Case No. UKUT-282-(LC)-UTLC-Case-Number:-LC-2022-117

is about the test to be applied in determining whether a cost, reflected in service charges demanded from leaseholders, has been reasonably incurred as required by section 19 of the Landlord and Tenant Act 1985. 2.The appellant landlord, Assethold Limited, was represented in the appeal by Mr Mark Loveday and Mr Richard Miller, and the respondent leaseholders by Mr Edward Denehan, all of counsel, and I am grateful to them.The factual background3.The property in question is Corben Mews, in London SW8, of which the appellant is the freeholder; it employs a managing agent, Eagerstates Limited. Corben Mews is a warehouse conversion, in two separate but contiguous blocks, A and B (I refer to the two blocks together as “the building”); originally it was divided into 14 flats over four storeys, and more recently a developer has taken an airspace lease and added two penthouse flats. The respondents are the leaseholders who applied to the FTT for a determination of the reasonableness of service charges; they all hold long leases granted in 2013, 2016 and (in the case of the rooftop developer) 2018.4.The exterior of the building is made of zinc sheeting, brickwork or render, and there is a small amount of wood panelling around the entrance to Block B.5.In October 2019 the building was inspected by 4site Consulting Limited, which then carried out a health, safety and fire risk assessment for each block. It found some minor defects, such as the storage of flammable items in inappropriate places, and in relation to Block B 4site identified failures in internal compartmentalisation. Eagerstates then issued consultation notices to the leaseholders in relation to the remedial work necessary to cure the defects, but the work was never carried out.6.In February 2020 a different firm, Hydrock, was instructed by JMC Surveyors and Property Consultants Limited, on Eagerstates’ instructions, to undertake a survey of the external walls of the building, and their report indicated that the building was satisfactory subject to changing the timber decking on the balconies to a different material. This has been done.7.In August 2020 Hydrock carried out an intrusive inspection of the walls and issued a further report in September 2020 which concluded that the construction of the external walls was suitable for a building of this height and did not present a significant fire risk.8.In January 2021 Hydrock carried out a further external wall assessment and produced a report on 15 March 2021. The report said that combustible materials were present in the external walls and that this presented an “intolerable” risk to the occupants, on the basis that the risk of fire was “medium” and the potential consequences of a fire were “extreme”. The report recommended remedial measures including the removal of combustible materials and the provision of cavity barriers; it also recommended that until that work was done the appellant should put in place interim measures, either in the form of an extended alarm system or by providing a waking watch, but that:“Based on the level of risk identified, it is recommended by Hydrock that the client complete the remedial works detailed in section 7.1 at the nearest opportunity to lower the level of risk present in Corben Mews.”9.A draft of the report was sent to Eagerstates in February 2021, and was met with incredulity; their employee Mr Ronni Gurvits wrote back “You are joking! The building has gone from acceptable to intolerable!” Eagerstates instructed surveyors, JMC Surveyors and Property Consultants Limited, who raised a number of queries with Hydrock. Hydrock maintained that its report was correct. 10.Immediately after receipt of the final Hydrock report in March 2021 the appellant hired a waking watch for both blocks (one person in each), at the cost of £28,000 a month.11.The respondents took advice from Safety Consulting Partnership Limited, which inspected the property on 18 March 2021 and reported that the fire risk at the property was low and did not justify a waking watch, and recommended some minor work which, the respondents say, matched what was recommended by 4site in 2020.12.In June 2021 the appellant issued service charge demands to the respondents, requiring payment of a charge to cover the cost of the waking watch. 13.Section 19(1) of the Landlord and Tenant Act 1985 provides as follows:“(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period—(a) only to the extent that they are reasonably incurred, and(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;and the amount payable shall be limited accordingly.”14.The respondents made an application to the FTT, which has jurisdiction under section 27A of the 1985 Act to determine whether service charges are payable. It is common ground between the parties that the leaseholders’ service charge liabilities in their leases would cover the cost of a waking watch if reasonably incurred, and so there is no dispute about the terms of the leases. Before the FTT the respondents said that the charges were not payable, first because there was no power in the leases for the landlord to demand a service charge payment on an ad hoc basis during the accounting year (which ends in December), and secondly because the cost of the waking watch was not reasonably incurred and so fell foul of section 19(1)(a). The respondents succeeded on both grounds. 15.The basis on which the FTT said that the cost was not reasonably incurred was that the report by Hydrock was incorrect and that no waking watch was necessary. The FTT further found, at its paragraph 85, that if it was wrong about that, then the cost was reasonably incurred only for one month as an interim measure, by the end of which the remedial work should have been done, and also that the watch should have been set only in Block B, rather than being for both blocks, because it was only in Block B that cavity barriers were needed.16.The respondents’ case was also that if the charges were payable, they were excessive because the quality of the waking watch was unsatisfactory (with reference to section 19(1)(b)); the FTT found on that issue (again, if it was wrong about the reasonableness of the whole cost) that the standard of the watch was so poor that 50% of the cost (for that one month, in one block) was payable.17.The waking watch ceased on 16 November 2021, the day after the FTT delivered its decision. The remedial works recommended by Hydrock had not at that date been done. Mr Loveday at the appeal hearing was without instructions as to whether anything had been done since then.The appeal18.The appellant appeals the finding that the cost of the waking watch was not reasonably incurred. It also appeals the finding that if the cost was reasonably incurred it could not have been reasonable to incur that cost in respect of block A.19.There is no appeal from the FTT’s finding at its paragraph 85 that if the cost was reasonably incurred then that was the case only for one month; nor from the FTT’s decision about the standard of service provided. Accordingly what the landlord seeks to establish in the appeal is that the cost of the waking watch for both blocks for one month (£28,000), reduced by 50% because of the standard of service (to £14,000), was reasonably incurred.20.Because the charges in question were not validly demanded, the appellant if successful will not be able to recover anything pursuant to the demands made in June 2021. But the decision in the appeal will enable the parties to know what can be recovered if validly demanded in due course.21.The grounds of appeal as drafted – not by Mr Loveday - gave rise to some confusion and rather than setting them out it will be more helpful if I distil them into the two issues argued at the hearing, namely (1) whether the FTT applied the correct test to the question whether the cost of the waking watch was reasonably incurred and (2) whether when the correct test is applied the cost was reasonably incurred. In order to explain those two issues I have to set out some of the detail of the FTT’s decision.