[2024] UKUT 175 (LC)

The FTT’s decision was that the cost of the Countryside system in the three years in question, in the amount charged to the leaseholders, was not reasonably incurred. It was critical of Mr Williams, the development manager for FirstPort who gave evidence for the landlord, who was not aware of the contracts when he raised the purchase order to trigger the payments to Countryside. It said “the bad deal made in 2000 was still a bad deal in 2018”, that the system was “foisted” on the leaseholders; and the effect of section 19 was that the tenants should not have to pay the full cost of those contracts in the years in question. It did not decide what would be a reasonable payment in its decision of 22 March 2023, but asked the landlord to obtain from Countryside a breakdown of the cost into rental and maintenance.

That breakdown was not forthcoming; Countryside told the landlord that it charged a fixed fee under the contracts and no breakdown into rental and maintenance costs existed. Therefore in a supplementary decision of 3 May 2023 the FTT adopted the figures obtained by FirstPort for an equivalent level of maintenance for a new system, and determined that the costs of the Countryside contracts were reasonably incurred only to the extent of a figure that represented 19% of the charges demanded by the landlord. From that determination the landlord appeals.

For the landlord, Mr Allison points out that had the Countryside contracts been made a few years later they would have been “qualifying long-term agreements” (“QLTAs”) and subject to the consultation requirements of section 20 of the Landlord and Tenant Act 1985 – which were introduced by section 151 of the Commonhold and Leasehold Reform Act 2002. Mr Allison did not suggest that that makes any difference to what I have to decide in the appeal, and I agree it makes none.

The landlord’s argument is that the FTT made a decision about what was done in 2000 and indeed did so without evidence: there was nothing to suggest that the contracts were in fact a “bad deal” in 2000. But in fact its jurisdiction under section 19 is to determine whether the landlord’s costs were reasonably incurred. As both parties agree, the cost (that is, the charge made by Countryside) was incurred when payment was demanded: Burr v OM Property Management [2013] 1 WLR 3071. And the landlord in incurring those costs in 2018, 2019 and 2020 was bound by the contracts to make those payments to Countryside; it cannot be said that that was an unreasonable decision given that the landlord’s options were either to pay, or to not pay and be sued by Countryside - or, at worst, have Countryside remove or disable its equipment, which would have placed the landlord in breach of its covenants under the lease.

Mr Allison relies upon the decision in Auger v London Borough of Camden (2008) LRX/81/2007. That was an appeal from a decision of the London Rent Assessment Panel on an application by the London Borough of Camden for a dispensation from the consultation requirements of section 20C of the 1985 Act in respect of “Partnering Agreements” which it proposed to enter; under that agreement a programme of capital works would be carried out to Camden’s housing stock over a period of years, with the contract rate determined by the Partnering Agreement. One of the reasons why the LVT granted the dispensation sought was that it took the view that there would be no disadvantage to the leaseholders because they would still have the protection of section 19 of the 1985 Act and would be able to challenge the resulting service charges. The Lands Tribunal (HHJ Huskinson) allowed the leaseholders’ appeal, accepting their argument that section 19 would not protect them. The judge said this:

That passage was quoted with approval in London Borough of Lewisham v Rey-Ordieres and others [2013] UKUT 14 (LC) at paragraph 44, although the outcome was different in that case because the costs under the contract in question were not entirely inflexible. But the passage quoted above from Auger describes the present situation exactly, Mr Allison argued: there is no question about the quality of the work, only about the decision to incur the cost, and in the present case as in the situation imagined in Auger the landlord’s hands were tied and there were no other realistic options open to it.

What the FTT did, according to Mr Allison, was to fall into the trap analogous to the one encountered in historic neglect cases, where it is argued that a cost for repair was not reasonably incurred because it would have been cheaper if the landlord had done the works years earlier. The landlord’s decision to incur the cost has to be assessed now, in the position in which the landlord finds itself (although the tenants may be able to set off a claim in damages for breach of covenant in the historic neglect: Continental Property Ventures v White (2006) EW Lands LRX/60/2005).

Furthermore, Mr Allison argues that the supplemental decision of 3 May 2023, when the FTT reduced the amount payable by 81%, was irrational, first because the FTT was using as a comparator the cost of maintaining a new system, which is likely to be lower than an old one, and second because in allowing the landlord to charge for maintenance costs only (even had it done so accurately) means that the leaseholders got the system for free – no allowance is made for the fact that in reality the landlord does not own the security systems.

Mr Allison adds that it is likely that all or most of the leaseholders were aware of the rented security system, which was in place by the time most of the leases were granted, so it was not – as the FTT seemed to think – that they were taken by surprise by it; in any event the terms of the lease requiring the landlord to provide security systems explicitly state that the landlord may hire such systems.

Mr Spender put forward a number of reasons why the FTT’s decision was correct.

His primary argument was that the landlord was not bound by the Countryside contracts because there is no evidence that the contracts had ever been novated to it.

If that is true then the landlord’s argument would collapse; it would no longer be able to point to its contractual commitment to justify the expense. Had that been the leaseholders’ case in the FTT, and had it succeeded, their challenge would have been successful.

However, that was not the leaseholders’ case in the FTT. There is no mention of it either in their initial pleadings (the relevant document is their reply to the landlord’s defence, dated 1 April 2022) or in the Scott Schedule where the parties’ cases were set out in detail. The leaseholders’ argument in the Scott Schedule was simply that the costs were excessive.

In Mr Spender’s skeleton argument in the FTT he observed, very briefly in one short paragraph (15), that there was no evidence of novation. When this was raised at the hearing the landlord was able to produce the 2008 settlement agreement, which referred to the novation of the contract to the landlord’s predecessor in title. Mr Allison’s recollection was that the point was not pursued before the FTT and was mentioned only briefly by both advocates in closing. There was no application to amend the leaseholders’ statement of case in the FTT to rely on this point. Had there been, I have no doubt it would have been refused because it was far too late to raise it; it could not fairly have been relied on unless the landlord had warning of the point. The landlord would have had to be given the opportunity to produce relevant evidence (including perhaps evidence from Countryside itself) and also to raise the obvious point under section 27A(4) of the 1985 Act, namely that past payments by the leaseholders of sums demanded for the security system could amount to an agreement that the landlord was contractually bound to pay for the system.

For the same reason I refused to allow Mr Spender to rely upon the point on appeal; it was not part of his case in the FTT and cannot be raised afresh now when the time for calling evidence is past. If authority for that obvious point of fairness be needed, it can be found in the Court of appeal’s decision in Azhar v All Money Matters [2023] EWCA Civ 1341.

Mr Spender then had four further arguments, each of which he said was sufficient to justify the FTT’s decision.

The first related to the burden of proof. He pointed out that where costs are challenged under section 19 it is for the leaseholders to raise a prima facie case that the charge was not reasonably incurred; once they do so, the burden shifts to the landlord to show that it was. In the present case the landlord cannot do so because no-one can explain the cost incurred; Countryside cannot provide a breakdown between rental and maintenance. And market evidence indicates that the cost is far too high, even accepting Mr Allison’s point that a new system would cost less to maintain than an old one.

The second related to the landlord’s decision-making process: Mr Williams raised a purchase order without having had sight of the contracts. It was his decision to incur the cost regardless of any contractual obligation on the landlord’s part. That was not a rational decision-making process.

The third related to the outcome of the landlord’s decision to incur the cost. It is well-established that the term “reasonable” in section 19 means that the decision must not only be taken through a rational process but must also be objectively reasonable in outcome: Waaler v Hounslow London Borough Council [2017] EWCA Civ 45. The outcome of the decision in this case was not reasonable for the tenants because the price was far too high. The landlord’s argument that section 19(1)(a) operates differently in the context of long-term agreements is wrong.

Finally Mr Spender sought to distinguish what was said in Auger. In that case, he said, the terms of the contact in question were controlled by the European-regulated tendering process that would precede it, which gave considerable protection to the tenants. Only in such a case would it be possible to say that the landlord could answer a challenge under section 19(1)(a) by the fact that it was contractually bound to make the payments. Likewise in Lewisham v Rey-Ordieres specific statutory protections were in place for the tenants. Mr Spender relied upon Daejan v Benson and others [2013] UKSC 14, another case about dispensation from the consultation requirements of section 20C of the 1985 Act. At paragraph 42 Lord Neuberger said:

That, said Mr Spender, is the purpose of section 19(1)(a) in the present case, and insofar as the decisions in Auger and Rey-Ordieres might appear to run counter to that they have been superseded by what was said in Daejan. In the present case the leaseholders are getting necessary services, provided to an acceptable standard, but they are paying more than they should.

Mr Spender’s second point about the landlord’s decision-making process and the role of Mr Williams can be disposed of briefly. Mr Williams is not the landlord. He was involved in day-to-day management, he had to activate the payment process by raising a purchase order, and he did not know the details of his employer’s contractual arrangements. That is perfectly consistent with the landlord’s case that it made the payments because it was bound by the contracts, because it was bound by the contracts whether or not Mr Williams knew that to be the case. Insofar as the FTT based its decision on Mr Williams’ own decision-making process, it took into account an irrelevant matter; and the landlord’s decision-making process cannot be attacked on the basis of the way in which Mr Williams carried out his duties.

I then turn to the decision in Auger. I disagree with what Mr Spender says about it; the Tribunal’s reasoning did not depend upon the existence of special regimes to protect the tenants. On the contrary, the judge reasoned that the tenants would not be properly protected and therefore refused dispensation.

That decision could not be made today. Auger was decided in 2008, and since then the landscape regarding dispensation applications has changed; the Supreme Court’s decision in Daejan v Benson means that dispensation can be refused only if the failure to consult caused prejudice to the leaseholders. It cannot be refused on the basis that the contract is a bad deal, unless the leaseholders could show that their observations would have led the landlord to make a different choice – which is not always, perhaps not even often, going to be the case. So the reasoning in paragraph 47 in Auger (quoted above at paragraph 46) could not now be a reason for refusing dispensation.

Is that reasoning in itself nevertheless correct, as the landlord argues, so as to provide an answer to what the leaseholders say in the present case?

What the leaseholders say – taking Mr Spender’s other two arguments together – is that section 19(1)(a) is there to protect the leaseholders from paying too much for services, that therefore the decision to incur the costs in question must be one that is reasonable in terms of the outcome for the leaseholders, in the context of long-term agreements just as much as in other cases. The outcome of the incurring of the costs in the three years in dispute was not reasonable, because the charges were inexplicable and in any event far too high.

In addressing that argument I remind myself that the question I have to answer is whether the costs of the Countryside contracts were reasonably incurred by the landlords. The parties agreed that the relevant costs were incurred on the date when the invoices were presented in the three years in dispute, relying upon Burr v OM Property Management. That is correct, but that does not mean that the FTT was able to make a judgment only about what happened at that point in time.

The issue in Burr was the need to decide when time starts to run for the purposes of section 20B of the 1985 Act, which provides that a tenant is not liable to pay service charges that reflect costs incurred more than 18 months before the demand for the relevant charges. Given the strict time-limit, there was a need to pin-point the date on which time started to run.

But section 19(1)(a) requires consideration of more than a pin-point in time, and of more than the options available to the landlord on that specific date.

That is always the case and is not a point limited to long-term contracts. At the point when an invoice is presented by a supplier the landlord will in most cases, and not just in the case of long-term agreements, already be contractually obliged to pay, and so will have no choice about incurring the costs on that date. It could of course choose not to pay, with consequences obviously bad for the tenants as well for the landlord, including the possibility of the services being disconnected, but the cost would still have been incurred when the invoice was presented and there was nothing the landlord could have done about that. That is likely to be the case for all contracts, whether short-term or long, unless the landlord pays in advance. In the present case Mr Spender suggested that the landlord could have sought to re-negotiate the contract, but could point to no basis on which the landlord could have had the bargaining power to do so and I regard the suggestion as fanciful.

So the moment of presentation of the invoice and the reasonableness of the landlord’s making a payment in response to the invoice cannot be the only thing to be examined in connection with section 19(1)(a), because if it were then in all cases the answer would be as described in paragraph 47 in Auger; that the landlord was contractually bound to pay and therefore it was reasonable to incur the cost.

Instead, section 19(1)(a) is aimed at the incurring of costs in the broader sense of the landlord’s taking on the liability; the mischief at which it aims is the landlord’s committing to too high a price, and therefore the section requires an examination of the background to the presentation of the invoice. The question is whether it was reasonable – in the sense of producing a reasonable outcome for the landlord and the leaseholders as explained in Waaler v London Borough of Hounslow [2017] EWCA Civ 45 – for the landlord to have incurred the costs by entering a contractual commitment and thereby making itself liable to incur the costs, whether it did so a short while before invoicing in the case of a one-off contract or years before as in this case.

I think the approach of the FTT and the Tribunal to a challenge under section 19(1)(a) in respect of costs incurred under a contract should be to ask whether the cost was reasonably incurred in the sense that the landlord acted reasonably in taking on the commitment and thereby making it inevitable that it would incur the cost when the invoice was presented (whether that is going to happen once, or repeatedly throughout the contractual term). I therefore disagree with the analysis in paragraph 47 of Auger. Section 19(1)(a) is not disabled once a long-term contract is in place, or indeed by any other contract; it continues to operate just as does section 19(1)(b), so that under either sub-section a landlord may find itself bound by a contractual obligation but unable to recover the full costs from its tenants, either because the service provided is sub-standard (s.19(1)(b)) or because the service is good but the price is unreasonably high (s.19(1)(a)).

The FTT was therefore right to look at what happened in 2000, and to ask whether it was reasonable for the developer/landlord to enter into the contracts with Countryside at that date, on the information then available.

The present situation is not analogous to the “historic neglect” situation, because the failure to do work in the past is not part of the incurring of the cost.

So far as the taking on of the contractual commitment in 2000 is concerned, that was of course not done by the present landlord; but for the reasons I have explained the appeal has to be approached on the basis that it is bound by those contracts. Section 19 of the 1985 Act requires that the cost be reasonably incurred, regardless of who incurred it. There has been some argument about whether the original leaseholders were aware of the rental agreements with Countryside when they purchased, and the FTT seems to have regarded that as problematic but I do not see the relevance of that. The issue is whether it has been shown that the contracts made in 2000 were, as the FTT called them, “a bad deal.”

I agree with Mr Allison that in saying “the bad deal made in 2000 was still a bad deal in 2018” the FTT went beyond the evidence about the circumstances in 2000. There was no evidence whatsoever that the contract was a bad deal in 2000. Mr Spender did not suggest that. I have read the leaseholders’ arguments in the FTT and there is no suggestion and no evidence that the developer could have done better in 2000. The challenge is only to the three years 2018, 2019 and 2020 and all the evidence relates to available prices for rental, purchase and maintenance at that date. The problem seems to be that the price of the relevant technology has gone down so much that the price set by the contract (even as modified by agreement in 2008) has become too high, but no-one could have foreseen that. Criticism of the deal in 2000 rests only on hindsight.

By the time the costs in 2018, 2019 and 2020 were actually incurred, when the invoices were presented, the landlord had no choice but to pay them; it had no choice because it was bound by contracts made in 2000 which it could not now escape, and the then landlord’s decision to enter those contracts has not been shown to have been unreasonable (in the sense required by section 19(1)(a) as explained in Waaler v Hounslow).

Accordingly I take the view that the FTT’s conclusion was not open to it on the evidence, not because it was wrong to look at the arrangements made in 2000 but because there was no evidence before it to justify the judgment that it made about those arrangements; its decision is set aside.

That being the case I do not need to say much about the FTT’s supplementary decision on 3 May 2023 in which it adopted the leaseholders’ suggestion as to what they should pay instead of the contract price. It is obviously problematic, because it means that the leaseholders have to pay what it would cost to maintain a relatively new system without having had to incur the cost of buying it. Had I needed to do so I would have set that decision aside on the basis that it was not a realistic or fair determination; but it is in any event set aside along with the FTT’s initial decision, of which it was a consequence.

I substitute the Tribunal’s own decision. The Tribunal accepts the landlord’s concession of 25% of the cost in 2020, and determines that, with that concession, the costs of the Countryside contracts were payable in the years in dispute because they were reasonably incurred.

The FTT made an order in favour of the leaseholders under section 20C of the 1985 Act, preventing the landlord from recovering its costs of the litigation as a service charge (insofar as the lease permits that). The landlord wants that order to be reversed if it succeeds in its appeal from the decision about the Countryside contracts, on the basis that that was the most expensive item in issue in the FTT and it should therefore not be penalised by a section 20C order.

On the other hand, the leaseholders have indicated that they wish to make an application for a section 20C order in respect of the costs of this appeal, and for an order under rule 10(14) of the Tribunal’s rules that the landlord reimburse the fees they have paid to the Tribunal. In accordance with Mr Spender’s sensible suggestion I direct that within 28 days of the date of this decision the landlord may make written submissions as to why the section 20C order made by the FTT should be reversed, and as to why there should not be a section 20C order in respect of the costs of the appeal and an order in favour of the leaseholders under rule 10(14). If the landlord does so the leaseholders may reply within 21 days of receipt of those submissions. Any application for permission to appeal this decision, by either party, must be received by the Tribunal within one month of the Tribunal’s determination of the applications in relation to section 20C and rule 10(14).