[2024] UKUT 41 (LC)

In its decision the FTT said of the management charge that:

“… the charge is much higher than would be paid in the market for management services. Using its own expertise as the landlord was not able to provide any background to the makeup of the service charge account the Tribunal determines that the service charge, inclusive of the management fee should be reduced to £39 per week”.

Ms Osler submitted that the FTT had not been entitled to reach this conclusion without providing the parties with the opportunity to comment on the examples of charges in the market which the FTT had in mind. In failing to inform the parties that it intended to rely on evidence of other charges the FTT acted unfairly, or so it was said.

In support of this ground of appeal Ms Osler referred to the decision of the Lands Tribunal in Arrowdell Ltd v Coniston Court (North) Hove Ltd [2006] EWLands LRA/72/2005 (31 October 2006), in which the decision of a leasehold valuation tribunal (LVT) on the assessment of the sum payable on a collective enfranchisement of a block of flats was set aside and redetermined because of breaches of the rules of natural justice. At [23], the Lands Tribunal made the following observations:

“It is entirely appropriate that, as an expert tribunal, an LVT should use its knowledge and experience to test, and if necessary to reject, evidence that is before it. But there are three inescapable requirements. Firstly, as a tribunal deciding issues between the parties, it must reach its decision on the basis of evidence that is before it. Secondly, it must not reach a conclusion on the basis of evidence that has not been exposed to the parties for comment. Thirdly, it must give reasons for its decision.”

The FTT’s explained, when it refused permission to appeal, that the charge proposed by Catalyst was “outside the parameters the tribunal would have expected in a similar block” and said that it had “relied on its own general knowledge of management charges and not on any specific property”.

The FTT is a specialist tribunal whose members are appointed because of their experience and professional background in residential property matters. While sitting in the FTT its members will acquire further relevant experience and a familiarity with general levels of value or costs in a particular area. The more experienced the panel (and the panel in this case was particularly experienced) the deeper will be its reserves of knowledge and the more reliably it will be able to form an opinion on a matter of assessment within the scope of its expertise. That is one of the key strengths of the tribunal system and it is particularly important in dealing with the numerous cases of modest value in which a decision has to be made on very limited information. Rent assessments are typical of those types of cases.

The dividing line between making use of the expertise of the members of the FTT panel in determining an issue and relying on evidence which the parties are entitled to an opportunity to comment on is not always easy to define. But it is an important dividing line. The business of the FTT would grind to a halt if, in every rent case (most of which are decided without a hearing) the panel was obliged to notify the parties of all of the matters it intended to rely on in reaching a determination of the weekly rent for a modest flat and to allow them a chance to comment.

Some assistance in identifying where the line should be drawn is provided by Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 E.G.L.R. 14, an appeal to the High Court under section 23 of the Arbitration Act 1950 concerning a rent review arbitration in which it was said that the arbitrator had broken the rules of natural justice by basing his decisionto some extent on matters never referred to by the surveyors who had given written evidence, never put by the arbitrator to them, and which appeared for the first time in his award.  Zermalt was referred to by the Lands Tribunal in Arrowdell and it formed the basis of the submissions of counsel which were accepted in that case.

Bingham J set aside the award of the arbitrator saying this:

“Nevertheless, the rules of natural justice do require, even in an arbitration conducted by an expert, that matters which are likely to form the subject of decision, in so far as they are specific matters, should be exposed for the comments and submissions of the parties. If an arbitrator is impressed by a point that has never been raised by either side then it is his duty to put it to them so that they have an opportunity to comment. If he feels that the proper approach is one that has not been explored or advanced in evidence or submission then again it is his duty to give the parties a chance to comment. If he is to any extent relying on his own personal experience in a specific way then that again is something that he should mention so that it can be explored. It is not right that a decision should be based on specific matters which the parties have never had the chance to deal with, nor is it right that a party should first learn of adverse points in the decision against him.”

It can be seen that Bingham J emphasised the importance of an arbitrator exposing “specific matters” which are likely to form the subject of decision to comment by the parties before making a decision. Personal experience which is relied on “in a specific way” is also subject to that requirement. Implicitly, and necessarily, the arbitrator’s (or tribunal panel member’s) general experience and knowledge may be relied on without the parties first being forewarned. The parties already know that the question which divides them is to be determined by an expert tribunal whose members have been appointed because of their relevant experience and there is no obligation on the FTT to catalogue that experience.

An example of a specific matter which must be disclosed to the parties is provided by Arrowdell where the LVT rejected the evidence of the expert witnesses in favour of its own knowledge of “relativities which have been agreed between parties or their valuers in other similar cases”. The panel were referring to specific examples of cases in which agreements had been reached on the same subject matter as had been the subject of evidence.

Both Arrowdell and Zermalt were cases in which tribunal or arbitrator had been provided with detailed expert evidence. In that respect they are unlike this case, in which the FTT was provided with virtually no evidence to assist it in determining the value of the services provided to tenants of Aspley House. Nevertheless, the rules of natural justice still apply and governed the FTT’s conduct of the reference. I am satisfied that the FTT did not break those rules. It did not rely on specific examples of management charges, but on its own general experience of the level of charges typical of such blocks. It was not necessary to identify all of the numerous buildings of which the members of the panel are likely to have been aware, nor would it have been practical. It was not possible to identify a sample of buildings since the FTT was not relying on a sample, but on its experience of a wide range. It was entitled to rely, without more, on its general experience of management charges. That is what it was appointed to do and, in the absence of assistance from the parties, there was no other source on which it could rely.

It was also submitted by Ms Osler that, had the FTT asked for comments from the parties about the level of management charge which it had in mind, it would have discovered that the item described in the service charge account as “managing agent block” was not a charge for management at all, but included a range of services such as pest control, landscaping, insurance, repairs and testing. Moreover, she suggested, it would have discovered that the sum proposed for 2022/23 was based on an estimated budget for the whole development, which was then allocated to the individual blocks. Finally, it would have been told that the reason the charge increased by almost 50% from the previous year was because the previous year’s expenditure had been underestimated.

This explanation could have been provided to the FTT at the hearing if Catalyst had sent a representative who was familiar with the service charge. It is unsupported by evidence. For both of those reasons it cannot be relied on in the appeal. If it had been deployed at the proper time it might have led to a different result, but it might not. It would have been necessary to consider whether charges for matters such as repairs are permitted under the tenancy agreement. That would have turned on the composition of the category shown in the original service charge schedule as “superior landlords costs” and would have given rise to the difficulties mentioned at [15]-[16] above.