Continental Property Ventures Inc v White [2006] 1 E.G.L.R. 85

In the LVT, the landlord had been successful on three of four heads of service charge. On the fourth head, damp-proofing and redecorating works, the LVT reduced the amount payable from £55,174.67 to £3,525.00 because:

a)      £38,060.52 of the works would have been covered by a guarantee, which the landlord did not call upon, and

b)      the balance, some £17,114.15, was the result of the landlord’s failure to carry out the necessary investigations and repairs to a leaking pipe in good time.

The LVT concluded that none of the works which were covered by the guarantee were recoverable, and that if the landlord had complied with his repairing covenant timeously, the cost of the works would have been just £3,525.00. In other words, the landlord’s historic neglect was the reason for the incurring of costs of the level demanded.

Permission to appeal was originally granted only for the historic neglect question, which was a pure point of law.

When however the landlord submitted its statement of case to the Lands Tribunal (as it then was), two further grounds had crept in: the landlord contended that the LVT’s decision was flawed on the facts and causation of damage in connection with the guarantee. No permission had been given to appeal on these two points.

Before the Lands Tribunal therefore, the landlord sought to amend its grounds of appeal to include the guarantee question, framed:

a)      as a question of fact, as to whether the guarantee upon which the landlord chose not to rely would indeed have covered the damp-proofing and redecorating works, and

b)      as a question of law, that even if the guarantee had covered the works, on its true construction, s.19(1)(a) permitted recovery of the costs of the works from the tenant by way of service charge.

Success on an appeal on questions of fact is notoriously tricky to come by, and in this case it was made all the more difficult because the landlord had elected to call no evidence on the issue before the LVT.

Refusing permission to appeal the question of fact, HHJ Michael Rich QC said: “Where a party wishes to appeal on an issue of fact, as to which he has not called evidence before the LVT, permission will normally be refused, unless there is some good reason for that failure”.

The question of fact therefore falling away, the landlord was left to argue the two points of law, viz. that s.19(1)(a) of the 1985 Act permitted it to recover the damp-proofing and redecorating costs from the tenant even if those costs were otherwise recoverable under the terms of a guarantee and notwithstanding its historic neglect of the property.

A further interesting question also arose as to the LVT’s jurisdiction where a tenant defends a s.27A application by raising issues which, as causes of action, would be outside the LVT’s relatively limited jurisdiction.

HHJ Rich QC rejected the landlord’s submissions on s.19(1)(a) in connection with the reasonableness of incurring costs where a guarantee could be called upon at no charge: “The LVT held as a matter of fact that the landlord could have had the guarantee works carried out under the guarantee at no charge. It concluded therefore that to carry out those works at a cost was to incur the cost other than reasonably. Unless there was evidence of some disadvantage or good reason to reject the availability of the works without cost in favour of incurring a cost, this seems to me to be incontrovertible”.

The nub of this question was whether the circumstances in which costs came to be incurred (including any delay in incurring them) should be considered in the context of whether those costs were reasonably incurred, or whether the subsection was limited only to consideration of whether, at the date when the costs were incurred, it was reasonable to incur them.

The LVT had chosen the broader construction. HHJ Rich QC disagreed. In doing so, he disagreed with Mr Norman Rose FRICS in Wandsworth London Borough v Griffin [2002] 2 EG 105 (another Lands Tribunal decision and therefore not binding on him), saying:

“the question of what the costs of repairs is does not depend upon whether the repairs ought to have been allowed to accrue. The reasonableness of incurring costs for their remedy cannot, as a matter of natural meaning, depend on how the need for the remedy arose”.

In the High Court decision of Loria v Hammer [1989] 2 EGLR 249, Mr John Lindsay QC deducted £150 from sums otherwise payable by way of service charge. HHJ Rich QC concurred with the decision:

“One reason for the correctness of Mr Lindsay’s conclusion is that there can be no doubt that breach of the landlord’s covenant to repair would give rise to a claim in damages. If the breach results in further disrepair imposing a liability on the lessee to pay service charge, that is part of what may be claimed by way of damages. At least to that extent it would, as was held by the Court of Appeal in Filross Securities v Midgley (Peter Gibson, Aldhous and Potter L.JJ., July 21, 1998), give rise to an equitable set-off within the rules laid down in Hanak v Green [1958] 2 QB 9, and as such constitute a defence. This would not mean that the costs incurred for the “nine stitches” were not reasonably incurred. It would however mean that there would be a defence to their recovery”.

He continued: “What the LVT was engaged upon was determining whether these costs were “payable” within the meaning of S.27A. They held that they were not, because they had not been reasonably incurred. That, in my judgment was a mistaken reason. But the conclusion at which they arrived, upon their findings of fact, was none the less correct and the appeal must be dismissed”.

The landlord sought to argue that, by virtue of the LVT’s limited jurisdiction, a tenant could not defend an application in respect of service charges by seeking a determination that damages were payable for breach of covenant.

HHJ Rich QC disagreed.

“I accept that the LVT has jurisdiction to determine claims for damages for breach of covenant only in so far as they constitute a defence to a service charge in respect of which the LVT’s jurisdiction under s.27A has been invoked. I see no reason of principle why such jurisdiction should not extend to determining even a claim for loss of amenity or loss of health arising from breach of a repairing covenant, but would draw attention to what I said in Canary Riverside Pte v Schilling (LRX/65/2005 decision dated December 16, 2005) as to the desirability of the LVT’s exercising restraint in the exercise of the extended jurisdiction given to it by the Commonhold and Leasehold Reform Act 2002”.

In the Schilling decision, HHJ Rich QC saw no reason why a LVT lacked jurisdiction to determine any issue was not expressly within another tribunal’s exclusive jurisdiction, if determination of that issue was essential to determining whether ‘a service charge is payable’.

He continued however, that the LVT should be mindful of the appropriate forum for resolving disputes, and gave two examples of litigation better suited to jurisdictions outside the LVT:

a)      litigation about voidability for mistake, forgery or misrepresentation would be better suited to the more formal environment of the court, presumably because of the serious nature of the allegations required to make out the cause of action, and

b)      issues in respect of which the LVT had jurisdiction to determine only one aspect of a matter better determined as a whole. For example, whilst the LVT would be entitled to decide whether a term of a lease was fair and therefore binding within the meaning of the Unfair Terms in Consumer Contracts Regulations 1999, because that decision relates directly to the question of whether a service charge is payable, the LVT would not have the jurisdiction to make a determination as to whether the lease is capable of continuing in existence without the alleged unfair term, as those Regulations permit.

When I have represented landlords, I have quite regularly come across tenants alleging historic neglect, even though it strikes me that delay in incurring costs is a factor which supports a landlord’s case: if a property has been neglected, it probably does need money spending on it.

Equally however, this case shows that historic neglect can succeed as a defence of set off to a s.27A application, if framed as breach of covenant and supported by sufficient evidence. This explains HHJ Rich QC’s finding that, even if its reasoning was mistaken, “the conclusion at which the LVT arrived, upon its findings of fact, was … correct”, and the corresponding dismissal of the appeal.

It seems to me that this principle works well where the defence reduces the service charge, even if down to zero. But it also raises an interesting question: what happens if the breaches of covenant are so extensive as to attract damages exceeding the service charge subject of the application? The purpose of a s.27A application – and the extent of the jurisdiction of the LVT in this respect – is to determine whether a service charge is payable, by whom, to whom and so on. Unless essential to the determination of the s.27A application, the LVT has no jurisdiction to entertain a claim for breach of covenant. So if damages would exceed the service charge, does the LVT have the power to determine the quantum of those damages? A third category perhaps to add to the two identified by HHJ Rich QC above as being better suited to court than to the LVT.