London Borough of Southwark v Dirk Andrea Woelke [2013] UKUT 0349 (LC)

Mr Woelke was the long lessee of a flat in one of the nineteen blocks on the Tabard Gardens Estate in London SE1.

In 2003 the management company, the Tabard Gardens Tenant Management Co-op (“the TMC”), decided to replace the windows in 19 blocks on the estate. Mr Woelke’s share of the cost was estimated to be £3,486.27.

The work was completed in June 2004. The TMC then collapsed, and Southwark resumed direct management of the estate. Documents were mislaid in the hand-back process. The statutory eighteen month limitation period under section 20B of the 1985 Act had passed by the time Southwark was able to ascertain out how much each lessee was actually liable to pay for the works. In the event, it decided to restrict its claim to the estimated sum originally notified to leaseholders.

It was Southwark’s practice to separate its demands for payment of service charges for major works from its demands for payment for routine services, which it called revenue service charges.

On 6 July 2005, Southwark invoiced Mr Woelke for the windows. It sought payment of £3,486.27.

The second major works project was the refurbishment of the cold water storage tanks on the estate. On 22 September 2008 Mr Woelke was informed that his share of the estimated cost was £517.68.

On 7 October 2009 Southwark invoiced Mr Woelke £518.49 for the estimated cost of the works.

The water tanks were duly replaced. On 4 November 2010 Southwark informed Mr Woelke that:

• The final account had now been drawn up;
• The cost of works to the respondent’s block was £20,867.12, to be divided equally between the 42 units in the block;
• Once professional fees and an administration charge had been added, Mr Woelke’s contribution was £552.99;
• As this was £34.50 more than the estimated sum a further invoice for the balance was provided.

A statement was also delivered showing the total sum of £552.99 said to be due for the cold water storage tanks, reflecting the fact that Mr Woelke had not paid the invoice delivered in October 2009.

Mr Woelke refused to make any payment for either the windows or the cold water storage tanks. In the end Southwark brought a claim in the county court for the total sum of £4,039.26. The claim was transferred to the LVT.

The lease was for a term of 125 years. Under its terms, Southwark covenanted to provide, and Mr Woelke covenanted to contribute to the cost of, services and repairs.

• “Service Charge” was defined in the lease as “a fair proportion of the costs and expenses … incurred in the year”. (my emphasis)
• The service charge year ran from 01 April to 31 March;
• Before the beginning of each year, Southwark was to estimate the annual service charge and notify Mr Woelke;
• Mr Woelke was then to pay his portion of the estimated service charge quarterly on 1^st April, July, October and January;
• “As soon as practicable” after the end of each year, Southwark was to calculate the actual service charge;
• Southwark was then to notify Mr Woelke of the amount, giving a summary of the costs incurred, and setting out any shortfall payable;
• Any shortfall was then payable within one month of the notification;
• Any excess payment was to be credited against Mr Woelke’s account for the following year;
• Time was not of the essence for service of either of the two notifications.

The LVT determined that:

“It is in our judgment simply not open to Southwark to issue separate demands: one for “ordinary” service charges on an annual basis and another for major works, which may well straddle two or more service charge years.  The council in our judgment is obliged … to issue one demand which wraps up both the ordinary service charges and that part of a major works contract which relates to that particular service charge year.”

It concluded therefore that the sum claimed was not yet payable because it had not been demanded in accordance with the terms of the lease.

The LVT did not consider that its decision was wrong, but granted permission to appeal because Mr Woelke’s lease was in a form that Southwark used extensively and it routinely separated its major works and revenue service charge demands. The appeal was of continuing significance to the management of Southwark’s residential estates.

Permission was granted on the ground that the LVT was wrong to interpret the lease as requiring that a demand be served consolidating both the revenue service charges and the charges for major works in each year.

Echoing the opening lines of one of my very first posts, Martin Rodger QC began his consideration of the arguments: “In every case the extent of a leaseholder’s obligation to pay service charges will depend on the particular terms of the lease under which the obligation arises”.

He continued: “When construing the terms of a lease, only very limited assistance is likely to be found in the decisions of other courts concerning different leases. Nonetheless, in the course of argument both counsel referred to two decisions of the Court of Appeal which illustrate how similar issues of construction have been resolved in other cases”.

Southwark relied on Universities Superannuation Scheme Ltd v Marks & Spencer plc [1999] L&TR 237, which concerned an inadvertent mistake in implementing the service charge procedures in a lease.

In his judgment Mummery LJ provided the following general guidance (at p.243):

“The purpose of the service charge provisions is relevant to their meaning and effect. So far as the scheme, context and language of those provisions allow, the service charge provisions should be given an effect which fulfils rather than defeats their evident purpose. The service charge provisions have a clear purpose: the landlord who reasonably incurs liability for expenditure in maintaining the [building] for the benefit of all its tenants there should be entitled to recover the full cost of doing so from those tenants and each tenant should reimburse the landlord a proper proportion of those service charges.”

For Mummery LJ, the answer to the case depended entirely on the construction of the relevant provisions of the lease. For that reason, Martin Rodger QC did not find the judgment very (if at all) helpful in resolving Southwark’s appeal.

The Court of Appeal’s decision in Leonora Investment Co v Mott Macdonald [2008] EWCA Civ 857 more closely resembled Southwark’s case in that it involved a conscious decision by a landlord to depart from the service charge procedure laid down by a lease.

The Court of Appeal found that the tenant was not liable to pay for the major works until the landlord followed the contractual route which would entitle it to recover the balance of the full year’s service costs. The contract required the provision of a statement of service costs which would trigger the obligation to pay. At paragraph 24 of his judgment Tuckey LJ said:

“The conclusion I have reached may seem harsh or over technical, but if so it results from what I consider to be the proper construction of the leases. No one has challenged the judge’s conclusion that it was open to the landlord to issue a revised statement. Nor would I. Provisions of this kind should not be seen as procedural obstacle courses. Businessmen dealing with one another often make mistakes and there is no scope for saying that the provisions in this clause only gave the landlord one opportunity to get it right.”

The test for liability to pay

By way of preface, Martin Rodger QC held that “[w]here a contract lays down a process giving one party the right to trigger a liability of the other party, such as the payment of a sum of money in response to a demand, it is a question of construction of the contract whether the steps in the process are essential to the creation of the liability, or whether the process may unilaterally be varied or departed from without invalidating the demand”.

He then set out a two stage test for determining whether the liability to pay had arisen:

1) Identify the minimum requirements laid down by the lease for the creation of the obligation to pay, and then

2) Consider whether the circumstances of the case satisfy those minimum requirements.

He gave some pointers as to how to approach the test:

1) It is not appropriate to adopt a technical or legalistic approach;

2) Service charge provisions are practical arrangements which should be interpreted and applied in a businesslike way;

3) A businesslike approach to construction is unlikely to permit very much deviation from the relatively simple and readily understandable structure of:

(i) Annual accounting,

(ii) Regular payments on account, and

(iii) Final balancing calculations.

4) When entering into long residential leases the parties must be taken to intend that the service charge will be operated in accordance with the terms they have agreed.

5) Leaseholders should be able to work out for themselves whether a sum is due to be paid by reading the lease and comparing the process it describes with the information provided in support of the demand by the landlord, without the involvement of lawyers or other advisers.

Applying the principles to the appeal

Mr Woelke was obliged to pay his service charge “at the time and in the manner” set out in the lease.

The specific questions in Southwark’s appeal therefore were whether its invoices of 6 July 2005, 7 October 2009 and 4 November 2010 were sufficiently in conformity with the lease to create a liability to pay.

Time for making the advance payments

Mr Woelke was required to make payments quarterly in response to Southwark’s notification of its reasonable estimate of the amount which will be payable by the lessee by way of Service Charge in the forthcoming year.

The lease required Southwark to notify the lessees of the estimate before the beginning of the year, but time was expressly not of the essence for service of that notification. Southwark therefore enjoyed some leeway, and could notify lessees of the estimate later and still recover the charge. The obligation to notify lessees of the estimated charge remained: it simply provided for some flexibility as to when the notification was given. The lessees had no obligation to pay until the notification was given.

Martin Rodger QC noted in passing that by virtue of section 41 of the Law of Property Act 1925, the general rule in property contracts is that stipulations relating to time are not regarded as essential unless the contract provides so either expressly or by necessary implication.

The advance demand

The lease required Southwark to make “a reasonable estimate of the amount which will be payable by the Lessee by way of Service Charge … in that year”.

Southwark had omitted the window replacement costs from its estimate for 2004-5 and 2005-6. Was it entitled to do so, if it could reasonably anticipate that those costs would be incurred?

The Deputy President accepted that there would be occasions when there is uncertainty over whether work would be done in one service charge year or in the next, but emphasised that the lease did not require certainty, only a reasonable estimate.

In this case the contract was entered into within six weeks of the section 20 notice. Practical completion was reached just over six months later, on 21 June 2004.

Southwark must have known before 1 April 2004 that it would have to pay at least part of the cost of the replacement windows during the forthcoming service charge year.

Even if had waited until the defects liability period had expired and the final payments under the contract had been made, it would certainly have been in a position to provide an estimate of the costs in time to include them in the estimate for 2005-06 which was due to be served before 1 April 2005.

However, no part of the cost of the windows was included in any estimate. Instead Southwark had sent the lessees invoices for the full amount of their share, which included expenditure incurred in at least two service charge years, on 6 July 2005.

Waiver

Martin Rodger QC accepted the principle that if the notification provisions of the lease were solely for Southwark’s benefit, on normal contractual principles, Southwark would be entitled to waive its right to include any individual component of expenditure in the advance payment and in the estimate. It could even forego advance payments and dispense with the estimate altogether.

He noted that on the same normal contractual principles it is not open to one contracting party unilaterally to waive terms of the contract which confer benefits on another party.

He determined that the latter of the two principles applied:

• It was correct that the obligation on the leaseholder to make advance payments on account of the Service Charge was for Southwark’s sole benefit, but
• The same could not be said of the obligation to provide a reasonable estimate of the amount payable by the leaseholder by way of Service Charge in the forthcoming year. The estimate gave the lessee advance warning of the contribution which he will be expected to pay for the services to be provided in the forthcoming year.

Southwark therefore bore a positive obligation to provide a reasonable estimate, before the start of the year, of the fair proportion of the costs and expenses to be incurred in that forthcoming year, and which would be payable by the leaseholder in that year.

Therefore the omission of an estimate of the major works cost was not consistent with the contract.

Consequence of the omission

The normal remedy, where a party to a contract is in breach, is a claim for damages or an application for an injunction or specific performance.

In Morshead Mansions Ltd v Mactra Properties Ltd [2013] EWHC 224 an order was granted in the High Court for the provision by a landlord of proper service charge accounts for a residential block.

In Wembley National Stadium Ltd v Wembley (London) Ltd [2007] EWHC 756 at [67] a similar remedy was contemplated in a case involving a final account of service charges payable under the lease of Wembley Stadium.

A lessee might wish to enforce the obligation if s/he intended to sell and wished to provide prospective purchasers with a clear idea of the likely service charge liability.

In normal circumstances, however, the only practical consequence of a failure to take account of major works in the estimate would be that Southwark would not be entitled to collect advance payments for the cost of those works.

The cost of the major works would remain part of the Service Charge for the year or years in which it was incurred, whether or not it was included in the original estimate. Southwark would therefore be entitled to recover it by way of balancing payment, provided it complied with the provisions of the lease in that regard.

End of year notification

The lease required that, as soon as practicable after the end of each year, Southwark should:

• Ascertain the Service Charge payable for that year, and
• Notify the lessee of the amount.

This was an obligation which Southwark was not at liberty to waive and which would be capable of enforcement by a leaseholder.

A contractually compliant notification was the essential precondition of the leaseholder’s liability to pay any shortfall over the estimated demand.

The obligation to pay was triggered by service of the notice and must be satisfied within one month.

Conversely, if the lessee’s advance payment was greater than the actual amount spent, s/he was entitled to a credit, which would be set against the liability to make an advance payment for the next year.

Southwark was not entitled to dispense with or delay the end of year notification, because the lessee was entitled to know as soon as practicable after the end of the year if s/he is entitled to a credit.

Contents of the end of year notification

On Martin Rodger QC’s analysis of the lease in this case, the end of year notification must have four features:

(1) It must notify the leaseholder of the amount of the Service Charge payable for the relevant year;

(2) It must contain or be accompanied by a summary of the costs incurred;

(3) It must state the balance (if any) due;

(4) The summary of costs which it contained must include an explanation of the manner in which the proportion of those costs apportioned to the flat had been calculated.

Without each of the pieces of information to be notified to the leaseholder the notification would fall short of the requirements of the lease and would create no liability on the part of the leaseholder.

The twofold purpose of a contractually compliant end of year notification

1) The notification created the liability to pay, and

2) It enabled the leaseholder:

(i) To understand the extent of that liability, and

(ii) To verify that it has been correctly calculated.

Non-technical approach

In a deft reconciliation of the parties’ positions, the Deputy President continued:

“The notification requirements in the lease should be approached in a non-technical manner … It is not necessary that all of the information be provided in a single document or even on a single occasion. If on an objective reading of two or more documents on which reliance is placed it would be clear to a reasonable recipient, familiar with the terms of the lease, that the appellant was providing notice …, and provided that taken together the documents satisfied the minimum requirements I have referred to above, I can see no reason why a single document should be insisted on.

“There is no reason why service charges for major works should not be identified in a separate document if that is thought to be more convenient for the purpose of identifying charges for which loans or different payment terms are available, provided that the leaseholder is also provided with a statement of the total Service Charge and the balance due for the year”.

Omitted/overlooked items

It is human to err. The Deputy President held that the lease allowed for humanity:

“If after notice has been given of the Service Charge for the previous year an additional item of expenditure, previously overlooked, is discovered, it would be sufficient … to provide a statement of the nature and amount of that additional expenditure without repeating [the] previous summary of the whole of the costs and expenses incurred in the year.  It would be essential, however, for the relevant notification to state the total Service Charge for the year, recalculated to take the additional item into account, to identify the method of apportionment which had been adopted and to state the new balance due.

“An additional notification which left leaseholders to work out for themselves that there was no overlap between the cost of major works and the sums previously demanded for revenue items, and to calculate the aggregate Service Charge for the year and the balance now due from them, would in my judgment be defective”.

Annual accounting

Having given a lifeline to Southwark with one hand, Martin Rodger QC withdrew a little with the other. He emphasised the importance of annual – as opposed, I imagine, to project-based – accounting so as to achieve clarity and a fit with the annual service charge accounting period.

Alternative arrangements

Concluding his judgment, the Deputy President reminded the parties that they were at liberty to agree arrangements which did not comply with the lease, for example where large amounts were demanded, and the proposed arrangement allowed the cost of work to be spread over a longer period than the single year provided for by the lease.

Prior agreement between the parties was however imperative to avoid the situation which had given rise to the appeal.

Applying the principles described above, Martin Rodger QC held that Southwark’s invoices failed to comply with the requirements of the lease, and dismissed the appeal.

It is more by happy accident than design that my last two posts have seen the Lands Chamber – and two different judges thereof – perform a metaphorical MOT on the machinery in a lease governing liability to pay service charges.

In this case, Martin Rodger QC held that Southwark could have more than one bite at the cherry. It was entitled to issue further balancing demand if an item of expenditure was overlooked.

The entitlement to multiple bites of the cherry turned however on the provisions of the lease. I suspect that the position might be different if the lease provided that time was of the essence – or that the end of year service charge demand was conclusive as to the amount owing.

From a statutory perspective, omissions in demands can be problematic, since the eighteen month rule in section 20B requires (reasonable) alacrity on the part of the landlord. I cannot mention section 20B without the Court of Appeal’s consideration of it in OM Property Management v Burr [2013] EWCA Civ 479.

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