LAW AND LEASE A barrister's blog about residential service charges

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1 Norwich City Council v Simon and Susanne Redford [2015] UKUT 0030 (LC) Large property-owning bodies, especially local authorities, can have a tendency for entirely practical reasons to allocate service charge costs, or to raise demands, in a manner rather unwedded to the terms of the lease. This is one such case. The lease The lease here contained three key definitions: 1) The Estate comprised five blocks, containing in total 33 flats. 2) The Building contained seven flats, Bull Close. 3) The Property was flat 33, of which the Redfords were the long lessees. The issue dividing the Redfords and Norwich City Council was the method of calculating the cost of communal lighting on the Estate. The draftsman of the lease, in an access of enthusiasm for the phrase and/or, that syntactic tick so beloved of lawyers, had provided that the service charge was to be calculated as follows: such percentage as shall from time to time be a fair share as determined by the Council s Housing Manager of the Council s Expenditure attributable to the Property proportionate to the number and/or nature and/or size of the properties from time to time comprised in the Building and/or claiming the benefit of or entitled to use the services specified in Schedule D The Council s Expenditure included the cost of providing lighting to the communal areas. In Schedule D, the Council covenanted to provide communal lighting to a reasonable level and to keep the lighting system in repair. I have to confess that by this point, my Windermere Marina Village antennae were waggling in a big way unnecessarily, as it transpired.

2 Norwich s apportionment of lighting costs Norwich had entered one contract for the provision and maintenance of communal lighting to all of its properties and estates. The cost and consistency of the work was audited as follows: The cost of each service or item was fixed. The annual cost of the contract therefore varied, depending on the number of call outs; For each call out, the contractor was required to provide Norwich with the address and detail of work carried out. Norwich then determined the amount payable by each of its long lessees in two stages: It apportioned the total portfolio cost of the lighting between each of its estates according to rateable value, It then used the result of that calculation to pinpoint the cost payable by each lessee on each estate, including the Redfords. The application to the FTT The Redfords applied to the FTT. They were not persuaded that the amount that Norwich claimed from them in respect of communal lighting costs was accurate. They asked the FTT to decide two questions: (1) Whether Norwich s method of charging without providing details of the actual expenditures on a particular Estate was fair, reasonable and complied with the leases and (2) What, if any, reasonable cost was payable given there was no actual firm data available to give the true cost of this maintenance. The FTT determined that: Norwich had not complied with the terms of the lease, because it had calculated the consumption of communal lighting on the Estate as a proportion of total consumption across all of its properties, rather than by the actual amount consumed on the Estate, and Having seen neither hide nor hair of the lighting contract, nor any breakdown of the charges between estates, it was unable to decide how much was payable by the Redfords for communal lighting to their estate. Norwich appealed. Permission to appeal was granted by Martin Rodger QC.

3 The appeal The appeal was decided by HHJ Alice Robinson. Norwich argued that the FTT had erred in two respects: 1) It had wrongly interpreted the lease. The allocation of costs was in accordance with the terms of the Redfords lease; consequently 2) It had failed to determine the fair share payable by the Redfords. It should have done so because the lease provided for the service charge to be calculated in a particular manner, and therefore fell foul of section 27A(6) of the Landlord and Tenant Act This was the Windermere Marina Village point. The issue for HHJ Robinson was not however of the Windermere Marina Village variety: it was a question of the construction of the lease, and more specifically, of the meaning of the phrase Council s Expenditure. She gave three reasons for upholding the FTT s analysis of the lease: The meaning of the words To fall within this definition, she said, the cost must be the reasonable expenditure of the Council in complying with its obligation to provide, maintain etc lighting to the communal areas on the Estate. This meant that Norwich could only recover expenditure relating specifically to the Estate, and the Estate alone. That was the natural and ordinary meaning of the words expenditure in complying with its obligation to provide communal lighting on the Estate. The words in the context of the lease She delved further: The lease made no reference to any greater body of property than the Estate, which meant only the estate comprising the five blocks of flats, of which the block containing the Redfords flat was one; There was no provision for the apportionment of costs between any greater body of property than between the flats on the Estate; By contrast, the lease contained a careful provision for apportionment of a share of the Council s Expenditure attributable to the Property in the definition of Service Charge.

4 The reasonable person with background knowledge She then turned to the Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 principles. The effect of Norwich s argument was that, in some years, the Redfords lease would result in them either: Paying some of the costs of providing communal lighting to other estates owned by Norwich, or Receiving a contribution from the residents of those estates towards the costs of supplying communal electricity to the Redford s estate. HHJ Robinson considered that that a lessee entering that lease would have expressed considerable surprise at that prospect. I do not, she said, consider that that is the meaning which the wording of the lease would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties at the date the lease was entered into. The amount payable The problem that the FTT, HHJ Robinson and, presumably, Norwich s representatives faced was an evidential one. It was not possible to tell whether the amounts demanded from the Redfords were actually the amounts spent on communal lighting. Norwich had not equipped any of them with the requisite information. The outcome The appeal was dismissed. Observations This case has a cousin in South Tyneside Council v Ciarlo [2012] UKUT 247 (LC). In Ciarlo, the covenant was to pay the landlord such sum as may be notified to him as representing the due proportion (in his case 50%) of the reasonably estimated amount required to cover the cost and expenses incurred or to be incurred in carrying out various obligations and functions. The local authority included a claim for a management fee in the service charge.

5 It calculated the amount payable by simply dividing the management cost equally among its long lessee population. HHJ Huskinson had this to say on that apportionment: There is an element of commonsense and an element of swings and roundabouts in the analysis. The commonsense aspect is that it is sensible to divide the costs in the manner chosen rather than seeking precise and detailed figures for the management cost for each individual building and in then finding (as a result of doing this) that the management costs have increased substantially because they have been swelled by the cost of the detailed work needed in seeking this (unobtainable) precision. The swings and roundabouts aspect arises in the following way, namely that it may well be for a small building (e.g. a building containing two flats ) few problems may arise for many years and little management time is called for but there may come a year when a particular and troublesome management problem at this building arises (being a management problem which cannot be claimed from a particular lessee as an administration charge). In such a year the lessee of the small building would face a substantial site specific charge for management if he had to pay 50% of the actual costs incurred in managing the building in that particular year. However instead in such a year the first respondent is spared having to pay this substantial sum by reason of the manner (which I find reasonable) which the [local authority] and [its arms length management organisation] have agreed upon for calculating the cost of management for each building. Does this mean that we now have two inconsistent lines of decision following this case? I do not think so, by reason of the leases: The Redfords lease expressly refers to the cost of providing communal lighting on the Estate. Mr Ciarlo s was more nebulous, referring only to payment of a due proportion of the reasonably estimated amount of providing services. The Redfords lease was therefore more prescriptive than Mr Ciarlo s or is it just that HHJ Robinson read it that way?