UPPER TRIBUNAL (LANDS CHAMBER)

	
UT Neutral citation number: [2014] UKUT 0213(LC)
LT Case Number: LRX/74/2013

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charges – restrictive contribution covenant - whether management fee recoverable – appeal dismissed

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE
RESIDENTIAL PROPERTY TRIBUNAL (NORTHERN RENT 
ASSESSMENT PANEL) 

BETWEEN:
                                           WESTLEIGH PROPERTIES LTD                  Appellant
and
        MRS J S GRIMES                                     Respondent

Re: 18 Winner Street,
		Paignton,
		Devon
		TQ3 3BJ

Determination on written representations

© CROWN COPYRIGHT 2014

The following case is referred to in this decision:

Waverley Borough Council v Arya [2013] UKUT 0501 (LC)

Introduction
1.	By a decision made on 6 April 2013 the Leasehold Valuation Tribunal for the Southern Rent Assessment Panel (“the LVT”) determined that the appellant, Westleigh Properties Limited, was not entitled to recover management fees which had been added to the service charges payable by the respondent, Mrs Grimes, and two other lessees of flats at 18 Winner Street, Paignton, Devon TQ3 3BJ (“the Property”) for the years 2004-2012.  This appeal raises the sole issue whether the LVT’s decision was correct. 
2.	Permission to appeal was granted by the Tribunal and after considering the case papers I directed that it be dealt with on the basis of the parties’ written representations. The appellant has been represented in the appeal by Gateway Property Management Limited, (“Gateway”) which has made submissions on its behalf, which have been replied to by the respondent.
3.	The Property is a converted semi-detached building with a former printers shop on the ground floor and a separate front entrance leading to three self-contained residential flats on the first and second floors.  The former printers shop is also now occupied as a flat (Flat 4).  Access to the three flats on the upper floors is obtained through a small ground floor hallway leading to a communal staircase.  The respondent is the lessee of Flat 2.  The lessees of the other two flats on the upper floors, Mr Shah and Mr Parsons, were parties to the proceedings before the LVT but have chosen not to respond to this appeal.
The proceedings before the LVT
4.	The proceedings before the LVT comprised two separate applications.  The first arose out of proceedings commenced by the appellant in the Southend County Court to recover service charge arrears for the years 2004-2010; the defendants were the three lessees of the upper floor flats, and the proceedings were transferred to the LVT for it to determine the extent of the lessees’ liability under s. 27A, Landlord and Tenant Act 1985.  The LVT made a decision on 19 July 2011, but that decision was subsequently set aside as having been made without notice of the hearing being given to the respondents.  The second application before the LVT had been commenced by the respondent and sought a determination of her liability to contribute to the service charge for the years 2002-2012.  There was therefore a substantial overlap in the subject matter of the two applications 
5.	Neither party presented evidence concerning the service charges for any year before 2004 and the LVT made no determination in relation to them.  The service charge years in dispute divided between those which predated the involvement of the appellant’s managing agents, Gateway in May 2009 and those which post-dated their appointment.  The disputed charges related to insurance and to the supply of water and electricity to the common parts as well as to management fees. 
6.	The service charge accounts produced by the appellant to the LVT show that in 2009, 2010 and 2011 the only costs included in the service charge related to insurance, electricity, water, management, accountancy and bank charges.  In 2012 additional charges relating to a health and safety and fire risk check and to the administration of major works were also included.  The LVT allowed part of the health and safety and fire risk charge but disallowed the charges for water, as no water was supplied to the common parts of the Property, and for administration of the major works, because there were no major works and no evidence was adduced of any administration.  
7.	In the period before 2009 the service charges had not included any contribution towards the fees of a managing agent.  A management fee totalling £740.25 was first claimed for the years 2009 and 2010.  In 2011 a management fee of £950 was claimed together with accountancy charges of £96.  In 2012 a management fee of £864 and an accountancy fee of £96 were claimed together with the sum of £600 as an administration fee in relation to the major works.  
8.	The LVT disallowed all of the management fees, the accountancy fees and the major works administration fee.  In paragraph 60 of its decision it explained its reasons:
	“All of the management fees have all been disallowed.  The Tribunal was unconvinced that any representative from Gateway ever inspected the property until prior to each of the two hearings.  The appellant has not suggested that it has regularly visited the property.  The Tribunal could see no evidence at all of any management, and this was evidenced by the fact that historic water charges had only just been identified and that there was no need for a communal water supply.  There was no evidence of maintenance decoration or cleaning of the communal hall”.
9.	As is apparent from this passage, the LVT disallowed the management fees on the basis that no management had been undertaken.  It also disallowed the accountancy and bank charges, leaving only the cost of insurance and electricity for the common parts, and part of the cost of a health and safety and fire risk assessment, as the only costs which could properly be included in the service charges for the years 2009-2012 during which Gateway had been responsible for the management of the Property.
The Lease
10.	The lease of Flat 2 was assumed by the LVT to be a standard form also used for the letting of Flats 1 and 3.  Flat 4 is let on different terms which are not relevant to this appeal.
11.	The lease of Flat 2 was granted on 27 June 1997 by a predecessor of the appellant (referred to as the Lessor) to a predecessor of the respondent (referred to as the Lessee).  It is for a term of 199 years and, at clause 1, it reserves a nominal ground rent together with a further or additional rent equal to one quarter of the amount which the Lessor might spend in maintaining the insurance of the Property against loss or damage by fire.
12.	Clause 2 of the lease comprises the Lessee’s covenants with the Lessor.  Only clause 2(d) is directly relevant to the appeal; by it the Lessee agreed:
	“To contribute annually or more frequently as the Lessor shall require when called upon to do so by the Lessor a one quarter share of the costs, expenses and outgoings and matters mentioned in Clauses 3(a) and 3(b) hereof.”
13.	Clause 2(b) is a covenant by the lessee to pay rates, taxes and outgoings assessed charged or imposed on Flat 2, and to pay a proper proportion of any such charge imposed in respect of the Property as a whole.  Clause 2(l) provides for that proper proportion to be agreed between the parties or determined by an independent surveyor. 
14.	Clause 3 comprises the Lessor’s covenants with the Lessee.  These run to seven separate sub-clauses and include covenants for repair, redecoration, quiet enjoyment, insurance, to procure that other flats in the building are let on similar terms, and to enforce observance of the covenants contained in the leases of other flats (at the lessee’s expense).  Only sub-clauses (a) and (b) are referred to in the Lessee’s covenant at clause 2(d).  They provide as follows:
	“3(a) to maintain repair and renew (a) the roofs foundations main walls and all other parts of the main structure of the Building and (b) the boundary walls fences gutters and rainwater pipes of the Property and the Building (c) the gas pipes and water tanks and pipes, drains and electrics and other cables and wires in under and upon the Property other than those serving only the demised premises	(d) the common parts, namely the front door, entrance hall, stairs, landings, passages, storage cupboards and parts of the Building used in common by the Lessee with the Lessees of the other flats within the Building
	(b) as and when the Lessor shall deem necessary but not more than once in every period of five years (subject to contribution as hereinbefore provided) to redecorate all such parts of the exterior of the Building as heretofore or are usually decorated… and to redecorate or otherwise treat appropriately such of the interior common parts as are usually treated …”
15.	The lease makes no express reference to a service charge.  Apart from the obligation in clause 2(d) to contribute to the costs of the matters referred to in clauses 3(a) and (b) “annually or more frequently as the Lessor shall require when called upon to do so” no thought has been given to the method by which the lessee’s contribution is to be calculated or collected.    
16.	Nor does the lease make any express reference to a managing agent or to the cost of engaging a managing agent.  No function is described which is to be performed by any agent of the Lessor, and even the determination of the Lessee’s contribution towards any taxes, assessments or outgoings under clause 2(b) is  left to an independent surveyor to be appointed by a third party.

The appeal
17.	On behalf of the appellant, Gateway has not directly disputed the LVT’s conclusion that it had not inspected the Property in any of the years for which a management fee was claimed.  Nor had this been disputed in the evidence given to the first LVT by Gateway’s representative Mr Marr (which the appellant wished to rely on for the purpose of the second LVT hearing); Mr Marr is recorded in the first decision as having confirmed “that Gateway had not had any call for repairs to be undertaken, although they were actively managing and were arranging for a building surveyor to visit the property shortly”.   
18.	The main submission on behalf of the appellant has been that a management fee and other associated professional fees are “an integral part” of the costs which must be incurred by the appellant in order to perform its obligations under clauses 3(a) and 3(b) of the Lease because “one cannot exist without the other”.  They also submitted that the cost of collecting service charge arrears ought additionally to be regarded as coming within clauses 3(a) and 3(b) since the appellant would be unable to perform the functions referred to in those clauses unless it was able to collect the money payable by the Lessees.
19.	Although the respondent has sought to uphold the LVT’s decision that no management has been undertaken by Gateway, she has also taken a more fundamental point, namely, that the lease does not entitle the appellant to recover fees paid to its managing agent as part of the service charge at all.  Logically that issue ought to be determined first, before consideration is given to the question whether any management was carried out.
20.	The first LVT which decided the application in the absence of the respondents in 2011 allowed the service charges claimed by the appellant largely on the grounds now advanced in support of the appeal.  It considered that the management fees were an integral part of the matters referred to in clauses 3(a) and 3(b) of the Lease.  The LVT which made the second decision, which is now under appeal, did not specifically consider the question posed by the respondent, namely whether the lease permits any management fee to be recovered.  
Discussion
21.	The terms of the lease relating to service charges are unusually limited both in their scope and in the procedures agreed between the parties for determining how much is to be paid and when payment is due.  Nonetheless, as the lease is the only relevant agreement between the parties, any liability on the part of the respondent to contribute towards costs incurred by the appellant in connection with the Property must be found in the lease itself.  The search for any such obligation must be based on the terms which the parties have expressly agreed and recorded in writing, but their agreements must be read and understood in their proper context, as they would be understood by any objective reader of the lease who was aware of the circumstances in which it had been entered into.    
22.	The only relevant obligations on the Lessee to make payments to the Lessor are those contained in clause 1, which reserves a contribution towards the insurance premium as an additional rent, and in clause 2(d).  The Lessee is required to contribute a quarter share “of the costs expenses and outgoings and matters mentioned in clauses 3(a) and 3(b) hereof.”  Clauses 3(a) and (b) relate only to the Lessor’s obligation to maintain, repair and renew the main structure, boundaries, conduits and common parts of the Property, and to redecorate internally and externally not more than once in every five years.  The Lessee is therefore obliged to contribute only towards the costs expenses and outgoings incurred by the Lessor in performing those limited obligations.  If the Lessor incurs costs in relation to any other matter, for example dealing with insurance, collecting rent, preparing service charge accounts or enforcing covenants, the Lessee is under no obligation to make any contribution towards those costs. 
23.	In its recent decision in Waverley Borough Council v Arya [2013] UKUT 0501 (LC), the Tribunal discussed a number of authorities dealing with the question whether a management fee may be added to a service charge where no express reference is made to the costs of management.  At paragraph 30 I said this:
	“It is clear from these authorities that, in principle, the costs incurred by a local authority, or by any other landlord, in arranging for the provision of services, and managing their delivery is properly regarded as part of the cost of providing the service which may be recovered from its tenants through an appropriately framed service charge covenant.  The same is true of the overhead costs incurred in connection with the management and provision of services.  In both cases it is necessary to respect any limits which the parties may have imposed on the categories of expenditure to which the service charge may relate ”
24.	Although clauses 3(a) and (b) are limited in their scope to repairing and redecorating, it is therefore clear that the respondent may, in principle, also be required to contribute under clause 2(d) to costs of management.  Those costs of management must, however, be related to the performance by the appellant of those of its obligations which are specifically mentioned in clause 2(d) i.e. its repairing and redecorating obligations under clauses 3(a) and (b).  If the appellant finds it necessary to carry out works of repair, or to redecorate the exterior of the Property, any expense reasonably incurred in commissioning, administering or supervising those works would in principle fall within the Lessee’s obligation in clause 2(b) because they would be part of the “costs expenses and outgoings and matters mentioned in Clauses 3(a) and (b)”.  
25.	In the service charge years with which this appeal is concerned no repairs or re-decoration were undertaken.  While I agree with the appellant’s submission that management fees and associated professional fees can be an integral part of the performance by the landlord of its obligations under clauses 3(a) and (b), I do not accept that the appointment of a managing agent automatically entitles the appellant to recoup the costs incurred in that appointment, whatever the tasks the agent actually undertakes.  I do not accept the submission on behalf of the appellant that the managing agent is permanently “standing by” ready to attend to any repairs which might be required, and that the cost of its preparedness is part of the cost of performance by the appellant of its repairing and redecorating obligations.  In the years in question no steps were taken by the appellant in the performance of those obligations and accordingly no part of the management fee which the appellant agreed to pay its managing agent amounted to “costs expenses and outgoings and matters mentioned in Clauses 3(a) and (b)”.   
26.	The agents did undertake some tasks for which they were remunerated.  No doubt they demanded and collected ground rents, arranged for the payment of electricity and insurance invoices and the preparation of annual accounts, and prepared and despatched service charge demands.  Nonetheless, the original parties to the lease having signed up to the restrictive terms of clause 2(d), they agreed that none of the costs incurred by the Lessor in connection with those matters was to be passed on to the Lessee.          
27.	In my judgment therefore the agreement between the parties in this case simply does not permit the recovery of an annual flat rate management fee irrespective of the management tasks actually undertaken in return for that fee.  In any year in which the managing agent undertook tasks falling within the scope of clause 3(a) and (b) of the lease, in addition to the other tasks for which they charge their fee, some part of that fee would properly be capable of being passed on to the lessees.  The appropriate apportionment would have to be considered in relation to specific facts and, if it became the subject of dispute, it would have to be resolved by the subject of an application to the First-tier Tribunal under section 27A of the Landlord and Tenant Act 1985.
28.	I would emphasise that the Lease in this case is unusually restrictive in the extent of the services to which the Lessee is required to contribute.  The appellant relied on a number of decisions of first tier tribunals in which management fees had been allowed as part of a service charge, despite there being no express reference to such fees in the lease.  Each such decision turned on the particular terms of the lease under consideration, and nothing in this decision calls them into question.  As in the Waverley case the services provided in this case to which the lessee has agreed to contribute have been minimal.  In those circumstances, while it may be convenient for the appellant to employ managing agents to administer the Property on its behalf, to collect the rent, to ensure that the electricity bill is paid and, when required, to arrange for repairs or other works, it is only the latter function for which the appellant may look to the respondent for a contribution towards the agent’s fees.  
29.	For these reasons, although I accept that the appellant has incurred fees in engaging a managing agent, no part of those fees is, on these facts, recoverable from the respondent or other lessees through the charge payable by them under clause 2(b) of the lease.  Although my conclusion has been arrived at for different reasons from those given by the LVT, the outcome is the same and the appeal is therefore dismissed.

								Martin Rodger QC
								Deputy President

								Dated: 14 May 2014