[2024] UKUT 81 (LC)

This appeal engages two areas of law. The first is the provisions in the Commonhold and Leasehold Reform Act 2002 which give certain long leaseholders of flats the right to take over the management of their block from their landlord through a limited company known as an RTM company. This is a no-fault right; the leaseholders do not have to show that the landlord was not managing the block properly.

We do not need to go into a great deal of detail about the law relating to RTM companies, save to note the decision of the Court of Appeal in Triplerose Ltd v Ninety Broomfield Road RTM Co Ltd [2015] EWCA Civ 282, some years after the legislation came into force, that an RTM company can acquire the right to manage only a single self-contained block, together with appurtenant property. That appurtenant property extends only to property used solely by that block (FirstPort Property Services Limited v Settlers Court RTM Co Limited [2022] UKSC 1, overruling Gala Unity v Ariadne Road RTM Co Limited [2012] EWCA Civ 137). So where there is appurtenant property shared between blocks the landlord remains responsible for its management even where one or more RTM companies have taken over the management of their block or blocks.

Kenilworth Court is a development of five blocks of flats, A to E, with communal gardens. Blocks A, B, D and E contain 10 flats each, while Block C has 12. For many years, since at least 2003 (as the FTT found at paragraph 19 of the decision now appealed) the five blocks have been managed together as a single unit. The individual leases of the flats make provision (as the Tribunal found in the first appeal) for the leaseholder to pay by way of service charge a fraction of the landlord’s expenditure on the whole estate, i.e. all five buildings and all the shared appurtenant land.

In 2006 the residents of Blocks A to D exercised their right to manage their block through a company, and those in Block E did the same in 2007. The five RTM companies together, through managing agents, continued to manage the estate together as a single unit from 2007 onwards. Doubtless many other RTM companies made similar arrangements in the years before Triplerose and before SettlersCourt.

The second and third appellants, who are brother and sister, bought the long lease of Flat 3, Block E Kenilworth Court in 2004; in 2016 the first appellant purchased the flat from them. The second appellant, Ms Gorrara, is the first appellant’s solicitor.

The second area of law relevant to the appeal is the regulation of variable service charges by the Landlord and Tenant Act 1985. Section 27A gives the FTT jurisdiction as follows:

“27A Liability to pay service charges: jurisdiction

(1)

An application may be made to [the FTT] for a determination whether a service charge is payable and, if it is, as to—

(a)

the person by whom it is payable,

(b)

the person to whom it is payable,

(c)

the amount which is payable,

(d)

the date at or by which it is payable, and

(e)

the manner in which it is payable.

(2)

Subsection (1) applies whether or not any payment has been made.

(3)

An application may also be made to [the FTT] for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to—

(a)

the person by whom it would be payable,

(b)

the person to whom it would be payable,

(c)

the amount which would be payable,

(d)

the date at or by which it would be payable, and

(e)

the manner in which it would be payable.

(4)

No application under subsection (1) or (3) may be made in respect of a matter which—

(a)

has been agreed or admitted by the tenant,

…

(5)

But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment.

It is worth noting that the FTTs jurisdiction is not limited to making determinations about service charges that have already been demanded. That is clear from sub-section (3), which enables the landlord or the tenant to ask the FTT whether, if costs were incurred for, say, repairing the roof, a service charge would be payable and if so how much would the charge be.

One of the reasons why a service charge might not be payable is that it fails to meet the requirements of section 19 of the 1985 Act which provides:

“19.— Limitation of service charges: reasonableness.

(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.

(2)

Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.”

Many leases make provision for service charges to be paid in advance, before the relevant expenditure has occurred; such charges are subject to the test set out in sub-section (2), which is inevitably less stringent than the test in sub-section (1) for charges relating to costs actually incurred.

The lease of flat 3 defines the landlord’s expenditure on the estate as the “Maintenance Expenses” and then provides as follows in Schedule 6:

“1.

The Lessee’s Proportion means .75% per centum or such other percentage as the Lessor shall in the interests of good estate management deem to represent a fair proportion of the Maintenance Expenses attributable to the matters mentioned in the Fifth Schedule hereto

PROVIDED ALWAYS as follows

…

2.

An Account of the Maintenance Expenses (distinguishing between actual expenditure and reserve for future expenditure) for the period ending the 24th day of March for each year during the term shall be prepared and the Lessor shall within three months of the date of each Account serve on the Lessee a copy thereof and of the said Certificate

3.

The Lessee shall pay to the Lessor by way of further and additional rent the Lessees proportion of the Maintenance Expenses in manner following that is to say:-

3.1

In advance on the 29th day of September and 25th day of March in every year through the term one half of the Lessees Proportion of the amount estimated by the Lessor or its managing or other agents as the Maintenance Expenses for the year ending on the next 24th day of March

the first payment to be apportioned (if necessary) from the date hereof

3.2

within 21 days after the service on the Lessee of the copy of the Account and Certificate referred to in paragraph 2 of this Schedule for the period in question the Lessee shall pay to the Lessor or its managing agents [or] be entitled to receive or be credited with the balance by which the Lessee’s proportion respectively exceeds or falls short of the total sums paid by the Lessee to the Lessor pursuant to paragraph 3.1 of this schedule during the said period”

Obviously the proportion set out in clause 1 is problematic; there are 52 flats at Kenilworth Court, and 0.75% x 52 = 39% so that proportion leaves the landlord with a serious shortfall. The RTM companies, in maintaining the estate together as a whole, have demanded service charges from the 52 lessees that are said to add up to 100% on the basis of rateable value, with Flat E3 being charged 1.7026% of the budgeted costs of managing the whole estate.

Aside from that difficulty, these are commonplace provisions which require that while payments are made in advance on account of service charges on the basis of estimates, there should be a reconciliation at the end of each year so that the leaseholders know what the actual service charge was, and a balancing exercise so that any shortfall is paid and any surplus re-paid. Nevertheless, it seems that for many years, perhaps since 2007, no reconciliation has been carried out. Estimated charges have been paid, on a monthly basis, and any surplus has been transferred to the reserve fund for the estate. Accounts have been provided to the leaseholders each year (as the FTT found at its paragraph 45); they are relatively brief, setting out what has been spent on the estate over the preceding year, with no break-down to show what has been spent on individual blocks.

In 2016 Ms Gorrara began to make enquiries of the managing agents about the service charges in recent years, expressing concern about the level of disrepair in Block E. In January 2017 she asked for an analysis showing the breakdown between the blocks. In May 2017 the first appellant stopped paying the monthly service charge payments.

On 24 June 2019 the appellants made an application to the FTT.