Iain Robert MacGregor v B M Samuels Finance Group plc [2013] UKUT 0471 (LC)

Mr MacGregor was the leasehold owner of 23 and 29 Samuels Towers, Longhill Avenue, Chatham, Kent ME5 7AT.

The application giving rise to the appeal was made by his landlord, BM Samuels Finance Group plc. Samuels Towers contained forty four flats in two blocks dating from the early 2000s. The blocks were imaginatively known as A and B: Mr MacGregor’s flats were both in Block B.

Hurford Salvi Carr Property Management Limited (“HSC”) managed the blocks.

The lessees were liable to pay 2.273% :

a) Of the insurance rent, defined as the cost to the landlord from time to time of paying the premium for insuring blocks A and B, and

b) Of the annual Service Charge expenditure, which included all costs expenses and outgoings whatever reasonably and properly incurred by the landlord during a financial year in or incidental to providing services which included lighting, cleaning and heating the common parts.

The appeal was by way of the rehearing. These were the three initial issues:

1) Whether administration charges were payable. B M Samuels conceded that they were not payable at the hearing because section 47 of the 1987 Act had not been observed;

2) The sums payable in respect of electricity to the common parts for the years 2009 and 2010, and

3) The sums payable for building insurance for the period 7 August 2009 to 6 August 2010.

At the outset of the hearing, Mr MacGregor asked the Upper Tribunal to determine that its decision would apply to all of the lessees rather than just him.

Mr Trott declined. The jurisdiction of the Tribunal was limited to determining the amount payable to B M Samuels under section 27A of the 1985 Act. It was up to the other lessees to take action if they wished, once the decision on the appeal was handed down.

For the avoidance of doubt, Mr Trott held that the same reasoning applied to the determination of the administration charge under paragraph 5(1) of Schedule 11 to the 2002 Act.

I hope that I will be forgiven for skating over the appeal so far as these electricity charges are concerned because the Upper Tribunal was concerned with the specific facts and figures of electricity consumption in blocks A and B of Samuels Towers.

E.ON supplied electricity until October 2010, when it was supplanted by British Gas.

E.ON charged VAT on Block A electricity on four bills in 2009 and 2010. The rate varied between 15% and 17.5%.

It also charged CCL, also only on the supply to Block A.

After October 2010, British Gas charged VAT at the reduced rate of 5%. It did not charge CCL.

VAT and the CCL are charges addressed in documents produced by OFGEM and HMRC, entitled, respectively “The Resale of Gas and Electricity, Guidance for Resellers: Updated October 2005” and HMRC Notice 701/19. The OFGEM guidance is referred to in the RICS Service Charge Residential Management Code, at paragraph 7.20.

The OFGEM guidance

It has to be said that the authors of this document do not commit themselves. The following appears on page 5:

“…It is our understanding that no matter what the rate of VAT paid by the reseller [the respondent] to his own supplier, he or she may only include the lower rate (currently 5 per cent) in the charges made to the purchaser [the appellant].

“We also understand that liability to pay the Climate Change Levy is influenced by the VAT position.  Even if the reseller has to pay Climate Change Levy he cannot pass it on to purchasers who only pay lower rate VAT.”

HMRC Notice 701/19

The August 2012 edition of this notice, entitled: “VAT: Fuel and Power” is more authoritative. Its addresses CCL too.

At paragraph 2.1, Her Majesty’s officers state that the reduced rate of VAT applies to supplies of fuel and power for qualifying use.

“Qualifying use” includes domestic use.

Consumption of fuel and power that exceeds 1,000 KWh per month is treated as domestically consumed only where that consumption is for use in a dwelling or certain types of residential accommodation, including flats. Corridors, lifts, hallways and stairways in a residential unit are treated as part of the same residential unit.

The effect of paragraph 2.7 of the Notice is that the Climate Change Levy is not chargeable on domestic use.

In the light of the above, Mr Trott concluded that neither VAT at the higher rate nor CCL should have been passed on to Mr MacGregor. These elements of the electricity charges were therefore:

• Not reasonably and properly incurred;
• Not part of the annual expenditure, and
• Not recoverable via the service charge.

Difference between E.ON and British Gas charges

There was a significant difference between the rates charged by E.ON and British Gas for electricity.

• In its bill dated 27 October 2010, E.ON were charging 15.96p per KWh for primary units and 13.67p per KWh for secondary units.  The standing charge was 29.04p per day;
• In its bill dated 2 November 2010, British Gas were charging 7.32p per KWh with a daily standing charge of 22.34p.

Mr Trott did not accept Mr MacGregor’s submission that the difference in cost necessarily meant that the cost of electricity supplied by E.ON was unreasonably incurred and that the respondent should have changed supplier sooner:

“There was no detailed analysis by either party of the electricity market in 2009 and 2010 so it is not possible to set the charges incurred into the wider market context. Although a landlord must be alert to changes in market prices and to the competitiveness of different energy suppliers it is not reasonable to expect a landlord always and immediately to change supplier so as to constantly follow the lowest tariffs even in the absence of a long term supply contract. There is likely to be a degree of inertia in changing a supplier and I do not consider, on the evidence, that the respondent was wrong not to have changed supplier before it did”.

The landlord conceded that the disputed demand for the buildings insurance premium did not comply with section 47 of the 1987 Act and was therefore to be treated, under section 47(2), “for all purposes as not being due from the tenant to the landlord at any time before that information is furnished by the landlord by notice given to the tenant.”

Mr MacGregor’s appeal therefore succeeded on this point.

The service of a further section 47 notice

Whereas the landlord had conceded that its demand for administration charges was not compliant with section 47, meaning that the lessee was consequently not in fact in arrears, it relied upon Johnson v County Bideford Ltd [2012] UKUT 457 (LC) as authority for the proposition that the non-compliant insurance demands could be corrected retrospectively by the service of another demand which was compliant.

Mr MacGregor responded that the landlord could furnish him with as many new notices as it liked but, under section 20B of the 1985 Act, he was not liable to pay the insurance premium for 2009/10 where, as here, those costs were incurred more than 18 months before a demand for payment had been validly served.

Mr Trott, sensing a brewing storm, said:

“Although it is not necessary for the purposes of my decision to consider this issue further, in my opinion it would be unhelpful for me to stop at that point for two reasons.

“Firstly, I think it would be of assistance to the parties, and might prevent further litigation, were I to offer guidance about whether the respondent is prevented by the provisions of section 20B of the 1985 Act from serving a further, compliant, section 47 notice in respect of the insurance premium for 2009/10.

“Secondly, having heard the parties’ evidence about whether the insurance premium was reasonably incurred I consider that it would assist the parties, and again might prevent unnecessary litigation, were I to give my reasoned conclusions on the issue”.

The relevant parts of section 47 of the Landlord and Tenant Act 1987 and section 20B of the Landlord and Tenant Act 1985, as set out by Mr Trott, are here.

Mr Trott turned his attention to Johnson. Applying that decision to the facts of the appeal before him, he concluded the landlord would not be prevented in principle by section 20B from correcting the invalidity of the original demand for payment of the insurance premium with retrospective effect.

He emphasised however that his conclusion, “reached without the benefit of detailed submissions, is only for the guidance of the parties when considering their future action and does not form part of this decision”.

Mr MacGregor contended that the correct level for the buildings insurance premium should be based on the 2007/08 figure of £1,433 rather than the £8,727 charged in 2009/10. B M Samuels stood by the sums claimed.

Professional conduct

Before dealing with the nitty gritty of the insurance premium, the Upper Tribunal grasped the nettle which underpinned much of Mr MacGregor’s case, and which related to a Mr Thornton, who was both managing director of the managing agent and owned and controlled, either on his own behalf or through his wife, other companies who were undertaking services on behalf of the landlord.

The Upper Tribunal was not prepared to accept the accusatory tone of Mr MacGregor’s argument. Mr Trott pulled up Mr MacGregor’s legal representative because he did not give a fair and balanced representation of Mr Thornton’s actions in Weston and others v Ian Frances as liquidator of Axiom Workshops Ltd (in liquidation) (LON/00AG/LSC/2011/0470).

He continued: “This Tribunal is concerned to establish whether the disputed service charges were reasonably incurred. It is not its function to police alleged breaches of the professional and ethical standards of the RICS”.

Professional conduct and the Tribunal’s jurisdiction

There are however occasions when professional (or indeed other) conduct requires consideration.

Solitaire Property Management Company Limited v Holden [2012] UKUT 86 (LC), was an appeal concerned with the use of reserve funds. In his decision, His Honour Judge Huskinson expressed puzzlement that the LVT, having concluded that the amounts which had been demanded by the landlord for the reserve funds were reasonable, then examined the reserve funds provision in the way that it did. At paragraph 32, he held that:

“…The LVT did not consider the reserve funds position for the purpose of deciding a question arising under section 27A as to how much was payable as service charge in any given year… The LVT’s consideration of this reserve fund’s position appears to have been an entirely separate consideration as to whether the trust funds held by the appellants had been wrongly depleted by them and whether the appellants should in consequence make good to the new trustee (i.e. the new manager, Mr Bulmer) … This question was separate from and did not involve consideration of any question arising under Section 27A …

“33.  In my judgment the LVT had no jurisdiction to embark upon this breach of trust inquiry in circumstances where such inquiry was not necessary to decide a question arising under section 27A.”

The role of companies

In Country Trade Limited v Noakes [2011] UKUT 407 (LC) His Honour Judge Gerald said:

“5. The [LVT’s] Decision is redolent with contentious language casting implied aspersions on the probity of the management arrangements reached between the Appellant and Robbert Limited … Those arrangements, described variously as being a ‘device’ or ‘incestuous’ by the LVT, arose out of commonality of ownership and directorship of some of the legal entities involved about which the Appellant had been open and frank throughout.

“6.     Unless, which is not the case here, it is asserted that the management arrangements were a mere ‘sham’ i.e. an arrangement which disguised the true relationship or agreement between the parties, there is nothing in principle objectionable to a management company such as the Appellant employing a company it owns or is involved in to provide services: see Skilleter v Charles [1991] 24 HLR 421.

“7.     Whilst such arrangements may well justify a rigorous scrutiny of the fees being charged and the services provided, sight must not be lost of the fact that (a) the question is whether or not the costs are reasonable within the provisions of section 19 of the Landlord and Tenant Act 1985 and (b) there is nothing objectionable to such arrangements – unless, as I have said, which was not the case here, it is alleged they were a mere “sham” or artifice.  It is therefore preferable to avoid the use of such descriptions not least because it may give the impression that the tribunal is not focused on what is or are the real issues – ‘reasonableness’”.”

Mr Trott declined to accept that the evidence established an intimate connection between Mr Thornton’s control of companies involved with the management of the property and the level of service charges. The energy which Mr MacGregor had devoted to investigating the relationship between those companies had “diverted attention from the sole issue in dispute, namely whether the service charges were reasonably incurred”.

The level of Mr MacGregor’s accusatory suspicion in the appeal was unjustified. The arrangements he complained of were not objectionable in themselves, but Mr Trott “agreed with Judge Gerald’s caveat that they invite rigorous scrutiny of the charges which are demanded”.

He moved on to the issue he was required to determine.

The reasonableness of the insurance premium

A significant increase in the insurance premium occurred in 2009/10 when it rose from £3,800 to £7,294.

Mr MacGregor argued that the increase was attributable to commission payments.

B M Samuels replied that the increase in premiums was due to the managing agents’ better acquaintance with the risks of the property, which were confirmed by the insurer’s subsequent inspection in November 2009, and which led to the production of a list of mandatory risk improvements.

Mr Trott concluded that the landlord had effected buildings insurance in a reasonable manner. It had used a recognised insurance broker, which had:

• Carried out an insurance valuation to determine the appropriate declared value;
• Index-linked that value;
• Carried out a detailed risk assessment that was confirmed by the insurer, and
• Market tested the insurance every other year.

He held that the payment of commission was a common commercial practice. There was “nothing objectionable in principle to connected companies being involved in the management of a property provided the relationship between them is not a sham”.

Therefore, reasonably incurred were both the 2009/10 insurance premium of £7,549.32, and the costs (3.5%) of financing the premium. Those latter were incurred as a result of non-payment of the service charge by one lessee who owned about a third of the flats.

The problem for B M Samuels however was that those sums not yet payable because it had failed to comply with section 47 of the Landlord and Tenant Act 1987.

The appeal was:

• Allowed in respect of administration charges and the insurance premium:
  • No service charge was payable in respect of the administration charge.
  • No insurance premium was payable for the year 2009/10.
• The appeal was allowed in part in respect of electricity charges.

Energy costs are currently high, both literally and on the political agenda. VAT is a dark forest, and I will make sure that I have the OFGEM and HMRC  documents to hand for guidance when all the trees begin to look the same.

Away from energy, this decision covers points which are of more general relevance to life in the Tribunal.

First, it answers the perennial question as to how binding one decision is on another lessee, the answer being not at all unless that other lessee takes action.

Second, it is comforting to have a clear decision that section 20B of the 1985 Act cannot defeat tardy compliance with section 47 of the 1987 Act.

Third, the decision is a salutary reminder that courts and Tribunals do not relish requests for findings of dishonesty, nor do they accept one-sided portrayals of individuals where that portrayal is but half of a more rounded, balanced story.

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