Windermere Marina Village Ltd v (1) Ian Wild (2) Gillian Lesley Barton [2014] UKUT 0163 (LC)

The lessees were the long leasehold owners of what was known as a “boathouse apartment”, which enjoyed a waterfront position and mooring for a small boat at Windermere Marina Village.

There were originally just 18 boathouse apartments, but the leases envisaged that that there would be further development, and Martin Rodger QC inferred that it was also therefore fair to assume that the proportion of the service charge payable by the boathouse apartment lessees might vary to reflect those changes.

In 2007, the landlord engaged a surveyor, a Mr Pogson FRICS, to report on the apportionment of the running costs. The report used the RICS Code of Practice on Residential Service Charges as a guide. Martin Rodger QC described it as “thorough and impressive”.

Unfortunately the lessees did not agree with Mr Pogson’s conclusions. The two main bones of contention were the security and ground maintenance costs. Mr Pogson’s conclusions meant that the lessees of the boathouse apartments paid four times more than the landlord, which was the owner of the moorings.

The lessees applied to the LVT for a determination of their liability to pay the new proportion of the security and ground maintenance costs – and disputed their liability to contribute towards the costs of Mr Pogson’s report.

The LVT decided that the lessees were liable for security and ground maintenance costs, but were not liable to contribute towards the costs of Mr Pogson’s report.

It then tackled the thorny question of apportionment.

It had the benefit of evidence from two surveyors: Mr Pogson and a Mr Gale-Hasleham, instructed by the lessees. It preferred Mr Gale-Hasleham’s method of apportionment.

It determined that “a fair and reasonable apportionment of the costs of security and ground maintenance … should be on the basis of a ratio of 1:1 between the house owners and the moorings.”

It did not consider whether the lease prevented it from re-opening Mr Pogson’s apportionment. The point was not raised at that stage.

It made a section 20C order.

The landlord appealed.

1. The LVT’s jurisdiction to re-open Mr Pogson’s apportionment in the light of the lease and section 27A(6);
2. The effect of the jurisdiction issue on a provision which offends section 27A(6);
3. Sufficiency of evidence and reasoning, and
4. Sufficiency of reasoning on the section 20C order.

Here is the whole of section 27A as it was in force at the date of the LVT’s decision on 14 November 2012.

Was Mr Pogson’s decision final and binding as the lease declared it was?

The common law position

Martin Rodger QC began with the common law, and turned to the words of Lord Denning, that icon of twentieth century jurisprudence, in Campbell v Edwards [1976] 1 WLR 403:

“It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it. Even if he has made a mistake they are still bound by it. The reason is because they have agreed to be bound by it. If there were fraud or collusion, of course, it would be very different. Fraud or collusion unravels everything”.

Section 19, Landlord and Tenant Act 1985

He moved on to the effect of the Landlord and Tenant Act 1985 on the common law: the effect of section 19 of the Act was to impose a number of restrictions – all dealing with reasonableness in one form or another – onto the agreement between the landlord and the tenant.

Section 19 and apportionment have been considered in three cases.

Schilling v Canary Riverside Development Properties Ltd [2005] LRX/26/2005

Section 19 does not impose any restriction on the apportionment of a service charge: its concern is with the amount of the charge. Authority for that proposition is derived from Schilling v Canary Riverside Development Properties Ltd [2005] LRX/26/2005.

In Schilling the apportionment of service charges was fixed – as it often is – under the lease. Mr Schilling was to pay 0.33% of estate expenditure, and 0.909091% of car park expenditure. Judge Michael Rich QC held:

“The complaint was in each case as to the mode by which the share to be paid was calculated in accordance with the terms of the leases…. [the lessee’s case] depended on construing the limitation of recoverable service charges under section 19(1)(a) of the Act of 1985 as requiring reasonable apportionment of costs which had been reasonably incurred… Costs are to be taken into account “only to the extent that they are reasonably incurred”, but if reasonably incurred they fall to be apportioned in accordance with the terms of the lease, except if excluded by a failure to consult or otherwise under for example sections 20B and 20C. The foundation of the appellants’ challenge therefore falls away”…

So, concluded Martin Rodger QC, “section 19(1) provides no relief to a tenant who has agreed a fixed apportionment of service charges, even if, viewed objectively, that apportionment is unfair or unreasonable. The same is true of section 19(2) in relation to service charges payable on account. Neither statutory provision has anything to do with apportionment”.

Observing that in fact the case before him had nothing to do with section 19 or fixed service charges – but plainly having been unable to leave fixed service charge apportionments undisturbed in the long grass – Martin Rodger moved on to leases where the method of apportionment is to be one of a number identified in the lease.

Levitt v London Borough of Camden [2011] UKUT 336 (LC)

In Levitt, the lease allowed for Camden to apportion the service charge in one of three increasingly broad ways. Either:

1. By relative rateable value or floor area;
2. As a fair and reasonable proportion … such proportion to be determined by the Landlord’s Finance Officer whose decision shall be final and binding”, or
3. By “such other method as the Landlord shall specify acting fairly and reasonably in the circumstances”.

The facts of Levitt are these: the boiler system in the lessees’ block was unreliable. The lessees therefore installed their own individual boilers in their flats. They resisted Camden’s decision to charge them for the installation of heating systems in other flats when they had paid for their own systems themselves.

HHJ Walden Smith cited Schilling as authority for the proposition that section 19 of the 1985 Act did not empower the LVT to determine the reasonable apportionment of relevant costs.

Martin Rodger QC drew a distinction between Schilling and Levitt, noting that in the latter the landlord had “a choice over the method of apportionment which it would adopt in relation to any particular category of expenditure”.

The impact of section 27A(6) on the exercise of that choice was not however examined in Levitt, which remained a case on section 19 rather than section 27A(6).

London Borough of Brent v Shulem B Association Ltd [2011] EWHC 1663 (Ch)

I have expressed not altogether positive views about Morgan J.’s judgment in Brent v Shulem B, a case is primarily about notices under section 20B(2) of the 1985 Act.

In its less eccentric passages however, the judgment cites – but makes no decisions about – section 27A(6).

Faced with a lease in not dissimilar terms to the one with which Martin Rodger QC was dealing, Morgan J. said:

“… the amount of the proportion … is to be settled by the surveyor of the lessor, who decision is stated to be final. It may be that this reference to the finality of the surveyor’s decision is no longer contractually effective in view of section 27A(6)… However for the purpose of [this case] I do not think that it is material to take into account the possible operation of [section 27A(6)]”.

For Martin Rodger QC, this passage sets out the process by which section 27A(6) is to be applied to the wording of service charge clauses which appear to deprive the LVT/FTT of its power to consider a section 27A application:

• “The meaning of the agreement must be determined on normal principles of construction;
• “Only after deciding what a particular provision means would one go on, in an appropriate case, to consider whether it was rendered void by section 27A(6)”.

Section 27A

Having reviewed rather a lot of case law which did not answer the question before him, Martin Rodger QC at least found himself in a position where he knew what the case was not about:

“The question of principle raised by this appeal does not arise under section 19 of the 1985 Act, and (at the level of principle) has nothing to do with whether the particular service charges sought to be collected by the [landlord] from the [lessees] are fair or reasonable. Nor has this appeal anything to do with leases under which the apportionment of service charge expenditure between different parties is in accordance with a fixed proportion or percentage (as in Schilling) or an agreed formula (such as by reference to floor area, bed spaces or rateable value”.

He continued:

“The issue of principle is concerned only with cases where the parties have not agreed the apportionment of liability at the commencement of their lease, but have left the question of apportionment to be determined by a third party at a later date. The issue is also likely to be relevant to leases under which more than one method of apportioning charges is identified, but where the choice of which method is to be adopted, either generally or in relation to particular categories of expenditure, is left to the landlord or a third party” (Levitt).

He turned his attention to section 27A.

Section 27A(1)

The initial question for the LVT on a section 27A application appears in section 27A(1): is the service charge is payable at all? This may require the LVT to consider the lease and to interpret its provisions.

If the answer to that initial question is “yes”, by virtue of section 27A(1), the LVT has the power to answer any of five further questions:

• By whom;
• To whom;
• When;
• How, and
• How much.

To Martin Rodger QC’s mind, a section 27A(1) application could be made where the only issue was the apportionment of expenditure between lessees. For example:

• In larger developments, different proportions of service charge are often payable in respect of different services and the classification of a particular service may give rise to a divergence of opinion between lessor and lessee;
• Alternatively, it may simply be that the method of apportionment – if not fixed by the lease – can be read in a number of ways.

Section 27A(4)

This subsection proscribes applications for matters which have, amongst other things, been agreed, admitted or determined.

This therefore is the provision which prevents a challenge to a service charge apportionment where the lease fixes the percentage payable or the formula by which the apportionment is to be established. The lease is a contract, by the terms of which the parties have agreed to be bound. The interpretation of the lease can naturally be the subject of an application, but the actual percentage or formula cannot.

However section 27A(4) must be read in the light of … 

Section 27A(6)

Here is the full text of the subsection:

“An agreement by the tenant of a dwelling (other than a post-dispute arbitration agreement) is void in so far as it purports to provide for a determination –

(a)  “in a particular manner, or

(b)  “on particular evidence,

“of any question which may be the subject of an application under subsection (1) or (3)”.

“The purpose of the provision”, observed Martin Rodger QC, “is clearly to avoid agreements excluding the jurisdiction of the first-tier tribunal on questions which could otherwise be referred to it for determination … [T]he question in the case of any particular agreement by a tenant is whether it has the effect of providing for the determination of any question which could be the subject of an application under sub-section (1) or (3) “in a particular manner” or “on particular evidence”.

Resolution of the jurisdiction question

The leases of Windermere Marina Village – I had nearly forgotten that we were up in Swallows and Amazons country after all those perambulations through London-based case law – provided that the apportionment was to be established by the landlord’s surveyor, and that the surveyor’s decision was to be final and binding.

Martin Rodger QC held that that provision fell foul of section 27A(6)(a) because it provided for a determination “in a particular manner”.

Neither Schilling nor Levitt could save the landlord:

• In Schilling the apportionment percentage was fixed under the lease, and so could be said to be agreed;
• In Levitt, although section 27A(6) was not considered, the outcome would have been the same, based as it was on what was fair and reasonable in the circumstances.

If a provision in a lease is caught by section 27A(6), what happens to it – and the apportionment of service charge liability that it purported to determine?

In the bloodless world of section 27A, there is no Orwellian room 101 into which the recalcitrant clause is ushered, defiant, to later emerge, compliant.

The clause is simply vaporised, or, to use Martin Rodger QC’s more direct words:

“Section 27A deprives the landlord’s surveyor of his role in determining the apportionment. [The clause] is to be read as if the method of ascertaining a fair apportionment was omitted altogether”.

The effect therefore of section 27A(6) was to require the LVT to determine the service charge apportionment from scratch, based on the evidence that it had heard. That is what it had done.

It was argued that the LVT had failed to reach a decision based on the evidence, and had failed to give adequate reasons for its decision.

Martin Rodger QC, now on the home straight, was having none of that argument. The LVT had carried out a site inspection, heard evidence from two experts and had expressed itself sufficiently clearly. Issue 3 failed.

This was given even shorter shrift. On its proper construction, the lease did not allow the landlord to put its costs of the proceedings through the service charge. The section 20C question therefore did not arise.

The Deputy President’s decision contains two useful asides:

• The first draws a distinction between the serving of a certificate triggering a liability to pay and the apportionment of the service charge.
• The second is a practical suggestion about case management of challenges to apportionments.

Certificates and third party determinations

Many leases require a landlord to provide the lessee with a certificate which states the amount that the lessee must pay. On receipt of the certificate the liability to pay falls on the lessee.

Martin Rodger QC was at pains to emphasise that contractual procedures for triggering a liability to pay may be unaffected by section 27A(6). It is the amount which is demanded in the certificate or determination which may be susceptible to a challenge under section 27A(6).

Case management

As part of its case management, when faced with the possibility of being required to carry out an apportionment exercise because section 27A(6) has rendered void a contractual apportionment provision, Martin Rodger QC proposed that it would be sensible for the First-tier Tribunal to consider giving notice to other parties who may wish to make representations on the issue.

The landlord’s appeal was dismissed.

For over ten years section 27A has been diligently opening the door to the LVT/FTT, all the while hiding its power to rock the leasehold boat – until now.

Now we have not only an analysis of cases which are almost on point, but an explanation as to what happens to a clause in a lease where section 27A(6) is engaged, and what is effectively a practice note-ette to the FTT as to how best to case manage apportionment disputes.

That guidance, when implemented, should prevent the occurrence of:

1. A multiplicity of decisions – which risk being inconsistent, and
2. Uproar and mayhem if the landlord, having obtained a decision in respect of one lease, applies that decision throughout a block or across an estate.

FTT procedure rules 23, 24 and 29 empower the FTT to follow Martin Rodger’s advice, but in my experience uproar and mayhem are not legislated for – at least in the FTT.

Click here for a printer-friendly version of this post