Liability to pay for remedial works where costs recoverable under NHBC warranties

There are a number of contractual and statutory restrictions on the recovery of service charges.

One of those statutory restrictions is section 19 of the Landlord and Tenant Act 1985.

Section 19(1) regulates after the event expenditure.

Section 19(2) is directed to monies which become payable before relevant costs are incurred.

But what about a scenario where there’s a possibility of a third party (e.g. NHBC) making a contribution to the costs of a schedule of works. How does section 19(2) operate in those circumstances?

This was the matter under consideration by the Court of Appeal in Avon Ground Rents Limited v Cowley and ors [2019] EWCA Civ 1827.

Regular readers of this blog may remember our earlier note following the Upper Tribunal decision in this matter.

 

Background

Avon Ground Rents Limited is the freeholder of “the Interchange”,  a mixed use commercial/residential development comprising a basement, ground and upper floor areas arranged around a central courtyard. The development completed in 2008.

In July 2015, the freeholder became aware that water was penetrating through the surface of the central courtyard. It transpired that the membrane beneath the courtyard had failed, and that a new waterproofing layer was needed. Liability for repairing the defect fell upon the freeholder who, in principle, was entitled to recover the costs of the remedial works from the two commercial tenants and from the lessees of the 49 residential flats on the upper floors of the building.

To complicate matters, there are three separate NHBC warranties which apply to different parts of the structure.

  • the “Buildmark” warranty: covering the private residential flats
  • the “Buildmark Choice” warranty: covering the 15 flats held by Metropolitan Housing Trust
  • the “Buildmark Link” warranty: covering the commercial units.

The remedial works were anticipated to cost circa £291,008.

In June 2016, the freeholder’s agent issued demands for the first instalment of service charges, which included each leaseholder’s apportioned share of the cost of the remedial works.

It doesn’t appear that NHBC disputed its liability to contribute towards the cost of the necessary remedial works, but there was some lack of clarity around liability on each policy type, the excess owed on each policy type, and the contribution that NHBC would make to each policy types’ liability.

 

Application to the First Tier Tribunal

The freeholder applied to the First Tier Tribunal to ask the FTT to determine its entitlement to a service charge if it were to incur the cost of the proposed remedial works (estimated to be circa £291,000), and to determine the liability of each lessee to pay their due proportion of those costs.

Each of the private residential leaseholders would be required to contribute between £3,114 and £6,286.

The freeholder had made clear at each stage that it was willing to apply the proceeds of the NHBC warranty to the service charge account when those monies were received.

The FTT were satisfied that the works were a “reasonable approach” based on “reasonable investigative steps” and represented a “reasonable solution based on professional advice”.

The FTT also determined that if the estimated costs, together with the fees of surveyor and managing agents, were incurred that these would be recoverable through the service charge payable by each lessee “subject in each case to deductions first in respect of insurance receipts from NHBC”.

The FTT was unable to make the relevant finding until the contribution to be made by the NHBC was known.

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

In its final decision (of 4 June 2017) the FTT determined

  1. The contribution required from the private residential leaseholders towards the cost of the remedial work was nil as the NHBC was liable to pay the full amount apportioned to the private residential leases
  2. Metropolitan Housing Trust were liable to pay £11,697.98, taking into account the NHBC contribution net of excess.

The landlord appealed.

 

Decision of the Upper Tribunal

The Upper Tribunal considered the impact of section 19(2).

It concluded that there was no reason why the prospect of a receipt from a third party must be certain before it may be taken into consideration in determining the reasonableness of an advanced payment.

Accordingly, it upheld the decision of the FTT.

 

Appeal to the Court of Appeal

Whilst the freeholder accepted that both the FTT and UT correctly held that, under the residential leases, the lessees were required to pay the whole of the sum demanded, they argued that each Tribunal erred in finding that section 19(2) affected that position.

Section 19(2) deals with service charges that are payable before relevant costs are incurred.

All parties agreed that under the terms of the leases, the lessees were contractually obliged to pay service charge. It was agreed that monies due in respect of the relevant repair works would fall within the terms of the lease.

However, the Court of Appeal stated that the contractual position is the starting point only: it is then for the Court to consider the relevant statutory provisions (in this case section 19(2)).

Section 19 provides a statutory overload to regulate leasehold arrangements. Its effect is to modify the contractual obligation of the lessee, so that no greater amount than is reasonable is payable before the relevant costs are incurred.

A comment was made that the wording of section 19(2) is intended to allow for flexibility. What is “reasonable” is for the relevant Tribunal to determine. The question as to whether the possibility of 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.

In reaching its decision, the Court took into account the following three critical facts:

  1. an effective policy of insurance was in place in respect of the repair works which would cover the majority of the works;
  2. the freeholder had agreed to give credit for any sums received from NHBC by way of insurance; and
  3. the amount of the insurance contribution was not hypothetical, the sums had been identified and formed the unchallenged factual basis for the FTT’s determination.

As the Court of Appeal put it:

“….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 respect of those works, the landlord does have to give credit for anticipated payment when assessing the reasonable amount to be credited on account”.

Accordingly, the Court decided that it was not reasonable for the lessees to pay in advance for the entire cost of the remedial work where it was expected that NHBC would make a contribution.

 

Commentary

This is a reminder to landlords of the protection conferred by section 19(2) of the 1985 Act. This protects residential lessees from unreasonable demands.

Although an adjustment would have been made eventually once NHBC’s payment was received, in this particular case it was unreasonable to expect the leaseholders to pay the higher service charge in the meantime.

 

 

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.

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