Mihovilovic v Leicester CC [2010] UKUT 22 (LC)

Another Upper Tribunal (Lands Chamber) case. This was an appeal by the leaseholders of an LVT decision in respect of service and major works charges levied by Leicester City Council, the freeholder. There were three main issues in the appeal:

i) A charge for insurance of the building had been levied, but Leicester had not in fact obtained insurance, choosing to ‘self insure’. The LVT had found that Leicester could include a charge in respect of this self-insurance.

ii) The LVT had found that works to communal windows and to communal doors fell outside the s. 20(1) Landlord and Tenant Act 1985 requirements for consultation. The disputed issue was whether the LVT was correct to consider the costs of these works individually, where they had been presented to the leaseholders as part of single set of works, also including works to individual flat’s windows and doors. (The ‘disaggregation’ issue).

iii) The date of contract for works issue – the LVT had found that the date for the contract was before the commencement of the lease, but also that this was irrelevant abd it was the date that works began that was significant.

As the lease in this case was in the same form as some 500 of Leicester’s right to buy leases, this was not a negligible issue for Leicester.

On i) – the insurance issue – the lease provided that the landlord could recover costs incurred in “observing and performing the provisions of sub-clauses (1) (2) (3) and (4) of Clause 4 hereof…so far as such costs are chargeable to the Lessee by the Lessor under the provisions of Part III of Schedule 6 of the Act…”.

Clause 4 included:

(3) To ensure so far as practicable that any services which are provided from time to time by the Lessor and to which the Lessee is entitled (whether by himself or in common with others) are maintained at a reasonable level and to keep in repair any installation connected with those services

(4) To rebuild or reinstate as soon as reasonably practicable the Premises and the Building in case of destruction or damage by fire tempest flood or any other cause against the risk of which it is the normal practice to insure.

‘Any services’ meant services in the Fourth Schedule, which included “(D) The costs and expenses of insuring the Premises and the Building against the risks specified or referred to in sub-clause (4) of Clause 4 hereof”.

Finally, Part III, Schedule 6 of the Housing Act 1985, with which the lease is required to comply by s.139 HA 1985, provides at paragraph 14(3):

There is an implied covenant that the landlord shall rebuild or reinstate the dwelling-house and the building in which it is situated in the case of destruction or damage by fire, tempest, flood or any other cause against the risk of which it is the normal practice to insure.

And paragraph 16A(3) provides:

Where the landlord does not insure against the obligations imposed by the covenant implied by virtue of paragraph 14(3), or, as the case may be, the superior landlord or other person does not insure against his obligations to the like effect, the lease may require the tenant to pay a reasonable sum in place of the contribution he could be required to make if there were insurance.

The leaseholder’s argument was that ‘self-insurance’ is not insurance, as shown by 14(3) and 16A(3) of Schedule 6 HA 1985. There is no payment for an indemnity against risk. Moreover, while 16A(3) allows that a landlord may require the tenant to pay a sum in place of an insurance contribution, it is not a requirement and when, as here, the lease did not require such a payment, there was no liability on the leaseholder to pay it.

Leicester’s arguments were that:
a) The word ‘may’ in 16A(3) of the Schedule did not give the Council a discretion to include such a term or not – the requirement was included by force of s.139 – even if not expressly in the lease, the term applied by force of statute. The word ‘may’ was only included because there were two situations in which the term could be excluded: either with the consent of a County Court prior to the conveyance, or where the Council were themselves a leaseholder and thereby prevented from carrying out the obligations of Schedule 6. Neither applied here. Sheffield City Council v Oliver LRX/146/2007 meant that the covenant applied by force of statute.

b) If that was wrong, as a local housing authority the Council have wide powers to manage their stock as they see fit and it would not be consistent with the existence of these wide powers if individual leaseholders were able to demand that insurance must be provided in a particular manner or with a particular provider. A generous and wide interpretation should be taken of the lease, Leicester City Council v Master (LRX/175/2007, 12 December 2008). The adminsitrative and logistical costs of ‘self-insurance’ would thereby be a service “incurred or to be incurred by the Lessor in observing and performing” the provisions of clause 4(4).

Held: There was no liability on the leaseholders to pay the costs of ‘self insurance’ by the Council.

Paragraph 16A(3) is expressly permissive in its terms. It enables provision to be made in the lease requiring the tenant to pay a reasonable sum where the landlord chooses to self-insure, but it does not require such a provision to be made or imply a covenant as to such payment.

In contrast, the preceding three paragraphs of Schedule 6 were expressly manadatory. Paragraph 16 was thereby clearly intended to create a discretion. Sheffield City Council v Oliver concerned one of the mandatory paragraphs and should not be taken to mean that all the paragraphs would be implied into the lease by force of statute.

While it was no doubt within the Council’s wide powers to bear the risks itself rather than insure:

The lease makes specific provision under clause 3(2) and paragraph (D) of the Fourth Schedule requiring the tenant to pay the council’s costs of insuring against the clause 4(4) risks. That provision was necessary because the clause 4(4) obligation is not to insure against the risks but to rebuild or reinstate in the event of certain occurrences. It is implicit, however, in the power that is given to the landlord to charge for the costs of insurance that the tenant is not liable to pay the costs of rebuilding or reinstatement should that be required. But if the council do not insure but decide to bear the risks themselves, any payment sought in respect of the costs of such so-called self-insurance would not be a payment for costs of the services provided or to be provided under clause 4(4). The services are rebuilding and reinstatement, and there is no suggestion that if rebuilding or reinstatement is not required any amount paid in respect of the council’s self-insurance would be refunded.

On ii) – the disaggregation issue, the appellants argued that: it was wrong for the LVT to reach this conclusion without inviting the applicants to address it on this issue; it was wrong in law on the facts;

Leicester argued that it was for the applicants to make the case that these were a single set of qualifying works and that they had not done so.

Held: On considering the documents in the case the approach of the appellants throughout had been to treat the works as a single qualifying work and the council had not disagreed with this approach, indeed had put the works forward as a single entity in their s.20ZA application for dispensation. It was therefore not open to the LVT as a matter of procedural fairness to reach a conclusion of disaggregation that differed from the approach apparently taken by both parties without warning the applicants and giving them the opportunity to address the matter. This was substantially prejudicial to the applicant and the appeal must succeed on this ground. In any event, where the parties have effectively agreed an issue, the LVT has no jurisdiction to make a contrary determination. Where, as here, there was no express agreement on a shared approach, it was open to the LVT to consider the matter, but not without warning to the parties and inviting their submissions.

On iii) – the date of the works contracts:

The LVT had found that the date on which the contract was entered into was ‘before the start of the lease’ (para 27), but then went on to state that:

The Tribunal…also determine that the fact that the contract granted to the Council’s Direct Contract section was made before the date of the Lease is irrelevant. It is the date the windows were installed which is the relevant date.

Both Leicester and the applicants agreed that this latter finding was wrong in law. But Leicester relied on the LVT’s finding that the date of the contract was prior to the start (and the 31st day) of the lease to argue that there was no requirement to consult, due to regulation 7(5) of the Service Charges (Consultation Requirements) (England) Regulations 2003.

The applicants had written to the LVT raising their concerns that while a broad or framework contract may have been entered prior to the beginning of the lease, if it did not specify the specific works to the specific building then the applicant’s view was that the contract would properly arise when ‘the contract was awarded or a purchase order raised for the works on the building’.

Held:

In its decision the LVT did not address the question that Mr Hitchcock [for the applicants] had raised in his letter, possibly because, as it said in paragraph 31 of its decision, it considered the date of the contract to be irrelevant. I am not sure that its conclusion in paragraph 27 was intended to be to the effect that the DSO contract constituted, for the purposes of regulation 7, the agreement under which the works were carried out. But in any event, by failing to consider the matters that Mr Hitchcock had raised in his letter, the LVT made a procedural error that has substantially prejudiced the appellants, and the appeal must be allowed on this ground also.

The LVTs finding on the date of the contract could not be relied on, so Leicester’s argument could not be said to based on its findings.

Appeal upheld on all counts and the case remitted to the LVT on the disaggregation question and in failing properly to address the question of the date of the works agreement. Order under s.20C that Leicester’s costs in the Tribunal are not to be regarded as relevant costs in determining the service charge made.

Comment
While the disaggregation issue and the relevance of the date of contract may be examples of the LVT being its own sweet intermittently procedurally wayward self, the insurance issue is potentially of more widespread significance.

The upshot would be that no Council that had chosen to ‘self-insure’ its properties could recover a contribution from RTB leaseholders unless there was an express clause in the lease to that effect, as the implied clauses in Schedule 6 Housing Act 1985 (as amended) do not cover such a recovery, merely give a discretion to include an express term.