PAS Property Services Ltd v Mr & Mrs S D Hayes [2014] UKUT 0026 (LC)

The property in question goes by the name of White Croft Works, 69 Furnace Hill, Sheffield. It comprises two buildings: one old and refurbished, one new.

Mr & Mrs Hayes owned four apartments: two in the old building and two in the new. It was the plumbing in the new building that brought the parties before HHJ Alice Robinson.

Heating and hot water to the old building were supplied by boilers located in each apartment.

Heating and hot water in the new building were provided through a common heating system. A single gas-fired boiler in the basement pushed hot water around the new building on a continuous loop. The loop passed through:

• The radiators in the common parts of the new building;
• The radiators in each apartment, and
• The individual water tanks in each apartment.

“Thus”, said HHJ Alice Robinson, “[it] is known as a closed system. None of the hot water supplied is drawn off by the occupiers of the flats”.

Each apartment in the new building had a timer and a thermostat which empowered the occupier to close off the supply of hot water to the radiators when the air in the apartment reached a certain temperature. When that happened, the hot water simply bypassed the apartment until it was demanded again.

HHJ Robinson summarised: “The timer enables the occupier to choose times of the day and days of the week when hot water from the system is to be supplied or to turn it off completely. The supply of water from the system to individual water tanks can be similarly controlled”.

Each apartment was fitted with a Switch2 meter when it was constructed. The meter enabled the amount of heat supplied to each apartment to be measured. Those meters had not however been brought into commission.

Two definitions were important for the resolution of this appeal.

The “Estate” covered the old and new buildings at White Croft Works. It included the outside space, but expressly excluded the apartments and the common parts.

By contrast, the old and new buildings together comprised the “Building”, but excluded the gardens and other outside areas. Oddly, the definition did not expressly exclude the apartments.

The detail of the service charge appeared in a schedule to the lease:

• The list of “Services” for which the lessees were liable to pay was divided into two parts: the Part I and Part II services. The Estate services formed Part I, and the Building and Common Parts services Part II;
• A further group of lessee liabilities appeared under the heading “Additional Items”.

Each lessee paid a percentage of the total amount spent across the three groups each year.

Initially no charge was made for the gas supplied to the common heating system – but 2009 brought a new landlord who began to charge the lessees in both old and new buildings for the gas consumed by the common heating system in the new building.

The LVT was required to determine the extent to which the lessees of the old and new buildings were liable to pay for gas consumed by the common heating system in the new building alone.

It found for the lessees. The landlord appealed.

The parties were in agreement that the correct legal approach towards interpretation of the Lease appeared in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, in which Lord Hoffman set out general principles of construction.

The lessees also relied on Sheldon Square Residents Association v St George North London Ltd [2011] UKUT 13 (LC), which underlines the importance of construing the Lease as a whole against the factual background which existed when the leases were granted.

The landlord relied on Arnold v Britton [2013] EWCA Civ 902 as recent authority for the proposition that the court cannot simply re-write an agreement if the agreement turns out, in practice, to be unfair.

The landlord took HHJ Robinson to three elements of the lease which, it argued, entitled it to claim the cost of the gas used in the new building:

• That most weasely of false friends, the sweeper clause, in Part II of the service charge schedule;
• A reference to the costs of gas in the “Additional Items” section of that schedule, and
• The tenant’s covenant to pay for all gas “used or consumed in the apartment”.

The first question was whether the cost of gas supplied to the apartments was recoverable by virtue of it being a “Service” within the meaning of Part II of the service charge schedule.

Wording of the clause

The Part II Services included repair, maintenance, cleaning, lighting and refuse disposal connected with the Building and Common Parts.

The landlord relied on the sweeper clause at the end of the list, which read: “any other services relating to the Building and the Common Parts or any part of them reasonably provided by the Landlord from time to time during the Term and not expressly mentioned”.

Analysis

HHJ Robinson’s analysis is divided into two sections:

• Whether heat supplied to the apartments was a Part II Service, and
• Whether heat supplied to the common parts was a Part II Service.

Liability to pay for heat supplied to the apartments

HHJ Robinson began her determination of this issue with a number of propositions:

• Service charges are intended to enable a lessor to recover the cost of works and services supplied for the benefit of more than one lessee where buildings are in multiple occupation;
• A reasonable person would not normally expect to pay for the costs of services provided to individual lessees in a block with flats let on 125 year leases.
• Utilities are normally provided by third party suppliers on a direct contract with the lessee, even if the lessee enjoys the right to use the actual pipes and conduits through which those utilities pass.

In her judgment, the lease did not suggest that the Part II services – for example, cleaning – would include services provided to the apartments too. Where a service was intended to extend to the apartments, the lease contained express words to that effect.

Against that background, and citing Lloyds Bank v Bowker Orford [1992] 2 EGLR 44, HHJ Robinson determined that the definition of “Building”, although not expressly excluding the apartments, “would not lead a reasonable person to conclude that it embraced the provision of heat to individual apartments through the common heating system”.

The heating of the apartments was accordingly not a Part II Service. The lessees could not be fixed with liability under that element of the lease.

Liability to pay for heat supplied to the common parts

Conversely, HHJ Robinson held that the cost of heat supplied to the common parts of the new building was a Part II Service, and was accordingly recoverable by way of service charge from the lessees of both the old and the new building.

“I recognise”, she said, “that the lessees of apartments in the refurbished building would have to contribute towards [the cost] … even though they derive no benefit from it. However, this is a common feature of a number of the Services … and is an inevitable consequence of the decision to characterise White Croft Works as a single entity for the purpose of the Lease”.

Wording of the clause

“The cost of the supply of electricity gas oil or other fuel and water for the provision of the Services and for all purposes in connection with the Estate and/or the Building and/or the Common Parts or any part thereof”.

Analysis

HHJ Robinson noted that the supply of gas for the purpose of heating the apartment was made clear by the reference to the words “any part thereof” in relation to the Building.

She nonetheless declined to accept the landlord’s arguments for three reasons.

First, she had already determined that the provision of heat to the apartments was not a Service within the meaning of the Part II Services.

Second, most of the “Additional Items” were supplementary to the Part I and Part II Services rather than freestanding.

Third, “the phrase “for all purposes in connection with” meant, in effect, in connection with the management of the Estate, Building and Common Parts. It did not extend to a service supplied to individual apartments for which no provision is made anywhere else in the service charge schedule”.

Concluding this issue, HHJ Robinson held that clear words would be required to permit a landlord to recover the costs of heating apartments through the service charge. Levitt v London Borough of Camden [2011] UKUT 366 (LC) was just such an example.

This ground of appeal had nothing to do with the service charge.

It was not raised before the LVT, but HHJ Robinson dealt with it because the parties both “recognised it was important for them to have guidance as to how [the gas] costs could be recovered, if at all”.

Wording of the clause

As is generally the case, each lease contained covenants pursuant to which each lessee made payments to the landlord.

The covenants to pay the rent, the service charge and insurance rent were followed by:

• A covenant “to pay forthwith on demand a fair and proper proportion (to be determined by the Landlords Surveyors acting reasonably) of any outgoings expenses or assessments…”
• A covenant to pay “the cost of all water electricity gas and telephone (including all meter rents) used or consumed in the Apartment”.

The common ground

It was common ground that the second of these two covenants enabled the landlord to recover the cost of gas supplied to the common heating system for heating individual apartments. HHJ Robinson agreed.

The dispute

The dispute between the parties was as to how the amount charged should be calculated.

I hope I will be forgiven for writing that HHJ Robinson’s decision here was not, to my mind, a model of clarity.

It started well: “the covenant … is to pay ‘the cost of all gas used or consumed in the Apartment.’ As a matter of language, that is not apt to embrace the cost of gas used or consumed in other apartments”.

Things thereafter went a little askew: “… identification of a fair and proper proportion of the gas used or consumed in each apartment is a matter for the Landlord’s Surveyor, acting reasonably, as things stand at the moment there is no means of calculating such a fair and proper proportion other than by monitoring consumption through the meters”.

Whilst I can grasp the relevance of a liability to pay a “fair and proper proportion” of the gas consumed in all of the apartments, I am puzzled as to how the requirement to pay for “all gas used or consumed in the Apartment” became a requirement to pay a “fair and proper proportion” of that gas.

I suspect that “all” and “fair and proper proportion” were conflated. It would appear that the amount payable by each lessee for gas comprised two figures:

• The exact cost of “all” gas used or consumed in each apartment, plus
• A “fair and proper proportion” of the gas used or consumed in the common parts.

The two figures added together can probably be described as a fair and proper proportion of the total gas costs that each lessee is liable to pay in connection with each apartment. They are not however a fair and proper proportion of the gas used or consumed by each lessee in each apartment.

Back to the judgment.

HHJ Robinson reminded herself that Westminster City Council v Fleury [2010] UKUT 136 (LC) is authority for the proposition that, provided that the landlord’s surveyor’s decision is reasonable, it did not matter that other reasonable decisions could have been taken.

In her judgment however, the only reasonable way of calculating the proportion of each apartment’s gas consumption in relation to total consumption in the building was to use the metered figure as a starting point.

Apportionment by floor area would not take into account individual consumption and would not therefore be reasonable, even if it ultimately turned out to be as fair as meter reading – and cheaper, because the costs of meter monitoring would be avoided.

The appeal was dismissed.

I am with HHJ Robinson’s conclusion on the non-service charge liability point, but there is mischief at work in the closing paragraphs of this decision.

The Upper Tribunal’s out-of-jurisdiction experience

Plainly the Upper Tribunal’s jurisdiction amply covers the interpretation of the service charge schedule.

I struggle however to find a jurisdiction for final element of HHJ Robinson’s decision. She is clear that the point does not fall within the ambit of the service charge. Her analysis is based on the parties’ need for guidance on the recoverability of gas costs, although she does not answer the question as to what the parties were to do in the absence of metered consumption figures.

As a matter of practicality, it seems to me that the Tribunal cannot be faulted in giving guidance that would help the parties resolve their differences, but as a matter of procedure, I am more hesitant.

Where is the jurisdiction for the Upper Tribunal to speak to covenants which are neither service charges or administration charges? Was this part of the decision an arbitration by any other name?

A single point of reasonableness?

After some initial hand-wringing, I reconciled HHJ Robinson’s rather trenchant approach to reasonableness with the general rule that reasonableness is not a fixed point, but extends across a range of actions. The apparent inflexibility is explained away by the conflation of the phrases “all” and “fair and proper proportion”.

I am therefore comforted that we are not heading towards a position where there can be only one reasonable answer, as opposed to a range of reasonable responses.

This appeal is tricksy in so many ways.

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