The Elysian Fields in this case is a luxury, early 20^th century apartment block in Liverpool with a restaurant on the ground floor.

Readers of the Olga da Polga stories, written by Michael Bond, he of Paddington fame, will recall that Elysian Fields was also the name given to the patch of waste ground on the other side of the shrubbery, frequented by Fangio, the part Argentinian hedgehog.

Olga da Polga herself is an Abyssinian guinea pig. I have an almighty soft spot for guinea pigs.

I digress.

This property – which to my knowledge does not share a name with any Michael Bond tale – is located in Rotherham.

It is listed and dates from the 19^th century. It too was put to mixed use: it contains seventeen commercial and nineteen residential properties.

All of the leases before HHJ Behrens were tripartite. Respectively, the landlord, management company and lessees were:

• For the Elysian Fields, Iliad Group Limited, Elysian Fields Management Company Ltd and Mr Nixon;
• For the Imperial Buildings, Iliad (Rotherham) Limited, Imperial Buildings Management Company Ltd and Mr & Mrs Nixon.

The theme is more Homeric than Bondian.

The leases required the management companies to provide various services for which the lessee paid by way of service charge. The obligation read as follows:

• “To pay … to the Management Company on the 1^st October in every year (or on such other appropriate date or dates to be determined by the management company acting reasonably) the amount of the Service Charge estimated by the Management Company as being required to enable the provision of the Services during that year, and
• “Forthwith upon demand to pay to the Management Company any underpayment in respect of the provision of the Services for any previous calendar year”.

The leases required the following of the management companies:

• To keep proper books of account of all costs charges and expenses incurred by it in carrying out its obligations … and an account shall be taken as at the 30^th day of September … in every year during the continuance of the Term provided that:

…

(b) The accounts … shall be prepared and audited by a competent chartered accountant who shall certify

(i) Firstly the total amount of such costs and expenses … for the period to which the account relates, and

(ii) Secondly the proportionate part due from the Lessee to the Management Company … and such certificates shall be final and binding upon the parties thereto

• Within one month of the date of such certificates … to serve on the Lessee a notice in writing stating the said total and proportionate amounts specified …

The management companies did however send service charge demands to Mr and Mrs Nixon.

The demands were not over-endowed with information. Taking one example dated 19 March 2012, HHJ Behrens commented that “the only information on the invoice is that it is the service charge for the period 1/4/2012 until 30/6/2012”.

Logic dictated that it was an advance charge, but there was no information about how the service charge and its component parts had been calculated, nor did it set out the apportionment of the service charge to the individual apartment.

The statements

The management companies also sent statements to Mr and Mrs Nixon, but the statement before HHJ Behrens “contained even less information than the invoices”.

The Nixons withheld payment of their service charges. The management companies issued seven county court claims – one for each of the Nixons’ apartments.

The defences

In their defences, the Nixons, who were acting in person, responded that:

• The service charges were unreasonable and therefore irrecoverable;
• They had not received audited accounts for the three years from 2009-12;
• The claims should be transferred to the FTT.

The transfer orders

The county court duly transferred the seven claims to the FTT – but in two batches.

For the first batch, it ordered that:

“The matter be transferred to the First Tier Tribunal Property Chamber in order for a decision to be reached as to the reasonableness of the service charge claimed by the Claimant”.

For the second batch, it made the following order:

“This matter be transferred to the Leasehold Valuation Tribunal”.

Provision of certified accounts

It was only after the transfer that the management companies provided Mr and Mrs Nixon and the FTT with certified accounts. The certificate accompanying those accounts made it clear however that an audit had not been carried out.

“Thus,” said HHJ Behrens, “the accounts supplied to the FTT did not comply with [the terms of the lease]”.

The FTT held that Mr and Mrs Nixon were not liable to pay any service charges because:

• A management company should not issue proceedings for the recovery of service charges without having first given the lessee enough information to allow him/her to decide whether to pay the service charge or to defend the claim;
• Further, as the management companies had not supplied the Nixons with any information about the estimated service charge, to allow it to recover the service charges would be to allow it to “avoid its responsibilities under the lease, and under the [Landlord and Tenant] Act [1985], to provide audited accounts”.

The management companies were granted permission to appeal. The following grounds were considered by HHJ Behrens:

• Whether provision of audited accounts was a condition precedent to Mr and Mrs Nixons’ liability to pay service charges, and
• The scope of the FTT’s jurisdiction in the light of the wording of the transfer orders.

No. HHJ Behrens held that provision of audited accounts was not a condition precedent to Mr and Mrs Nixon’s liability to make the on account payment towards the annual service charge.

There was only one  criterion to be satisfied for the Nixons to be liable for payment of the on account service charge. That was the estimation by the management company of the amount of the annual service charge.

Case law

Two authorities supported HHJ Behrens’s view:

• Redrow Homes v Hothi [2011] UKUT 268 (LC), and
• Pendra Loweth Management Ltd v North [2015] UKUT 0091 (LC).

Redrow Homes

This was one of HHJ Huskinson’s decisions.

The FTT had held, and it was not disputed, that it was an implied term of the lease that the accounts would be prepared within a reasonable time.

That term was breached.

HHJ Huskinson was asked to consider the effect of that breach. In doing so, he distinguished between contractual terms where time was of the essence, and those where it was not, and cited Halsbury’s Laws of England on the point:

“The modern law, in the case of contracts of all types, may be summarised as follows. Time will not be considered to be of the essence, except in one of the following cases:

(1) The parties expressly stipulate that conditions as to time must be strictly complied with;

(2) The nature of the subject matter of the contract or the surrounding circumstances show that time should be considered of the essence, or

(3) A party that has been subjected to unreasonable delay gives notice to the party in default making time of the essence”.

In Redrow, HHJ Huskinson did not consider that time had been made of the essence of the obligation to provide accounts.

He also determined that breach of the term did not mean that the lessee no longer had any obligation to pay service charges.

If that had been the intention of the parties, it would have been clearly set out in the lease because it was such an unusual term.

The effect of such a term would have been that a landlord could provide “excellent and valuable” services throughout the year, and yet be deprived of any payment from the lessees by reason of its failure to provide accounts within a reasonable period of the year end.

Breach of the obligation to provide accounts within a reasonable period in fact meant that the lessee had three options:

• To claim damages;
• To claim an injunction obliging the defaulting party to comply with its obligation to provide accounts, or
• To make a section 27A application for the determination of the service charges in respect of which accounts had not been prepared.

Pendra Loweth

Turning to Pendra Loweth, HHJ Behrens noted Martin Rodger QC’s comments:

“A failure on the part of the management company to provide annual certified accounts does not seem to me to suspend the lessee’s obligation under [the lease] to pay the estimated service charge on demand. There is simply no connection between the performance by each of the parties of their respective obligations. The obligation to pay the estimated service charge is not expressed as being subject to the production of the audited accounts…”

That too supported his conclusion in the Nixons’ case.

Whilst therefore HHJ Behrens held that the FTT had erred in determining that Mr and Mrs Nixon’s had no liability to pay service charges and allowed the appeal, he made the following confession:

“I have considerable sympathy for the views expressed by the FTT … especially as this is a case where Mr Nixon has repeatedly requested audited accounts without success… The accounts provided in April 2014 do not comply with the provisions of the lease because they have not been audited.”

The scope of the FTT’s jurisdiction

This ground of appeal divided into two.

First, it was not part of the Nixons’ case that they were not liable to pay their service charges because of the non-provision of audited accounts – the pleading point.

Second, if the answer the above was “yes”, whether that question had been transferred to the FTT in the first transfer order – the transfer order point.

Technically, having allowed the appeal on the provision of the accounts ground, HHJ Behrens did not need to consider these further grounds of appeal, but he did so on the basis that at least one of them raised an important point of procedure.

The pleading point

The management companies argued that their entitlement to recover service charges as a matter of principle was not part of the county court proceedings. The only matter before the county court – and therefore the FTT – was the reasonableness of the service charge.

HHJ Behrens dismissed this argument with nerry a backward glance.

Reviewing the county court statements of case, he noted that, in their defences, Mr and Mrs Nixon pleaded breach of the obligation to provide audited annual accounts.

It was true that they had not stated that the consequence of the breach was that they were not liable to pay the service charge, but that, to his mind, that was of no relevance:

• Mr and Mrs Nixon were litigants in person, and
• The defence was “wide enough to enable Mr and Mrs Nixon to submit, as a matter of law, that no service charge was payable”.

The transfer order point

The management companies’ second argument on jurisdiction related to the terms of the orders under which the seven claims were transferred to the FTT.

They argued that the wording of the first transfer order limited the FTT to a determination of the reasonableness of the service charge and nothing more.

Cain v LB Islington [2015] UKUT 0117 (LC)

In Cain, Martin Rodger QC reviewed:

• Lennon v Ground Rents (Regisport) Ltd [2011] UKUT 330 (LC), and
• Staunton v Kaye, Taylor, [2010] UKUT 270 (LC).

From those two cases he drew the following principles:

• The FTT’s jurisdiction is limited to the questions transferred to it by the county court;
• That said, the FTT has specific expertise, and the questions transferred by the county court should be viewed in a practical way in the light of that expertise;
• Pedantry in the interpretation of a generally-worded transfer order is to be avoided unless it is clear that the county court intended to reserve a specific question to itself;
• It would be to do a “disservice to the parties and the transferring court for [the FTT] to adopt an over-scrupulous approach to its jurisdiction”.

In Mr Cain’s case, the county court had ordered that “the reasonableness of the service charges demanded” should be transferred to the FTT.

“Construing the order for transfer with appropriate generosity, it can therefore be seen that subsumed within the jurisdiction which it conferred was the power to rule on any question of interpretation of the lease on which the quantification of the service charge depended”, said Martin Rodger QC.

The transfer therefore included the power to the FTT to determine whether the service charges had apportioned in accordance with the lease.

Conclusion on the jurisdiction point

Whilst HHJ Behrens dismissed the pleading point with nerry a moment’s hesitation, the transfer point merited more discussion – but was ultimately also dismissed. It was, in his words, “inconceivable that the parties or [the county court] intended there to be a different jurisdiction” for the different batches of transferred cases.

The outcome – and some directions

The appeal was therefore allowed. HHJ Behrens remitted it to a differently constituted FTT to determine the amount payable by the Nixons.

That was not all however. Commenting that the management company was “plainly in breach”, HHJ Behrens directed that it supply Mr and Mrs Nixon with fully audited accounts for the years in question within 28 days of the day of service of the order.

Two cases: different bases

I am rather troubled by HHJ Behrens’s analysis of the Redrow Homes and Pendra Loweth cases.

Whilst their commonality lies in the lessee’s continued liability to pay, they do not, to my mind, sit very well together:

• Redrow Homes is about the consequences of the landlord breaching a term of a lease, and the remedies available to the lessee where time was not of the essence of that term, whereas
• Pendra Loweth is about the interpretation of leases: the Upper Tribunal found that the payment obligation was not conditional on the management company’s obligation – which it had breached – to provide accounts.

Accounting and auditing

Lifejackets at the ready: I am about to dip my toe into the waters of accounting practice.

Many leases, especially older ones, require there to be an audit of the service charge accounts.

I am however reliably informed by my in house accountant that “audit” in those leases often does not actually mean an audit in accordance with International Accounting Standards by an individual registered on the Register of Statutory Auditors.

In that view he is supported by the chartered accountants’ regulatory body, the Institute of Chartered Accountants of England and Wales (the ICAEW), in their Technical Release 03/11.

One of the main reasons why service charges go no further than a set of financial statements, rather than extending to the full panoply of audit, is cost. I imagine, for example, that cost may have been the reason for the lessees in Pendra Loweth voting against an audit.

An auditor cannot audit unless accounts have been prepared. Audited accounts go through a two-stage process: the financial statements are drawn up, and then the auditor – who must be independent of the person preparing the financial statements – arrives on the scene.

Company accounts and accounting standards

Obligation to file company accounts

A limited company incorporated in England and Wales is required by law to file annual accounts at Companies House.

In relation to Residents’ Management Companies (RMCs), the content of those accounts has been rather a preoccupation of accounting bodies in recent years.

The FRC

The body which sets the standards framework within which auditors, actuaries and accountants operate in the UK is the Financial Reporting Council (the FRC). It produces Financial Reporting Standards (FRSs).

The preoccupation

Both the ICAEW and the FRC, having separately taken Counsel’s opinion, consider that an RMC acts as principal, not as agent, when it contracts with third party suppliers – eg with window cleaners, builders and managing agents.

The vexing question is whether the RMC should file dormant or live company accounts in its annual return because:

• It does not actually own any of the money it receives: that money is impressed with a statutory trust pursuant to section 42 of the Landlord and Tenant Act 1987, and yet
• It enters into contracts in its own name.

FREDs

In August 2013, the FRC issued FRED 50, a consultation paper about the content and presentation of residents’ management company accounts. The proposal was to create an FRS for the financial statements of RMCs.

FRED stands for Financial Reporting Exposure Draft.

FRED 50 provoked significant debate. You can read the responses from the industry here.

In February 2015, the FRS issued FRED 58, a consultation paper devoted to accounting for micro-entities. FRED 58 contained a new draft FRS: “The Financial Reporting Standard applicable to the Micro-entities Regime”.

FRED 59, also issued in February 2015, consulted on possible amendments to an existing FRS, FRS102, the Financial Reporting Standard applicable in the UK and Republic of Ireland, in relation to small entities.

The results

The consultation on FRED 58 resulted in the FRC issuing FRS105.

“Buried deep in the document are two paragraphs relating to the accounting treatment of Residents’ Management Companies”, writes Gordon Whelan FCA, a chartered accountant specialising in residential service charge accounts.

Those two paragraphs are at page 107 of FRS105. In summary, they state that no specific standards are set for micro-entity RMCs.

FRED 59 did not bring about any changes to accounting practice for RMCs which fell within the small entities regime in FRS102 either.

What of FRED 50? Unsurprisingly perhaps in the light of its decisions on FRS102 and FRS 105, the FRC has not enshrined any of FRED 50’s provisions into an FRS.

It has instead elected – at least for the time being – to allow the accounting industry to use its professional judgment in the preparation of accounts for RMCs.

Where next?

What does that mean for RMCs?

Gordon Whelan suggests that “two sets of accounts are required:

“1. Statutory accounts that only include the transactions that relate to the company and exclude any service charge income or expenditure.

“2. Separate service charge accounts prepared in accordance with best practice (TECH03/11) and the requirements of the lease for the property”.

Multiple claims

Landlords, for cash flow reasons, need service charges to be paid. As a rule of thumb, they cannot wait for five or six years’ worth of arrears to build up before issuing a claim for payment.

The result is that many service charge arrears claims fall within the scope of the small claims track in the county court because the amount claimed is less than £10,000.

The small claims track differs from the fast and multi tracks in that the legal costs which are recoverable, even by the successful party, are very limited, unless the other side has behaved unreasonably pursuant to Civil Procedure Rule 27.14(2)(g).

It may therefore seem logical to issue five small claims cases so as to benefit from five sets of limited costs allowances, rather than to issue one claim for the total amount. Perhaps that was the thinking in the Nixons’ case.

It strikes me however that multiple claims are not necessarily the way forward:

• The total arrears for all five claims may take the claim into the fast track, where only the trial costs are limited and all other costs are recoverable, subject to assessment;
• The issue of multiple claims has the potential, as is shown here, to result in administrative difficulties;
• The court may consider that the attempt to increase the small claims costs limit is in itself unreasonable behaviour.

Litigants in person

Whilst on the subject of county court proceedings, here is a newsflash: a new Civil Procedure Rule, CPR 3.1A, will come into force with the Civil Procedure (Amendment No.4) Rules 2015/1569 on 01 October 2015. It relates to proceedings involving litigants in person.

Thank you to the Law Society via Nearly Legal for flagging up the new rule.

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