South Tyneside Council v (1) Nicholas Ciarlo, (2) Alan Hudson [2012] UKUT 247 (LC)

South Tyneside Council was criticised by an Audit Commission report in 2007 for charging its long lessees what was effectively a token £25.00 per annum management fee. The criticism was made because the balance of the management costs was being met from the Council’s housing budget: the Council’s secure tenants were therefore subsidising the long lessees through their rent.

As a result of the Audit Commission report, the Council created South Tynes Homes, an Arms Length Management Company (an ALMO). The ALMO took on responsibility for the management of the Council’s entire leasehold portfolio, ie both short and long leases.

At the same time, the Council decided to increase its management fee, but faced the problem of calculating the cost of managing properties let on long leases.

It engaged in a detailed calculation of the various elements which went to make up the fee it paid to the ALMO, separated the long lessee costs from the social housing costs, reduced the long lessee costs by 15%, which was the figure estimated to be recoverable from long lessees directly as administration charges, and arrived at an annual management fee some £100 or so higher than the previous £25. That management figure was reduced by a few pounds to £125 per tenant, irrespective of the nature of the property, and was, in the following years, increased in line with inflation.

Before the LVT, it was not in dispute that the leases in question entitled the Council to recover its costs of management. However the items covered by the charge were in issue, because in its calculations, the Council had included the ALMO’s overhead costs, including IT support, human resources and the costs of governance.

The LVT decided that these costs were not recoverable under the terms of the lease because they were not costs incurred for the “proper and reasonable management of the Building”.

The LVT therefore went on to determine a reasonable management charge by identifying three categories of property, and three levels charge, by reference to the extent of the common areas. On the LVT’s calculation, the management fee for the third type of property (the one with the most extensive common parts and gardens) was a rather eye-watering 2½ times the amount actually being charged by the Council at the time of the application.

The extent of the costs recoverable by way of management charge

HHJ Huskinson began the “Conclusions” section of his decision by identifying the clauses of the lease at issue. (For an example of a successful appeal where the LVT failed to do this, see here.)

Comparing the terms the leases before him with the lease in question in the unreported case of City of Westminster v Pottle, he concluded that “the management required by that clause is not restricted to the provision of services referred to elsewhere in the lease.  In other words the management which the appellant is entitled to provide (and charge for the cost of providing) involves not merely providing the services repairs etc referred to elsewhere in the lease but extends to the general managing of the relevant building as part of the appellant’s residential property portfolio.”

He concluded that the decision of the LVT could not therefore stand.

Reasonableness of the costs

The next question was whether the costs charged by the Council were reasonable. The factual matrix was the following:

• The Council’s agreement with the ALMO was to pay 100% of the ALMO’s costs of managing its housing stock. The ALMO being a not-for-profit organisation, there was not element of profit in those costs;
• The Council’s agreement with the lessee entitled it to recover in advance a proportion of the “reasonably estimated amount required to cover the cost and expenses incurred or to be incurred by the Council in carrying out the obligations or functions contained in the lease”, including managing the building in which the lessee’s property was located;
• The ALMO did not invoice the Council its management costs for each separate building;
• Although the lease entitled the Council to appoint a managing agent, it did not require the Council to agree terms and conditions of payment which would require the managing agent (here the ALMO) to charge a separate and specific amount for the management of each specific building.

How then was the management charge to be calculated? Not in the way calculated by the LVT:

“The fact that no separate and specific amount is charged by [the ALMO] to the [Council] for managing [a given building] does not mean that in consequence some figure must be assessed as a generally reasonable management fee for managing this sort of building (without reference to [the ALMO’s] actual costs which are recharged to the appellant).  The LVT appears to have taken the contrary view and to have followed the course of assessing such a generally reasonable fee, based it seems on an uplift of previous years’ management fees.  I respectfully conclude that the LVT was wrong in so doing”.

HHJ Huskinson accepted the Council’s calculation method, noting that there was an element of common sense and an element of swings and roundabouts in its analysis. Common sense he found because if the Council was obliged to calculate precise and detailed figures for the management cost of each individual building, the management costs themselves may be substantially increased by the cost of the “detailed work needed in seeking this (unobtainable) precision”. Swings and roundabouts he found to be probable since for every building there would be years when very little needed to be done, followed by occasions when concentrated management would be required.

The case of City of Westminster v Pottle is unreported, but is useful as authority for the proposition that a management charge clause is not to be read restrictively. I have had difficulty locating a transcript of Pottle, but the  same point is illustrated in Lloyds Bank plc v Bowker Orford [1992] 2 EGLR 44 and Wembley National Stadium Ltd v Wembley London Ltd [2008] 1 P&CR 3.

Both cases are judgments of the High Court, the first by Neuberger J. and the second by the Chancellor, Sir Andrew Morritt. My colleague in Chambers Ellodie Gibbons relied on them and on two Lands Tribunal decisions, London Borough of Brent v Hamilton LRX/51/2005 and Norwich City Council v Marshall LRX/114/2007 in her successful appeal to the Lands Chamber in 2011 in Palley v LB Camden [2011 UKUT 469.