In Front of the FTT
Every leaseholder on a ‘variable’ lease has the right to challenge their service charge demands if they feel they are ‘unreasonable’ and should ideally follow a certain procedure when doing so. The guidance from the Leasehold Advisory Service website is that whilst they should ‘continue to pay their service charges’ they should, at the same time, make it clear that they are paid ‘without prejudice’ to their right to challenge the charge later. Whilst unfortunately this is not a legal requirement it does mean that the service charge account does not become depleted and services to the block are maintained.
In our situation, a couple of leaseholders (a husband and wife operating as landlords) had both owned their flats for 7 years with no such challenge when they decided not to pay their service charges any more by:
- Ignoring the in-house collection processs of our managing agent until it became exhausted:
- Failing to notify either our agent or our RMC with their concerns during the process;
- Ignoring the Letter Before Action sent by our company solicitor;
- Failing to advise whether they intended to mount a defence until both claims were filed in the central court money claims centre (small claims track (CPR Part 27) by our company solicitor, then they mounted a defence!
This resulted in the claims being allocated by the central court to the two separate courts of Central London and Clerkenwell and Shoreditch where both courts referred the claims to the FTT. Every time the solicitor raised questions on behalf of the respondent, we, as the appicant were obliged to answer (no matter how frivolous).
We had to present a skeleton argument which was then filed on our behalf for use at the hearing.
This skeleton argument consisted of the following:
- An introduction on our behalf which was lodged in support of our application for a determination as to the reasonableness of of service charges claimed in the sum of (amount) against each respondent in relation to the claim;
- Background which is set out in the Particulars of Claim;
- What is in issue;
- Chargeable under the leases;
- Have the sums been correctly demanded?
- Reasonableness of sums claimed;
Whilst all this was going on we were also offered a mediation service. This is where if an agreement can’t be reached through conciliation then mediation would be the next step. There is no legal requirement to use it but it is often quick, simple, and less expensive than litigation. Courts and the FTT can also impose a financial penalty on those who unreasonably refuse to use it. Mediators act as a go-between, assisting both parties in putting their cases in front of each other but they don’t act as arbitrators. This means they cannot force either side to do anything.
We hadn’t sougt either dispute mechanism before because the husband was impossible to deal with and we never had any contact with his wife. Nevertheless, as the courts like to see that mediation has been attempted, we accepted their offer.
The process involved us being placed in room and the respondent in another (the wife did not atttend) with the mediator moving between the rooms with questions and answers. Despite our making one or two concessions at this stage there were none from him. So, as we believed it would, mediation failed.
There were literally hundreds of e-mails passed between the parties before everything was submitted to the FTT in the form of ‘bundles’ and whilst the Tribunal may invite both parties to agree on what their respective bundles, this did not happen in our case. Bundles must be submitted on time because failure to do so means that the Tribunal cannot merge the documents into a single bundle. This can lead not only to an increase in the amount of time spent referring to two sets of page numbers but there is a risk that one bundle may inadvertently be referred to more than the other or perhaps being missed completely.
If a representative (whether legally qualified or not) is appointed by a party to represent them in the proceedings they are subject to written notice of appointment which means that their name and address are given to the Tribunal and the other parties. Any expert evidence cannot be introduced without the Tribunal’s consent and must be in the form of a written report provided to the Tribunal and each other’s parties a) at least 7 days before the date of the oral hearing or b) the date when the issue dealt with by the expert’s report will be decided without a hearing. In cases of a technical nature the rules mean that it is the duty of an expert to help the Tribunal on matters within their expertise so they are usually assisted by expert evidence from a valuer or experienced property manager. This duty overrides any obligation to whoever instructs or pays the expert.
After getting a hearing date and ensuring our bundle was submitted on time, the other side did not do the same and the hearing had to be re-scheduled with another date set for a couple of months later. We had to pay a hearing fee and we also appointed our solicitor and a barrister to represent us.
At the heart of the hearing lay the liability of the service charge demands which will turn on:
- The construction (interpretation) of the lease;
- How all the relevant clauses interact with each other.
The proper approach to the interpretation of any contractual provisions (including those of service charges) is the same in every case because leases are rarely identical, both in language and circumstance. The meaning of the covenants (promises) which both parties enter into are required to be crystal clear and leave no room for doubt. If the meaning cannot be established then it cannot be enforced. Any party that wants to enforce a covenant has to establish that it is contained within the lease and if it is not clear then it will be the construction of the language used which will determine the outcome.
So how was our case approached?
Modern case law has determined that in some situations service charge demands may well be payable where the service charge mechanism has not been strictly followed and that non-compliance has arisen as a consequence of an established course of dealings at the building between landlord and leaseholders. For example, the service charge recovery clauses may have been interpreted from a business perspective, rather than being viewed from a legal and technical angle. Such an approach does allow for some deviation from the strict terms of the lease as long as leaseholders can understand how the charge has arisen and what their liability is.
The rationale behind this is that leaseholders have had the opportunity to read the lease and understand its provisions but if the freeholder deviates significantly from the terms, the leaseholder liability becomes unenforceable. Success of that argument at any hearing will depend on a) any argument raised by the defendant and any prejudice it has caused them and b) the particular district judge hearing the matter. In a situation where the leaseholder has historically made payment it is arguable that it is potentially unfair to later dispute liability created on that basis.
Estoppel by Convention
We had deviated from the lease by collecting service charges in advance rather than in arrears. It was a decision taken by our (then) managing agent some years previously as a) our freeholder had been ‘absent’ for years and b) money was desperately needed up front to start repairs to the building caused by decades of neglect. Our Barrister was able to successfully argue that the departure from the lease mechanism had created an ‘estoppel by convention’, a legal principle that prevents a party from arguing a point because of it’s previous conduct, allegation, or denial.
Note: The other type of estoppel is equitable.
The legal concept of estoppel does not arise very often, but when it does it’s because parties to a contract act on an assumed state of the law or the facts. Whilst the contract does not have to be binding on the assumed matters, it is the actions/conduct of the parties that could amount to a “convention”. It is relevant to the non-compliance of lease terms whereby over a number of years parties to a lease have overridden its prescribed terms and where applicable it can potentially be crucial to the outcome of a claim.
The decision of the Upper Tribunal in the case of Cain v Islington Borough Council  UKUT 542 (LC) as to whether service charges were reasonable, (including those dating from twelve years ago) summarised that a tribunal could infer from a series of payments made without protest that the tenant had agreed that the amount claimed was the amount properly payable. The longer the period over which payments had been made, the more readily a tribunal would find that the tenant agreed that which had been demanded. The tenant in this case was barred by s.27a(4) of the Landlord and Tenant Act 1985 (liability to pay service charges: jurisdiction) from proceeding with the application.
Legal and Professional Costs
Newer leases (i.e. those written after 1996) often include a specific obligation for the leaseholder to pay the landlord’s legal or professional costs incurred in connection with either recovering (or trying to recover) service charge arrears, or in connection with a breach of covenant by the leaseholder. Such costs are classed as administration charges as they are neither ground rent or service charges. Providing that recovery is ‘reasonable’ they can recovered directly a) from the defaulting person or, b) if the legal costs incurred are included in the list of services provided by the freeholder (or the managing agents) they can be recouped as a service charge and apportioned across all leaseholders.
Our old leases however don’t contain either of the above clauses and have not been able to reflect the considerable number of legislative changes that have been implemented since they were written. Ours simply state that the Lessee is ‘to pay the Lessor all costs, charges and expenses (including legal costs and fees payable to a Surveyor) which may be incurred by the Lessor in (or in contemplation of) any proceedings under s146 of the Law of Property Act 1925 (restrictions on and relief against forfeiture of leases).
An obligation is however imposed on all leaseholders (under s146(3) of the Act) to pay the ‘reasonable costs and expenses properly incurred by the Lessor in the employment of a solicitor and surveyor or valuer or otherwise in reference to any breach, giving rise to the right of re-entry or forfeiture which, at the request of the lessee, is waived by the lessor, or from which the lessee is relieved, under the provisions of this Act’. This obligation is regardless of whether the leases allow the recovery of legal costs from an individual or not.
Leaseholders can however limit the landlord costs under s20c of the Landlord and Tenant Act 1985 (limitation of service charges: cost of proceedings) by preventing the freeholder from putting the costs of any legal proceedings through the service charges even if the lease allows it but the payment of costs by leaseholders are limited only in certain circumstances.
They can, in fact, be unlimited, and can be awarded by a superior court with the Tribunal Procedure (First Tier Tribunal)(Property Chamber) Rules 2013 s13(1) reading: ‘the Tribunal may make an order in respect of costs a) under s29(4) of the Tribunal, Courts and Enforcement Act 2007 (wasted costs) and the costs incurred in applying for such costs or b) if a person has acted unreasonably in bringing, defending or conducting proceedings.
After hearing both sides of the case, the Tribunal reviewed the evidence presented and made a determination on a) the basis of the evidence and b) the judgment and experience of the Tribunal members.
Their decision was not given to us verbally at the hearing but their written decision came in a couple of weeks or so. It gave a clear breakdown of each section of the case and why it decided for or against us (and the decisions were mostly in our favour).
Permission To Appeal
If any appeal is to be launched then the application is sent to FTT for them to grant permission. It then goes to the Upper Tribunal Lands Chamber This applies to both parties. The Lands Chamber will not accept an appeal without such permission and they must receive it within 14 days of the parties being sent the decision of the FTT. If permission is refused, only then can an application for permission to appeal be made to the Lands Chamber. Additionally (and with the agreement of the Upper Tribunal), complex cases which could have the potential to be appealed on points of law could be referred to the next level with no substantive hearing before the FTT, a move designed to save time.
For me, the process raised two major concerns. The first one was that of our managing agent sending in their Regional Manager to the hearing at the last minute who told the Tribunal that most of my work would be carried out by other lessees! He back-pedalled quickly by accepting that there was not a lot that lessees would normally do and that he had no wish to belittle or underplay my role but it was too late. Rather like a judge directing a jury to ignore what has just been said.
Anyway, when it came to my turn to address the panel I was able to advise them that my three main roles were:
- Providing intructions to the managing agent (something I have done since 2007);
- Inspecting the building because the managing agent had not been consistent in carrying out this role,
- Liaising with contractors on required works.
It did me no good however because the Tribunal said they were not clear whether there had been a failing on the part of the agent to to carry out its services or they had stepped back when I stepped in!
So, whilst adding my fees on top of theirs was excessive (another helpful little observation by the Regional Manager) this in turn raised the issue of leaseholders paying twice for the same services in some areas. I’d been trying to address this myself for some years by asking the agent to tailor a management agreement specifically for the requirement of our block of flats and reduce their fees accordingly, but they refused.
So all that happened was that the agent was put on notice that based on the experiences of the Tribunal their fees were at the upper end of the reasonable range of fees charged for managing a building of this type. It was my fees that were not required to be paid and having been the driving force behind the management of our block for 12 years, I was very unhappy!
The second concern was the fact that whilst the leaseholder and his solicitors had ignored the Directions, and both were debarred from the hearing, the former turned up on the day and asked for an adjournment, claiming to a) have no knowledge of the debarrment and b) had not been in contact with his brief as both parties had been in hospital! After having to sit and listen this absolute rubbish, whilst he did not get his adjournment request granted he was allowed to stay as the hearing was held in open court and he had the right to sit in as a member of the public! There was nothing that we could do and even after the hearing he deliberately tried to speak to the Tribunal by hanging around and making our Barrister and solicitor wait until he left.
So where are we now?
The leaseholders could have chosen to settle or the judgement could have been sent to the mortgagee to try and get them to pay, in instalments if necessary.
Instead, not only have the leaseholders refused to pay what the Tribunal directed they should pay, the arrears they have accrued since 1st October 2017 means we have to comply with the Debt Pre-action Protocol which is thought to make the service charge collection process even more long winded!
Not only that, we believe the action taken against us and their continual refusal to pay a single penny is with the intent of make the RMC bankrupt. Why? Because we have had to become involved in the management of both their rentals on a number of occasions at the request of the tenants, even to the extent of involving the council. Even before then he had knocked on the doors of a number of residents doasking if they were satisfied with the level of management (we had secured RTM at the time) and if not, he could do it better and cheaper.
We now have the necessary paperwork from both Clerkenwell and Shoreditch and the Central London County Court to enforce the tribunal award against both leaseholders, known as an Order of Recovery. It did take a bit of time to get the latter because they outsource this area of their business which takes time and allows for errors in the process.
We have recently instructed the sending in of the bailiffs so this article will be updated as events continue to unfold.