Lord Justice Briggs :
Introduction
- The issue in this appeal is whether, when quantifying a service charge payable by a lessee under a long lease of residential property, credit must be given by the lessor in respect of a third party contribution towards the cost of carrying out repairs and improvements to the property, so as to avoid any element of double recovery by the lessor. The question is mainly one of construction of the relevant long lease, but the parties prayed in aid in support of their submissions
various
aspects of the extensive statutory framework affecting the recovery of service charges, both as a supposed aid to construction and for the purpose of determining the extent of the jurisdiction of the Upper Tribunal and of this court to depart from the quantification of the service charge by the person identified in the lease as having that responsibility.
- This issue arose out of a much more general challenge to the recoverability by the lessor of a service charge in connection with its carrying out of large-scale repairs and improvements to the relevant property, and to the block of flats and maisonettes of which it formed part, and only emerged for the first time when the case was appealed by the (largely unsuccessful) lessee from the Leasehold Valuation Tribunal for the Northern Rent Assessment Panel ("the LVT") to the Upper Tribunal. As will appear, the Upper Tribunal resolved the issue in favour of the lessee, so that it arises in this court on the lessor's appeal.
- The appellant lessor, Sheffield City Council ("the Council"), appeared by Mr Christopher Baker. The respondent lessee, Ms Hazel Oliver, was represented by Mr James Fieldsend and Miss Amanda Gourlay, both of whom appeared pro bono. The court was much assisted by the submissions of all counsel, and wishes to express its particular appreciation for the selfless dedication to this case of both counsel acting pro bono.
The Facts
- The full facts underlying the service charge dispute between the parties are set out in more than sufficient detail in the written decisions of the Upper Tribunal, Martin Rodger QC and P. D. McCrea FRICS, namely the Main Decision dated 12 May 2015 [2015] UKUT 0229 (LC) and the Addendum to that decision dated 7 September 2015 [2015] UKUT 0494 (LC). For present purposes, the facts material to the determination of this issue can be relatively shortly stated, although the relevant provisions of the lease need to be set out in full.
- The appellant Council is the freehold owner of the Lansdowne and Hanover Estates ("the Estates"), which consist of some 1,000 flats and maisonettes, contained in forty separate blocks, groups of which are connected by walkways and stair-towers to form "super-blocks". Each individual flat and maisonette has a small private balcony.
- The Estates were constructed between 1968 and 1972 to a non-traditional construction, involving the use of a concrete frame with masonry cross walls. The main elevations were enclosed by in-filled panels comprising timber studwork hung at alternate levels with clay tile cladding or a composite material of glass reinforced plastic known as Asbestolux. In the absence of further major investment, non-traditional construction of this kind ordinarily has a service life of between 20 to 30 years. Prior to the major refurbishment work described below, only routine maintenance had been carried out in relation to the Estates, with the exception of certain cavity insulation to some of the properties in 2003.
- Although the majority of the residential units on the Estates are let as social rented housing, as at 29 March 2010 there were some 77 let on long leases, and 80 by the time of the hearing before the LVT.
- Ms Oliver is a former social housing tenant who exercised her right to buy her property, namely 128 Cliff Street, which is a two storey maisonette located in block L13 on the Lansdowne Estate. The lease was granted on 25 September 1989, for a term of 125 years to Miss Oliver and her mother jointly. I will call her maisonette "the Property", Block L13 "the Block" and her long lease "the Lease". The Block and the Property are respectively called "the Building" and "the demised premises" in the Lease. After being credited with the right to buy allowance due under Section 129 of the Housing Act 1985, Ms Oliver and her mother paid £6,840 for the Lease, and it was let at a ground rent of £10 per annum.
- The Reddendum in clause 1 provided, in addition to the ground rent, for there to be payable:
"In addition to the rent a service charge (hereinafter called "the Service Charge") to be determined and levied in accordance with the provisions contained in Part III of the said Schedule hereto".
By clause 3 the Lessee covenants to pay the rent and the Service Charge upon demand therefor by the Council and to observe and perform the provisions contained in Part III of the Schedule (which relate to the Service Charge).
- By clause 3 (29) the Lessee covenants as follows:
"Subject (so far as applicable) to the provisions of paragraphs 16A to 16D and 18 of Schedule VI of the 1985 Act to pay to the Council from time to time as part of the Service Charge a reasonable part of the costs and expenses which the Council may from time to time incur or estimate to be incurred in carrying out repairs and improvements to the structure and exterior of the demised premises and the Building …"
- Under clause 4 (3) of the Lease, the Council as landlord covenanted:
"To keep in repair (the definition of repair where appropriate including decorative repair) and (if desirable in the opinion of the Council) to improve (a) the structure and exterior of the demised premises and of the Building (including drains gutters and external pipes) and to make good any defect affecting that structure PROVIDED that the obligation to repair includes an obligation on the part of the Council to rebuild or reinstate the demised premises of the Building if either of them is destroyed or damaged by fire tempest flood or any cause against the risk of which it is normal practice to insure (b) any other property over or in respect of which the Lessee has any rights by virtue of this Lease and (c) any installation connected with the provision of those services referred to in sub-clause (2) hereof and to maintain such services at a reasonable level."
- By clause 4 (4)(i) the Council covenanted to take out and maintain insurance in respect of the Property and the structure and exterior of the Block and to make all necessary payments for that purpose subject to reimbursement by the Lessee, and to lay out all monies received by virtue of that insurance in making good any relevant loss or damage, to the extent covered by the policy.
- Part III of the Schedule, headed "Service Charge Provisions – Section I - the Service Charge" provides so far as is relevant as follows:
"1. The Service Charge payable by the Lessee shall be a fair proportion to be determined by the City Treasurer or other duly authorised office of the Council (based upon a comparison of the rateable value of the demised premises with the rateable value of all the premises contained in the Building at the dates such payments shall fall due or in the event of abolition of such rateable values in accordance with such formula as the City Treasurer or other duly authorised officer of the Council shall determine) of all costs expenses and outgoings incurred or estimated to be incurred by the Council in respect of or for the benefit of the Building (such fair proportion representing that part of the said costs expenses and outgoings incurred or to be incurred by the Council in complying with their obligations contained or implied herein for the benefit of the Lessee insofar only as such costs expenses and outgoings may lawfully be recovered from the Lessee)."
- Paragraph 6 in Section II of Part III of the Schedule, headed "Administrative Provisions" provides for estimated service charge bills, in paragraph 5, to be adjusted in accordance with paragraph 6, as follows:
"6. Each of the foregoing estimates of the said costs expenses and outgoings shall be adjusted by adding thereto any under-estimate (the amount by which actual costs expenses and outgoings have exceeded estimated costs expenses and outgoings) or by subtracting therefrom any over-estimate (the amount by which estimated costs expenses and outgoings have exceeded actual costs expenses and outgoings) calculated by comparing the actual costs expenses and outgoings recorded in or appearing from the accounts prepared for each financial year of the Council the end whereof last precedes the commencement of the accounting year in respect of which each such estimate is being prepared with the estimated costs expenses and outgoings (apportioned on a daily basis) of the accounting years so far as part or parts thereof are co-extensive with each such preceding financial year."
- After extensive research, taking of advice, consultation, the obtaining of planning permission and the selection of a building contractor, Apollo Property Services Group Limited ("Apollo"), the Council embarked upon a large-scale refurbishment of the Estates in June 2011 which included works of both repair and improvement. The works were completed in August 2013 at a total cost of £11,438,801.80, of which the Council sought to recover £615,323.64 from its long leaseholders pursuant to service charge provisions in their leases broadly equivalent to those in the Lease. The amount sought to be recovered from Ms Oliver (based on actual rather than estimated costs) was £9,378.72, being constituted by the following elements:
i) £7,224.47 for exterior cladding and associated works to the Property.
ii) £1,582.69 as a contribution of 1/27th of the cost of works to the Block.
iii) £371.56 as a contribution of 1/202nd of the cost of works to the super-block in which the Block was located.
iv) £200 administration fee.
The works to the Block were carried out between October 2011 and March 2012.
- The large scale refurbishment of the Estates including the Block and the Property were intended substantially to lengthen their working life, and to improve their thermal efficiency. So far as concerned the Property, the major elements of the work included re-cladding, the provision of a new central heating and hot water boiler for the Property itself and the provision of new thermostatically controlled radiator valves.
- The cladding and associated structural work had the effect of thickening the exterior wall of Miss Oliver's property (and all comparable properties) so that, if nothing else was done, the boiler flues would all have needed to be lengthened. Rather than do that, the Council decided to replace all the boilers. Nonetheless it did not seek to recover from its long lessees (including Ms Oliver) the cost of replacing the boilers, or the radiator valves, or any proportion of its professional fees incurred in connection with the refurbishment of the Estates. The Upper Tribunal concluded (without making any specific finding), in the absence of sufficient evidence, that had those items been included, that might have increased the total service charge levied against the Property by a little over £2,000 (being slightly over £1,000 for the boiler and £1,000 for the professional fees).
- The Council had received some government funding towards the overall costs of the refurbishment of the Estates pursuant to the Decent Homes Programme, but this was laid out only for the benefit of its social housing tenants, rather than its long leaseholders. Of much greater relevance for present purposes was the fact that the Council also received substantial funding ("CESP funding") from the Community Energy Savings Programme, which had been established by the Electricity and Gas (Community Energy Savings Programme) Order 2009 (SI 2009/1905), pursuant to an agreement with NPower made on 15 May 2012 ("the NPower Agreement"). The CESP Programme ran from 1 October 2009 to 31 December 2012. Under the Programme, the then Department of Energy and Climate Change set a community target for reduction in carbon emissions which was to be met by requiring commercial gas and electricity suppliers to fund energy saving measures for domestic consumers. The CESP was targeted at low income areas, and enabled gas and electricity suppliers to meet carbon emissions targets either by making arrangements with individual home owners, or (and in practice more frequently) with social housing providers such as the Council. The Programme applied to strictly delineated geographical areas, and required works to be done within a prescribed period of time. Part of the Estates, including the Block and the Property, fell within a qualifying area, but some other blocks within the Estates did not. Furthermore, even in relation to that part of the Estates falling within the qualifying geographical area, only some of the relevant refurbishment works were carried out within the qualifying period of time.
- The Council received a total of £2.913 million pursuant to the NPower Agreement, of which £1.574 million was referable to the refurbishment of the Estates, and £43,570.44 specifically referable to the work on the Block. Payments under the NPower Agreement could be claimed by the Council from NPower only upon proof of the carrying out of specific works to relevant residential units, including the Property. The Council claimed and received £2,210.41 for work done specifically to Miss Oliver's property, comprising:
i) £1,885.44 in respect of external cladding.
ii) £317.97 in respect of the replacement boiler.
iii) £7 in respect of the thermostatic radiator valves.
- The NPower Agreement also enabled the Council to claim what were described as "whole house bonuses" where more than one item of work was undertaken in relation to a single residential unit, and "area bonuses" because of the aggregate of work done on other flats and maisonettes in other blocks within the Estate. The whole house bonus received because of the carrying out of the three types of work to Ms Oliver's Property was a further £2,210.41, because the whole house bonus was 100% of the base figure claimed.
- Several provisions of the NPower Agreement made it clear that, as between the Council and NPower, it was the Council's responsibility to carry out the relevant works within the Estates, and to make all relevant payments to its building contractors. Clause 7.2 of the NPower Agreement provided as follows:
"The Social Housing Provider agrees and acknowledges that the Funding shall only be used by it in accordance with their agreement and for the purposes of the Scheme. The Social Housing Provider undertakes not to use the Funding (or any of it) for any purpose other than for the provision of Physical Measures in Relevant Homes within the Area as part of the Scheme."
The Social Housing Provider was the Council and the Property was one of the Relevant Homes.
- The Council decided not to deduct the amounts received under the NPower Agreement in respect of specific residential units held by long leaseholders (including the Property) from the service charges levied against those lessees. Its reasoning, as found by the Upper Tribunal (at paragraph 113 of the Main Decision) was that:
"… not all of the blocks on the Estates qualified for funding and the Council considered that it would be unfair to allow some leaseholders an allowance against their contribution, but not others. It was, Miss Sharpe said, "a political decision" not to attribute the CESP funding only to those blocks which were eligible for it."
Some blocks in which there were long leasehold residential units fell outside the CESP Scheme because they were outside the geographical area to which it related. Others fell outside it because the works done to those blocks were not carried out within the qualifying time period.
- The result of that decision by the Council, in relation to the Property, was that, although the Council received a contribution under the CESP Scheme from NPower in relation to the cladding and associated works, the boiler and the radiator valves, and a 100% uplift by virtue of the whole house bonus, it nonetheless charged Ms Oliver by way of service charge in full for the cladding works, although it made no charge in relation to the boilers or the radiator valves nor for its associated professional costs. As I have said, those decisions not to include an element in respect of boilers, radiator valves and professional costs within the service charges were applied to all the Council's long leasehold tenants, regardless whether their residential units fell within the geographical or temporal confines of the CESP Scheme. Mr Baker submitted that the Council's decision not to charge any of its long leaseholders for boiler works, radiator works or professional costs was in some way at least in part consequential upon the Council's receipt of the CESP funding.
Statutory Control of the Recovery of Service Charges
- In relation to residential property let to tenants, provisions now to be found in Sections 18 and following of the Landlord and Tenant Act 1985 impose a detailed regulatory scheme in relation to the recovery of service charges by landlords. The scheme includes an overriding requirement that costs may be taken into account in determining the amount of the service charge only to the extent that they are reasonably incurred (section 19). There are provisions for consultation, for the provision of information, for time limits for the making of service charge demands, for the control of the recovery of costs incurred by the landlord in connection with proceedings, and for the provision of regular statements of account (not yet in force), and for the inspection by tenants (or recognised tenants' associations) of underlying accounting documents. Parts of the regime are disapplied in relation to some tenants of public housing authorities, but not in relation to those tenants if they are leaseholders under long tenancies.
- Section 20A specifically requires the landlord to deduct certain specified types of grant received in respect of relevant works from the costs in respect of which a service charge is payable. This section does not specify payments under the CESP Scheme within the grants so identified.
- For the present purposes the most important provision is s.27A, headed "Liability to pay Service Charges: Jurisdiction", which provides, so far as is relevant, as follows:
"(1) An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to –
(a) …
(b) …
(c) the amount which is payable,
…
(2) Subsection (1) applies whether or not any payment has been made.
(3) An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to –
(a) …
(b) …
(c) the amount which would be payable,
…
(4) No application under subsection (1) or (3) may be made in respect of a matter which –
(a) has been agreed or admitted by the tenant,
(b) has been, or is to be, referred to arbitration pursuant to a post-dispute arbitration agreement to which the tenant is a party,
(c) has been the subject of determination by a court, or
(d) has been the subject of determination by an arbitral tribunal pursuant to a post-dispute arbitration agreement.
(5) But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment.
(6) An agreement by the tenant of a dwelling (other than a post-dispute arbitration agreement) is void 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)."
- At the relevant time for the purposes of this dispute, the appropriate tribunal within the meaning of sub sections (1) and (3) was the LVT. An appeal lies on a point of law to the Upper Tribunal, and a second appeal to the Court of Appeal. Both the appellate bodies may make any order which the LVT could itself have made.
- In Windermere Marina Village Limited v Wild [2014] UKUT 0163(LC), the Upper Tribunal (Mr Rodger QC) had to consider the effect of a service charge clause which provided that the tenants should:
"Pay a fair proportion (to be determined by the Surveyor for the time being of the Lessors whose determination shall be final and binding)".. of various relevant expenses and costs.
He concluded that this provision fell foul of s.27A(6). He said, at paragraph 40:
"The prohibition in s.27A(4) on re-opening matters which have been agreed must, however, be considered in the light of s.27A(6). This renders void any agreement by the tenant in so far as it "purports" to provide for the determination of any question which could be the subject of an application under subss.(1) or (3) "in a particular manner" or "on particular evidence". The purpose of the provision is clearly to avoid agreements excluding the jurisdiction of the first-tier tribunal on questions which could otherwise be referred to it for determination."
He noted, at paragraph 45, that the apportionment of service charges can be a complex matter, and that there may be more than one fair or reasonable method which may be adopted. At paragraph 47 he noted the submission by counsel for the landlord that it would only be if the LVT was satisfied that the Surveyor's apportionment was not fair that it could substitute its own view of what was fair. At paragraph 48, he continued:
"I cannot accept Mr Gilchrist's submission. Section 27A deprives the landlord's surveyor of his role in determining the apportionment. Paragraph (2) is to be read as if the method of ascertaining a fair apportionment was omitted altogether. Mr Pogson's conclusions cannot therefore have any contractual effect. That being the case, it was for LVT to decide what was a fair proportion of the expense of communal services payable by the respondents. It is not suggested that the method it preferred was unfair, and the fact that the alternative method, which it rejected, may also have been fair does not undermine its conclusion."
- In Gater v Wellington Real Estate Limited [2014] UKUT 0561(LC) the Upper Tribunal (again Mr Rodger QC) allowed an appeal from the First-tier Tribunal (which had by then replaced the LVT as the appropriate tribunal) on the ground that it had wrongly applied the approach to a determination by the landlord's surveyor which the Upper Tribunal had disapproved in the Windermere case. In the Gater case the relevant lease (called the 'White Lease') contained two overlapping provisions for the determination of the service charge apportionment by the landlord's surveyor, one of which provided that his decision should be final and the other of which did not. The Upper Tribunal concluded that the presence or absence of the words "whose decision shall be final and binding" made no difference to the requirement to treat the provision for determination by the landlord's surveyor as void under s.27A(6). Mr Rodger QC said, at paragraph 73:
"It was submitted by Ms Black that the only effect of s.27A(6) was to render void the words "whose determination shall be final and binding" and that the roles of the Landlord's surveyor in determining the fair proportion of the service costs remained intact. I do not accept that. The statutory anti-avoidance provision renders void so much of the agreement as has the effect of providing for the determination in a particular manner of any question which could be referred to the appropriate tribunal under s.27A(1). A determination of proportions by the landlord's surveyor is such a provision, whether it is said to be final and binding or not. The Tribunal said as much in Windermere …"
After quoting from the Windermere case, he continued, at paragraph 74:
"As is apparent from this passage, where a provision for determining an apportionment is rendered void by the operation of s.27A(6) of the 1985 Act, and the parties cannot agree what is fair, the consequence is that the fair proportion falls to be determined by the appropriate tribunal. That is a fundamentally different exercise from the one undertaken by the First-tier Tribunal in this case, when it asked itself whether the respondent's method of apportionment was fair rather than asking itself what the fair apportionment should be."
The Proceedings Before the LVT and Upper Tribunal
- Both Ms Oliver and the Council applied, in 2011, to the LVT for a prospective determination of long leaseholder liability to pay service charges in relation to the then proposed refurbishment scheme. At that stage the issues were mainly directed to the question whether the proposed programme of works was itself reasonable. Subject to one small item, the Council succeeded and Ms Oliver lost. The issue arising from the CESP funding was mentioned but not dealt with.
- On Ms Oliver's appeal to the Upper Tribunal, she lost again on the main issue, but largely succeeded on the question whether the Council should have deducted its CESP receipts, to the extent attributable to the cladding work on her Property and (in part) attributable to the whole house bonus. The Upper Tribunal concluded that, to the extent that the Council's expenditure on the cladding works had been funded by NPower under the CESP Scheme, that part of the cost had not been incurred by the Council within the meaning either of clause 3(29) of, or paragraph 1 of Part III of the Schedule to, the Lease. The gist of its decision is to be found in paragraph 120, as follows:
"In principle we do not think it is open to the Council to calculate the service charge without reference to the receipt by it from a commercial third party of funds specifically intended to meet the cost of part of the works. We do not consider that the Council has "incurred" those costs within the meaning of the lease in circumstances where in the course of the contract, it reached agreement with a third party which bound that party to reimburse part of the cost. The fact that the CESP funding was not limited to properties let to the Council's own secure tenants, but was equally applicable to work done to those belonging to its long leaseholders, prohibits the Council from treating the funding as if it was part of its general revenue. If the Council had not carried out the specific items of work which it now seeks to charge to the leaseholders it would not have received the CESP funds. In those circumstances for it to retain the CESP funding while recovering the leaseholders' contributions towards the cost of the work in full would amount to double recovery."
At paragraph 127 the Upper Tribunal left open the possibility that the Council might wish to reconsider its decision not to charge Ms Oliver for the cost of the boiler replacement, radiator valves and professional costs, expressing no view on whether the Council could lawfully do so.
- The Upper Tribunal quantified its conclusion that the CESP payments attributable to the Property needed to be deducted from the service charge in its Addendum decision. It concluded that no part of the £1,885.44 representing the CESP contribution to the cost of the cladding works had been "incurred by the Council" in relation to the Property. Since the boiler and radiator valves had not been charged to Miss Oliver the CESP contribution to those items was left out of account.
- As for the whole house bonus, the Upper Tribunal noted that this had been earned in part by the cladding works, which had been charged to Miss Oliver, and in part by the boiler and radiator valve replacements, which had not. It being difficult therefore to decide whether the whole house bonus represented a further deduction from the cost which the Council had incurred, the Tribunal concluded that the fairest way to deal with it was to allow for a 50% deduction of that bonus: see paragraph 10. By contrast, no part of the area bonus which (by a process of long division) might be said to be attributable to the Property was required to be deducted, because the cause of the Council's receipt of that bonus was "too remote" to require credit to be given for it at all: see paragraph 11.
- Since the Upper Tribunal concluded that the Council was required to allow those deductions because the amounts which the CESP Scheme thereby contributed reduced the Council's cost incurred within the meaning of that phrase as used in the Lease, the issue whether the Upper Tribunal was at liberty to conduct its own fair apportionment did not arise. Nonetheless, as Mr Baker submitted, it is possible to detect at least an element of fair apportionment in the Upper Tribunal's treatment of the whole house bonus.
The Parties Submissions on this Appeal
- Mr Baker's main submission for the Council was that it was not a permissible construction of the relevant provisions in the Lease to conclude that the Council had not "incurred" costs in relation to items of refurbishment, even to the extent that it had received CESP funding in relation to those items. He said that the Council had "incurred" cost in relation to all those refurbishment items for the carrying out of which it had contracted with Apollo, once a relevant item had been carried out and a payment liability in respect of it had fallen due. It was he said irrelevant how (if it did) the Council recouped that expenditure, whether from CESP funding, whether from its own resources or from service charge contributions levied against long leaseholders.
- In response to a question from the bench whether a cost for which there was third party funding was to be regarded as an "actual cost" within the meaning of paragraph 6 of Part III of the Schedule, he submitted that a liability to Apollo became an "actual cost" once it had crystallised and fallen due, prior to which it might properly be regarded as an estimated cost.
- Mr Baker sought to bolster his submission about the ordinary meaning of "incurred" by reference to statutory usage of that word in legislation about public housing, the right to buy and service charges, upon the basis that those responsible for drafting the Lease might reasonably be supposed to have had that statutory meaning in mind. He referred in particular to s.90(12) of the Housing Finance Act 1972, to s.124 of the Housing Act 1974, and to Schedule 19 to the Housing Act 1980, all of which use phrases such as "costs incurred" and "liability incurred". I did not find that these cross-references added anything to Mr Baker's main submission, based on the natural meaning of "incurred" in the context of the Lease.
- Mr Baker did not altogether discount the possibility that the avoidance of double recovery, or of the making of a profit by the Council pursuant to the service charge provisions in the Lease, might have a role to play in the determination of a "fair proportion" of costs incurred to be paid by a particular lessee within the meaning of paragraph 1 of Part III of the Schedule. But he submitted that there had been nothing at all unfair or unreasonable in the Council's decision to spread the benefit of the CESP payments across the whole of the Estate, for the benefit of all its long leaseholders. Since the Council decided not to charge any of its leaseholders a proportion of the costs of boiler replacement or professional charges, the Council had not in any event made a profit out of the service charge provisions overall.
- Finally he submitted that where (as in the Lease) a service charge provision specified a person upon whom responsibility for the determination of a fair proportion fell, but did not state that such a determination was final and binding, then nothing in s.27A of the Landlord and Tenant Act 1985 enabled the LVT, the Upper Tribunal or this court to substitute its own view of a fair apportionment unless satisfied that the Council's apportionment was unfair. He submitted that, in that respect, the Gater decision of the Upper Tribunal was wrong and should be overruled. The purpose of that section was only to prevent an ouster of the jurisdiction of the Tribunals, but a provision in a lease for the non-final determination of a fair proportion to be paid left intact the Tribunal's jurisdiction, on rationality grounds, to set aside that determination if satisfied that it was unfair. An attempt by Mr Baker to rely on an extract from Hansard for that purpose went nowhere.
- Mr Fieldsend, supported by Miss Gourlay, founded his submissions on a very simple starting point. The parties to the Lease could not sensibly be thought to have made provision for the levying of a service charge which permitted any double recovery by the Council in relation to the cost of carrying out relevant works. The service charge provisions in the Lease must therefore be construed so as to achieve the objective of preventing double recovery. His primary submission was that the Upper Tribunal had therefore correctly interpreted the word "incurred", so that any works paid for by third party contribution would automatically fall outside the cost thereby incurred by the Council. To that extent, it had not been left out of pocket in carrying out those works.
- Mr Fieldsend submitted that the Council's receipt of the CESP payments attributable to specific cladding works on his client's Property, together with the whole house bonus (again all attributable to work on the Property), gave rise to manifest double recovery if the Council were to be permitted to charge Ms Oliver a full proportion (whether based on rateable value or some other formula which has replaced it) of those costs.
Analysis
- Although Mr Baker criticised it as assuming that which needed to be proved, in my judgment Mr Fieldsend identified the correct starting point, namely that a construction of the Lease would produce a result which reasonable parties in the position of the Council and Miss Oliver could not sensibly have intended, if its service charge provisions permitted the Council to make double recovery.
- The prospect of double recovery (if service charge proportions are determined without giving credit for third party funding) is by no means limited to payments under the CESP Scheme. The exterior of the Property or of the Block might be seriously damaged by an insured risk the repair of which would fall both within the Council's repairing obligations (and therefore the confines of the service charge provisions) and within the cover provided by an insurance policy taken out pursuant to clause 4(4)(i) of the Lease, at the Lessees' joint expense.
- The Council might receive payment against the carrying out of works falling within its repairing covenant from an original builder of the Block under a guarantee, from the employers or insurers of the driver of a heavy goods vehicle which crashed into it, or by way of damages from someone committing malicious damage. All those sources would be third party contributions to the cost of carrying out the requisite works, and double recovery would occur if the Council did not have to give credit for the receipt of them when determining the service charge liabilities of the long lessees within the Block.
- It is in my view no answer to say, as Mr Baker submitted, that the statutory prohibition of double recovery in relation to some forms of grant in s.20A of the Landlord and Tenant Act 1985 point to a mutual understanding, under the Lease, that double recovery is in principle permissible, save where specifically prohibited. The statutory provision may equally, and in my view more, sensibly be regarded as a form of belt and braces where a particular Lease made no sufficient provision for the avoidance of double recovery in relation to such grants.
- I have therefore not found it difficult to conclude that a way has to be found to interpret the Lease so as to prevent all such forms of double recovery, upon the simple basis that the Lease would otherwise lack common sense, as between long leaseholder and lessor. I have however found it rather more difficult to identify an appropriate means of doing so.
- The choice seems to me to lie between:
i) Giving a particular meaning to the phrase "cost and expenses which the Council may in time to time incur" (in clause 3(29)) and the phrase "costs, expenses and outgoings incurred … by the Council" in the Schedule; or
ii) Treating "actual costs, expenses and outgoings" in paragraph 6 of Part III of the Schedule as limited to those which leave the Council out of pocket; or
iii) Treating the avoidance of double recovery as a matter to be taken into account when determining a "fair proportion" of the Council's incurred costs, expenses and outgoings to be paid by the Lessee, under paragraph 1 of Part III of the Schedule.
- No one of those alternatives is obviously to be preferred. As to (i): there is in my view real force in Mr Baker's objection that a cost is incurred once there is a liability to pay it on the part of the Council, regardless how that liability is defrayed or recouped. As to (ii), (which Lewison LJ, whose judgment I have read in draft, prefers), I am concerned that it places an excessive burden on the draftsman's distinction between estimated and actual costs, expenses and outgoings in a paragraph designed to provide for balancing payments or repayments where actuals prove to be different to those estimated. I find Mr Baker's submission that an estimated cost becomes an actual cost once it has crystallised and fallen due to the building contractor very persuasive.
- I have on balance concluded that the third of these alternatives is to be preferred. Although paragraph 1 of Part III of the Schedule requires a fair proportion to be "based upon" a comparison of rateable values (or upon some substitute formula if, as had occurred, rateable values are done away with) it seems to me that this need be no more than a starting point, leaving room for further adjustments of a proportion mechanically derived from that formula to be made where necessary, for example, to avoid double recovery, and indeed where necessary to make sure that the proportion to be paid by the Lessee is "a fair proportion" or (pursuant to clause 3(29)) "a reasonable part" of the relevant costs and expenses which the Council may incur.
- In particular, double recovery of this kind may not lend itself to a simple mechanical deduction, as the Upper Tribunal itself found when trying to decide whether all, none or part of the whole house bonus should be deducted. Although the Tribunal was proceeding on a theoretical basis of identifying the cost which the Council had or had not incurred, its treatment of the whole house bonus (and for that matter the area bonus) strikes me as having much more to do with fair and reasonable apportionment, than with such a cold mechanical calculation.
- I therefore conclude that the Upper Tribunal was right to treat the avoidance of double recovery as a necessary objective in seeking to construe the Lease but, albeit not without hesitation, I consider that it was wrong to do so by invoking a special rather than natural meaning of the word "incurred".
- The Upper Tribunal did not, at least in form, carry out its own fair apportionment, or address the question whether (assuming that all the relevant costs had been incurred) the Council's own apportionment was fair or unfair. But that is, in my view, the task which the Upper Tribunal should have carried out, and indeed in substance did carry out in relation to the whole house and area bonuses.
- In the light of Mr Baker's persuasive submissions that there was nothing necessarily unfair about the Council's own approach to the spreading of the benefit of the CESP funds across all its long leaseholders, regardless whether their properties fell within the geographical or time constraints of the Scheme, it becomes necessary for this court to decide whether the Windermere and, more importantly, Gater cases were rightly decided, in treating the apportionment carried out by the Lessor's Surveyor or (here) the Council's appointed officer, as irrelevant.
- In my view those cases were rightly decided, for the reasons given by the Upper Tribunal in each of them, to which I have already referred. The Upper Tribunal was careful in both those cases to distinguish between a situation where the determination was to be carried out in a prescribed manner (for example by a person with discretion as to the result), and a situation where a particular determination was the only possible consequence of the application of an agreed formula. The former provision falls foul of s.27A(6), whereas the latter does not, because the precise amount to be paid has been determined by the parties' agreement: see s.27A(4)(a).
- In my judgment the Upper Tribunal was right to say in the Gater case that for this purpose it mattered not whether the provision that the determination be carried out in a particular way or by a particular person was expressed to be final and binding. The avoidance of such provisions is not expressed in subsection (6) to be dependent upon the presence of such an express provision. It is void wherever it would otherwise be of contractually determinative effect.
- The result is that this court must determine the fair proportion of the Council's costs incurred to be levied as a service charge upon Ms Oliver, without having first to conclude that the Council's apportionment was unfair or unreasonable. In my judgment the determination of a fair proportion does require the Council to give credit for the relevant parts of CESP funding received in relation to, and only by reason of, the works which it carried out in respect of the Property. Fairness in this context is to be achieved by the avoidance of double recovery, as the Upper Tribunal concluded.
- As to the base figures (for which see the table in paragraph 6 of the Addendum decision), I would, like the Upper Tribunal, require a full deduction in relation to the cladding, but none in relation to the boiler or radiator valves, since the cost of those items was not charged to Ms Oliver. I would also agree, for the reasons given by the Upper Tribunal, that no part of the area bonus need be deducted as against Ms Oliver's liability.
- I have found the fair apportionment of the whole house bonus slightly more difficult, mainly because the overwhelming majority of that bonus was, in terms of calculation, attributable to the cladding. If I had been considering the matter without regard to the Upper Tribunal's analysis, I might well have concluded that a fairer apportionment would be a deduction of £1,885.44, rather than 50% of the aggregate sum of £2,210.41. Nonetheless, for the reasons which I have given, I consider that in substance the Upper Tribunal was conducting a fairness apportionment in relation to the whole house bonus, rather than a mechanical assessment of the amount of costs that had been incurred by the Council. In those circumstances I do not consider that I should depart from the Upper Tribunal's 50% apportionment, since it was within the range of fair outcomes available to the decision maker.
- The result is that I would dismiss this appeal, because it produces no different monetary outcome than that which the parties obtained from the Upper Tribunal.
Lord Justice Lewison:
- I agree with Briggs LJ at [42] that the lease should be interpreted if possible to avoid the possibility of double recovery by the landlord. I agree also that giving a special meaning to "incurred" is the least attractive of the three options.
- I would give more weight to the second of the options, namely that the "actual costs" are the costs which ultimately leave the landlord out of pocket. As Lord Hoffmann explained in Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 391:
"One speaks of something being "actually" the case to point a contrast; perhaps with what appears to be the case, or with what might be the case, or with what is deemed to be the case. The effect of the word therefore depends upon the nature of the distinction which the speaker is wanting to make. This can appear only from the context in which the phrase is used. "
- Plainly one contrast in paragraph 6 of the service charge schedule is between the estimated cost and the actual cost. But it is pertinent to ask in any particular case: why does the actual cost differ from the estimated cost? One possible answer, which in my judgment is the answer in this case, is that since the cost was estimated part of it has been paid by a third party, namely NPower. The actual cost to the landlord has therefore been reduced by that amount.
- That said, I agree with Briggs LJ that if I am wrong about "actual cost", then the application of the "fair apportionment" produces the same result.
- I too would dismiss the appeal.
Lord Justice Longmore:
- I am less attracted than Lewison LJ to the second proposed option of "actual costs" for the simple reason that, since the Council did in fact pay Apollo, they actually incurred those costs. The fact that they may have recouped the costs does not mean that they were not incurred.
- I therefore prefer the third option of "fair apportionment" and, in any event, agree with both Briggs LJ and Lewison LJ that this appeal must be dismissed.
