Sheffield City Council v Oliver [2017] EWCA Civ 225

We saw this case in the Upper Tribunal, here, and I’ll borrow the brief facts.

Ms Oliver was the long leaseholder in a block of flats on the Lansdowne Estate, which was owned by the Council. The Council carried out city wide major works, which included works on the Lansdown Estate. Some of the works were eligible for a contribution from a commercial energy company as part of the Community Energy Savings Programme (“CESP”). In total 15 of the 25 blocks on the Lansdowne Estate were eligible to receive CESP funding. The contribution to Ms Oliver’s block was £43,570.44. The Council decided not to pass the CESP directly to the leaseholders as a set off against their service charge contributions. Rather, the Council decided to attribute the money to the funding of works to its city-wide housing stock. The effect of this was that every leaseholder’s service charge was reduced irrespective of whether their block had been entitled to CESP funding.

The charge to Ms Oliver by Sheffield for the works was:

i) £7,224.47 for exterior cladding and associated works to the Property.
ii) £1,582.69 as a contribution of 1/27^th of the cost of works to the Block.
iii) £371.56 as a contribution of 1/202^nd of the cost of works to the super-block in which the Block was located.
iv) £200 administration fee.

However, Sheffield had received from CESP for the works in respect of Ms Oliver’s flat (and specifically so as the total amount could only be claimed by proof of works to each flat)

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.

There was a further ‘whole house bonus’ paid to Sheffield from CESP in respect of Ms Oliver’s flat because of the carrying out of the three types of work to Ms Oliver’s Property of a further £2,210.41

The Upper Tribunal has held that where funding has been provided from a third party and the purpose of the funding is specifically intended to meet the cost of certain works, it is impermissible to calculate the amount a leaseholder must pay under a service charge without reference to the receipt of that money. The equivalent of the payment for external cladding and half the whole house bonus were not recoverable from Ms Oliver as, in effect, the Council had not ‘incurred’ them.

Sheffield appealed to the Court of Appeal.

Sheffield argued:

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.

On ‘fair proportion’ in the lease clause, Sheffield argued that while

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.

Ms Oliver’s argument was that

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.

The Court of Appeal agreed with Ms Oliver. The lease could not reasonably be construed to allow double recovery as this could not be what the parties intended.

The Upper Tribunal had erred in deciding to adopt a ‘special meaning’ of the word ‘incurred’. The council had incurred the costs, but the point where double recovery would be prevented was in construing ‘a fair proportion’.

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.

Appeal dismissed as, in effect, the Upper Tribunal had assessed a ‘fair proportion’ so the monetary result would be no different.

Comment

As the Court of Appeal note, this principle would apply to any recovery of costs from a third party by the landlord:

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.

There is therefore a considerably broader application than just the circumstances of this case. However, there is a question whether the Court of Appeal’s approach – preferring ‘a fair proportion’ of the costs as the mechanism for avoiding double recovery, rather than ‘costs incurred’ – restricts its application to leases where apportionment of a service charge is expressed as ‘a fair proportion’, rather than a set percentage of costs incurred. Lewison LJ’s somewhat dissenting judgment on this point may be relevant, as he prefers to consider the ‘actual costs’ incurred.