Gateway Holdings (NWB) Limited v Mrs Lynda McKenzie, Mr Simon Greenfield [2018] UKUT 371 (LC)

On 16 December 2016, Mrs McKenzie applied for a determination of the amount of service charge payable under s.27A of the Landlord and Tenant Act 1985.

The years in question were 2013, 2014, 2015 and 2016. Her father had paid the charges demanded for the first three of those years. On the application form, Mrs McKenzie wrote on that those years were “not in dispute”.

Major works had been charged to the 2016 service charge account. The landlord had consulted under section 20 of the 1985 Act in relation to those works, and Mrs McKenzie challenged the amount claimed by stating that “the section 20 claim is in dispute.”

She also made a section 20C application, for herself and for all of the other leaseholders at Charles Willow Court. If granted, the section 20C order would provide that none of the costs incurred by the landlord in connection with the proceedings would be recoverable from any of the lessees at Charles Willow Court through the service charge.

Charles Willow Court is a relatively youthful building, having been completed in 2006.

There were however issues with the quality of the external decoration, especially the window frames. The developer appears to have carried out some remedial work of uncertain quality before selling the freehold to Gateway in 2010.

Unfortunately, there was confusion as to liability for maintenance as early as August 2010. Gateway initially asserted that since the window frames in the flats were demised to the lessees, the lessees were responsible for their maintenance.

In 2016 however it accepted that under the terms of the leases, it was liable to maintain the windows, railings, doors and door frames of the individual flats, and started to consult for major external works under section 20 of the 1985 Act.

The lessees took the view that the reserve fund should be sufficiently buoyant to pay for the works. If there was any shortfall, that was for Gateway to meet because it had delayed in carrying out the works and was in breach of its obligations.

Mrs McKenzie’s argument to the FTT was therefore that she should not have to pay for the major works demands, and, in Martin Rodger QC’s words, that “Gateway should be ordered to remedy the exterior and interior condition of the building at its own cost”.

Mr Greenfield was the lessee of flat 8. At his request, he was joined to Mrs McKenzie’s application on 08 March 2017.

At the hearing in May 2017, the lessees challenged not only the 2016 service charge, but also the charges for 2011 to 2015.

Gateway did not have the evidence for those years to hand, and there was not enough time to deal with those years on the day of the hearing.

On 01 August 2017, the FTT issued a “case management decision and further directions” in which, amongst other things, it noted that the years 2011 to 2015 were also disputed.

Gateway objected to Mrs McKenzie disputing those charges because she

• Had admitted liability to pay by describing the years 2013 to 2015 as “not in dispute” on the application form, and, in any event
• Had not been the tenant during the earlier years.

The FTT rejected both arguments.

Gateway applied for permission to appeal the case management decision.

The FTT refused to consider the application, saying that a right of appeal was only available against a decision on a preliminary issue or when a determination had been made which finally disposed of all issues.

Martin Rodger QC noted that the FTT relied on rule 36 of the FTT rules. He speculated that the FTT may also have had in mind Re: Sarum Properties Ltd’s application [1999] 2 EGLR 131, a Lands Tribunal decision about rights of appeal from the Leasehold Valuation Tribunal.

Either way, he was surprised at the FTT’s refusal to consider the application, saying that it:

“seems to me to read more into rule 36 than may be justified, but it is not necessary for me to reach a conclusion on that question in this case”.

After those procedural shenanigans, the parties returned to the FTT on 09 October 2017 for day two of the hearing. The FTT issued its decision on 19 December 2017.

• It again rejected Gateway’s arguments about Mrs McKenzie’s entitlement to challenge service charges pre-dating her ownership;
• It reduced the 2016 major works demand from £1,867.69 to £1,502.46;
• It determined the service charges for the years 2011 to 2015, and reduced them by more than £1,502.46;
• It concluded that the net effect of its decision was that the lessees were in credit, and
• It made an order under section 20C of the 1985 Act in favour of Mrs McKenzie and Mr Greenfield alone, even though Mrs McKenzie had sought an order for all of the lessees.

Gateway originally appealed the decision on Mr Greenfield’s service charges, but it later withdrew that appeal and continued against Mrs McKenzie alone.

It did not accept that it was liable to credit Mrs McKenzie’s service charge account with sums that had been overpaid by her father at a time when she was not the tenant.

The appeal was relevant beyond Mrs McKenzie’s case, because two more lessees at Charles Willow Court had challenged service charges demanded between 2011 and 2015, even though, like Mrs McKenzie, they had not been the lessee at the time of the demands.

Gateway accepted, as had been held by the FTT, that section 27A(4) applied only to an agreement or admission by a tenant at the time the service charge in question was payable, and not to things said or done by someone who was not tenant at that time.

The question was whether a person who had never been obliged to pay or entitled to receive a particular service charge had standing to challenge that charge under section 27A.

Who can make an admission?

Gateway accepted that Mrs McKenzie could not admit a service charge for years pre-dating her lessee-ship.

Whilst Mrs McKenzie was the tenant when she wrote, on the section 27A application form, that the 2011-2015 years were “not in dispute”, she had not been the tenant when the disputed service charges had been levied and paid. It was her father, not her, who had made the payments.

Martin Rodger QC underlined the point, saying:

“Section 27A(4)(a) only operates as a bar to jurisdiction where an agreement or admission has been made by a tenant. The provision says so in terms. Thus, an agreement or admission by a guarantor or mortgagee would not prevent a tenant from seeking a determination as to the payability of a service charge”.

That being the case as a matter of principle, there was no need to consider the effect of the phrase “not in dispute”.

Martin Rodger QC could not help noting however that had it needed to do so, the FTT should have asked itself whether, looked at objectively, not subjectively, there had been an admission or agreement (see Cain v LB Islington [2015] UKUT 0542 (LC) at [14]).

Section 27A standing

He then turned to “the real issue”: whether Mrs McKenzie ought to have been permitted to seek a determination in respect of years during which she was not the tenant and in relation to which she had no legal entitlement to recover any sums overpaid.

The history of section 27A(1) is instructive:

• Section 19(2A) of the 1985 Act, the precursor to section 27A, provided that the right to apply for a determination of liability to pay a service charge was restricted to “a tenant by whom, or a landlord to whom, a service charge is alleged to be payable”;
• Section 19(2A) was repealed by the Commonhold and Leasehold Reform Act 2002;
• Section 27A was inserted by the same Act, and
• Section 27A does not state who may make an application to the appropriate tribunal in relation to a service charge.

Martin Rodger QC was referred to three cases. It is fair to say that he found only one of them directly helpful.

In Sarum Properties Ltd’s application [1999] 2 EGLR 131, the Lands Tribunal held that the reference to “a tenant” in the former section 19(2A) included a former tenant who had assigned her interest.

That decision was however problematic for two reasons.

First, it related to section 19(2A), not section 27A, and

“cannot be regarded as establishing any point of principle of continuing relevance since the current section 27A(1) is in unrestricted terms and must be taken to have been drafted in a deliberate attempt to minimise opportunities for jurisdictional disputes”.

Secondly, it related to the liability of a previous tenant. The original tenant under an “old” tenancy within the meaning of the Landlord and Tenant (Covenants) Act 1995 may well have remained liable to pay service charges beyond the date of the assignment. Martin Rodger QC observed that:

“There seems no doubt that a former tenant with a continuing liability would be able to make an application under section 27A, but the question is whether any other limitation ought to be read in to what is otherwise an unqualified entitlement”.

This Court of Appeal case was Gateway’s primary stumbling block.

In Oakfern the sub-tenant applied under section 27A for a determination of the service charges payable. He was required to pay a service charge to an intermediate tenant which in turn was obliged to pay a head landlord for services which it provided.

The intermediate tenant argued that the sub-tenant was not entitled to make such an application. Parker LJ explained at [82]:

“In my judgment there is no justification for implying any restriction into the entirely general words of section 27A of the 1985 Act. In some cases, one may suppose, the applicant for a determination under that section as to the proper amount of service charge payable will be the party who is liable to pay the service charge, the subject of the challenge, and the respondent to the application will be the party who is seeking to levy it on the applicant; but there is no reason why this will inevitably be the case. … As to possible abuses of process the leasehold valuation tribunal has ample powers to regulate its own procedures, including power to strike out vexatious or abusive applications.”

Martin Rodger QC was clear:

“The decision of the Court of Appeal in Ruddy on the issue of jurisdiction was that there was no justification for implying any restriction into the entirely general words of section 27A(1). I agree, and in any event I am bound by that conclusion. I do not accept that the decision can be distinguished in any of the ways suggested by Mr Allison [Counsel for Gateway].

“… the Court of Appeal did not say that Mr Ruddy’s entitlement to apply under section 27 depended on his status as a sub-tenant, and did not refer to the extended definition of tenant in section 30 (in any event, the word “tenant” does not appear in section 27A(1)).

“Moreover, I do not accept that Mr Ruddy was liable to pay the same service charge as his immediate landlord; the two liabilities were legally and factually distinct, although both were referable to the provision of the same service (see Westmark (Lettings) Ltd v Peddle [2017] UKUT 0449 (LC))”.

In this Lands Tribunal case, a leaseholder applied under section 27A against his freeholder, a management company which was party to his lease, and a firm of managing agents.

The Tribunal dismissed the application against the managing agent on inconsistent and unreasoned grounds: first, as an abuse of process and second, because it had no jurisdiction over the application.

Martin Rodger QC was unimpressed:

“If the original tribunal had no jurisdiction it was not necessary to resort to the concept of abuse of process to justify dismissing the application. I consider the first-tier tribunal was right to say that the claim against the managing agent ought to have been dismissed, but on the simple basis that its involvement was entirely unnecessary to enable a determination to be made of the amount payable as a service charge or the persons to whom and by whom it was payable. The agent had made no application of its own under section 27A and the decision does not shed any light on its scope”.

Drawing together the threads, Martin Rodger QC concluded that applications under section 27A  are not limited to those entitled to receive or obliged to pay the service charge in question.

“The words of the statute are unrestricted. The answer to the question of principle posed at the start of this decision is that a residential leaseholder may apply to the first-tier tribunal under section 27A for a determination in respect of service charges paid by her predecessor before she acquired her lease”.

All of the above was very well, but was the FTT’s decision on the service charges pre-dating Mrs McKenzie’s lessee-ship of any practical benefit to her?

No, concluded Martin Rodger QC. Mrs McKenzie’s lease was in conventional terms: it required a payment on account twice a year. If, at the end of the year, there was a surplus, the lease provided that “the landlord shall give credit for such overpayment”.

That, reasoned Martin Rodger QC, “presumably means the sum overpaid must be credited to the account of the tenant who paid it”.

In this case, the FTT had found that there had been an overpayment by a tenant, but that tenant was not Mrs McKenzie.

Given that Mrs McKenzie had no legitimate interest in the service charges for the 2011 to 2015 years, as a matter of case management, the FTT should not have permitted her to challenge those charges in her section 27A application.

It followed that the FTT had also been wrong to reduce Mrs McKenzie’s contribution to the 2016 major works by the service charge overpayments to which her father was entitled.

Finally on this issue, Martin Rodger QC observed that:

“It is of course possible on the assignment of a lease, for terms to be agreed between the outgoing and incoming leaseholders for any overpayment of service charges from earlier years to be credited to the current leaseholder, but there is no evidence in this case of any such arrangement”.

Service charges

The FTT’s decision for Mr Greenfield stood.

As for Mrs McKenzie, the Upper Tribunal amended the figure payable by Mrs McKenzie for 2016. There was nothing to determine for the earlier years, because she had not been the lessee and had accordingly been under no obligation to pay.

To that extent, Gateway’s appeal succeeded.

The FTT’s section 20C order

Martin Rodger QC declined to overturn the section 20C order.

In the overall scheme of things, Mrs McKenzie’s case occupied a small part of the FTT’s decision, which also set out the reasons why Mr Greenfield’s challenge to the 2011 to 2016 service charges was successful.

Further, the decision on the 2011 to 2015 service charges might be useful to the executors of Mrs McKenzie’s father’s estate if they decided to reclaim the overpayments.

It was true that the appeal had resulted in a small adjustment to Gateway’s entitlement, but that adjustment was of “little practical significance” and it was neither just nor equitable that she or the other lessees at Charles Willow Court should have to contribute towards Gateway’s legal costs through the service charge.

So saying, he extended the FTT’s order under section 20C so that it covered all of the lessees at Charles Willow Court, as applied for by Mrs McKenzie and Mr Greenfield.

Section 20C on the appeal

The position on the appeal was slightly different.

Gateway had abandoned the appeal against Mr Greenfield, and it was just and equitable therefore that he should not have to contribute towards the legal costs of the appeal through the service charge.

The appeal against Mrs McKenzie had however been successful. It did not directly impact the other lessees at Charles Willow Court, save that it achieved the desired outcome for Gateway in relation to its potential liability to reimburse to new lessees overpayments made by their predecessors.

Martin Rodger QC therefore declined to make a section 20C order in favour of Mrs McKenzie in relation to the costs of the appeal.

A quick word on the FTT’s powers

Martin Rodger QC notes that Mrs McKenzie had applied for an order that “Gateway should … remedy the exterior and interior condition of the building at its own cost”.

It is unclear whether Mrs McKenzie was simply asking for a decision as to who should pay for the works, or whether she was asking for an order that Gateway should carry out the works.

At present, the FTT does not have the power to order a party to do something – ie to grant an injunction.

That may however be set to change: last week, the Ministry of Housing Communities and Local Government issued a Call for Evidence on considering the case for a Housing Court. You can see the details here. There are four parts to it: Parts 3 and 4 are most relevant to those of us who find ourselves in the FTT.

Whose liability?

The question of liability to maintain parts of buildings is not a stranger to these pages, and windows are regular visitors to the issue too. (see Upper Tribunal Waaler observations)

Generally, most lessees have an obligation to keep in repair the property that is demised to them, but there are (at least) two reasons why the obligation to maintain, repair and decorate windows and external decorations might reasonably fall on the landlord.

First, accessing the external parts of the demise in multi-storey buildings can be challenging, and it can impractical to expect a lessee on the fifth floor to be able to repair and maintain the external parts of windows.

Secondly, by taking on the repairing maintaining and decorating obligations for items such as windows, it is also possible to achieve a consistency of appearance across a block.

An accounting question

The business of service charge accounts and assignments is a tricky one.

Leaving to one side the arrangements that outgoing and incoming lessee might enter into between themselves, what should happen to service charge money when one tenant sells his/her flat and a new tenant arrives?

It seems to me that when a tenant challenges a service charge demand on a section 19 ground, ie that the sums demanded are irrecoverable under the lease, unreasonable in amount or for works of a standard that is not reasonable, it seems to me that any reduction applied by the FTT should be returned to the tenant on whom the demand in question was served.

That is because the money should never have been demanded in the first place.

But is the position the same where a reasonable on account service charge demand is made, the tenant sells the flat, and there is a surplus at the end of the year because the landlord has not spent all of the money demanded?

Looking at the question from the opposite direction: if a reasonable on account service charge demand is made, the tenant sells the flat, and there is a balancing charge payable at the end of the year because the landlord has spent more than was budgeted, on whom does the liability to pay the balancing charge fall?

In the normal run of leases, the landlord can only demand payment from the person who is the tenant.

On my reasoning therefore, the answer to the second question is that the new tenant must pay the balancing charge. There is no longer any relationship of landlord and tenant between the old tenant and the landlord.

Does the same logic apply to the first question? It seems to me that it should.

Answers on a postcard – virtual or otherwise – please.

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