No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119

Service charges; s.20B(1) of the Landlord and Tenant Act 1985; contractually valid demand; contractual costs

The background

This case commenced in the FTT in June 2014. Lina Mattsson has been instructed by the Respondent Lessee throughout and was led by Lesley Anderson QC in the Court of Appeal.

The Landlord is the headlessor of a prestigious building in Canary Wharf, London. The Tenant is the leaseholder of some 30 apartments in the building. Following years of complaints by the Tenant that it had been overcharged for utilities, the Tenant issued an application for a determination as to the amount payable pursuant to s 27A of the Landlord and Tenant Act 1985. The Landlord defended the application denying any overcharging.

Shortly before the 3 day hearing in July 2015, the Landlord conceded that it had wrongly included commercial rate VAT and CCL in the utility charge rates, in addition to charging VAT at the residential rate, thus overcharging the Tenant (and all other lessees of the Building) by some 26%. The Landlord also admitted some other overcharging, but a number of issues remained in dispute. The FTT decision handed down in 2015 was appealed by both parties and the matter was remitted to the FTT for a further determination in 2016.

In June 2019 the FTT decided that the Landlord had overcharged the Tenant some £160,000 (in addition to the 26% admitted in 2015). One of the Landlord’s charges which was held to be irrecoverable was £11,389.15 referred to as “Switch2 standing charges”. Switch2 was a company responsible for reading the energy supply meters in the building and for calculating energy bills. Switch2’s fees in 2008-2012 had been charged as if they were a utility, describing them as a “Standing Charge”. The Upper Tribunal considered these charges as part of the 2016 appeal. It held that Switch2 standing charges were a service charge item, and had not been demanded in accordance with the requirements of the Tenant’s Underleases. To be recoverable they would therefore need to be re-demanded. It also followed that they had been demanded in the wrong amount. The Landlord decided not to re-demand them, as more then 18-months had passed since they were incurred. The Landlord instead argued that these charges could be “re-allocated” to the service charge and that s 20B(1) was not engaged as there had been “a demand” for these charges, albeit not contractually valid (and in the wrong amount).

In 2018 the Landlord sought to recover some £500,000 legal costs from the Tenant, being its costs of defending the proceedings. In November 2018 the Tenant made an application for a determination as to whether these legal costs were properly due. The question of whether on a proper construction of the terms of the Underleases the Legal Costs are recoverable was determined as a preliminary issue. The Landlord argued that they were recoverable under various clauses in the Underlease, either as an administration charge or as a service charge.

The FTT and the Upper Tribunal rejected the Landlord’s arguments on both issues; both Tribunals granting permission to appeal to the Landlord.

The Decision

The Court of Appeal unanimously dismissed the Landlord’s appeal. The Court held that the natural and the correct reading of the language of section 20B(1) of the 1985 is that “a demand” for the purposes of section 20B(1) must be a contractually valid demand which is served in accordance with the service charge provisions of the relevant lease. The requirement that the relevant costs should have been “taken into account in determining the amount of any service charge”, can only be interpreted as a reference to the operation of the contractual service charge machinery in the Underleases. Similarly, the consequence, if the 18-month period has expired, that “the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred” presupposes that the tenant would be liable to pay the relevant portion of the service charge had the period not expired. The Court expressly approved Brent London Borough Council v Shulem B Association Ltd [2011] EWHC 1663 (Ch); [2011] 1 WLR 3014 and its own previous decision in Skelton v DBS Homes (Kings Hill) Ltd [2017] EWCA Civ 1139; [2018] 1 W.L.R. 362.

The Court also rejected the Landlord’s various arguments in respect of recovery of its legal costs of the proceedings from the Tenant. First, the Landlord argued that its costs were recoverable under cl.3.10, a ‘s 146 cost clause’. The first limb of cl.3.10.1 permit the recovery of legal costs incurred in, or in contemplation of, proceedings under the Law of Property Act 1925 s.146 or s.147. The Landlord argued that it was irrelevant that it had no intention to forfeit, and the only requirement for recovery under this clause was that legal costs were incurred in relation to proceedings which could, in theory, satisfy 81 Housing Act 1996, as this is a precursory of service of a s.146 notice. The Court of Appeal rejected this argument, holding that the words “in contemplation of any proceedings” require an investigation of the Landlord’s state of mind at the time when the costs were incurred, confirming Barrett v Robinson [2014] UKUT 322 (LC).

The Court also rejected the Landlord’s argument that it could satisfy the second limb of cl.3.10, namely that the costs had been incurred because of a “default” by the Tenant, as there was a “balancing” owing the to Landlord following the final determination. The Court held that both the FTT and the Upper Tribunal had been entitled to find as a fact that there has been no “default” by the Tenant within the meaning of clause 3.10. The Tenant cannot sensibly be regarded as a party in default under the Underlease when it was the Tenant which started proceedings to clarify the long-standing confusion and uncertainty surrounding the payment of utility charges, when it achieved a very substantial measure of success in those proceedings, and when its willingness to pay the correct amount, when ascertained and quantified, has never been in doubt.

Finally, the Landlord’s argument that the cost were recoverable as a service charge was given short shrift. None of the service charge provisions allowed for such recovery.

Lessons learnt

Perhaps unsurprisingly, the Court of Appeal confirmed that the s 20B(1) time-limit is strict and that landlords must make a contractually valid demand within 18-months (or serve a s 20B(2) notice). The Court of Appeal’s approval of Barrett v Robinson is equally unsurprising, however no doubt a great relief to lessees as it limits landlord’s ability to shoehorn a wide range of litigation costs into s 146 costs clauses. However, watch this space as the landlord has sought permission to appeal from the Supreme Court.