Chris Barney, Marc Morell v Eastern Green Limited [2013] UKUT 0331 (LC)

Are deep-fried foods bad for the pocket as well as the health?

The issue in this case was the apportionment of the insurance premium as between commercial and residential premises in a mixed use building, the commercial premises being home to a deep fat fryer.

79 Piccadilly, Manchester, M1 2BU is a converted textile company headquarters and warehouse.  The ground floor was occupied by a retail shop and a café/fish shop/takeaway. At the date of the hearing, the basement was used for storage, but had seen active service as a Bier Keller. The first to fourth floors contained twenty five flats. The appellants were the lessees of flats 4 and 23.

Mr Morrell’s lease contained the following provisions:

(1)       “The Building” included both the commercial and residential accommodation.

(2)       The normal covenants to insure and to pay an insurance rent. The insurance rent was to be calculated by reference to the floor area of each demise relative to the entire floor area of the building (ie including the residential and commercial parts), but was “subject to variation in accordance with paragraph 1 of the Fourth Schedule of this Lease.”

(3)       Paragraph 1 of the Fourth Schedule allowed the Management Company to vary the proportion of the service payable: “if in the opinion of the Management Company it should at any time become necessary or equitable to do so the Management Company shall recalculate the Lessee’s Proportion and the proportions of the Building Service Charge and Residential Service Charge applicable to the residential units in such manner as the Management Company shall consider to be equitable”.

It appears to have been common ground that the commercial units, and in particular the unfortunate deep fat fryer, had considerably increased the insurance premium for the building when compared with a building in solely residential use.

The landlord recognised this, and took action through the management company.

Having taken advice from insurers that the commercial risk should be calculated at 0.6% and the residential risk at 0.2%, it set the premium per square foot of commercial floor space three times higher than the premium that the residential occupiers were required to pay per square foot.

The lessees argued that the respondent’s methodology for apportioning costs was unsupported by the evidence and was wrong.

The LVT considered the parties’ arguments, noting that the landlord was obliged to insure ‘the Building’, that the tenants signed their leases, presumably upon taking appropriate advice, agreeing to pay the insurance of the Building in respect of the risks.

It concluded “…there is no basis upon which we can imply an obligation on the landlord to deal with the insurance premiums in the way sought by the applicants.”

It drew support for its determination from the decision of the Lands Tribunal (George Bartlett QC, President) in Shrimpton and Jones, Re 80A Bolton Crescent (LRA/140/2007). In paragraphs 13 and 14, the President said:

“13…An insurance premium incurred in insuring the building against the risk specified would not be made unreasonable if, by reason of the ground floor being in commercial use, the premium was higher than it would have been if the ground floor had been in residential use. The obligation is to insure the building against risks of the specified categories, and this obligation is not qualified by the particular uses that may be made of other parts of the building.  On the other hand if the landlord insured against risks additional to those normally insured against under a householder’s comprehensive policy the cost associated with these additional risks would not, in my judgment, be a cost reasonably incurred.

“14. An alternative construction, which as I understand it is the one contended for by the appellants, is that the liability of each tenant is limited to his proportion of the cost that the landlord would incur in insuring the building on the assumption that the whole of the building was in residential use.  This, however, is not what either lease provides, and I can see no reason for implying a term to this effect.”

The LVT concluded that the method of apportionment chosen by the landlord for building insurance and terrorism cover was reasonable and was to be upheld.

The Upper Tribunal granted permission to the lessees to appeal, the LVT having refused.

At the hearing, in addition to their ground of appeal on apportionment, the lessees sought permission to argue that the LVT was wrong in its conclusion that the premium paid for insuring the Building against the insured risks had been reasonably incurred and was reasonable in amount.

HHJ Huskinson “reached the firm conclusion that the appellants cannot be allowed to pursue this argument… This is an appeal which is proceeding by way of review. It would wrong upon such an appeal to allow a wholly fresh topic, previously unchallenged in these appeal proceedings, to become the subject of challenge”.

The lessees argued that the LVT misunderstood the limited evidence before it:

• The 3:1 ratio of risk meant that the risk to the insurers was three times greater from the commercial units and accordingly the insurance premiums to be paid by the occupiers of the commercial units should be three times that paid by occupiers of the residential units;
• Therefore the LVT should have found that the only reasonable method of apportionment was for the premiums to be allocated 75% to the commercial units and 25% to the residential units – with this 25% then being allocated between the residential units on a square footage basis;
• The President’s decision in Shrimpton and Jones had been misunderstood by the LVT and was not helpful.  He submitted there was nothing in that decision which dealt with the question of the proper apportionment of the premium, which is what the present appeal is concerned with.

The landlord sought to uphold the LVT’s decision.

HHJ Huskinson noted that the landlord:

• Accepted that the insurance contributions should be recalibrated so as to be more favourable to the lessees, and
• Had recalculated the lessees’ insurance contributions in a way which “work[ed] to the appellants’ advantage and results in them paying a substantially lesser proportion of the insurance premiums than would be recoverable from them if the Proviso had not been brought into operation”.

Once the decision to recalibrate the apportionment was taken, the terms of the leases required the management company to recalculate the apportionment in such manner as it considered to be equitable.

If the management company’s view of equitability was the test, whence the LVT’s jurisdiction to examine the method of apportionment?

HHJ Huskinson considered that the LVT’s power arose not from section 19, which empowered it to determine whether relevant costs have been reasonably incurred, but from Section 27A, pursuant to which it was vested with the power to determine whether a service charge is payable and, if so, the amount which is payable. For the avoidance of doubt, “service charge” within the meaning of section 18 includes amounts payable for insurance.

How then should the LVT have exercised that power? Just as it did: “the test to be applied by the LVT in reaching a decision on this point is not for the LVT to make the management company’s decision for it and to decide what it (the LVT) considers to be the equitable method of apportionment in all the circumstances.  Instead the test to be applied is in my judgment the test which the LVT correctly applied in the present case namely whether the method of apportionment chosen is reasonable.

“The LVT considered that the method of apportionment adopted by the respondent was reasonable.  In my judgment the LVT was entitled so to conclude for the reasons it gave”.

HHJ Huskinson considered that the LVT had correctly understood the landlord’s evidence, and that the lessees’ arguments were unsupported:

• On the basis of advice from insurers and brokers, the commercial risk was calculated at 0.6% and the residential risk at 0.2%, meaning that the rate per square foot to be charged by way of insurance premium to the residential units was to be one third of the rate per square foot charged to the occupiers of the commercial units, and
• The landlord had made available Mr Tony Jackson of Bridge Insurance Brokers who had assisted at the afternoon part of the hearing.

The LVT had concluded that the method of apportionment was reasonable and gave reasons for so concluding.

“This”, said HHJ Huskinson, “is an appeal which is proceeding by way of review.  I therefore remind myself that I am reviewing the LVT’s decision not substituting my own judgment. The Upper Tribunal can only interfere if the LVT has gone wrong in principle, or left material factors out of account, or its balancing of the material factors led it to a result which was clearly wrong.  Applying this test I conclude that I cannot interfere with the LVT’s decision. I would however go further and record that, for the avoidance of doubt, I agree with the LVT’s decision that the method of apportionment adopted by the respondent was reasonable”.

HHJ Huskinson was unmoved by the lessees’ argument that the LVT had misunderstood Shrimpton, and noted the LVT’s statement that it would reach the same conclusion, irrespective of whether Shrimpton was in the mix.

For the reasons given above HHJ Huskinson:

1. Found that the lessees were not entitled to challenge the LVT’s decision on whether the insurance premiums were reasonable or were reasonably incurred;
2. Dismissed the lessees’ appeal against the LVT’s decision that the method of apportionment adopted for the calculation of the Insurance Rent was reasonable.

Costs order on the grounds of conduct

The landlord sought an order for costs (limited to statutory limit of £500 at the time) against the lessees. The lessees resisted such an order.

HHJ Huskinson turned to section 175(6) of the Commonhold and Leasehold Reform Act 2002, which, for cases begun before 01 July 2013, limited the jurisdiction to make an order for costs against a party to an appeal such as this to circumstances where the Upper Tribunal concludes that the relevant party has acted “frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with the appeal.”

He declined to make such an order:

• A judicial member of the Upper Tribunal had granted permission to appeal, which would only have been done if it appeared that there were reasonable grounds for concluding that the LVT may have been wrong, and
• There had not been any incidental conduct by the lessees in relation to the appeal which could be described in the terms of section 175(6).

Section 20C order

At the appeal hearing, the lessees made an oral application under Section 20C of the 1985 Act for an order that the costs incurred by the respondent in connection with the proceedings before the Upper Tribunal were not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable.

HHJ Huskinson expressly left open the question of whether the costs would be recoverable under the terms of the leases. In the light of is decision to dismiss the appeal however, he did not find it just and equitable to make a section 20C order.

I have the impression that the difference between the parties in this case was in their evidence. The landlord arranged for an insurance broker to give evidence in support of its case: the lessees needed a broker or similar person to do the same on their behalf – or at least to assist them in preparing an effective cross-examination of the landlord’s expert. So far as I can gather, they did not have that evidence or that assistance.

Lest it be forgotten, this was not a case where the Lands Chamber was considering whether to alter the apportionment of the insurance premium for the building contrary to the terms of the leases. These leases contained a mechanism by which the management company could effectively take a view as to the fairness of apportionment of the service charge as between the commercial and residential tenants, and could make adjustments, provided that those adjustments were equitable.

Fish and chips: golden, crunchy, salty, fabulous with ketchup – and shocking news on the insurance front.

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