Headleases and subleases cause all sorts of timing issues in service charges.

This appeal throws out two points.

The straightforward element relates to the eighteen month rule under section 20B of the Landlord and Tenant Act 1985. In this case, some of a head landlord’s demands for service charges were not passed on by the tenant to the subtenants until more than eighteen months after the costs were incurred.

The second element requires skills not dissimilar to ambidexterity. In it, Judge Elizabeth Cooke considers the nature of advance service charge demands paid by a lessee and then passed on to sub-lessees.

The action takes place in Folkestone, at 19/21 Rendezvous Street. I wonder whether, after the EU referendum on 23 June, it may have to be renamed “Appointment Street” if the Leavers succeed in persuading the country to turn its back on the EU.

Rendezvous Street v Appointment Street. I would go for the former: I do enjoy a good Gallic ring to a place name.

The freehold of 19/21 Rendezvous Street was held by a Mr Godden.

Mrs Vairaven, the appellant in this appeal, was long lessee of part of the building. Mr Godden was her landlord. I will describe her as the “landlord”, and Mr Godden as the “freeholder”.

Mrs Vairaven sublet the flats in her part of the building on long leases to sub-lessees.

The head lease

Under the terms of the lease between Mr Godden and Mrs Vairaven, Mr Godden was obliged to maintain the exterior of the building. In exchange, Mrs Vairaven covenanted to pay 75% of that cost.

The machinery for payment of that cost provided that Mrs Vairaven should make an on-account payment on 01 January every year.

If there was any money left over at the end of the year, the lease provided that the surplus should be credited to Mrs Vairaven’s account.

The sub-leases

Mrs Vairaven’s covenants

Rather oddly, given Mr Godden’s covenant to maintain the exterior of the property, Mrs Vairaven covenanted with the sub-lessees:

• That she too would repair, maintain and renew the structure and exterior of the building.
• That she would repair, maintain and renew the common parts;
• That she would “pay the rent and service charge and insurance premium and other rents reserved by the Head Lease…”;
• That she would “use [her] best endeavours to ensure that the Head Landlord keeps the Building maintained renewed repaired and decorated in accordance with his covenants in the Head Lease”.

The sub-lessees’ covenants

The sub-lessees covenanted to pay a service charge.

Each sub-lease set out the percentage payable by each sub-lessee, but unfortunately did not actually define “service charge”.

There does not appear to have been any mechanism in the sub-leases by which the service charge was to be paid either. Not the clearest lease in Kent perhaps, but these things happen.

In any event, the sub-lessees did not dispute their liability to pay a service charge for in respect of costs incurred:

• By Mrs Vairaven on the interior of the property, or
• By Mr Godden, the freeholder, on the exterior.

Mr Godden’s demands of Mrs Vairaven

Mr Godden, the freeholder, made four interim demands of Mrs Vairaven:

• £5,840.00 for the year ending 31 March 2008;
• £6,215.63 for the year ending 31 March 2009;
• £6,480.00 for the year ending 31 March 2010, and
• £6,716.25 for the year ending 31 March 2011.

The demands related to insurance, a management fee, and repairs.

Mrs Vairaven refused to pay the demands because she did not consider that the sums claimed were all due to Mr Godden.

Despite that, Mr Godden took no action to recover the amounts claimed in the 2008 demand.

In July 2009 however, the LVT determined that the 2009 demand was payable in full.

In January 2012, the LVT determined, with Mr Godden’s and Mrs Vairaven’s agent’s agreement, that the total amount payable for the 2010 and 2011 demands together was £12,463.19.

Mrs Vairaven finally paid the interim demands on 01 August 2013, after Mr Godden had begun possession proceedings against her.

Mrs Vairaven’s demands of the sub-lessees

A week after paying Mr Godden, Mrs Vairaven sent a service charge demand to the sub-lessees, requiring payment of the sub-lessees’ respective proportions of the costs that she had had to pay to Mr Godden.

The sub-lessees declined to pay.

Mrs Vairaven issued a county court claim.

The county court transferred the question of the amount of service charge payable by the sub-lessees to the FTT.

The FTT’s decision

Before the FTT, relying on section 19 of the Landlord and Tenant Act 1985, the sub-lessees argued that the works and services provided to them had not been reasonably incurred or carried out to a reasonable standard.

The FTT decided however that the sub-lessees were not liable to pay the service charge demands made of them by Mrs Vairavan because the demands were for payments on account, and the sub-leases did not allow Mrs Vairavan to make on-account demands.

In the alternative, the FTT determined that if the service charge demands were not for payments on account, but were actually end of year charges, the demands for first two years were irrecoverable by reason of section 20B of the Landlord and Tenant Act 1985.

Neither of the above required the FTT to consider the sub-lessees’ section 19 issues.

The appeal

None of the parties were legally represented at the appeal.

Mrs Vairavan was represented by her husband, Mr Vairavan.

Four of the sub-lessees attended: Mrs Jorgensen, Mr Blackett, Mr Smith and Mr Samuels. 

Payments on account or balancing charges?

The parties – and Judge Cooke – agreed that the sub-leases contained no provision for service charge payments on account with a balancing charge at the end of the year, as there was in the head lease.

It was however unclear as to why the FTT decided that the service charge demands were for payments on account:

• The demands made no reference to payment on account;
• They were headed “Service Charge Demand”;
• The County Court statements of case referred to “service charges”;
• The applicant’s Statement of Case in the FTT refers to service charges, and
• There was no mention of payments on account.

Speculating, Judge Cooke wondered whether, in discussion with the FTT, Mr Vairavan had referred to the payments as payments on account.

It was understandable if he had done, because the money paid by Mrs Vairaven to Mr Godden was a payment on account.

The money sought from the sub-lessees was however a reimbursement of that payment.

As between Mrs Vairaven and the sub-lessees, the payments could not therefore be described as advance, or on-account, payments. Her demands for payment from the sub-lessees were demands for reimbursement of the sums that she had actually paid to Mr Godden.

They were not advance payments representing what she might have to pay.

Years ending 2008 and 2009

Mrs Vairaven did not appeal the FTT’s decision for the years ending 2008 and 2009.

That did not surprise Judge Cooke, given her decision the sub-lessees’ service charge demands were end of year demands and not on-account demands. The demands had been made too late: section 20B of the Landlord and Tenant Act 1985 was engaged.

Years ending 2010 and 2011

The demands for the years ending 2010 and 2011 were not however caught by the eighteen month rule in section 20B.

Judge Cooke therefore allowed the appeal on those two years, and informed the parties of her decision orally at the end of the hearing.

Back to the FTT

Her decision meant that the sub-lessees’ arguments on reasonableness under section 19 of the Landlord and Tenant Act 1985 needed to be properly considered.

She accordingly sent back to the FTT for a determination of the amount payable for the service charge years ending 2010 and 2011.

“Unfortunately,” she observed, “that means that there is still no finality and that there may have to be a further hearing; however, I have also pointed out to the parties that the FTT operates a free mediation service, and I have recommended … that they engage in mediation in order to bring matters to the conclusion that all parties need”.

It must be said that the appeal put the parties into a rather messy situation requiring them to adopt the attributes of a Janus because, as Judge Cooke noted, at any hearing, the FTT would have “to apply section 19 to a sum which is final as far as the sub-tenants are concerned, but was only a payment on account so far as the Appellant is concerned”.

The test for the reasonableness of incurred costs being wider than the equivalent test for costs paid on account, it followed that the sub-lessees had more extensive grounds for challenging the service charges demanded by Mrs Vairaven than Mrs Vairaven had of challenging the charges demanded by Mr Godden.

“If [the sub-lessees] succeed it may be possible for [Mrs Vairaven] then to rely on the FTT’s finding in any future proceedings against the freeholder”, she added.

“These are difficulties that would not have arisen if the [sub-lessees] had been joined as parties to the LVT proceedings between [Mrs Vairaven] and [Mr Godden]; likewise in the current proceedings it would have been helpful for the FTT to consider at an early stage when directions were being given whether [Mr Godden] should have been joined”.

Further submissions

There was a short delay between Judge Cooke informing the parties of her decision at the hearing, and the preparation of the written reasons for it. In that delay, Mr Vairaven addressed further submissions to her. The sub-lessees objected.

Judge Cooke dealt with the argument shortly: “I have not taken any of this correspondence into account in writing my reasons; it is not open to Mr Vairavan to seek to re-open the decision I made on 19 April in this way”.

Observations

Payments on account: the reasonableness test

Section 19 of the Landlord and Tenant Act 1985 sets out two distinct tests.

The first applies where the cost of works or services have been incurred. The second applies where the costs have not been incurred and an on-account service charge demand has been made.

When making an application under section 27A of the Landlord and Tenant Act 1985, it is important to know which of the two tests is the relevant one.

The test for on-account payments is the narrower of the two: the FTT is only interested in whether the amount demanded is reasonable.

It is only when costs have been incurred that the wider, “reasonably incurred” and “reasonable in standard” tests come into play.

It does happen that a section 27A application is made to the FTT in connection with an on-account demand, but by the time the application is actually heard, the costs have been incurred and final, balancing charges have been issued.

In that event, the parties need to be clear as to the relevant test.

Where there are challenges to the quality of works and services, everyone will need to be equipped with evidence in relation to the questions raised. That evidence will in all likelihood be more wide-ranging and detailed than the evidence needed to challenge on-account payment demands.

Extra submissions

I know that I am not the only one to whom the irrefutable, case-winning point has come in the dead of night, several days after the conclusion of a hearing. I know this from conversations with colleagues, other members of the Bar, litigants in person – in fact from just about everyone I speak to about the challenges of oral advocacy.

If the tribunal has not given its decision, I think that it is acceptable to send a short note to the tribunal – and the other side – setting out the position. If the parties have overlooked an important point of law that goes, for example, to the tribunal’s jurisdiction, it seems to me that some liaison with the other side is required to ensure that the tribunal is alerted to the issue.

If however the decision has been given, there is no way back, unless the advocate in question has made a submission that needs to be corrected because it was wrong, and it would be to mislead the tribunal to allow it to stand.

Mediation

“En vogue”, “de rigueur”, “le dernier cri” – alternative dispute resolution (ADR) is very much the thing nowadays. Mediation is the form of ADR with which most are familiar, and there can be a real benefit to be derived from it:

• It allows the parties to take control of their dispute and its resolution;
• It allows settlement on terms that the FTT cannot order. Indeed, the settlement does not need to have anything to do with the actual matter before the FTT. The dispute may appear to be about money, but may in fact be about communication or engagement;
• It tends, if done reasonably early, to save the parties money. The FTT’s free mediation service is a real bonus here. LEASE, the Leasehold Advisory Service, is planning, I believe, to provide a mediation service, but for a charge.

In the private sector, The Property Mediators – unsurprisingly – mediate property disputes across a wide range of specialisms, including service charges.

They are planning a “Mediation Awareness Week” in the autumn: it should be an invaluable opportunity to ask all the questions you always wanted, but never dared, to ask about mediation.

Watch this space.

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