The Court of Appeal recently handed down judgment in the case of Avon Ground Rents Limited –v- Rosemary Cowley and Others  EWCA CIV 1827. The decision deals with the situation where a landlord makes on-account service charge demands but there is a possibility of a third party making a contribution to those costs. The question in this case was whether, in those circumstances, the landlord must give credit for the anticipated payment when assessing the reasonableness of the on-account charges. The answer, according to the Court of Appeal, is yes.
Avon Ground Rents Limited (Avon) were the freehold owner of "the Interchange", a mixed-use development arranged around a central courtyard which was completed in 2008. The Respondents were the long leaseholders of flats in the building (the First Respondent represented 34 flat owners and the Second Respondent owned 15 flats under a single long lease).
In July 2015, Avon became aware that water was penetrating through the surface of the central courtyard of the development into one of the two commercial units in the basement. Surveyors were instructed and concluded that the membrane beneath the courtyard had failed and that a new waterproofing layer was needed. Liability for repairing the defect fell upon Avon who in principle were entitled to recover the costs of the remedial works from 2 commercial and 49 of the residential tenants. As is common, the residential leases provided for a fair and reasonable proportion of anticipated expenditure to be demanded from the residential leaseholders on account of anticipated works within that service charge year.
In January 2016, Avon gave the leaseholders notice under Section 20 of the Landlord and Tenant Act 1985 (the 1985 Act) and at the same time they notified the National House-Building Council Insurance Scheme (NHBC) of a claim. On 10 June 2016, Avon's agent issued demands for the first instalment of the service charges for the year beginning 25 June 2016 which included the leaseholders apportioned costs of the remedial works which were estimated at £291,008.
Avon issued an application at the First-Tier Tribunal (FTT) under section 27A(3) of the 1985 Act and raised specific concerns regarding:
- the proposed remedial works;
- the liability of the leaseholders to contribute to it; and
- amongst other things, asked the FTT to determine what the liability of each of the Respondents would be to pay their due proportion of those costs.
By the time the matter came before the FTT, NHBC confirmed it would contribute towards the costs of the remedial works but was not, at that time, prepared to commit itself to paying a specific sum. The FTT determined that the works represented a reasonable solution based on professional advice and that the estimated costs together with the fees of the surveyor and managing agents would be recoverable through the service charges subject in each case to deductions first in respect of insurance receipts from NHBC. The FTT could not make a determination on the exact amount payable by the Respondents until it was known what the precise contribution was from NHBC At that point, further submissions were to be made by the parties.
In its final decision, the FTT determined that the contribution required from the First Respondent towards the costs of the remedial works was nil as the NHBC was liable to pay the full amount apportioned to the private let residential leases. The Second Respondent was liable to pay the amount less the NHBC contribution (net of the excess). The matter was appealed to the Upper Tribunal ("the UT") which agreed that the full cost of the remedial works was not a reasonable advance payment in circumstances where a payment of a near equivalent amount was anticipated from the NHBC and there was no reason to believe that it would be delayed. The decision was further appealed to the Court of Appeal.
The Court of Appeal's decision
The Court of Appeal agreed with the decisions of the FTT and the UT and found that Avon must give credit to the leaseholders for the sums anticipated to be received from NHBC, so that the leaseholders did not have to pay on-account service charges in respect of the amounts to be recovered from NHBC.
There are no rigid rules to be applied and each case will turn on its specific facts; all relevant matters will need to be given appropriate weight.
The Court of Appeal found that Avon's argument that the likelihood of payment by a third party should not be taken into account in determining whether an on-account service charge is reasonable, ignored the reality of many situations. The Court of Appeal noted that it would result in unnecessary expenditure by leaseholders having to pay higher service charges than were reasonable, or by having to embark upon what could be lengthy proceedings in order to recoup "overpaid" monies.
In this case, the Court of Appeal considered it correct for the FTT to consider all of the relevant circumstances as they existed at the date of the hearing, giving weight to the factors as it considered just and reasonable. The following three factors were relevant here:
- an effective policy of insurance was in place in respect of the repair works which would cover the majority of the costs of the works;
- the landlord had already agreed to give credit for any sums received from NHBC;
- the amount of the insurance contribution was not hypothetical, the sums payable by the First and Second Respondents following receipt of the insurance contribution had been identified to the FTT.
The fact that certain costs that would normally be recovered through service charges are recoverable from a third party will be something which landlords will need to bear in mind when making on-account service charge demands from leaseholders. For example, it may be that sums are due to be paid via an insurance policy, guarantee or as a result of a claim against a third party. There are no hard and fast rules regarding the reasonableness of charges from leaseholders in these cases and each situation will need to be considered on its own facts. The important takeaway from this decision is that landlords will need to consider recoverability from a third party in the context of on-account service charges to ensure that the reasonableness of demands is not open to challenge.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.