[2023] UKUT 207 (LC)

The FTT was persuaded by the respondents that the decision of the Court of Appeal in Berrycroft meant that the leaseholder’s application had no realistic chance of success. The decision in Berrycroft predated the introduction of section 27A, 1985 Act by the Commonhold and Leasehold Reform Act 2002. It concerned a tripartite arrangement similar to the Lease in this case under which the leaseholders of a block of flats were obliged to pay a service charge to a management company which, in turn, was required to procure insurance from an insurer nominated by the landlord. Following a change of landlord the management company was instructed by the new landlord to insure with a nominated insurer through an exclusive agent for that insurer. The cover offered by the new insurer was based on the same valuation as the previous policy but the premium was considerably higher. The management company resisted the instruction and asserted that there was no justification for changing insurers, so the landlord exercised a step-in right to procure the insurance itself, from its nominated insurance company at the higher premium. Representative leaseholders and the management company brought court proceedings against the landlord claiming a declaration that the premium was excessive and irrecoverable. Alternatively, they sought a determination under sections 19 and 30A, and paragraph 8 of the Schedule to the 1985 Act that the landlord was not entitled to recover its expenditure on insurance and that the premium was not reasonably incurred and should not be taken into account in determining the amount of the service charge.

The trial judge dismissed the claims and held that the landlord was entitled to require the management company to insure through the insurer’s exclusive agent. He held that no term could be implied that the landlord would only require the management company to pay a reasonable premium, but that in any event the premium was not unreasonable or excessive in the circumstances. Notwithstanding that the premium was substantially higher than was available from other insurers, the costs had not been unreasonably incurred.

The leaseholders appealed to the Court of Appeal, which considered two issues. The first was whether a term was to be implied that the nominated insurer’s premium should not be unreasonable. The Court of Appeal upheld the decision of the trial Judge that no such term could be implied. The second issue was whether the rights and liability of the landlord and the tenant under the leases were affected by the provisions of the 1985 Act. It was this part of the Court of Appeal’s decision which the FTT was persuaded to treat as determinative of the leaseholders’ section 27A application.

Beldam LJ, with whom the other members of the Court of Appeal agreed, began by pointing out that, in view of the conclusion in relation to the first question, it was perhaps unnecessary to consider the second question. Chadwick LJ later pointed out in Cinnamon Ltd v Morgan [2001] EWCA Civ 1616, that the Court of Appeal’s observations in Berrycroft about the effect of the 1985 Act were therefore obiter, that is, they were unnecessary for the decision and do not form part of the binding ratio of the case. Nevertheless Beldam LJ referred to the definition of “landlord” in section 30, which includes any person which has a right to enforce payment of a service charge, and explained that although the service charge was payable to the management company, and not to the landlord, because the tenant had covenanted directly with the landlord to pay the service charges to the company, the landlord still had the right to enforce payment of the service charge, and was therefore still a landlord for the purposes of the provisions of the 1985 Act. He nevertheless held that in so far as the insurance charges were incurred by the tenant as part of the service charge they were not incurred “by or on behalf of” the landlord and, since under section 18 a service charge meant an amount payable which might vary according to the relevant costs which in turn were defined as costs incurred or to be incurred “by or on behalf of the landlord”, the sums payable by the tenant in respect of the insurance were not a “relevant cost”.

The decision in Berrycroft was considered by Chadwick LJ in Cinnamon. In that case both the landlord and a management company sought to recover service charges from a leaseholder. When the leaseholder sought to rely on sections 18 and 19, 1985 Act, the management company referred to Berrycroft and persuaded the trial judge that the provisions of the Act did not apply where the service charges were incurred by a management company rather than by a landlord.

By the time Cinnamon reached the Court of Appeal, the management company had had second thoughts and applied jointly with the leaseholder for the appeal to be allowed and for a determination that the management company was a landlord for the purpose of section 18(2), 1985 Act and that the section applied to the service charges claimed in the proceedings. Before accepting that concession Chadwick LJ first satisfied himself that the judge had been wrong about the effect of Berrycroft. He explained at [15] that, having regard to sections 18 and 30 of the Act, a person who has a right under a lease to enforce a charge for services which varies according to the cost incurred by that person in providing that service is a “landlord” for the purposes of the Act. He explained Berrycroft at [23], saying that there was no reason why, in the context of service charges, there should not be two persons answering the description of landlord. In relation to insurance charges the person entitled to the reversion on the lease was plainly a landlord, but the management company also satisfied the description in section 30 in relation to the charges which it was entitled to recover.