Sussex Villas Ltd v (1) Dr Huimin Wan (2) Neil Raine Harrison [2014] UKUT 0029 (LC)

The lease

The service charge was described as the “Annual Maintenance Provision” in the lease. As is fairly normal, its mechanics were set out in a Schedule to the lease. The Schedule was divided into two parts:

Part 1: landlord’s and lessee’s covenants

In Part 1 the landlord covenanted to provide various maintenance and repair services. The lessee covenanted to pay the service charge.

Part 1 also summarised the payments that the lessee was required to make by way of contribution to the Annual Maintenance Provision:

• A fixed amount of £50 per year, payable in advance, half in December and half in June. This was defined as the “Maintenance Provision”, plus
• A “further amount” within one month of receipt of the certificate described in Part 2 of the Schedule.

That further amount was the service charge equivalent of the great Grimpen Mire in the Hound of the Baskervilles: innocent and appealing in appearance, but, as it transpired, dark, deceptive and riddled with risk.

Part 2: computation of the Annual Maintenance Provision

Part 2 explained how the Annual Maintenance Provision was to be calculated. Martin Rodger QC described the provisions as “fairly indigestible”.

The year ran from 25 December to 24 December;

The Annual Maintenance Provision “in respect of any year” was to be computed as soon as possible “after the beginning of January in the succeeding such year”, and was to comprise three elements.

Element 1

The expenditure estimated to be incurred by the landlord “in such year”, with two deductions:

Deduction 1: “Any unexpired reserve already made … in respect of such expenditure”, and

Deduction 2: “Any excess of the corresponding estimate in relation to the immediately preceding year over the expenditure actually incurred in that year”.

Element 2

An “appropriate amount” towards expenditure which was not required on an annually recurring basis, eg painting and repairs to the building. That appropriate amount was “to be computed in such manner as to ensure as far as reasonably foreseeable that the aggregate amount included in the Annual Maintenance Provision for such matters as aforesaid pursuant to sub-paragraph (a) hereof and to this sub-paragraph shall not unduly fluctuate from year to year”.

Element 3

Any part of the Maintenance Provision which had not been paid by any lessee, provided that the landlord had:

• Tried to recover it, and
• The service charge account was credited with amounts subsequently paid.

Certification

A signed certificate was stated to be conclusive of “the amount of the Annual Maintenance Provision for any calendar year”.

There was a unanimous consensus before the LVT that the payment of the expenditure under the element 1 of the Annual Maintenance Provision entitled the landlord to “recover actual expenditure at the end of each accounting period, an allowance being made for payments made on account”. The LVT focused on Element 2, and noted two problems for the landlord:

1) Part 1 of the Schedule only allowed the landlord to recover £50 per year, and

2) The service charge in Element 2 was not to “unduly fluctuate from year to year”.

The non-fluctuation clause was particularly problematic because the landlord had not maintained the property, had therefore not spent very much on it, and now needed to spend quite a lot.

The LVT was not impressed. It determined that the landlord was not entitled to recover the cost of the works from the lessees, even though those costs were reasonable within the meaning of section 19(2) of the 1985 Act.

It LVT compounded the landlord’s discomfiture by making a section 20C order.

The landlord appealed both limbs of the LVT’s decision.

Martin Rodger QC heard the appeal.

He determined that the LVT and advocates before it had been “fundamentally mistaken”. He explained why.

Element 1

This was not, in his view, the computation of past or actual expenditure because the lease referred to expenditure “estimated to be incurred”. It would make no sense “if the whole year had already elapsed when the computation was undertaken and no expenditure would remain “to be incurred” or would require to be “estimated””.

The provision was not “designed to enable the landlord to recover actual expenditure which has already been incurred … but rather is a provision designed to enable the landlord to recover, in a conventional manner, estimated expenditure which had not yet been incurred”.

He moved on to consider the deductions to be made from element 1.

Deduction 1: “Any unexpired reserve already made … in respect of such expenditure”

Although the lease referred to paragraphs which had nothing to do with the creation of a reserve fund, Martin Rodger QC decided that its draftsman must have meant to refer to any reserve fund money which had not been expended.

As to the meaning of the clause, he held that the landlord was obliged to deduct from his estimated expenditure

• Any costs for works which needed to be carried out in the forthcoming year, and
• For which money had been paid into the reserve fund.

Deduction 2: “any excess of the estimate made in the preceding year over the expenditure actually incurred in that year”

He was fortified in his conclusion on deduction one when he came to the second deduction, which was effectively a balancing operation whereby unspent sums from the previous year’s estimate were credited to the Annual Maintenance Provision account.

“That excess”, said he, “cannot include the contribution to the reserve in the immediately preceding year (otherwise there would be no point in the accumulation)”.

Element 2

Martin Rodger QC agreed with the LVT on their interpretation of this element, which was intended to provide for contributions to the reserve fund for items of expenditure which did not occur on an annual basis.

The knotty phrase however was “shall not unduly fluctuate.”

The lessees argued that this meant that contributions to the reserve fund should not unduly fluctuate.

Martin Rodger QC disagreed: contributions to the reserve fund were to be computed so as to ensure that the “aggregate Annual Maintenance Provision” ie the combined total of elements 1 and 2, did not unduly fluctuate. This meant therefore that the landlord could reduce the contributions to the reserve fund in years where the annually recurring expenditure was for whatever reason unusually high, or, presumably, unusually low.

It was not the case, in his view, that element 1 was in any way limited so that the annually recurring expenditure was not to fluctuate unduly.

Element 3

This entitled the landlord to recover from the other lessees any sum falling within the meaning of “Maintenance Provision” which it had not been able to recover from the lessee who bore the liability to pay it.

It was not an open door to the levying of unexpected and unlimited sums on the lessees, since the sum recoverable was defined as the “Maintenance Provision”, not the “Annual Maintenance Provision”. The Maintenance Provision equated to £50 per year and was provided for in the Part 1 of the Schedule.

In words redolent of one dusting himself down after a good job well done, Martin Rodger QC concluded: “This interpretation of the … Schedule seems to me to be coherent and logical”.

By this stage of the decision, I was running low on coherence and logic.

Opinions were divided. Justin Bates, who appeared on a pro bono basis for Mr Wan, one of the lessees, said that the LVT had read the Annual Maintenance Provisions as advantageous for the lessees.

Martin Rodger QC’s view differed: “I would regard [the Annual Maintenance Provisions] as, at best, a mixed blessing. It is true that the [lessee] would not be troubled to fund expenditure before it had actually been incurred and would therefore enjoy a cash-flow benefit, but experience suggests that the practical impact of such a clause is to act as an incentive to a landlord to put off incurring necessary expenditure leading to neglect and unmanageably large bills at a later date”.

In any event, he concluded that: “whether advantageous or disadvantageous to the tenant, it does not seem to me that the construction urged upon the LVT by the parties was correct”.

Inevitably, the different interpretation of the lease led to a different amount payable by the lessees.

The landlord had planned to spend £24,500 on the works.

The landlord had demanded £9,453.17 from the lessees.

£8,166.66 of that was each lessee’s contribution to the “reserve’. To coin a phrase (not used in the judgment), Martin Rodger QC woz not bovvered that that sum had been described as a contribution to the reserve rather than as intended expenditure for the year because the documents accompanying the demand made it clear why the sum was being demanded.

There were however two points that needed to be sorted out.

First, the LVT had determined that £24,500 was a reasonable estimate of the cost of the works. Martin Rodger QC considered that, as the works were urgent, it was reasonable for the landlord to have demanded – and received – the full amount before starting the works.

Second, the actual reserve fund already contained £4,287.41 which was earmarked for “works to the rear”.

Credit therefore had to be given for that sum.

So whereas the landlord had demanded:

The estimated amount of annually recurring cost: £3,859.53

Plus the estimated cost of the work: £24,500.00

Making a total of: £28,359.53

It should in fact have demanded:

The estimated amount of annually recurring cost:£3,859.53

Plus the estimated cost of the work: £24,500.00

Less the amount held in the reserve: (£4,287.41)

Making a total of: £24,072.12

Each of the three lessees therefore should have been asked to pay £8,024.04.

The appeal had been listed as a review rather than a rehearing, but Martin Rodger QC considered that he had “sufficient material in the facts found by the LVT and the supporting documents to enable [him] to conclude that the [lessees’] liability for … the year … is £8,024.04”.

The LVT’s section 20C decision was predicated on the lessees having been “very substantially successful”.

That was no longer the case, and so Martin Rodger QC set it aside and re-determined it.

The matter was no longer so clear cut:

• Substantial success now sat with the landlord;
• The lessees had raised a number of issues which they had withdrawn before the LVT hearing, but
• The LVT had noted the landlord’s solicitors’ “heavy handed” approach, and
• The full amount claimed by the landlord was not due.

Legal advisers of a sensitive disposition should look away now. What follows is not pretty.

Martin Rodger QC turned to consider the outcome if an application were made for a determination of the legal costs and section 19(1) of the 1985 Act were to be applied. He observed:

“Where costs are reasonably incurred in procuring legal services which are provided to a reasonable standard, a landlord can expect to recover those costs through an appropriately worded service charge clause. Where, as here, the legal services provided caused the landlord’s case to be presented on an entirely false basis, it is impossible to regard those services as having been provided to a reasonable standard”.

Rather than leave to the FTT the question of the landlord’s entitlement to its legal costs “on the grounds that they had not been incurred in the provision of services to a reasonable standard”, Martin Rodger QC held that “since it seems to me manifest that that is the case, I prefer to adopt a less cumbersome and more economical approach” – in other words, he determined the section 20C application himself, and in favour of the lessees.

Sussex Villas Ltd no longer owned the freehold of the building by the time that the appeal was heard. It was therefore difficult to see how it could recover its costs of the appeal through the service charge.

Even so, Martin Rodger QC entertained the application, and made a section 20C order on the appeal: “it does not seem to me to be just and equitable that the [lessees] should be required to contribute to the costs incurred by [Sussex Villas Ltd] in correcting an erroneous decision of the LVT which was attributable in very large measure to the mistaken interpretation put on the lease by [Sussex Villas Ltd’s] own advisers (I have not forgotten that the same interpretation was accepted by the respondents’ counsel). Had [Sussex Villas Ltd] argued its case properly before the LVT the likelihood is that an appeal would never have been necessary”.

Martin Rodger QC does not mince his words.

Aside from this statement of the patently obvious, two points spring to mind.

A balancing charge on a shortfall

First: is it me, or does this lease lack provision for a balancing charge, as opposed to a balancing credit? It was perhaps this hole in the fabric of the lease which led the LVT proceedings astray.

Withdrawing a concession

Second: I hope I will be forgiven for saying that, to my mind, this case is procedurally rather off kilter.

The landlord appealed on the ground that the LVT had wrongly interpreted the provisions relating to the reserve fund – after all, there was agreement across the board that the first part of the Annual Maintenance Provision was a balancing charge in arrears.

It appears to have been Martin Rodger QC who re-opened the interpretation of Element 1. Was he in a position to do that bearing in mind the parties’ agreed interpretation of it before the LVT and the absence of any appeal from the landlord on the point?

From a technical perspective I am not altogether persuaded that he was, although from a practical perspective, he needed to do so.

Had it been the landlord who wanted to re-open the interpretation of the first part, it would first have had to resile from what it had conceded/agreed before the LVT.

There is no provision in the Upper Tribunal rules for withdrawing a concession, but there is equally no express provision in the Civil Procedure Rules either. The White Book’s commentary on the point appears under CPR 52.8, but that is a rule relating to the amendment of an appeal notice, for which the considerations are not the same, as indeed the editors of the White Book make clear.

In the courts therefore, the principles on which permission is granted to withdraw a concession have evolved through case law.

The Court of Appeal considered the whys and wherefores of withdrawing a concession in Jones v MBNA (unreported, 30 June 2000). May LJ said:

“Civil trials are conducted on the basis that the court decides the factual and legal issues which the parties bring before the court. Normally, each party should bring before the court the whole relevant case that he wishes in advance. He may choose to confine his claim or defence to some only of the theoretical ways in which the case might be put. If he does so, the court will decide the issues which are raised and normally will not decide issues which are not raised. Normally a party cannot raise in subsequent proceedings claims or issues which could and should have been raised in the first proceedings. Equally, a party cannot, in my judgment, normally seek to appeal a trial judge’s decision on the basis that a claim, which could have been brought before the trial judge, but was not, would have succeeded if it had been so brought. The justice of this as a general principle is, in my view, obvious. It is not merely a matter of efficiency, expediency and cost, but of substantial justice. Parties to litigation are entitled to know where they stand. The parties are entitled, and the court requires, to know what the issues are. Upon this depends a variety of decisions, including, by the parties, what evidence to call, how much effort and money it is appropriate to invest in the case, and generally how to conduct the case; and, by the court, what case management and administrative decisions and directions to make and give, and the substantive decisions in the case itself. Litigation should be resolved once and for all, and it is not, generally speaking, just if a party who successfully contested a case advanced on one basis should be expected to face on appeal, not a challenge to the original decision, but a new case advanced on a different basis. There may be exceptional cases in which the court would not apply the general principle which I have expressed. But in my view this is not such a case.”

I have only had one appeal where permission was sought to withdraw a concession made at trial, and I was glad not to be the one seeking permission: the judge was truly unhappy with the application.

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