How likely must it be that the cost of remedial work to a building will be recouped under an NHBC warranty before a residential service charge payable in advance may be reduced?

This was the question for the Upper Tribunal in the recent appeal of Avon Ground Rents Limited v Cowley and others [2018] UKUT 92 (LC).

 

The development

The appeal concerned a mixed use development known as the Interchange, comprised of commercial units and 49 residential flats, 15 of which are left to Metropolitan Housing Trust Limited under a single long lease.

 

Terms of the leases 

Although there’s different tenures within the Interchange, the leases of the different units are in substantially the same form so far as service charge is concerned.

Each leaseholder is required to contribute towards expenditure by the landlord in connection with the repair, management and maintenance of the building and the provision of services. These services are divided into 3 categories

  • Building provision
  • Estate provision
  • Residential common parts provision

The lease requires each leaseholder to pay the service charge by quarterly payments in advance. The amount payable is based on “the reasonable and proper expenditure estimated by the landlord as likely to be incurred in the account year”.

As is common, at the end of each accounting year, the landlord is required to determine whether there is a shortfall or surplus. Each leaseholder is required to pay its specified proportion of any surplus, or, alternatively, is entitled to an allowance reflecting any surplus.

 

Water leak

 

In July 2015, it was reported to the landlord’s agent that water was leaking into the basement of one of the commercial units. This was investigated, and it was discovered that the waterproof membrane separating the courtyard from the basement was defective and ought to be replaced.

In consequence, statutory consultation was embarked upon. In response to the stage 1 notice, one of the leaseholders concerned suggested that the landlord should make a claim on the building’s NHBC warranty.

In fact, the interchange was subject to 3 separate NHBC warranties, each applying to different parts of the structure. The first “buildmark” warranty covers the private residential flats and provides cover for defects above a certain minimum value but without any uninsured excess. A separate “buildmark choice” warranty provides cover for the 15 flats held by the housing trust, but with an irrecoverable excess totalling £14,595 for all 15 units. The 2 commercial units were covered by a third warranty “buildmark link”, but with an excess of £3,880 per unit.

 

Response of NHBC

On 20 January 2016 NHBC were notified of a claim under the warranties.

However, when the second stage of the consultation exercise was undertaken in March 2016, the leaseholders were informed that a claim had been made, and the consultation was only proceeding in case a claim was not accepted for any reason by NHBC.

Notwithstanding this, on 10 June 2016 leaseholders were issued with demands for the first instalment of service charges for the year beginning 25th June 2016, which included their apportioned cost of the remedial works (which were estimated to be £291,008).

It is clear from the Upper Tribunal’s decision that there were exchanges between the landlord’s agent and NHBC during which it sought to identify which of the three warranties would provide cover. Possibly because of the difficulty in ascertaining exactly where the defect had occurred, the question was not one which the landlord was immediately able to answer.

In principle, NHBC found that the claim was valid as there is damage caused by a defect which is principally what all three policies might cover. Alongside this, the landlord had applied to the Tribunal for a determination on the service charges. The Tribunal were asked to consider the landlord’s entitlement to collect a service charge and to determine the liability of each leaseholder to pay their due proportion of the estimated costs.

Applying the estate provision proportions to the total of £291,000, each of the leaseholders would be required to contribute up to £6,286, and the housing trust £75,514.

 

Decision of the FTT

After a hearing in September 2016, the FTT issued what it described as an “interim decision”.

The interim decision recorded that agreement had been reached that the remedial works fell within the estate provision category under each of the leases.

The FTT were satisfied that the remedial works were reasonable and made a determination that, if the estimated costs were incurred together with surveyor’s fees of 8% and managing agent’s fees of 5% (rather than the 7.5% proposed), these would be recoverable through the service charge “subject in each case to deductions first in respect of insurance receipts from NHBC”.

The FTT considered that it was part of its function under Section 27A to determine the amount which each leaseholder was obliged to pay. However, it was unable to make such a finding until the contribution to be made by NHBC was known.

 

NHBC’s position

In March 2017, NHBC acknowledged liability for the full cost of the repair.

NHBC did make it clear that, before it was prepared to make a cash settlement, it required confirmation from all parties that the apportionments were agreed.

This was communicated to the FTT by the landlord.

 

FTT’s final decision

The FTT acknowledged the landlord’s intention to give credit for the sums received from NHBC, but determined that the contribution required from the residential leaseholders was nil. Taking into account the NHBC contribution net of excess, the housing trust were liable to pay £11,697.98.

 

Appeal to the Upper Tribunal

Unsurprisingly, the landlord sought permission to appeal, which was granted.

The issue for the Upper Tribunal on appeal was whether the FTT was entitled to find that nothing was payable by the residential leaseholders and only circa £11.5k payable by the housing trust in circumstances when no payment had been received from NHBC, nor any binding settlement reached.

In the arguments advanced on behalf of the landlord, reliance was placed on Section 19(2) of the Act. Section 19(2) deals with on account payments of service charge and provides that no greater amount than is reasonable is payable.

It was common ground that, pursuant to the terms of the lease, each of the leaseholders was required to pay, by quarterly instalments, their specified proportion of “the reasonable and proper expenditure estimated by the landlord as likely to be incurred in the [year]”. It was common ground also that the landlord would give credit to the leaseholders for the sums received from NHBC.

The Upper Tribunal reminded itself of previous decisions. In particular, the tribunal looked at the considerations which the FTT either ought or may properly have had regard to in determining the question of reasonableness of an advance payment. These include

  1. The time at which the landlord would, or would be likely, to become liable for the costs.
  2. How certain the amount of those costs was.
  3. Whether there was any certainty that the works would in fact be carried out and paid for during the period covered by the advance payment.

Whether an amount is reasonable as a payment in advance is not, say the tribunal, generally to be determined by the application of rigid rules, but must be assessed in light of the specific facts of the particular case. The landlord’s argument that an anticipated receipt from a third party may only be taken into account if the receipt is certain is, in the view of the tribunal, too inflexible.

Accordingly, the tribunal found that the FTT was entitled to conclude that, as at June 2016, a contribution equal to the full cost of the remedial works was not a reasonable advance payment in circumstances where a payment of a near equivalent amount was anticipated from NHBC, and there was no reason to believe it would be delayed.

 

 

 

26 March 2018

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.