
interpretation or application.
28.
The effect of the variation would be to require each of the four tenants
to pay £200 a year, whereas nothing is now payable under the lease. The
lessor’s obligations under the lease would remain the same. Contractually the
lessees would be paying £200 without any entitlement in return. Not
surprisingly they are not in favour of being obliged to do so. Mr Bates
suggested that if the lessees made the contribution sought there would be a
greater incentive to the lessor to ensure that a qualified and appropriate manager
was appointed. But there was no evidence that this would happen, and as a
theoretical possibility it is obviously not sufficient to show that the leases
currently do not make satisfactory provision.
29.
I should add that there is nothing in the Lands Tribunal case of Mahmood
v Sinclair Gardens Investments (Kensington) Ltd, referred to
by the LVT and relied on by the lessor, to suggest that the variation sought in
the present case could or should be made. The facts in that case were that the
lease contained a repairing covenant on the part of the lessor but it was made
“subject to the lessee paying his proper proportion of the costs thereof”.
However, there was no provision in the lease whereby the lessee was made liable
to pay this proper proportion of the costs – so that it was manifestly
unsatisfactory in this respect, and the Tribunal (HH Judge Huskinson) directed
a variation to be made to correct this defect. In contrast there is not in the
leases that are the subject of the present application anything to suggest that
the management costs to which the proposed variation relates were intended to
fall on the tenants, and there is no reason why they should do so.
30.
I note also that in the LVT Bath case the tribunal varied leases
so as to provide for the payment by the lessees of an annual sum for the costs
and expenses of management. It concluded that it was in the interests of the
lessees for management of the building to ensure that the tasks associated with
its insurance and maintenance should be carried out properly and that this
should be done in order to maintain the value of the lessees’ investments as
well as the amenities of the property. The level of income generated was such
that it presented a risk of future neglect. That was a fully reasoned decision
based on the evidence that the LVT had before it. I can see that there may be
circumstances where the financial position of the lessor may make the absence
of a lessee’s covenant to pay for the cost of management unsatisfactory. This
could be the case, for instance, where there was an RTM company with no other
source of income. But evidence would be needed to show that there was a
particular need in the circumstances of the case. In the present case, in my
judgment, there was no evidence on which the LVT could conclude that the
absence of such a provision was unsatisfactory.
31.
The LVT determined that no compensation should be paid under section
38(1) of the Act (under which it had power, if it thought fit, to make an order
for the provision of compensation in respect of any loss or disadvantage that
any lessee was likely to suffer as a result of the variation). It said (see above)
that “no proper evidence” had been advanced by the lessees to show that the new
clause “would necessarily result” in the diminution in value of their leases or
as to the extent of such diminution in value. It is not, of course, the case
that a loss or disadvantage is only to be measured in terms of the diminution
in value of a party’s interest in the property, and it is on the face of it
hard to see how a requirement that the lessees should have to pay £200 a year
for something for which they at present pay nothing would not be a loss or
disadvantage requiring the payment of compensation. However, as I am satisfied
that the LVT was wrong to direct the variation, this matter does not arise for
determination.
32.
The appeal is allowed, and the lessor’s application for the variation of
the leases is dismissed.
Dated
7 July 2011
George
Bartlett QC, President
