London Borough of Southwark v Victoria Jane Clarke [2015] UKUT 0597 (LC)

Here is section 23 in full.

Effects of becoming subject to liability under, or entitled to benefit of, covenant etc

(1)  Where as a result of an assignment a person becomes, by virtue of this Act, bound by or entitled to the benefit of a covenant, he shall not by virtue of this Act have any liability or rights under the covenant in relation to any time falling before the assignment.

(2)  Subsection (1) does not preclude any such rights being expressly assigned to the person in question.

(3)  Where as a result of an assignment a person becomes, by virtue of this Act, entitled to a right of re-entry contained in a tenancy, that right shall be exercisable in relation to any breach of a covenant of the tenancy occurring before the assignment as in relation to one occurring thereafter, unless by reason of any waiver or release it was not so exercisable immediately before the assignment.

This case is all about subsection (1).

In 2003, Southwark granted a long lease of 43A Naylor Road to Mr Peter Clarke. Mr Clarke was the father of Ms Clarke, the respondent in this appeal.

Mr Clarke’s lease contained the lessee’s normal covenant to pay service charge contributions. The service charge year from 01 April to 31 March.

Before each service charge year began, Southwark was required:

• To make a “reasonable estimate” of the amount payable by the lessee before the beginning of each service charge year, and
• To notify the lessee of that estimate.

The lessee was then obliged to pay that estimate in quarterly instalments, three monthly, starting on 01 April each year.

At the end of each service charge year, “as soon as practicable”, Southwark’s obligations were:

• To calculate the actual amount payable by the lessee by way of service charge;
• To notify the lessee of that amount;
• To send with the notification a summary of the costs incurred, and
• To “state the balance (if any) due”.

There then followed the provisions which were, I think, key to the resolution of this appeal:

• “If the Service Charge for the year … exceeds the amount paid in advance under paragraph 2 and 3 of this Schedule the Lessee shall pay the balance thereof to the [Lessor] within one month of service of the said notice;
• “If the amount so paid in advance by the Lessee exceeds the Service Charge for the year … the balance shall be credited against the next advance payment or payments due from the Lessee …”

In October 2006 Southwark raised a service charge demand for major works. Mr Clarke did not pay it.

On 4 September 2008, Mr Clarke assigned his lease to Ms Clarke, his daughter.

In 2013, Southwark sent a notice described as the “Final Account Notification and Summary” to Ms Clarke. The amount demanded was £8,562.66.

Southwark then issued a credit note for £3,960.74 because the works had cost less than originally estimated in the demand made of Mr Clarke in 2006.

Ms Clarke did not pay the demand, and Southwark issued a county court claim for payment.

The claim found its way to the FTT, where it was treated as a section 27A application for a determination of the service charges payable by Ms Clarke for the 2007-08 service charge year.

Despite this, the FTT:

• Appears to have formed the view that it was determining Ms Clarke’s liability to pay the demand which had been made of her father in 2006;
• Overlooked the fact that Southwark had issued a balancing payment demand to Ms Clarke, and
• Concluded that section 23(1) of the 1995 Act absolved Ms Clarke from liability to pay the money claimed by Southwark.

On 15 April 2015 the Deputy President, Martin Rodger QC, granted Southwark permission to appeal, saying:

“[Southwark’s] claim in the County Court proceedings was not for the sum demanded of her father in 2006, but was for the reduced sum which had been the subject of a separate “Final Account Notification” sent to Miss Clarke herself on 16 May 2013.

“The Tribunal gave no explanation why [Southwark] was not entitled to that sum, and it does not have appeared to have considered that question. The Tribunal had already rejected each of the grounds on which [Ms Clarke] sought to deny her liability for the reduced sum and she would appear to have no obvious defence to her liability for that amount.”

My colleague Michael Walsh represented Southwark on the appeal, which was heard by Edward Cousins in the Upper Tribunal.

Edward Cousins began by noting that Southwark had in fact issued and sent a Final Account Notification and Summary to Ms Clarke.

Neatly summing up the FTT’s decision, he then observed that:

“…the FTT considered that by reason of the provisions of section 23 of the 1995 Act, there was no liability on the part of the Respondent to pay the estimated sum demanded because it related to a time before the lease had been assigned to her by her father in 2008”.

In simple terms, the FTT had been under the impression that Southwark’s claim was “for the estimated cost of work which had formed part of the service charge demanded from the Respondent’s father in 2006”.

That was an error.

The effect of section 23

He then turned to section 23 of the Landlord and Tenant (Covenants) Act 1995.

That section caused:

• All covenants and obligations between the landlord and the lessee to be enforceable between the landlord and tenant for the time being, and
• All rights and obligations under the covenants to pass on assignment.

Ms Clarke had received a valid demand after the lease had been assigned to her, and she was liable to pay it.

That demand was for payment of the balancing charge for the service charge. It was not a demand for an estimated amount, and the liability arose by the operation of the service charge machinery in the lease.

That machinery set out the two stage process that Southwark had followed in raising its demands:

• In the first stage, Southwark had sought an interim payment from Mr Clarke;
• In the second stage, Southwark had sought payment of the actual amount, once the final account had been produced. That had happened after assignment of the lease and was therefore sought from Ms Clarke, the assignee/lessee for the time being.

By the date of its claim, Southwark had moved from estimated figures – the first stage – to the final, actual figures – the second stage.

“The F-tT in effect, in my judgment, did not grasp the point and seems to have considered that the provisions of section 23 in some way limited the Respondent’s liability on the basis that part of the accounting period preceded the assignment”, said Edward Cousins.

Finding that Ms Clarke was in breach of her covenant to pay the £6,734.10 service charge demanded of her, Edward Cousins allowed the appeal on the substantive point and reversed the FTT’s section 20C order.

Lilies and oddities

Initially, I could not help thinking that the Landlord and Tenant (Covenants) Act 1995 rather gilded the lily here – and that the outcome would have been the same without invoking the Act.

I thought this because it was the lease that determined the amount payable at stage 2 of the service charge process:

“If the Service Charge for the year … exceeds the amount paid in advance under paragraph 2 and 3 of this Schedule the Lessee shall pay the balance thereof to the [Lessor] within one month of service of the said notice”.

On reflection however, I decided that the 1995 Act was not a gilding conceit, but was arguably a very relevant consideration. This is because the lease imposed on the lessee a liability not to pay the amount by which the final demand exceeded the interim demand, but to pay the difference between the amount of the interim demand that had actually been paid and the amount of the final demand.

In other words, on taking an assignment of a lease, a new lessee might find that s/he was liable for service charges which fell due for payment before the assignment.

Section 23 of the 1995 Act expressly relieves a lessee of liability under the covenants of the lease “in relation to any time falling before the assignment”.

Section 25 underlines the point. It provides:

“(1) Any agreement relating to a tenancy, is void to the extent that—

“(a) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act, …”

It seems at least arguable to me that the clause of the lease relied on by Southwark had the effect of excluding the operation of section 23 of the Act, because it required a new lessee to satisfy a liability that had accrued before s/he became the lessee.

Privity and the original tenant

It is one of the oddities of English land law that the 1995 Act should even be needed, but then there are occasions when English land law strikes me as being one big, nebulous oddity.

On this occasion, the concept of privity of estate is the oddity.

Privity of contract

At its core, a lease is a contract, and covenants in that lease are terms of that contract.

When a landlord grants a lease to a tenant, they are both parties to a contract. As parties, they are said to have privity of contract.

Privity of estate

They also have privity of estate, by virtue of their relationship as landlord and tenant. Estate is the umbrella term for the two forms of ownership of land in England, those two forms being leasehold and freehold. I pass over commonhold – as have most of the English population – for the time being.

The covenants in the lease that can be said to “touch and concern” the land attach to the estate, ie the leasehold.

Moving on

If the tenant sells the flat – in other words, if s/he assigns the lease – the parties to the lease remain the same. The new tenant therefore does not have privity of contract with the landlord because s/he is not party to the lease.

The landlord and the new tenant do however have privity of estate by virtue of being landlord and tenant. That means that they are bound by the covenants that touch and concern the estate.

In the case of a 99 year lease therefore, it may well be that there has been no privity of contract for donkeys’ years because the original parties to the contract, ie, the original landlord and tenant, have long since moved on.

The mischief

However, until the coming into force of the Landlord and Tenant Act 1995, there was a catch.

Even if the original tenant had assigned the lease many years before, s/he was still bound by the contract unless there was an express agreement that s/he would be released from it.

That meant that if the current tenant – aka the “tenant for the time being” – fell into arrears, the landlord could pursue the original tenant for those arrears, provided that:

• S/he was the original landlord and party to the contract, or

• The right to recover those arrears had been assigned to him/her in the event that s/he was not the original landlord.

Leases also regularly require every incoming lessee to covenant with the landlord that they will comply with the terms of the lease. This is achieved by a deed, which is a contract, albeit a contract which must comply with specific formalities.

In that event, if the lessee for the time being fell into arrears, a landlord was able to claim payment from any of the previous lessees who were party to a deed in those terms.

The 1995 Act

Section 23 of the 1995 Act is therefore quite radical, because it frees the original tenant from liability for breaches committed by subsequent tenants.

It’s fiddly – but revolutionary – stuff.

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Click here to read the judgment in full on the Lands Chamber website.