Pendra Loweth Management Ltd v Mr and Mrs North [2015] UKUT 0091 (LC)

We are in tripartite lease territory here. The parties to the lease are:

1)    The landlord, Mr Hick, who was not a party to the proceedings;

2)    The lessees, Mr and Mrs North;

3)    The management company, Pendra Loweth Management, which appears to have managed the whole site. It was not a residents’ owned management company.

Mr and Mrs North’s lease required them to pay a peppercorn rent plus four further charges:

• The Estimated Service Charge;
• The Service Charge Adjustment;
• The Additional Estimated Service Charge, and
• The Insurance Charge.

These four further charges were to be paid to the management company in consideration for various services.

The question before the Upper Tribunal was whether the management company’s demands for the “Estimated Service Charge” were payable.

The lease contained the following relevant definitions:

• Service Expenditure: all of the money spent by the management company in performing its obligations under the lease;
• Service Charge Year: the calendar year;
• Service Charge: the lessee’s proportion of the Service Expenditure.

I have not omitted a definition for the Estimated Service Charge – the lease did not expressly contain one.

The management company covenanted:

To estimate the service expenditure in advance for each service charge period and based upon such estimate to give notice to the [lessees] and to take all necessary steps to collect the amounts of estimated service charge due on the due dates.

The lessees covenanted:

[To pay] such sum demanded on account of the service charge in respect of each service charge period as the management company shall specify by notice in writing at its discretion to be a fair and reasonable interim payment having regard to the service expenditure estimated by the management company.

This as we shall see, was in Martin Rodger QC’s view the only description of the Estimated Service Charge in the lease.

The management company had various accounting obligations:

• To keep proper books of account relating to the management of the village;
• To calculate the amount of any service charge shortfall payable by each lessee within 90 days of the year end;
• To have an annual audit of the accounts carried out;
• To provide a statement by a firm of independent chartered accountants verifying that the accounts were true and fair, and
• To provide a copy of the accounts, with the accountants’ statement, to the lessees within 90 days of the year end.

It was common ground before the FTT that, in the disputed years, the management company had not provided accounts within 90 days of the year end.

It was also common ground that there had been no audit of the accounts – in fact, the accounts had never been audited. Apparently in 2008, a majority of the lessees had voted against an audit of the accounts.

The management company calculated the estimated service charge every autumn. It produced partial draft management accounts. Working with its accountant, it used those draft accounts and accounts from previous years to calculate the budget for the following year.

The budget contained an estimate of all of the management company’s likely income and expenditure for the following year.

Mr Hick and the management company issued a claim in the county court against one it the lessees in September 2012.

The court transferred the claim to the LVT, as it then was, for a determination of the lessee’s liability to pay the £5,426.82 of service charges alleged to be due.

Once in the LVT, applications appear to have proliferated, not only in terms of the temporal scope, but also as to the number of lessees involved. Ultimately, the lessees of twelve cottages on the site were engaged.

2006-2010

These demands:

• Carried the name and address of the management company, but
• Did not carry the name or address of the landlord.

The layout of the demand was the same for each of these years, and stated that cheques were payable to Pendra Loweth Management.

The demand was accompanied by a budget, which showed anticipated income and expenditure for the whole site.

Income included revenue from:

• Maintenance charges;
• The café;
• The bar;
• The shop;
• Other village facilities;
• Insurance claim receipts.

Anticipated expenditure included, amongst other things:

• Stock for the café and shop;
• Insurance;
• General and water rates;
• Ground maintenance.

There was an expected surplus, described as “profit”. For the 2007 budget, the projected profit was just over £20,000.00.

2011

In 2011, Mr Hick’s name and address were added to the demands.

The FTT decided to deal with the dispute in two stages.

The first stage would establish whether the service charges were payable at all when measured against:

1)    The terms of the leases, and

2)    Section 47 of the 1987 Act.

The second stage would then deal with quantifying any amount held to have been payable.

Therefore, even if the management company succeeded on stage one, it was not out of the woods entirely. The question of the reasonableness of the charge under section 19 of the 1985 Act remained to be determined in stage two. 

The FTT decided that the management company did not pass first base: the service charge demands were defective and, accordingly, not payable at all.

First, the only accounts which had been prepared were the company accounts. They included expenditure incurred in relation to Mr Hick’s other business interests on the site, including maintenance of the club house, advertising and rental income.

Those accounts could therefore not be said to be service charge accounts, because they were “polluted” by non-service charge costs.

Further, the lease required an annual audit of the service charge. The purpose of this audit was to give the lessees the comfort of knowing that the estimated service charge for the following year had been based on what had really been spent on service charges in the previous year.

The pollution and failure to piggy-back the estimated service charge on the previous year’s audited accounts meant that the lessees could not be confident that the estimated demands were accurate.

Finally, for the 2006 to 2010 years, the demands had not contained the name and address of the landlord as required by section 47 of the 1987 Act.

Permission to appeal was granted on condition that the management company produced annual audited accounts for the years 2007 to 2013. This was done, but the dispute was not resolved.

The issues before Martin Rodger QC on the appeal were threefold:

• Whether the estimated service charge demands were polluted by non-service charge expenditure;
• Whether the piggy-backing of estimates on audited accounts was a condition precedent to the recovery of the estimated service charge demands. The Upper Tribunal described this, rather more elegantly than I have done, as the “continuum of practice” point, and
• Whether the estimated service charge demands which had not contained the landlord’s name and address were defective by reason of section 47 of the 1987 Act. To my mind, that is the major point of general application highlighted by this case.

Martin Rodger QC noted that the Estimated Service Charge was effectively defined in the lessees’ covenant to pay as a “fair and reasonable interim payment having regard to the Service Expenditure estimated by the Management Company”.

He noted that:

• There was no prescribed wording or format for the demand;
• There was no requirement for the demand to be accompanied by a budget.

In what appeared to me initially to be a rather startling observation, he said:

“… the lease does not require as a pre-condition of liability to pay the Estimated Service Charge that the estimate must have been prepared by reference to a budget which follows strictly the categories of expenditure listed as Service Expenditure … and excludes from consideration any other items… If the [management company] considers that the budget it has prepared for its own activities in the forthcoming year is a suitable approximation of its likely expenditure on service charge items in the same period, I can see no reason to interpret the lease as requiring some process of stripping out items of expenditure which may not fall strictly within Service Expenditure”.

My initial startlement was calmed when I reminded myself that that observation was made on the question of whether the Estimated Service Charge demand complied with the lease – it was made not about the amount payable pursuant to that demand.

Referring to Paragon Finance Ltd v Nash [2002] 1 WLR 685 and Lewison LJ’s textbook “The Interpretation of Contracts”, Martin Rodger QC continued:

“Where parties agree that one of them is to be trusted to make an estimate which the other is required to pay, subject to an account being taken at a later date, and the estimate is made in good faith, there seems to me to be little or no scope to challenge the estimate except by relying on s. 19(2) of the 1985 Act”.

Conversely:

“Where a deliberately inflated estimate has been submitted in bad faith or an entirely arbitrary figure has been chosen the contractual position is likely to be different and it may be possible to say that, even without regard to the statutory cap on advance payments, the estimate is not payable in full”.

As the FTT had expressly held that there were no allegations of overcharging and/or bad faith in the case before them, there was no mileage in an argument based on inflation of the estimate or bad faith.

Finally on this issue, Martin Rodger QC was unimpressed by the argument that the Estimated Service Charge demand was not payable unless the lessee was provided with information which allowed him to assess whether the Estimated Service Charge demand was fair and reasonable. Good practice might require a lessee to be furnished with information, but the lessee’s liability to pay was predicated on the lease, not on the management company following good practice.

The FTT had therefore been wrong to find that the lessees bore no liability to pay the Estimated Service Charge because of non-compliance with the terms of the lease.

Martin Rodger QC began his determination of this issue with rather more caustic words for the management company:

“Although it should go without saying, the performance of the … management company has been so deficient in this case that it is worth emphasising that compliance with [the requirement to produce audited accounts] is not optional. It is an essential safeguard for the lessees whose money the management company is entrusted to spend”.

It may have been the case that some of the lessees had voted against the expense of audited accounts being prepared, but that did not mean that the management company was relieved of the responsibility of having the accounts audited for those lessees who had not voted that way.

That said, Martin Rodger QC was not minded to hold that preparation of audited accounts for one year was a pre-condition to liability to pay the Estimated Service Charge for the following.

There was in his view no basis for that argument:

• The lease did not connect provision of audited accounts with liability to pay the Estimated Service Charge;
• From a practical perspective, the management company was able to estimate the charge for the following year without audited accounts, and
• If the management company had to wait until the accounts for a given year (eg 2010) were audited before calculating the Estimated Service Charge for the following year (ie 2011), that following year (ie 2011) may be considerably advanced before the estimated demand for that year (ie 2011) could be issued.

Martin Rodger QC did not however leave the subject there.

“The absence of proper accounts for the previous years may, of course, provide grounds for treating the estimate with circumspection or even suspicion”, said he. “It may make it easier to justify a reduction under section 19(2) on the basis that there is little to suggest that the estimate is reasonable; but, as a matter of contract the payment of the Estimated Charge is not conditional on the provision of audited accounts”.

A quick reminder: the management company was responsible for the provision of services and was entitled to collect the service charge. The landlord only stepped into the management company’s shoes if the management company failed in that responsibility.

The lessees argued that they were not liable to pay the service charge demands for the years 2006-2010 because they did not contain the landlord’s name and address as required by section 47 of the 1987 Act.

Two points persuaded Martin Rodger QC to find for the management company here.

First:

• Section 47(1) requires the landlord’s name and address to appear on any “written demand” given to a tenant of premises;
• Section 47(4) defines “demand” as “a demand for rent or other sums payable to the landlord under the terms of a tenancy”;
• Section 60(1) defines “landlord” for the purposes of section 47 as “the immediate landlord”;
• The service charge was payable to the management company, and only to the landlord if the management company defaulted, which, in this case, it had not;
• Therefore the management company’s demand for payment of the Estimated Service Charge was not a “demand” within the meaning of section 47(4).

Second, and in the (very brief) alternative:

• Section 47(2) provided that the charges were not to be considered as “due from the tenant to the landlord” in the event of non-compliance with section 47(1);
• As the Estimated Service Charge was payable by the tenant to the management company, the sanction did not bite.

The appeal was allowed.

“I very much hope”, said Martin Rodger QC, “that the parties will see the sense in reaching agreement … and concentrating attention on the final accounts if any issues now arise in relation to them.”

Conditional grant of permission to appeal

Rule 23(1) of the Tribunal Procedure (Upper Tribunal) (Lands Chamber) Rules 2010 provides that:

“The Tribunal may give permission to appeal with such limitations or conditions as the Tribunal thinks fit”.

Rule 21(8) states that:

“Unless it decides to dismiss the application without representations from the respondent, the Tribunal must send or deliver a copy of the application and accompanying documents to the respondent, and must specify a time limit within which any representations relating to the application must be made”.

The combined effect of the two rules is that whenever the Upper Tribunal is considering granting permission to appeal, it must give the potential respondent an opportunity to have its say.

In cases where, for example, only part of the FTT’s decision is challenged, a landlord respondent may therefore include in its representations a submission that any amounts which are not subject to the appeal should be paid as a condition of the grant of permission of appeal.

Alternatively, where, as here, it is the landlord who seeks permission to appeal, and it is common ground that it has failed to comply with a given term of the lease, the Upper Tribunal has the power to require that failing be rectified as a condition of permission, especially where doing so may resolve the underlying issue between the parties.

Rule 23(1) is therefore a handy power vested in the Upper Tribunal.

Good faith

Now for something a little off piste.

In his analysis of the pollution point, Martin Rodger QC comments that as a matter of common law, an advance service charge estimate should be made in “good faith”.

“Good faith”: ma foi, is that not a principle of European, rather than English and Welsh, law?

Since residential service charges benefit from a statutory regime which limits a landlord’s power to spend lessees’ money, the common law position is arguably not as relevant to this decision as it might otherwise be.

Irrelevance never having been a deterrent to my curiosity, I scuttled off to first principles of contract law in Chitty on Contracts, and then down to the library to investigate (Sir Kim) Lewison’s The Interpretation of Contracts, currently in its fifth edition.

Chitty, the practitioner text on contract law, reports the waxing and waning of a requirement for good faith in contract law, and concludes, at paragraph 1-039 of the 31^st edition:

Nevertheless, the modern view is that, in keeping with the principles of freedom of contract and the binding force of contracts, in English contract law there is no legal principle of good faith of general application, although some authors have argued that there should be.

On then, to The Interpretation of Contracts.

Paragraph 14.11 addresses the exercise of discretion within contracts. It is therefore relevant to the quantification of advance service charges where the lease does not contain a set formula by which the advance charge can be calculated. Sir Kim records that the senior courts have swayed to and fro on good faith:

• In 1998, Brooke LJ held that “provided the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene”;
• In 2005, Potter LJ expressly denied the existence of a doctrine of good faith in English contract law in Horkulak v Cantor Fitzgerald International [2005] ICR 422;
• In 2008, in Socimer International Bank Ltd v Standard Bank London Ltd [2008] Bus LR 1304, Rix LJ held that “a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused”.

What emerges from the above is that where a party to a contract is entitled to make a decision by using its discretion, honesty and genuineness are key components of its lawful exercise, and arbitrariness, capriciousness and perversity are key indicators of the reverse.

I have to say that I remain unclear as to what “good faith” adds to those characteristics.

It is however clear that the Supreme Court is content with good faith appearing in private contract law disputes: the phrase crops up in Braganza v BP Shipping Ltd [2015] UKSC 17, decided a mere month or so ago.

The facts of Braganza are unhappy in the extreme – Mr Braganza was a ship’s engineer lost overboard in the mid-Atlantic, and the case turned on the process by which BP Shipping had decided that his wife was not entitled to death in service benefits.

At paragraph 18 of the judgment, Baroness Hale DPSC sets out the reasons why the court implies into a contract terms as to how one contracting party exercises its discretion in relation to another:

“Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common. It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest. That conflict is heightened where there is a significant imbalance of power between the contracting parties as there often will be in an employment contract [which was the form of contract under scrutiny in Braganza]. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given”.

She then cited Rix LJ’s 2008 observation in Socimer International Bank Ltd v Standard Bank London Ltd, “good faith” and all.

In so doing, she was not alone. Her fellow judges, Lord Neuberger PSC, Lord Kerr, Lord Hodge and Lord Wilson JJSC also did so without batting an eyelash. 

Amendment to section 47 of the 1987 Act

Returning to residential landlord and tenant law, I find that section 47 of the Landlord and Tenant Act 1987 raises an unexpectedly knotty point about landlords, management companies and the purpose of disclosing the landlord’s name and address.

In Triplerose Ltd v Grantglen Limited & Cane Developments [2012] UKUT 0204 (LC), HHJ Karen Walden Smith held that section 47 of the 1987 Act exists to inform the lessee of the identity of his/her landlord.

Modern leases are increasingly tripartite: there is a landlord, a lessee, and a management company, sometimes resident-owned, sometimes landlord-owned.

In tripartite leases, that management company, as at the Pendra Loweth holiday village, generally carries the maintenance and servicing responsibilities which, in a bipartite landlord-lessee contract, would normally lie at the landlord’s door.

In the light of section 47 as currently framed, a landlord to a tri-partite lease can avoid having to reveal his/her identity, at least so far as service charge demands are concerned.

Rent, however, is generally paid to the landlord, so, unless the rent is a peppercorn, section 47 does have some force in the tripartite lease scenario.

It might be said that section 1 of the Landlord and Tenant Act 1985 helps out here.

Section 1 obliges a landlord to disclose his identity. It entitles lessees to serve a request for the name and address of the landlord on:

• Any person who demands, or the last person who received, rent payable under the tenancy, or
• Any other person for the time being acting as agent for the landlord, in relation to the tenancy.

“Landlord”, in section 1, means the immediate landlord.

Problem solved, one might say.

Not necessarily, I would reply.

Why?

Because it is not at all clear that a failure to comply with a section 1 request can be enforced by a claim for an injunction.

Section 1(2) of the 1985 Act provides that the sanction for failure to comply with section 1 is a criminal one.

Applying Di Marco v Morshead Mansions Ltd [2014] EWCA Civ 96, it could, it seems to me, quite easily be argued by the defendant that the only sanction available is prosecution.

The wide availability of registered ownership information on HM Land Registry may be a simple means of avoiding the stresses and costs of bringing a private prosecution – and of actually obtaining the information about the landlord which is sought.

Alternatively, perhaps the purpose of section 47 is to ensure that the lessee knows the identity and address of the party who bears ultimate responsibility for providing the service in respect of which the lessee’s payment is made.

If that is the case, it does not fulfil that purpose, because it relates only to disclosure of the landlord’s details.

Whichever way section 47 is read, there is a good argument for amending it either:

• To require the landlord’s name and address to be provided on all demands relating to the property which is the subject of the lease, or
• To require the demand to bear the name person who is the ultimate recipient of the lessee’s payment.

Management company/managing agent

It is worth emphasising that the section 47 argument which saved the management company here only did so because the management company was one of the parties to the lease.

Plainly, that argument would not fly if the landlord were responsible for providing services and collecting service charges and had engaged a managing agent to do so.

In the first situation, the management company is a party to the lease, and has rights and obligations under it.

In the second, it is the landlord who enjoys the rights and bears the obligations. The managing agency is appointed by it to act on his/her behalf.

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