Neutral Citation Number: [2011] EWCA Civ 1258
Case No: B5/2011/0373/CCRTF
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM Hastings County Court
His Honour Judge Hollis
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 08/11/2011
Before :

THE CHANCELLOR OF THE HIGH COURT
LORD JUSTICE HOOPER
and
LADY JUSTICE RAFFERTY
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Between :

	Freeholders of 69 Marina, St Leonards-on-Sea - Robinson, Simpson & Palmer	Claimants / Respondents	
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	John Oram & Mohammed Ghoorun	Defendants / Appellants	

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Bruce Speller (instructed by Funnell & Perring) for the Appellants
Grace Cullen (instructed by Heringtons LLP) for the Respondents

Hearing date : 25 October 2011
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Judgment

The Chancellor : 
Introduction

1.	No.69 Marina, St Leonards on Sea, East Sussex (“the Building”) is a substantial Victorian building on the seafront.  It has been converted into 6 flats of which 5 have been let on 99 year leases commencing on 16th July 1985.  Mr Oram and Mr Ghoorun (“the Lessees”) are the lessees of, respectively, the basement and top floor flats on the terms of such a lease.  The freehold reversion is registered in the names of the other four tenants (“the Freeholders”).  They hold the property in trust for all the tenants and manage the Building on their behalf, including the Lessees.   

2.	The leases of the five flats let on long leases, which include those under which the Lessees hold, contain five provisions relevant to this dispute.  They are:
(1) “There shall also be paid by way of further or additional rent such sum or sums to be assessed in manner referred to in this clause as shall be a just and fair proportion of the amount which the Landlord may from time to time expend and as may reasonably be required on account of anticipated expenditure
(i) in performing the Landlord’s obligations as to repair maintenance and insurance hereinafter contained
(ii) in payment of the proper fees of the surveyor or agent appointed by the Landlord in connection with the carrying out or prospective carrying out of any repairs and maintenance herein referred to and the apportionment of the cost of such repairs maintenance and collection between the several parties liable to reimburse the Landlord for the same and such fees for collection of the rents hereby reserved and the other payments to be paid by the Tenant under this clause.”  (clause 1(b))

(2) “PROVIDED FURTHER such just and fair proportion shall be such sum as the rateable value of the flat bears to the total rateable value of all the flats in the Building…”  (second proviso to clause 1.)

(3) “The Tenant HEREBY CONVENANTS with the Landlord as follows:
(1) To pay the rents and other moneys hereby reserved and made payable at the times and in the manner in which the same are hereby made payable without any deduction whatsoever.” (clause 3(1))

(4) “(12)	To pay all expenses including solicitors’ costs and surveyors’ fees incurred by the Landlord incidental to the preparation and service of a notice under Section 146 of the Law of Property Act 1925 or incurred in or in contemplation of proceedings under Section 146 or 147 of the Act notwithstanding in any such case forfeiture is avoided otherwise than by relief granted by the Court and to pay all expenses including solicitors’ costs and surveyors’ fees incurred by the Landlord of and incidental to the service of all notices and schedules relating to wants of repair of the premises whether the same be served during or after the expiration or sooner determination of the term hereby granted (but relating in all cases to such wants of repair that accrued not later than the expiration or sooner determination of the said term as aforesaid).”
(clause 3(12))

(5) “Subject to contribution by the Tenant as hereinbefore provided the Landlord hereby covenants with the Tenant as follows:
(1) at all times during the said term to keep in good and substantial repair and in clean and proper order and condition those parts and appurtenances of the Building which are not included in this demise or in a demise of any part of the Building” (clause 4(1))

3.	In 2005 there occurred substantial water penetration which necessitated repairs to parts of the Building not subject to any of the six leases.  Accordingly, the obligation to carry out the repairs rested on the Freeholders in accordance with the terms of clause 4(1).  The repairs were duly carried out by the Freeholders at a total cost of £19,031.36.  The Lessees, in common with the other tenants, were liable to reimburse the Freeholders under clause 1(b) their share calculated in accordance with the formula prescribed by the second proviso to that clause.  

4.	Any such liability comes within the definition of ‘service charge’ contained in s.18 Landlord and Tenant Act 1985.    The Lessees complained that the amount was too much and the prior consultation insufficient to satisfy the requirements of s.20 Landlord and Tenant Act 1985.  Accordingly, the Freeholders commenced proceedings before the Leasehold Valuation Tribunal for (1) dispensation of the consultation requirement under s.20ZA and (2) the determination under s.27A of the amount payable by the Lessees.  The application was heard on 17th April 2007.   The Tribunal decided, for the reasons given in their determination dated 12th June 2007, that the consultation requirements should be dispensed with and that the sum recoverable from the tenants in proportion to their relative rateable values was £17,691.36.  The Tribunal made no order for costs.  In any event its ability to do so was circumscribed by Sch.12 para 10 Commonhold and Leasehold Reform Act 2002.

5.	Neither Lessee paid the sum so found to be due by him.  On 2nd December 2008 the Freeholders commenced proceedings in the Hastings County Court seeking payment of that and other amounts from each of them.  In paragraph 15 it was alleged in respect of the liability found by the Tribunal that Mr Oram owed the net sum of £595.53, having paid £1,071.00 already, and Mr Ghoorun owed £1,740.83.  These claims were resisted by the Lessees on the grounds, set out in their defence served on 29th December 2008, that the Tribunal’s decision should be enforced as a judgment under CPR Part 70 and not by separate action, the LVT decision was unenforceable until the rateable values of the flats had been determined and that the Freeholders were not entitled to recover their costs incurred before the Tribunal because no award had been made in their favour.  On 20th July 2009 the matter was, by consent, allocated to the fast track.

6.	On 20th May 2010 District Judge Nightingale gave the Freeholders permission to amend so as to claim further service charges and interest.  She gave judgment against the Lessees for the sums claimed, including interest, of £2,778.81 and £4,100.91 respectively.    Such sums included the amounts of £595.53 and £1,740.83 referred to in paragraph 5 above.  In her judgment she said:
“5. I am quite clear that this clause [clause 3(12)] in the lease is quite separate to clause 1(b) and this clause is an individual covenant between each tenant and the lessor.
6. I am also satisfied, having carefully considered this clause, that it does not pertain only in circumstances where a notice has been served under Section 146 of the Law of Property Act, which it has not in this case.  There have been schedules relating to wants of repair that were served and the matter was referred to the LVT, who made determinations in relation to the value of the repairs to be done.
7. So in my view this clause falls to be determined quite exclusively from clause 1(b) and it binds the tenants in this case to paying all that they have specifically cost the lessors in terms of dealing with these proceedings, both before the LVT and before this court, in relation to solicitors’ costs.”

7.	On 1st June 2010 the Lessees issued an appellant’s notice seeking permission to appeal to the Circuit judge.   They contended that the District Judge was wrong to have concluded that the amounts claimed fell within clause 3(12), some of them only became due after the proceedings had been commenced and that the District Judge should have assessed the costs on the basis of a small claim not a fast track claim.   On the same day the Freeholders served on the Lessees, so we were told at the hearing of the appeal, a notice under s.146.  The notice asserted that the respective leases contained a covenant by the lessee to pay rent and additional rent by way of service charge, that the Lessees had failed to do so with the consequence that the judgment of the District Judge given on 20th May 2010 was given against them.  It continued “You have therefore committed a breach of the said covenant”.  The notice went on to require the breach to be remedied within the next 14 days on pain of forfeiture if it was not.

8.	The appeal came before HH Judge Hollis sitting in the Hastings County Court on 11th February 2011.  He gave permission to appeal and dismissed it.  In his judgment he said:
“10. She [the District Judge] concluded that the costs before the tribunal should fall under 3.12 of the lease.  Although she does not go into the details, it must be the case that in deciding that she was taking the view that the costs fell incidental to the, or in contemplation of the preparation and service of proceedings under section 146 or 147 of the Law of Property Act 1925.
11. It seems to me that that was a perfectly reasonable view to have come to, and although I have given permission for this appeal, because it did seem to be a complicated issue that should be revisited.  I am satisfied, having had the assistance of Mr Speller for the lessees and Ms Naylor for the lessors, that the District Judge was not wrong in coming to the decision she did.  Especially bearing in mind that it is not now challenged that these were costs that the lessees could incur, indeed it seems they were sensible to do so as the lessees themselves were represented before the valuation tribunal and there was a question of equality of arms before that tribunal, although I know they do their best to discourage these sort of additional expenses.”
He went on to consider and reject the other grounds of appeal.

9.	By their appellants’ notice issued on 18th February 2011 the Lessees sought to appeal to this court on the ground that it was an error of law to find each of them to be liable for half the costs of the hearing before the Tribunal.  Rimer LJ, by whom permission to appeal was given on 25th May 2011, considered that it was arguable with a real prospect of success that the covenant contained in clause 3(12) was irrelevant.  In addition, though he did not find any important point of principle or practice to be engaged, he considered that the inadequacy of the reasoning of both District Judge Nightingale and HH Judge Hollis constituted a compelling reason for the Court of Appeal to hear this appeal.

Relevant Legislation

10.	Before I consider the submissions of counsel it is convenient to set out the terms of certain relevant provisions.  I start with s.146 Law of Property Act 1925.  Its precise terms are too familiar to require repetition.  The effect of the section is to inhibit a landlord from forfeiting a lease for breach of covenant or condition unless and until he has complied with the terms of the section and served the notice it requires.  It is not suggested that, if that section applied, the notice served by the Freeholders on 1st June 2010 did not comply with the terms of the section.  Counsel for the Lessees points out that subsection (11) provides that the section as a whole does not affect the law relating to re-entry or forfeiture…in case of non-payment of rent”. 

11.	I have previously referred to s.18 Landlord and Tenant Act 1985.  It defines a “service charge” as:
“an amount payable by a tenant of a dwelling as part of or in addition to the rent— 
(a)which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord's costs of management, and
(b)the whole or part of which varies or may vary according to the relevant costs.”
It follows that the liability of the Lessees under clause 1(b) though recoverable as rent was a service charge for the purpose of the legislation relating to that subject matter.  That legislation is now contained in the Housing Act 1996.

12.	S.81(1) Housing Act 1996 provides:
“A landlord may not, in relation to premises let as a dwelling, exercise a right of re-entry or forfeiture for failure by a tenant to pay a service charge…unless 
(a) it is finally determined by (or on appeal from) a leasehold valuation tribunal…that the amount of the service charge…is payable by him, or 
(b) the tenant has admitted that it is so payable.”
Subsections (2) and (4A) plainly recognise that the s.146 procedure is applicable in the case of re-entry or forfeiture in the case of non-payment of a service charge.  Given that the definition of service charge includes “an amount…payable as a part of…the rent”, the evident intention is that the s.146 procedure, as modified, is to be applicable in cases of non-payment of a service charge even when such charge is recoverable as part of the rent.

13.	I should refer also to various provisions in the Commonhold and Leasehold Reform Act 2002.    S.168 limits the right of a landlord to serve a s.146 notice on the tenant of a dwelling house held under a long lease unless “it has been finally determined on an application [of the landlord to a leasehold valuation tribunal] that a breach of [covenant or condition] has occurred”.  But s.169(7) provides that nothing in s.168 affects the service of a notice under s.146 in respect of a failure to pay a service charge.  

14.	Finally I should refer to Schedule 12 paragraph 10 which deals with costs incurred in proceedings before the Tribunal.  So far as relevant it provides:
“(1) A leasehold valuation tribunal may determine that a party to proceedings shall pay the costs incurred by another party in connection with the proceedings in any circumstances falling within sub-paragraph (2). 
(2) The circumstances are where– 
(a) …  ,or 
(b) he has, in the opinion of the leasehold valuation tribunal, acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with the proceedings. 
(3) …. 
(4) A person shall not be required to pay costs incurred by another person in connection with proceedings before a leasehold valuation tribunal except by a determination under this paragraph or in accordance with provision made by any enactment other than this paragraph.”
No order for costs in favour of the Freeholders was made by the Tribunal but counsel for the Lessees does not contend that this paragraph precludes recovery of such costs if a liability exists under the leases.

Submissions for the parties and my conclusions

15.	Counsel for the Lessees informed us that since the hearings before both the District Judge and the Circuit judge each of the Lessees has paid substantial amounts in satisfaction of their overall liabilities.  Such payments included the rateable proportion of the Freeholders costs incurred before the Tribunal.  He told us that the amount in dispute was now £1,137.51 in the case of Mr Oram and £1,120.97 for Mr Ghoorun.   Thus the Lessees accept a liability to pay and have paid the rateable proportion of the Freeholders costs.  In other words they accept a liability under clause 1(b) but not under clause 3(12).   The dispute is limited to the amount by which half of those costs exceeds their respective rateable proportion.  

16.	Counsel for the Lessees accepts those two covenants are separate and distinct but contends that clause 3(12) cannot apply because (1) the service charge was recoverable as rent so that s.146 is not in point; (2) the Freeholders costs incurred in the Tribunal were not incidental either to (a) the preparation and service of a s.146 notice or (b) to the service of notices and schedules relating to wants of repair; (3) no claim to that effect was pleaded.

17.	I did not understand counsel for the Freeholders to dispute the fact of the payments to which counsel for the Lessees referred nor the proposition that all that is in dispute now is the balance of the Freeholders costs incurred before the Tribunal after payment of the Lessees respective rateable proportions.  She relied on the facts that originally the Lessees refused to pay anything in respect of the cost of the repairs.  Such refusal necessitated the preparation of numerous schedules and notices both before as well as after the application made by the Freeholders to the Tribunal in order to be in a position to serve a s.146 notice in respect of the Lessees’ failure to satisfy its liabilities under clause 1(b) to pay the service charge.  In short she claims all the costs against the Lessees under clause 3(12) as costs incidental and preparatory to the service of the s.146 notice or notices and schedules relating to wants of repair and not just their rateable proportion on the basis that they are service charges.   These submissions, if correct, would dispose of the first two submissions of counsel for the Lessees.  With regard to the pleading point she submits that it is far too late to object that the issue was not pleaded when both the courts below have dealt with it.  In addition, in relation to the point raised before the Circuit Judge on the scale of costs she points out that it was common ground that this claim should be, as it was, assigned to the fast track.

18.	I prefer the submissions of counsel for the Freeholders.  There is no doubt that the Freeholders incurred costs in the repair of the common parts of the Building in performance of their obligation under clause 4(1).  That, in turn, created a liability on the tenants, including the Lessees, to reimburse the Freeholders for those costs under clause 1(b).   The amount of that liability comes within the definition of service charge in s.18 Landlord and Tenant Act 1985 but cannot be enforced except in accordance with the terms of s.81 Housing Act 1996 and, in the case of a long lease, as defined, in accordance with the provisions of s.168 Commonhold and Leasehold Reform Act 2002.   Each of those sections requires the amount of the tenant’s liability to have been finally determined by the Leasehold Valuation Tribunal.  Moreover each of those sections requires or recognises that even when so determined the enforcement of that liability is subject to the provisions of s.146 even if the lease treats it as an additional rent recoverable as such.  In short the enforcement of the liability of the tenants under clause 1(b) required first the determination of the Tribunal and second a s.146 Notice.

19.	I do not doubt that the covenant contained in clause 3(12) is separate and independent of that contained in clause 1(b).  It does not follow that if the Freeholders’ cost of the repairs was only recoverable under clause 1(b) its costs of the proceedings before the Tribunal were only so recoverable.  Indeed I do not consider that the Freeholders’ costs of the proceedings before the Tribunal come within the terms of clause 1(b) at all.  They were not incurred in performing the landlord’s obligation to repair, the apportionment of such costs or the collection of such costs.

20.	In those circumstances the District Judge was right to have concentrated on the terms of clause 3(12).  Liability under that covenant extends to:
(a) “expenses…incurred by the landlord…in or in contemplation of proceedings under s.146…”; and
(b) “…all solicitors costs…incurred by the landlord of and incidental to the service of all notices and schedules relating to wants of repair…”.
Given that the determination of the Tribunal and a s.146 notice are cumulative conditions precedent to enforcement of the Lessees’ liability for the Freeholders’ costs of repair as a service charge it is, in my view, clear that the Freeholders’ costs before the Tribunal fall within the terms of clause 3(12).  If and insofar as any of them may not have been strictly costs of the proceedings they appear to have been incidental to the preparation of the requisite notices and schedules.   

21.	The District Judge considered this matter at a time before any s.146 notice had been served.  This accounts for her conclusion in paragraph 6 of her judgment and the decision of the Circuit Judge in paragraph 10 of his.    Whilst neither of them spelled out the exact nature of the liability of the Lessees under clause 3(12), there is no doubt as to their conclusions.  I agree with them.  This disposes of the first two submissions of counsel for the Lessees summarised in paragraph 16 above.

22.	It is true, as counsel for the Lessees submitted, that liability under clause 3(12) was not pleaded by the Freeholders.  But it was clearly raised before the District Judge.  I have no reason to think that counsel for the Lessees was taken by surprise or that the Lessees were in any way disadvantaged by that circumstance.   The submission does not appear to have been repeated before the Circuit Judge.  The fact that the contention was not pleaded does not lead me to any different conclusion to that I have already indicated.

23.	I reach these conclusions without regret.  The proceedings before the Tribunal were necessitated by the refusal of the Lessees, two out of the six tenants of the Building, to pay anything in respect of the Freeholders’ costs of the repairs.   If, as the Lessees contended, the costs of the proceedings were only recoverable by the Freeholders under clause 1(b) then such proportion of the costs as was in excess of the Lessees’ rateable proportion would have been payable by the other four tenants who had paid their due share of the cost of the repairs and were not concerned in the proceedings before the Tribunal!

24.	At one stage the Lessees also complained that the costs of these proceedings should have been assessed as a small claim.  But there is nothing in this point either.  As counsel for the Freeholders pointed out, the claim was allocated to the fast track by consent.  The Lessees can hardly complain of a necessary consequence of that to which they had agreed.

25.	For all these reasons I would dismiss this appeal.
Lord Justice Hooper
26.	I agree.
Lady Justice Rafferty
27.	I also agree.