[2023] UKUT 207 (LC)

The contractual structure in this case requires the leaseholders to pay the service charge for insurance to the management company. The management company uses those funds to pay the insurer. The payments made by the management company to the insurer are not service charges within the meaning of section 18 because they are not an amount payable by a tenant as part of or in addition to the rent. They are amounts payable by the management company, which is not a tenant.

The contributions by the leaseholders to the management company are a service charge within the meaning of section 18. As Chadwick LJ explained in Cinnamon, the management company is a “landlord” for the purposes of the service charge provisions of the 1985 Act because it falls within the expanded definition in section 30 as a “person who has a right to enforce payment of a service charge.”

The charge payable by the leaseholders for insurance varies according to the costs incurred by the management company in procuring the insurance. The cost is therefore a relevant cost within the meaning of section 18(2) and the charge is a service charge. It is immaterial that the charges are not incurred on behalf of RMB. In Berrycroft, Beldam LJ’s suggestion that the insurance charges would not be regarded as having been incurred on behalf of the landlord and could not therefore be “relevant costs” overlooked the fact that the costs were incurred on behalf of the management company which was also a “landlord” by virtue of section 30. The Court of Appeal had already decided that the costs in question were reasonable, so the treatment of the effect of section 18 in a tripartite arrangement was obiter, and I am satisfied that it did not require the FTT to strike out the application in this case.

The unusual feature of this case, and the principal ground on which Mr Allison, on behalf of the respondents, sought to uphold the FTT’s decision, is that the leaseholders’ application under section 27A did not identify the person to whom the service charge is payable, i.e. the management company, as a respondent. Mr Allison submitted that the leaseholders’ case depended on a fundamental misunderstanding of the extent of the FTT’s jurisdiction under section 27A. He suggested that the FTT did not have a general jurisdiction to “fact find” and to unpick the relationships between the various entities involved in placing insurance (the insurer, the broker, the landlord’s agent, the landlord, the management company and the managing agents). The FTT’s jurisdiction was, as it has recently been put by Lord Briggs JSC in giving the judgment of the Supreme Court in Williams v Aviva Investors’ Ground Rents GP Ltd [2023] 2WLR 484, at [19]:

“A jurisdiction to review a proposed or demanded service charge for contractual and statutory legitimacy.”

In this case, Mr Allison submitted, the contractual and statutory legitimacy of the service charge was an issue between the management company and the leaseholders, and not between the leaseholders and the landlord.

I have already explained that the payment by the management company to the insurer is not a service charge. No payment has yet been made by the leaseholders to the landlord which could be the subject of scrutiny by the FTT under section 27A. Nevertheless, in my judgment, that does not mean that that the application should be struck out or there is nothing for the FTT to consider under section 27A.

There is no doubt who is liable to pay the service charge (the leaseholders) or, to whom it is payable (the management company) but the amount which is payable is a matter on which the leaseholders are keen to obtain a determination. Making that determination will involve considering whether the costs incurred by the management company (or on its behalf, as in the year in question it would appear that the insurance was procured by E&J Estates rather than by the management company) was reasonably incurred within the meaning of section 18(1)(a). If it was not (and the tenants say that multiple layers of commission which they suspect inflate the policy mean that the cost was not reasonably incurred) the service charge payable by the leaseholders to the management company will be limited accordingly.

It is important not to lose sight of the breadth of section 27A. In Gateway Holdings (NWB) Ltd v McKenzie [2018] UKUT 371 (LC) the Tribunal rejected a submission that a section 27A application could only be brought by a party legally obliged to pay or entitled to collect a service charge. The Tribunal referred to the decision of the Court of Appeal in Oakfern v Ruddy [2006] EWCA Civ 1389 in which it was suggested that a sub-tenant who was required to pay a service charge to an intermediate tenant which in turn was obliged to pay a head landlord for services which it provided could not make an application under section 27A. The Court of Appeal dismissed that argument, for reasons given by Parker LJ at [82]:

“In my judgment there is no justification for implying any restriction into the entirely general words of section 27A of the 1985 Act. In some cases, one may suppose, the applicant for a determination under that section as to the proper amount of service charge payable will be the party who is liable to pay the service charge, the subject of the challenge, and the respondent to the application will be the party who is seeking to levy it on the applicant; but there is no reason why this will inevitably be the case … As to possible abuses of process the Leaseholder Valuation Tribunal has ample powers to regulate its own procedures, including power to strike out vexatious or abusive applications.”

Oakfern v Ruddy and Gateway v McKenzie were both concerned with a question who could bring an application under section 27A. The Tribunal in Gateway held that, as an exercise in proper case management, the FTT had been entitled to strike out a claim brought by a tenant in respect of years before she had acquired her tenancy, because she had no legitimate interest in what had been payable for those early years, but not on the grounds that it had no jurisdiction. Neither case was concerned with who may properly be made a respondent to an application under section 27A. The section itself provides no guidance but unlike its predecessor, section 19(2)(a), 1985 Act, it is drafted in deliberately wide terms. In Gateway, the Tribunal suggested it must have been drafted in that way in a deliberate attempt to minimise opportunities for jurisdictional disputes.

On behalf of the leaseholders Mr Douglas submitted that no purpose would be served by bringing a claim against the management company (of which he and other leaseholders were directors). In practice the management company had not placed the insurance but had received an invoice from E&J Estates for insurance that it had arranged which it had reluctantly paid before passing on the charges to the leaseholders. The management company therefore had none of the answers to the leaseholders’ questions. The person with knowledge of the process by which the insurance was procured and of any commissions which were paid was the landlord (which Mr Douglas described as a shelf company within the E&J Estates’ Group) and E&J Estates itself.

Mr Allison submitted that no purpose would be served by a determination under section 27A in proceedings which the landlord and not the management company is a respondent. Since the charges were not payable to the landlord no purpose would be served by its involvement.I do not agree. The question whether the sums payable to the management company by the leaseholders are reasonably incurred is a question in which the landlord has an interest for a number of reasons.

First, by clause 3(5)(a) of the Lease the leaseholder covenants with the landlord to pay the service charge to the management company. Any determination that the sums payable to the management company were restricted by section 19(1)(a) would only bind the landlord if it was party to the application in which that determination was made. It would be unsatisfactory for there to be any uncertainty whether the leaseholder would be in breach of his obligation to the landlord to make payment of the service charge to the management company; to achieve that certainty it is necessary for the landlord to be a respondent to the application.

Secondly, the landlord has a right to forfeit the Lease (subject to the usual statutory controls) if the leaseholder is in breach of his covenants with the landlord or the management company. The forfeiture clause, clause 5(2), refers to “any breach of any covenants or agreements on the part of the Lessee herein contained”. The leaseholders therefore have an interest in binding the landlord to a determination that they are not liable to pay the full amount of the service charge to the management company if they can demonstrate that it was unreasonably incurred.

Thirdly, there are other remedies available to leaseholders who consider they are being overcharged for services. The statutory right to manage available under Part 2 of the Commonhold and Leasehold Reform Act 2002 is a no-fault entitlement, but a determination by the FTT that service charges are being unreasonably incurred through the current contractual management structure may enable the required majority of leaseholders to participate. In contrast, the regime in Part 2 of the Landlord and Tenant Act 1987 is fault based. It entitles leaseholders to ask the FTT to appoint a manager to carry out functions in connection with the management of the premises. It is arguable that the function of nominating the insurer for the purpose of paragraph 7 of Part IV of the Schedule to the Lease is a function in connection with the management of the building which could be taken over by a manager appointed by the FTT. One of the grounds on which such an appointment can be made is where the FTT is satisfied that unreasonable service charges have been made, or are proposed or likely to be made, and that it is just and convenient to make the order in all the circumstances of the case (section 24(2)(ab)). A determination under section 27A that a service charge is limited by section 19(1)(a) because the charge was unreasonably incurred is not a determination for the purpose of section 24, Landlord and Tenant Act 1987. But a determination under section 27A in proceedings to which the landlord was a party is likely to be persuasive if the same question arises in an application under section 24.

It therefore seems to me significantly to overstate the case to assert, as the respondents did before the FTT, that the leaseholders’ prospects of obtaining a determination under section 27A had no realistic prospect of success. On the contrary, there seems to me to be no reason in principle why such a determination should not be available in proceedings to which the landlord is a party even where the service charge is not payable to the landlord. Nor is it an abuse of process for the leaseholders to bring the application against the landlord. For the reasons I have given, the landlord is an appropriate party to the proceedings.

As for the question whether the management company should also be a party to the proceedings, I agree with Mr Allison that it would be an unusual application under section 27A where the person to whom the service charge was payable was not also to be bound by the FTT’s decision. Where, as in this case, there appears to be no divergence of interest between the individual leaseholders and the management company of which they are all shareholders and some are directors, the management company could either be made a respondent to the application or it could be added as an additional claimant. The management company has not so far been involved in the proceedings, and without giving it an opportunity to consider its position it would not be appropriate for this Tribunal to make any direction joining it. Whether it is to participate, and if so in what capacity, is a matter which can be considered by the FTT when the proceedings are remitted to it for determination.

I should emphasise, as I did during the hearing, that nothing I have said should give the leaseholders any comfort as to their prospects of establishing that the service charges payable by them to the management company have been unreasonably incurred. The authorities demonstrate that where a landlord is entitled to nominate an insurer it is not required to show that the premium charged by its nominee is the cheapest that could be found in the market. In this case the landlord is obliged to nominate an insurance company “of repute” and the management company must then place the policy with that insurer “through the agency of the Lessor” (quite what that expression means and whether, for example, it entitles the landlord to include the building in a block policy with other buildings in its portfolio, were not questions raised in the appeal).

In Bandar Property Holdings Ltd v J S Darwen (Successors) Ltd [1968] 2 All ER 305 a landlord covenanted to insure premises “in some insurance office of repute or at Lloyds”. After the landlord had obtained cover the tenant obtained a quote for similar cover at a lower cost but the court dismissed the tenant’s argument that the landlord’s entitlement should be capped at the lower cost. There was no implied term requiring the landlord to act reasonably in placing insurance and not to impose an unnecessarily heavy burden on the tenant.

In Havenridge Ltd v Boston Dyers Ltd [1994] 2EGLR 73, the covenant required the tenant to pay such sum as the landlord should “properly expend” in insuring the premises. Evans LJ explained that:

“The limitation, in my judgment, can best be expressed by saying the landlord cannot recover in excess of the premium that he has paid and agreed to pay in the ordinary course of business as between the insurer and himself. If the transactions arranged otherwise than in the normal course of business, for whatever reason, then it can be said that the premium was not properly paid, having regard to the commercial nature of the leases in question, or, equally, it can be supposed that both parties would have agreed with the officious by-stander that the tenants should not be liable for a premium which had not been arranged in that way.

If that is the correct test, as in my judgment it is, then the fact that the landlord might have obtained a lower premium elsewhere does not prevent him from recovering the premium which he has paid. Nor does it permit the tenant to defend the claim by showing what other insurers might have charged. Nor is it necessary for the landlord to approach more than one insurer, or to “shop around”. If he approaches only one insurer, being one insurer of “repute”, and a premium is negotiated and paid in the normal course of business as between them, reflecting the insurers usual rate for business of that kind then, in my judgment, the landlord is entitled to succeed. The safeguard for the tenant is that, if the rate appears to be high in comparison with other rates that are available in the insurance markets at the time, then the landlord can be called upon to prove that there were no special features of the transaction which took it outside the normal course of business.”