Thomas Homes Ltd v Colin MacGregor [2016] UKUT 495 (LC)

An interesting question. To what extent, if at all, can leaseholders’ service charges be set at a level to ‘subsidise’ a shortfall as against actual maintenance costs in service charges recoverable from social tenants in flats provided under a section 106 agreement.

The difficulties in this case were compounded by lease provisions which, for the non-social flats, apparently entitled the landlord to recover up to 3000% of any amounts actually expended (a reference to 10% of costs to all buildings, not to a specific block) – but nobody had sought rectification of this obvious error.

A development of 130 units had 39 as social housing, managed by an housing association, pursuant to a section 106 agreement with the council. The service charges on the social housing units were capped at £522 per annum initially, rising with RPI. The section 106 agreement made no provision as to who was to cover any shortfall between that amount and apportioned costs actually incurred in the management of the building and grounds.

The freeholder apportioned costs after deduction of the social housing units payment amongst the rest of the leaseholders, to secure 100% recovery.

Mr MacGregor took this to the FTT on the issue of the ‘subsidy’ to the social housing units. He also raised the point that 3 of the social housing units had been sold by the housing association and were now private leaseholders, but benefited from the service charge cap under the HA’s head lease of those units.

The FTT decision

recorded that the question for it to determine was a very narrow question as to whether the respondent was contractually bound by the combined effects of the lease and the section 106 agreement to accept the subsidisation of the occupiers of the social housing units. The F-tT observed that the lease was badly drawn. The F-tT made reference to the contra proferentem rule of construction of leases. The F-tT concluded that the answer to the problem required the F-tT to consider whether a court would imply a term into the lease of the subject property (and all the other non social housing units) to the effect that the tenant is bound by the terms of the section 106 agreement to the extent that any shortfall in the total cost of maintaining and insuring the estate caused by the capping provisions should be met by the other tenants. Having posed the question in this form the F-tT concluded that the terms of the lease were clear and that there was no express or implied term to the effect that the respondent should subsidise the occupiers of the social housing units.

There was no challenge to the actual amounts demanded as estimated charges in terms of whether the works had been done, were of a reasonable standard, or whether the costs were reasonably incurred. While the leaseholder raised a raft of issues, the only one which was relevant to the FTT and which the FTT could determine was the issue of payability under the lease.

The landlord appealed to the Upper Tribunal and was represented by counsel.  The respondent lessee was in person, as the somewhat scattergun points raised suggest (including arguing that the previous management company being wound up in a way which “contravenes the Companies Act”).

The UT found that on an application under s.27A Landlord and Tenant Act 1925, the FTT’s remit was simply to determine whether a service charge is payable and, if it is, as to (a) the person by whom it is payable, (b) the person to whom it is payable, (c) the amount which is payable, (d) the date at or by which it is payable, and (e) the manner in which it is payable.

(c) was the relevant issue.

The FTT’s approach was in error:

(1) The application to the F-tT was made under section 27A. It was for the F-tT to decide, in relation to each of the three service charge years before it, whether a service charge was payable by the respondent to the appellant and, if so, the amount which was payable. The decision of the F-tT on this point was:
“If the service charges claimed from the (respondent) include a subsidy of the “social” housing, they are not reasonable and will have to be re-calculated to exclude any such subsidy before they become payable.”
This is not an answer to the question posed to the F-tT. It does not constitute a decision upon the amount which was payable in respect of any of the three years.
(2) The F-tT appears to have construed the lease not by examining the meaning of the words which are present in the lease, but instead by starting from an assumption that a service charge which included a subsidy in respect of the social housing units was not payable by the respondent unless there was an express or an implied term to the effect that the respondent was to subsidise the social housing tenants (see paragraph 29 of the F-tT’s decision). In my view this is approaching the problem in the wrong way.
(3) The F-tT does not appear to have had drawn to its attention that the three years which were before it for consideration were years in respect of which the appellant had never made a demand for a final payment. Instead what was being demanded for each of those three years was merely the on account payment payable under schedule 7 paragraph 6.1 of the lease.

The lease provided for 10% of the landlord’s costs of all buildings. This was, as both parties agreed, a drafting error. But there was no application for a variation of the lease. The amount demanded came to a little under 10% of the relevant costs for the building.

The provisions of section 19(2) of the Landlord and Tenant Act 1985 applied in respect of each of these on account payments and required that no greater amount than is reasonable is payable.

There was no argument made that the amounts were not reasonable.

The appeal was allowed. That the drafting error in the lease was the appellant’s fault and was, in large part, the reason for the proceedings meant that a section 20C order was made in respect of the UT costs, so that they were not recoverable by the appellant.

Comment

A reminder, if one were needed that in approaching payability, the issue for the Tribunal is wholly contractual, not about fairness. It is entirely possible for one group of leaseholders to pay proportionality more than another group if that is the nature of the contract.

It should also be a reminder to leaseholder applicants that the jurisdiction of the FTT is limited by statute. The kind of wide ranging enquiry into fairness, conduct and other issues sought by the leaseholder in this case is quite simply outside the Tribunal’s powers.