The Gateway (Leeds) Management Ltd v (1) Mrs Bahareh Naghash (2) Mr Iman Shamsizadeh [2015] UKUT 0333 (LC)

The Sunday Times Style magazine has it that the 1970s are enjoying a revival.

I lived in Ilkley in the early 1970s. My father worked in Leeds, and we regularly went shopping there.

I somehow doubt that the Gateway development was a twinkle of a twinkle in its architect’s eye at the time. In fact it was so long ago that I wonder whether the architect him/herself was a twinkle.

The Gateway is a sizeable development:

• It covers 800,000 square feet;
• It contains 640 apartments;
• There is a 218 room hotel;
• There are 500 car parking spaces, and
• There is office and commercial space.

Mrs Naghash and Mr Shamsizadeh, the respondents to this appeal, were the long lessees of apartments 1003 and 1105.

The residential leases contained the normal requirements that the lessees pay a contribution towards the landlord’s costs of providing various services.

The costs of three of those services were at issue in this appeal:

1) The gym;

2) A concierge facility, and

3) A “high specification” CCTV system.

Each lease was tripartite, being between the developer/landlord of The Gateway, the lessee and the management company.

It was the management company which covenanted to provide services, and which was entitled to recover the service charge contributions from the lessees.

Mr Shamszadeh and Mrs Naghash’s leases were granted in January 2007.

In December 2007, the developer granted the management company a 10 year lease of a mezzanine unit for use as a gym.

The annual rent under that lease was £32,000. It was reviewable annually from April 2009. The lease provided that on review, the rent was to increase by 3% or by reference to the Retail Prices Index, whichever was the greater.

In January 2008, the developer granted the management company a lease of another unit, this time for a 20 year term, to be used as a concierge suite.

The annual rent under the lease was £24,000. The rent was reviewable in the same way as the lease of the gym.

The developer originally contracted for the supply of the CCTV service with an equipment leasing company.

It appeared that when the developer went into liquidation, the management company took over the developer’s contract and paid the CCTV supplier. The annual cost was £43,226.16.

The management company originally issued claims in the county court against the lessees for arrears of service charges. The sums claimed were:

• From Mr Shamsizadeh: £1,574.54 plus contractual costs under the lease of £496;
• From Mrs Naghash: £395.80 plus £938 in contractual costs under the lease.

The claims were transferred to the FTT for determination.

The FTT carried out an inspection of the Gateway.

There being no accounts available to cover the whole disputed eighteen month period from January 2011 to June 2012, it made reductions in percentages, rather than actual figures.

The gym

On average the lessees contributed £73 per annum towards the cost of the gym. The evidence stacked up in this way:

• Key documents were missing;
• The management company’s managing agent, Mr Dean, gave evidence, but he had no first hand knowledge of the facts, nor did he have access to the lease;
• The gym covered about the same area as a two bedroomed apartment in the development;
• The lessees asserted that a reasonable annual rent for such an apartment would be in the region of £10,000-£15,000. Mr Dean did not disagree;
• In 2012, the actual rent payable for the gym space by the management company was £39,000. It was the most significant element of the gym cost to the service charge;
• Mr Dean accepted that the rent of £39,000 appeared “superficially” to be high;
• The management company did not provide the FTT with evidence to support the other charges it had made;
• The lessees’ evidence did not challenge any of the other costs which contributed to the total charge for the gym.

The FTT considered that the “overall amount charged to the service charge account for the gym was unreasonably high for what was being obtained”.

It reduced the amount payable by 50%.

CCTV

Very little evidence was available:

• No invoices had been disclosed to evidence the management company’s payments;
• The payments were made under a lease purchase agreement which was not disclosed to the FTT;
• Mr Dean made the rather eyebrow-raising admission that the tenants had been “paying more than they should have been [for the CCTV], but that was a way for the developer to defray their construction costs by passing these costs on to the tenants”;
• The lessees did not put forward any alternative quotations.

The FTT reduced the lessees’ contributions by 20%.

Concierge office rent

Mrs Naghash did not challenge this cost, but Mr Shamsizadah did.

Here again, the FTT was beset by evidential poverty. All that it knew was that:

• The parties to the arrangement were the developer and the management company;
• Rent of £2,000 per month was charged to the service charge;
• The lease was said to be similar to that of the gym, but it was not disclosed.

The FTT determined the issue in the same way as it had the costs of the gym, that is, by reducing them by 50%.

• The gym charge: 50%;
• The CCTV charge: 20%, and
• The concierge facility: 50%. 

The management company appealed. The grounds were threefold:

1) The costs were not “service charges” within the meaning of section 18 of the Landlord and Tenant Act 1985 because they did not vary according to the cost of the service, and the FTT therefore had no jurisdiction to determine them;

2) The FTT had not given sufficient reasons for its decision, and

3) It had focused on whether a service was expensive, rather than whether the costs had been reasonably incurred.

Ultimately Justin Bates, who appeared for the appellant management company, ran grounds 2 and 3 together. Martin Rodger QC did the same in his decision. I propose to follow suit here.

If the gym, CCTV and concierge costs were fixed charges which did not vary as provided for by section 18 of the Landlord and Tenant Act 1985, the FTT had no jurisdiction to consider them.

You can read section 18 here.

Thus, held Martin Rodger Q, a charge must satisfy two requirements to fall within the meaning of section 18:

1) “It must be a payment for services, repairs, maintenance etc, and

2) “It must be capable of varying, in whole or in part, according to the costs incurred by the landlord”.

In the 1985 Act, “landlord” includes a management company.

Rent and section 18

The management company argued that the gym and concierge office rents varied according to RPI or a fixed percentage. They could not therefore vary according to the “relevant costs” under section 18.

Bolton v Godwin-Austen

The management company relied on Bolton v Godwin-Austen [2014] EWCA Civ 27, a case turning on the meaning of rent for the purposes of a collective enfranchisement.

In Bolton, the lessees were obliged to pay, as part of their service charge, a (large) contribution towards the rent that their immediate landlord paid to the freeholder.

In the course of his judgment, Sir Stanley Burnton observed that:

“An obligation to pay the rent payable by a head lessor to his freeholder is not a service charge or part of a service charge… In my judgment the obligation of a lessee to pay to his lessor the rent payable by the lessor to his freeholder (or head lessor) is itself an obligation to pay rent”.

Martin Rodger QC was not prepared to apply an observation made in the context of a collective enfranchisement to the operation of the Landlord and Tenant Act 1985:

“The normal usage of the expression “service charge” is to refer to a payment in return for services provided by a landlord to a group of tenants. An obligation to contribute towards the rent payable by the landlord to its own head landlord, and which has nothing to do with the provision of a service, is an additional payment for the use of the land, or, in other words, a rent. Sir Stanley Burnton did not say, and cannot be understood to have meant, that a rent can never properly form part of a landlord’s expenditure recoverable through a service charge”.

Applying that principle to the case before him, Martin Rodger QC held that a service remains a service charge within the meaning of section 18, even if the cost of providing it includes the cost to the landlord of renting accommodation for that purpose.

The leases of the Gateway did not require the lessees to pay rent: they required or entitled the landlord to provide various services for which it was entitled to recover the cost from the lessees.

“The fact that part of the expenditure incurred in providing that service is in respect of the cost of providing the premises does not convert the lessee’s obligation to contribute to the cost of providing the service into an obligation to pay rent”, said Martin Rodgre QC. “The lessee’s payment is for the provision of the gym, which can only be provided in a space over which the appellant either already has a right or must obtain a right. The payment made by the lessees in the Bolton case was not for any service, but was simply to reimburse the cost incurred by the intermediate landlord in payment its own rent due under the head-lease”.

Warwickshire Hamlets Ltd v Gedden

The rent v service charge distinction was considered by HHJ Huskinson in Warwickshire Hamlets Ltd v Gedden [2010] UKUT 75 (LC).

In that case, the management company was obliged to pay the freeholder an amount – a rent – for a flat for a resident warden.

HHJ Huskinson determined that the payment fell within the meaning of service charge because

1) The service charge should not be broken down into component parts to examine whether each element fell within the meaning of section 18;

2) The payment was, as required by section 18, payable directly or indirectly for the provision of services. If the management company did not make that payment, the freeholder would forfeit the management company’s lease, with the result that the management company would no longer be able to provide the section 18 services that it covenanted to provide in the lease.

To Martin Rodger QC’s mind, the first of HHJ Huskinson’s reasons was open to criticism: it could not be the case that a landlord, simply by creating one job lot of costs, could include sums paid for items not falling within the meaning of section 18.

On the other hand, the second reason stood up to scrutiny:

“The cost of rent for premises to be used in connection with the provision of services (whether the rent of a gym, a managing agent’s office or a warden’s flat) is sufficiently connected (“directly or indirectly”) to the provision of the service of the gym, management or concierge to be recoverable as a service charge within the meaning of section 18. The costs which form part of a service charge are to include overheads as is made plain by section 18(3)(a). Premises costs are exactly the sort of overheads which are included”.

Jurisdiction: the Upper Tribunal’s decision

To Martin Rodger QC’s mind, the management company’s argument was “impossible”.

The costs at the date of the hearing may have been fixed or variable according to an outside index. Those costs were not however destined to be fixed or vary with RPI for the entire term of Mrs Naghash’s and Mr Shasizadeh’s leases. The lease of the gym expired in 2017 and the concierge facility some ten years later.

The same applied to the CCTV contract.

In short, the variability of the costs must be measured against the whole term of the lease, rather than over the course of a year or period of years shorter than the term.

Martin Rodger QC moved on to the second limb of the appeal. The management company argued that the FTT had:

• Given insufficient reasons for its decision, and
• Not based its decision on evidence before it.

Sufficiency of reasons

“A tribunal must give proper and adequate reasons for its decisions. They must be intelligible and must deal with the substantial points which have been raised in a way which is sufficiently specific and clear to leave no room for doubt as to what has been decided and as to why the decision has been reached”.

So held Martin Rodger QC, reviewing the principles set out by Lawrence Collins J. in Lucie M v Worcestershire County Council & Evans [2002] EWHC 1292 (Admin), adopted by the Upper Tribunal in London Borough of Havering v MacDonald [2012] UKUT 154 (LC).

The sophistication of the Tribunal’s reasons will depend to a certain extent on the scope of the evidence. If there is little evidence and argument and the disputed amounts are modest, the reasons need not be sophisticated. Plainly the Tribunal is not obliged to deal with any arguments which have not been raised.

“The parties must know what has been decided and why it has been decided but the detail included in the FTT’s reasons may legitimately reflect the value of the claim before it”.

Evidence and the FTT

In Country Trade Ltd v Noakes [2011] UKUT 407 (LC), HHJ Gerald set out guidance as to the appropriate approach where there is a dispute about the value of work that clearly has been done but where the evidence is flimsy or not credible. He said:

“In those circumstances, the LVT is entitled to apply a robust, commonsense approach and make appropriate deductions based on the available evidence (such as it is) from the amounts claimed always bearing in mind that it must explain its reasons for doing so.  The circumstances in which it may do so will depend on the nature of the issues raised and service charge items in dispute, and will always be a question of fact and degree.  In some instances, such as insurance premiums, it will be very difficult for the LVT to disallow the landlord’s claim in the absence of any comparative or market evidence to the contrary.  In other cases, such as gardening, cleaning or such like, the position may be different but the nature and complexity of the work is fairly straightforward.  It is only where the issue is finely balanced that a result need be had to the burden of proof.”

The FTT’s choice

In terms of the amount by which the FTT had reduced the disputed charges, Martin Rodger QC accepted that the gym, CCTV and concierge costs had features which rendered them less run-of-the-mill than gardening and cleaning costs.

Equally however, the FTT had been faced with a three-way choice:

1) To make no reduction, thereby leaving the costs as they were;

2) To adjourn to allow the landlord to provide evidence, or

3) To adopt the Country Trade “robust, commonsense approach”.

The first of these options would have been wrong in the light of the landlord’s concession that the CCTV charges included an element of designed to allow the developer to recover some of its construction costs.

The second would have imposed a disproportionate burden on the parties in the light of the relatively modest sums at issue.

The third was the right option to have followed. It may have been unscientific, but it was proportionate and illustrated the application of the overriding objective. 

The gym

Martin Rodger QC held that the FTT had given a sufficiently clear and reasoned decision:

• “The core of the [Tribunal’s] reasoning was that “the overall amount charged to the service charge account for the gym was unreasonably high for what was being obtained”;
• The Tribunal had inspected the premises;
• It explained that the amount at issue was £49,231.00, of which £39,000.00 was the annual rent for the gym;
• The flats were charged £73 per annum, based on the £49,231.00 figure;
• It was clear from the decision that, in the FTT’s view, the amount paid for the gym – £49,231.00 – was twice as high as was reasonable.

In reaching that decision, the FTT had not relied on any of its own expertise, but had calculated the reasonableness of the amount payable by reference to the £10,000-£15,000 per year rent for which the lessees contended:

• It reduced the rent from £39,000 to £15,000;
• The balance of the running costs, of around £10,000, was not reduced.

CCTV

To Martin Rodger QC’s mind, it was clear from the evidence that the CCTV charges were unreasonable.

The CCTV leasing agreement, which the landlord had inherited from the developer, required the landlord to pay more than was justified because “it was a way for a developer to defray their construction costs by passing these costs on to the tenants”.

Ouch.

The issue before the FTT therefore was simply one of the amount by which the CCTV charges should be reduced. It had little to no evidence on that point, and its decision was ultimately based on what it had seen when inspecting the development before the hearing.

The lessees having shown – in conjunction with Mr Dean’s evidence – that the cost was unreasonable, the burden shifted to the landlord to quantify and evidence a reasonable cost.

There was no such evidence, but the FTT was “nonetheless required to make a decision on the reasonable cost of providing the service. Having seen the equipment it did the best it could and, in my judgment, cannot be faulted for the reasons it gave”.

The concierge suite

FTT was “well-equipped” to determine rental values for concierge services in Leeds. In the light of the limited evidence before it, it had made a legitimate determination.

The appeal was therefore dismissed, but not without a word of caution from Martin Rodger QC that his decision was not determinative of future service charges.

Each section 27A application should be treated on its merits. Consequently the landlord was “not prevented by the decision of the FTT, despite my dismissal of the appeal against it, from presenting more considered evidence in support of a claim for future service charges”.

The lessees’ application for a section 20C order was granted.

When is rent not rent but part of the service charge?

On my reading of Martin Rodger QC, a contribution towards rent:

• Is rent where the covenant is expressly phrased as a covenant to “pay rent” alone, or to indemnify the landlord’s payment of rent to someone else, but
• Is not rent where the payment is part of, or is wrapped up in a service, the cost of which varies over the life of the lease in accordance with the cost of providing the service. That is because it is either an indirect payment for the provision of that service, or an overhead within the meaning of section 18.

Knowledge and experience

This case belongs to the family of cases headed by Red Kite Community Housing v Robertson [2014] UKUT 0134 (LC), in which Siobhan McGrath gave guidance to the FTT about achieving fairness and whether to seek comments from the parties before proceeding to apply its knowledge and experience.

It strikes me that the FTT’s knowledge and experience is most likely to weigh heavily in the balance in two situations:

• First, in cases where, as here, the evidence is little more than a fig leaf covering the parties’ modesty, and
• Second, where the parties’ positions and evidence are diametrically opposed, and the FTT considers that the true position is somewhere between the two.

Evidence

This case also shows the importance of evidence, one of the three topics covered in the #LawUnleashed training sessions.

The lessee is obliged to identify the costs which s/he disputes and to give reasons for his/her challenge.

The landlord is expected to produce evidence which justifies the costs and answers the lessee’s challenge.

If the lessee succeeds in persuading the FTT that the costs should be reduced, the FTT will expect him/her to produce evidence of the amount by which the landlord’s costs should be reduced. It is a key element of the section 27A determination process.

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