Avon Ground Rents Ltd v (1) Cowley & Others, (2) Metropolitan Housing Trust, (3) Advance, (4) May Hempstead Partnership [2019] EWCA Civ 1827 (no transcript yet on BAILII, we’ve seen a copy on Lawtel)

This is an important Court of Appeal decision concerning Landlord and Tenant Act 1985, s.19(2) and the reasonable sum payable in advance on account of works where the landlord may be able in future to recover some of the costs from a third party. Section 19(2) is:

“(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.”

It is well established that where it is possible for works to be done at no cost to a tenant (e.g. under a guarantee), to carry out the works at a cost to the tenant will render that cost unreasonable, unless there is some evidence from the landlord of some disadvantage or good reason to reject the availability of works without cost in favour of incurring a cost (see Continental Property Ventures v White [2007] L&TR 4, cited in F Davey & J Bates, Leasehold Disputes, 3rd ed., p.16). But what of the position where the landlord has to incur cost but can then recover that from an external source?

The FTT here said that the landlord must give credit for the anticipated income from a third party. The UT(LC) upheld that decision (in a judgment which is on BAILII, here).

This case concerned a building known as The Interchange in East London. It was built in 2008, comprising residential and commercial premises. In 2015 the appellant acquired the property. Very soon after, the new landlord discovered that there was a serious water penetration problem in part of the property. The landlord was responsible for repairing this and was entitled to recover the costs of repair through the service charge as each lessee was required to pay a proportion of “the reasonable and proper expenditure estimated by the landlord as likely to be incurred in the Account Year by the landlord upon the matters specified in sub-clause 6.5”. Sub-clause 6.5 included the cost of repairs.

Where things become interesting is that the property was covered by a NHBC warranty (actually it was covered by three separate warranties, which causes a little bit of a problem later on).

In January 2016, the landlord’s agents started a major works consultation process with residential lessees. At around the same time, notice of a claim was given to NHBC. In March, the landlord applied to the FTT for a determination of its entitlement to collect the costs of repair works.

On 8 June 2016, NHBC set out its position:

“In principle we find the claim to be valid as there is damage caused by a defect which is principally what all three policy types cover. What we cannot do at this stage is confirm our liability on each policy type, the excess owed on each policy type and our contribution to each policy types’ liability. Once the tribunal has ascertained apportionment I can advise exactly what NHBC will be liable for.”

Two days later, the agents issued demands for the on-account service charges for the forthcoming year. These included an apportioned part of the estimated cost of £291,008 for the repair works. For each residential leaseholder that worked out as £3,114 to £6,286, depending on their percentage payable. For the second respondent, which had a lease of 15 flats, the contribution worked out to be £75,514. The landlord’s position was that it would apply any money received from NHBC to the service charge account.

The FTT issued two decisions. In its first decision, described as an interim decision, the FTT said that if the estimated costs (now at £291,954.64) were incurred they would be recoverable through the service charge “subject in each case to deductions first in respect of insurance receipts from NHBC”. The FTT said that it was not able to determine the amount payable by each lessee until it knew the amount that was to be paid out under the NHBC warranty. Directions were given requiring the landlord to apply back to the tribunal with the relevant details so that a determination could be made.

On 17 March 2017, NHBC acknowledged liability for the full costs of the repair, subject to the different excesses applicable to the three different warranties. There remained, however, an issue about how that was to be apportioned across the warranties and the effect of the excesses. NHBC’s position was that it required confirmation from all parties that apportionment was agreed before it would make a payment. For some reason, agreement was not reached with one of the commercial lessees. On 25 April 2017, the landlord’s solicitors wrote to the FTT setting out the landlord’s position, which was that any payment made by NHBC would be applied once received but that until then the leaseholders were required to pay the full amount claimed without taking account of the anticipate receipts from NHBC.

The FTT then issued it its second decision, referred to as the final decision. The FTT determined that nothing was payable by the first respondents as NHBC would pay the full amount attributable to those leaseholders. The FTT also determined that the second respondent was liable to pay £11,697.98, which took into account the anticipated payment from NHBC.

As already noted, the UT upheld that decision. The landlord appealed to the Court of Appeal, where the issue was stated to be:

“where there exists an anticipated schedule of works, the total costs of which are reasonable and there is a possibility of a third-party making a contribution to those costs, in assessing the residential service charge payable in advance in respect of those works, does [s.19(2)] require a landlord (depending on the facts of each case):
i) to give credit for the anticipated payment when assessing the reasonable amount to be credited on account; or
ii) to take account of third-party payments only when they are received and thereafter apply those monies as balancing the charge back to the leaseholders?”

The Court of Appeal noted that, following the UT decision, agreement had now been reached with the commercial lessees regarding the apportionment of the NHBC warranties so there was now no obstacle to NHBC making payment (and indeed, NHBC had paid some of the money).  The landlord maintained that the FTT and UT had been wrong to consider that the potential payments could be taken into account and that this was still relevant so far as the issue of costs was concerned.

Before the Court of Appeal, the landlord’s position was that s.19(2) envisaged a two-stage process. Stage 1 was directed to the reasonableness of the amount, having regard to the relevant costs. This did not involve considering any anticipated contributions from third parties as such contributions were irrelevant to the reasonableness of the amount at stage 1. Stage 2 is only reached once the costs have been incurred and was a balancing exercise. It envisaged a reconciliation of the relevant sums, providing lessees with the required statutory protection. It was only at Stage 2 that credit should be given for money received from third parties.

Out of the respondents, only the second respondent took part in the appeal (both at UT level and at the Court of Appeal). Their position was that placing a requirement of certainty on a payment due under a guarantee or insurance policy would be fettering the discretion of the FTT when determining a reasonable advance payment. (Pausing here, the CA does not actually record the appellant landlord as having argued that there had to be certainty of payment, indeed at [23] the appellant is recorded as having argued that future receipts do not come into Stage 1 “even if such sums are to be paid and it is known will be paid in the week following which the service charge becomes payable”; the landlord did however appear to argue for certainty as a minimum condition in the UT, see [39] of that decision). The second respondent also argued that the FTT had correctly taken account of all relevant circumstances as they existed at the date of the hearing, doing so in a broad common-sense way and arriving at a conclusion giving such weight as the tribunal thought fit to the various factors (nice to see Cumming v Danson out on tour). Given that the landlord had said that it would give credit for sums received from NHBC, the FTT had been entitled to take those sums into account when determining the reasonable amount.

The judgment in the Court of Appeal was given by Nicola Davies LJ, with whom McCombe and Coulson LJJ agreed. At [31], the CA approved the approach of the UT that

“whether an amount is reasonable as a payment in advance is not generally to be determined by the application of rigid rules but must be assessed in the light of the specific facts of the case. A number of considerations ought or may properly have to be taken into account in determining the question of reasonableness under section 19(2) which would include the time at which the landlord would, or would be likely to, become liable for the costs, and how certain the amount of those costs is.”

The CA continued to say at [33] that what was reasonable was for the tribunal to determine:

“It is an exercise which the tribunal is well-equipped to perform, assessing the relevant facts of each individual case and arriving at a determinationbasedupontheevidence. Thequestionastowhetherthepossibilityof third-party payments can be taken into account in deciding what might reasonably be demanded on account will depend on the facts of the individual case. If certainty were to be required this would constrain the discretion of the tribunal when in reality what is required is a test which allows account to be taken of all relevant matters and to those matters will be attributed the appropriate weight. This is particularly so when the purpose of the statutory provision is to protect tenants from unreasonable demands.”

The suggestion that no account should be taken of likely payment from a third party ignored the reality of many situations. Here, the FTT had been entitled to take account of the relevant circumstances and give them such weight as they considered just and reasonable. There were three critical facts, identified at [36]:

“i) An effective policy of insurance was in place in respect of the repair works which would cover the majority of the works;
ii) The appellant had agreed to give credit for any sums received from NHBC by way of insurance;
iii) The amount of the insurance contribution was not hypothetical, the sums payable by the first and second respondents following receipt of the insurance contribution were identified to the FTT and formed the unchallenged factual basis for its determination.”

The FTT had properly exercised its discretion. Nicola Davies LJ summed up at [37]:

“where, as here, there exists an anticipated schedule of works, the total costs of which are reasonable and there is a possibility of a third party making a contribution to those costs, in assessing the residential service charge payable in respect of those works, the landlord does have to give credit for anticipated payment when assessing the reasonable amount to be credited on account.”

As noted above, there was a further ground of appeal concerning costs, but as the appeal was dismissed this did not fall for consideration.