Gell v 32 St John’s Road (Eastbourne) Management Company Ltd (2021) EWCA Civ 789

This is one of those cases where the Court of Appeal says “It is perhaps surprising that in the 35 years since the Landlord and Tenant Act 1985 was enacted the effect on a claim for service charges of the striking out of a defence has not been determined”, and my first reaction is that really, it is rather surprising that it has come up at all. Nonetheless, it has, and if you have spent 35 years waiting for clarity on this point, you are in luck. However, the judgment does have some significant things to say about referrals to the First Tier Tribunal (PC) from the courts, and the position after a struck out defence.

The underlying case was a money claim by the Management Company for unpaid estimated works charges said to be payable by Mr Gell under his lease of a flat. The sum claimed was some £69,000 plus interest. Mr Gell had put in a defence and counterclaim, but these were struck out. (Crucially, the D&CC did not raise any issue of the reasonableness of the amount of the charge, or contesting the s.20 consultation procedure). At the same hearing, the Deputy District Judge declined to make an order for the amount claimed, on the basis that she was concerned about the documentation disclosed on the amount by the landlord. She gave judgment ‘in principle’ and set the matter down for a further hearing to assess the amount upon filing of further evidence. (Two accounts had been provided, one for £91,000, of which the landlord said at the hearing that it accepted that £21,000 was not recoverable, and another for £73,000.

At the next hearing, Mr Gell’s submissions and evidence mentioned the s.20 consultation process, but did not allege that it had not been complied with, and there was no challenge to the reasonableness of the charges.

At one point in the hearing, the judge said:-

“…currently Mr. Gell is being sued for a figure in excess of £76,000 which from what I’ve read he’s not in a position to pay at all because I believe he’s on benefits, so it follows that unless his mortgage company is willing to actually pay he will forfeit his lease and so we’re in a situation where I have to be absolutely clear that section 20 has been complied with, that estimates have been obtained which they haven’t in this particular instance. All I have is a building surveyor’s report and it happens to be the same man who is the director and shareholder of the management company [the judge means the landlord’s agent] and the consequences of me dealing with this are that Mr. Gell could lose his property, so it is a matter which concerns me.”

The judge then gave her decision and referred the issue of the amount of the service charges which were payable to the First-tier Tribunal (Property Chamber) “for them to make an investigation into the matter”. Counsel for the landlord objected that this would allow all issues concerning the amount of the service charges to be litigated, even where they had never been raised in the defence and where the defence had in any event been struck out. The judge was invited to limit the issue referred to the Tribunal to the reasonableness of the major works claim. She declined to do this, and declined to enter judgment for the £16,000 which she said was not affected by those issues. This meant that apart from deleting the parts of the Defence which alleged an historic fraud, nothing at all had been achieved between November 2016 when the proceedings were issued and February 2019.

The landlord appealed.

The Circuit Judge allowed the appeal on the basis that the DDJ was wrong to transfer the claim for an assessment of reasonableness, because
a) That order had the effect of allowing the defendant to defend the claim in a situation where his defence was struck out; and
b) After the defence was struck out there was no outstanding question between the parties falling for determination, so there was no power to transfer the claim under s.176A Commonhold and Leasehold Reform Act 2002.

The judge decided that this was a claim for a specified amount of money, with the result that it was not open to the defendant to claim that the amount was not due after the Defence was struck out. He contrasted this kind of claim with a claim for damages for trespass where no specific sum was, or could properly be, claimed. The judge therefore found for the landlord on both limbs of the first ground of appeal. Since it was not open to Mr. Gell to dispute his liability there was no question “which falls for determination which the First Tier Tribunal or the Upper Tribunal would have jurisdiction to determine” under the Landlord and Tenant Act 1985, and no power therefore to refer anything to the Tribunal under section 176A of the Commonhold and Leasehold Reform Act 2002.

Mr Gell appealed to the Court of Appeal (and this time he had representation).

Mr Gell argued that the effect of s.19 Landlord and Tenant Act 1985 was to put claims for service charges in the same place as claims for unliquidated general damages, such that the court was “required to consider and adjudicate on the reasonableness of all claims for service charges before any monetary judgment can be entered.”

Further, Yorkbrook Investments Ltd v Batten (1986) HLR 25 was precedent for the proposition that neither party bears the burden of proof in respect of the reasonableness of service charges and that therefore the issue is at large for determination by the court.

The Court of Appeal noted that in Yorkbrook, and in subsequent cases Criterion Buildings Ltd v McKinsey & Co Inc and Another [2021] EWHC 216 (Ch) and Enterprise Home Developments LLP v Adam [2020] UKUT 151 (LC), the judgments made clear that a defence of reasonableness would need to be pleaded by the defendant.

I therefore consider that it is incumbent on a tenant who contends that service charges are irrecoverable in part by reason of section 19 of the Landlord and Tenant Act 1985 because they are unreasonable, to plead that case in the Defence.

The claim was a claim in debt and the position was not analogous with general damages claims.

On the first hearing, the DDJ properly had two options, having struck out Mr Gell’s defence. Either a direction that Mr Gell file and serve a proper defence addressing just the amount of recoverable service charges (as per Brown v. AB [2018] EWHC 623, and the Note in the White Book at 3.4.22 ), or to give judgment for the claimed sum.

Unfortunately, in giving the directions for the second hearing, which required the landlord to serve evidence and permitted Mr Gell to serve evidence about the works to be done to the property, the issues were left unclear. Mr Gell served what was in effect a new defence extremely late (at 4.24 pm on the day before the hearing), which largely repeated the same allegations that had previously been struck out as an abuse. The DDJ should have considered the consequences of late service and the allegations that amounted to a further abuse of the Court. Having regard to its contents was perhaps rather indulgent to Mr Gell. Insofar as the document filed did raise any potentially triable issues, the DDJ should have made a judicial determination as to what those issues were and how they should be disposed of. The potential issues raised that the Court of Appeal could identify would have to to have been decided in favour of the landlord. The DDJ had erred in proceeding on what appeared to be the basis that any conceivable defence to the service charges was open to Mr Gell.

The transfer to the FTT was not open to the DDJ. S.176A requires the court to identify a “question” which “falls for determination” which it may then “transfer”.

In my judgment, the position was reached in February 2019 where the Deputy District Judge had allowed Mr. Gell the opportunity to raise a defence to the reasonableness of the service charges. It would have been better had she expressly acknowledged what she was doing, and required him to set out his case in a defence, as Mr. Pepperall QC did in Brown, but in substance that is what she did. In the event, he produced a document which was far too late and which failed to set out a case which was sufficiently meritorious to justify its admission at that stage. The only appropriate course open to the Deputy District Judge was to decline to have regard to it and to enter judgment for the claimant in the sum claimed plus interest calculated under the relevant provision in the lease, and to make an order for costs.

As such, reasonableness did not fall for determination.

Appeal dismissed.