Morshead Mansions Limited v Leon Di Marco [2013] EWHC 1068 (Ch)

Mr Di Marco is one of 104 long lessees at Morshead Mansions, Maida Vale, London. His landlord is Morshead Mansions Limited. The company is owned by the lessees: all of the tenants own a share in it.

The leases contain service charge provisions, under which the tenants pay an equal share of the service costs properly incurred by the company as landlord. The landlord, in the normal way, is obliged to manage and maintain the building.

Article 16 of the Articles of Association of the company entitle it to levy charges, with the consent of the members.

Mann J. set it out in full.

“The Directors may establish and maintain capital reserves, management funds and any form of sinking fund in order to pay or contribute towards all fees, costs and other expenses incurred in the implementation of the Company‘s objects, may require the Members to contribute towards such reserves or funds, at such time, in such amounts and in such manner as the Members shall approve by ordinary resolution passed in general meeting and may invest and deal in and with such money as not immediately required in such manner as they shall from time to time determine.”

Article 16 was the instrument that the company used in order to recover what would arguably otherwise be the service charge:

• In 2003 and between 2007-2009 it sent out both service charge demands and demands for the same amount under Article 16.
• In 2010 it dropped the service charge demand sent out only Article 16 demands.

Mr Di Marco did not support this use of Article 16 because the company employed it as a means of avoiding the effects of the 1985 Act.

Mr Di Marco and the company are no strangers to the senior courts. In Morshead Mansions Ltd v Di Marco [2008] EWCA Civ 1371, the Court of Appeal distinguished between two co-existing relationships – that of landlord and tenant and that of company and member.

“A defence to [a claim in one capacity] is not necessarily available as a defence to the other legally separate claim” (per Mummery LJ at paragraph 30).

In a judgment as important for what it did not decide as for what it did, Mummery LJ went on:

“31. This appeal is concerned only with the question of law whether Morshead is entitled under Article 16 and pursuant to the resolutions to be paid the money which it claims from Mr Di Marco as a member of the company. The judge did not decide and was not asked to decide whether section 18 applied to Mr Di Marco as a tenant. He was not deciding whether Morshead could avoid altogether the statutory protection which Mr Di Marco might enjoy as tenant if he was sued under the provisions of the lease or if he invoked the terms of the lease and the statutory provisions in his capacity as tenant. Whether Morshead, as landlord, is or was entitled to levy a charge or charges against him, as tenant, in the amount specified … is a separate matter with which we are not concerned on this appeal. Nor are we concerned in these proceedings with any question whether the directors of the company or its managing agents may properly use money raised from Mr Di Marco pursuant to the Article 16 resolutions in payment of the sum is alleged to be due from him as a member, if they are not due from him as a tenant.”

The company won the appeal. Mr Di Marco was obliged to pay its Article 16 demand.

This case originated in the Central London County Court, in the shape of two claims by the company for rent and payment under Article 16 demands, the first for the period 2004-9, and the second for 2010.

Mr Di Marco defended the claims and counterclaimed. He challenged:

• The validity and propriety of using Article 16 to deal with service charge matters and
• The use of the money raised without complying with the provisions of the 1985 Act which give tenants the right to investigate and challenge service charges.

In the course of the litigation, three preliminary issues were identified and agreed:

(a)  The company could expend money collected under Article 16 on provision of services under the lease;

(b)  Sections 18-30 of the Landlord and Tenant Act 1985 did not apply to such expenditure, and

(c)  The funds collected under Article 16 were not held on trust as service charges, pursuant to section 42 of the Landlord and Tenant Act 1987.

The company then applied to strike out Mr Di Marco’s case in its entirety on the basis that there were no further live issues. It relied on:

• The 2010 proceedings, and
• The agreement on the preliminary issues.

Mr Di Marco cross-applied for permission to amend his Defences and Counterclaims.

HHJ Hand QC gave summary judgment against Mr Di Marco on his defences, struck out his counterclaims and disallowed the amendments.

Mr Di Marco appealed the striking out in relation to four heads of the counterclaim.

1: Requests for an order that the following information be provided pursuant to the Act:

• Accounts and summaries of accounts, and inspection, for the years 2002 to 2005, pursuant to sections 21 and 22 of the 1985 Act;
• Provision of facilities for the inspection of summaries pursuant to the same statutory provisions, and
• A summary of costs for 2009 in accordance with the statute, with regard to “service charge expenses for the year 2009”.

2: A set-off on the ground that the company had failed to consult before carrying out major works of redecoration in 2007

3: A claim for an order restraining the company from claiming service charges for 2003;

4: A claim for the appointment of a manager by the court.

HHJ Hand QC held that sections 21 and 22 did not give rise to a duty to provide information which could be enforced by civil action because:

• The statute provided for a criminal sanction. In Lonrho Ltd v Shell Petroleum Co Ltd (No 2) [1982] AC 173, Lord Diplock said:

“where an Act creates an obligation, and enforces the performance in a specified manner … that performance cannot be enforced in any other manner …”, and

• This was not a case where the legislation was for the benefit or protection of a class of individuals.

Establishing a statutory duty which can be enforced by civil action where no express provision is made: the Digicel principles

In Digicel (St Lucia) Ltd v Cable and Wireless plc [2010] EWHC 774 Morgan J distilled a number of relevant principles:

“Having reviewed the authorities, when I come to examine the individual statute or the individual regulations in question, I consider that I should address myself to the following principal considerations:

(i)            For whose benefit was the statute or the regulations passed?

(ii)           If the statute or regulations were passed to benefit public and private interests, which was the primary object?

(iii)         For whose benefit was the particular provision enacted?

(iv)         If the particular provision was passed to benefit both public and private interests, which was the primary object?

(v)          Has the duty been expressed in terms which make it suitable for actionability?

(vi)         What is the class of persons who might suffer harm as a result of a breach of duty?

(vii)        Does the expected harm take the form of economic loss or damage to the person or damage to property?

(viii)       On what type of person is the duty imposed – is it a public authority or a private entity?

(ix)         Does the statute or the regulations impose a sanction for breach of duty: the sanction may be a criminal sanction or something else, such as the suspension or revocation of a benefit?

(x)          How adequate is the sanction imposed?

(xi)         Does the statute or the regulations provide a means of enforcement of the duty?

(xii)        If so, does the omission to provide for a right to claim damages point to an intention not to allow a claim to damages?

(xiii)     Do the means of enforcement raise questions of discretion or policy with the result that actionability in the courts would or might proceed on a different basis?

(xiv)       How adequate are the means of enforcement?

(xv)        Overall, having regard to the above and any other relevant matters, what did the legislature intend as regards actionability of a breach of duty?”

Mann J. added the numbering to clarify the citation, and added: “The starting point is the statute as a whole; or (in the case of a statute with a variety of provisions in it, like the 1985 Act) those parts of it which relate in some way to the duty imposed”.

The remedies are elsewhere: Taber v MacDonald (1998) 31 HLR 73

The company argued that the remedies for breaching the duties in sections 21 and 22 were criminal only, and not civil.

In Taber v MacDonald, a prosecution was brought for failure to comply with section 22 of the 1985 Act. That section imposes a duty to produce receipts and vouchers.

Roch LJ observed: “Section 22 and section 25 are concerned with the wilful and inexcusable failure of a landlord to procure documents which he has. The remedies for the absence of proper receipts and documents are to be found elsewhere.”

Mann J.’s decision

Mann J. appears to have had little hesitation in finding that sections 21 and 22 create a duty owed to the tenants in respect of which the tenants have a direct remedy in the civil courts.

The Digicel principles

• Tenants who have qualifying tenancies are a class of persons who suffer harm if there is a breach (Morgan J‘s point (vi));
• The duties are not owed to the public at large. They are owed to qualifying tenants and exist so that those tenants can ensure that their interests are respected (Morgan J’s points (i), (ii) and (iii));
• Criminal sanctions are less likely to achieve the intended result (the production of records and information) than a civil injunction, which is specifically geared to the provision of the information (Morgan J‘s points (x) and (xiv));
• It was likely that Parliament intended a criminal sanction to be the only method of enforcing sections 21 and 22. Taber dealt with a different point: it neither assisted nor bound the court;
• The future additional sanction of the right under section 21A to withhold rent was neutral on the question under examination;
• Parliament intended the duties contained in sections 21 and 22 to be enforceable in the same manner as other civil duties, that is to say by application to the civil courts.

In his view, the answers to practically all of Morgan J’s questions pointed that way.

Mann J. moved on to consider two further arguments advanced by the company.

Drain on court resources

He did not accept the company’s argument that litigation floodgates would be opened by allowing an enforceable civil right. In what could be described as rather caustic tones, he said:

“If there were the prospect of such a flood, I doubt if it is the first time that Parliament has introduced legislation without fully anticipating the extent of the litigation that would result”.

In any event, the floodgates argument was unsustainable: the criminal courts had jurisdiction to sanction a wayward landlord. The company did not explain why the criminal courts would not be flooded while the civil courts would be.

It could not be right that the criminal courts were chosen by Parliament because a conviction was more difficult to secure and the criminal courts less familiar territory than the civil courts: “that does not seem to me to be a particularly worthy intention to attribute to Parliament”, said Mann J. He added: “The criminal remedy might be thought to have a useful additional filter in the “without reasonable excuse” requirement, but it seems to me highly likely that a civil court would introduce a similar requirement anyway – if there is a good reason for not producing the documents then an injunction would not be granted”.

No overt disadvantage to the tenant

Finally on the establishment of a statutory duty, the company argued that the tenant could obtain provision of the documents by simply making an application under section 27A of the 1985 Act. The Tribunal could then make orders for the disclosure of information.

Mann J. did not buy it:

“It would be a waste of time and costs if a tenant had to apply to the Tribunal in ignorance of facts which he ought to have been given and which might, when forthcoming, demonstrate that there was no worthwhile dispute after all. It seems to me to be much more rational that the tenant should have an effective means of compelling the production of information which might head off a wider dispute that would otherwise arise”.

Conclusion on the first element of the appeal

“In the circumstances I consider that on the true interpretation of the 1985 Act the tenant has the right to apply to the court for the information which the landlord has to produce under sections 21 and 22. There would be no difficulty in framing injunctions, or enforcing them if necessary.

“Accordingly, in my view the judge erred in this part of his reasoning”.

In late 2009, Mr Di Marco made an application to the LVT in connection with major redecoration works in 2007, on the basis that the costs were not reasonably incurred and that there had been a failure to consult.

The LVT determined that Mr Di Marco had made Article 16 payments. Therefore no service charge had been demanded and no statutory consultation was required. Permission to appeal was refused.

Estoppel

In the court below, HHJ Hand QC held that the LVT’s decision gave rise to an estoppel, so that Mr Di Marco could not raise the matter again in these proceedings.

Mann J. shared that view: the LVT decision was a decision of a tribunal of competent jurisdiction in relation to a matter within its jurisdiction.

If the LVT’s decision was not technically an estoppel, it would be an abuse of process to allow Mr Di Marco to raise the point again when it had been decided against him.

Mr Di Marco’s appeal on this point therefore failed.

Misrepresentation

HHJ Hand QC made no reference to misrepresentation in the context of the LVT’s determination of his 2009 application.

However, Mr Di Marco argued that there had been a misrepresentation to the Tribunal because Mr Wismayer, a director of the company, had informed the LVT that no service charge been demanded to cover works carried out in 2007. This was accepted by the LVT.

“It is plain, said Mann J., “that what Mr Wismayer is recorded as having submitted is that the effect of the Court of Appeal decision was that the demands made in 2007 were not for service charges, because they were made under Article 16. That was not a representation, it was a submission, and it was a submission which the Tribunal accepted. It was also correct”.

In other words, Mr Wismayer had put forward an argument on the law, not a statement of fact.

This second point therefore also failed.

HHJ Hand QC refused Mr Di Marco permission to amend his counterclaim to introduce this issue because, in his judgment, it was not live between the parties.

Mr Di Marco appealed the finding that the issue was not live.

This was an unusual head of claim. Mr Di Marco wanted an order that Morshead: “may not make a new claim against him for service charges for or in the year 2003 which he has already paid through a claim against him as a shareholder in the claimant by its Recovery Fund 2003 in the amount of at least £900”.

The company had made no claims for service charges under Mr Di Marco’s lease for 2003, although it had demanded them.

This claim was unusual because it sought to prevent the company from doing something, but it was not a claim for an injunction: Mann J. considered that it was in effect a claim for a negative declaration.

In principle, unless it would be useful to do so, the court does not grant negative declarations (Guaranty Trust Company of New York v Hannay & Company [1915] 2 KB 536).

According to a “Global Statement of Account (Debts owed under the lease and under the Articles of Association)”, on 01 July 2003, Mr Di Marco became liable to pay £1,681.47. The statement described the liability as “Interim SC 2003 (excludes Reserve Fund)”.

Mr Di Marco’s liability on 06 March 2009, for 2003 and other years, was said to total £23,230.33, and he understood that the company intended to recover that charge when he sold his flat.

The company’s position was that Mr Di Marco had not paid the Article 16 demand by the date which would otherwise have given him relief from the then parallel service charge demand, but there was no claim – yet – for payment of the service charge.

There might indeed never be such a claim. Therefore the point was academic and did not justify a negative declaration.

It was however a fact that the 2003 figure appeared as a debt in the accounts.

Mann J. was not comfortable. “I am left,” he said, “with the unfortunate impression that this part of this case disguises some undisclosed agenda on the part of both parties… It is implicit in the landlord‘s attitude that it regards the matter as academic until such time as it chooses to render it real. That is not an appropriate attitude. If [the matter] is not academic then I do not see why Mr Di Marco should not be entitled to have the point decided – is he liable for these moneys or not? (assuming that is the real question). There are at least two ways of having it decided. One would be to seek an inquiry as to the amounts owing from him to Morshead, in the course of which this point would be decided.

“Alternatively if this were in fact the only live point then I do not see why it could not be taken by itself, and the only way in which it could be taken would be via a negative declaration. If a debtor wishes to clarify the existence or amount of a debt and has a legitimate interest in doing so, and if the creditor has not commenced proceedings in which the issue can be decided, then an application for a negative declaration ought to be open to the debtor if that is the best way of resolving the point”.

Since the company expressly declined to say that it would not bring a claim against Mr Di Marco, Mann J. considered that Mr Di Marco should be entitled to have the issued resolved, provided that the nature of the claim was properly pleaded and particularised, so that the court and the company could see the facts on which Mr Di Marco relied in support of the claim.

The appeal on this ground was therefore allowed subject to the proviso for proper pleading and particularisation.

HHJ Hand QC refused to appoint a manager under section 21(6) of the 1987 Act because only the LVT/First-tier Tribunal had the jurisdiction to do so.

Mr Di Marco had applied to the LVT for the appointment of a manager, but the LVT had refused his application. Mr Di Marco considered that it had been misled into that refusal.

He submitted that, since the LVT could not consider his application again, the exclusion in section 21(6) no longer applied and the County Court could exercise its normal jurisdiction to appoint receivers and managers.

Mann J. rejected his submissions, and found that HHJ Hand QC had been right for the reasons that he gave:

• Section 21 of the 1987 Act gives the Tribunal jurisdiction to appoint a manager;
• Subsection (6) excludes any court’s power to appoint a manager where an application could be made to the Tribunal;
• The Tribunal therefore had exclusive jurisdiction if an application to appoint a manager fell within the statute;
• The circumstances in which it can appoint are set out in section 24;
• Mr Di Marco’s grounds for appointing a receiver demonstrated that the appointment would (if made) be one within section 24;
• Accordingly the only body that can appoint a manager if those grounds are made out is the Tribunal, and the court has no jurisdiction;
• If the Tribunal has ruled on those matters and decided not to appoint, then (subject to an appeal) that is an end of the matter.
• The purpose of subsection 21(6) was to confine the appointment of a manager to the Tribunal in cases where the case was caught by section 24.

In Stylli v Haberton Properties Ltd [2002] EWHC 394 (Ch) Ferris J came to the same conclusion as to the exclusive jurisdiction of the Tribunal. Mann J. respectfully agreed with him.

That ground of appeal therefore also failed.

Mr Di Marco’s skeleton argument referred to a claim for a declaration that Morshead had demanded service charges pursuant to the 1985 Act for the years 2003 to 2009.

Mann J remarked that this claim ostensibly sought a declaration as to the legal status of certain documents, or as to the legal state of affairs arising out of dealings between Morshead and the tenants. HHJ Hand QC had rejected the claim for because it disclosed no cause of action.

“[The declaration sought], said Mann J., “does not necessarily require a cause of action as such. It does, however require some form of justification in pleaded fact and in the context of a pleaded dispute between the parties. Without the necessary facts being properly pleaded the court and the opposing party cannot see what facts are said to make the declaration correct as a matter of fact and law, and what facts are said to justify its being granted in the particular case”.

The claim for the declaration could not therefore stand: it was too poorly pleaded.

In the words of Mann J.: the appeal succeeded to a limited extent:

“(a) Mr Di Marco‘s claims for information under the 1985 Act ought not to have been struck out on the footing that there was no statutory tort, or statutory cause of action. Those claims ought therefore to be reinstated.

“(b) Mr Di Marco‘s claim for a declaration as to the 2003 debt does not fall to be struck out for the reasons given by the judge”.

Mann J.’s concluding words expressed concern that the making of the claim, and the resistance to acknowledging that there was no claim, were stances that were adopted for tactical and posturing reasons rather than reasons going simply to whether money might technically be owing or not. “However”, said he, “it is not for me to go into those tactical stances…”

This case is going to return to our screens in the early part of next year, because it is listed for a second appeal in February 2014.

I heartily agree with Mann J.’s conclusion on the right of the lessee to bring a civil claim to enforce sections 21 and 22 of the Landlord and Tenant Act 1985.

Feelings often run high in service charge litigation, but there is no real practical purpose to having a landlord convicted.

It is entirely unclear how a conviction can bring about the production of the documents that the tenant wants to see.

The question which baffles me is whether, in the 2008 Court of Appeal judgment, Mummery LJ held that a demand made under the Articles of Association of a lessee-owned landlord for payment for works which would fall within the definition of a service charge in section 18 of the 1985 Act:

• Can be challenged under the 1985 Act;
• Cannot be so challenged, or
• Was not a point that was decided by that judgment.

On the one hand, Mummery LJ, at paragraph 30 of the judgment, is nearly emphatic: “a defence to [a claim in one capacity] is not necessarily available as a defence to the other legally separate claim”.

On the other hand, he is clear that the judge below had not been asked to determine whether the company could “altogether avoid the statutory protection which Mr Di Marco might enjoy as tenant if he was sued under the provisions of the lease or if he invoked the terms of the lease and the statutory provisions in his capacity as tenant”.

I read that to mean that in fact the Landlord and Tenant Act 1985 might come to the aid of a tenant sued in his capacity as shareholder, but that the point did not require resolution because it was not before the court.

Is it the word “necessarily” in paragraph 30 which brokers a delicate truce between paragraphs 30 and 31?

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© Amanda Gourlay, 2013. Not to be reproduced without the author’s written permission