UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2014] UKUT 0510 (LC)
LT Case Number: LRX/100/2013

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – SERVICE CHARGES – works to upgrade fire alarm system – Leasehold Valuation Tribunal finding landlord contractually entitled to charge for such works (subject to any implied term preventing this) – LVT also finding landlord had complied with consultation requirements and that the costs were reasonably incurred upon works to a reasonable standard (so that there was no impediment under Landlord and Tenant Act 1985 as amended in making the charge) – question of whether LVT was correct in implying a further term limiting the sums chargeable to amounts which were reasonable for the tenants to pay and to items which (notwithstanding a contractual entitlement for the landlord to charge for such items through the service charge) it was reasonable to expect the tenants to pay for

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE
LEASEHOLD VALUATION TRIBUNAL FOR THE
MIDLAND RENT ASSESSMENT PANEL

BETWEEN:
                                                  THE ANCHOR TRUST                                    Appellant
and
                                                   MR TOM CORBETT (and Others)                      Respondents

Re: Flats at Elliott Gardens,
		Lickey Road,
Rednal,
		West Midlands,
		B45 8US

Before His Honour Judge Huskinson

Appeal determined upon written representations

© CROWN COPYRIGHT 2014

The following cases are referred to in this decision:

Finchbourne v Rodrigues [1976] 3 All E.R. 581
The Moorcock (1889) 14 PD 64 at 68

	DECISION
Introduction
1.	This is an appeal from the decision of the Leasehold Valuation Tribunal (LVT) dated 9 May 2013 upon the question of whether the appellant was entitled to charge the respondents, through the service charge provisions of their tenancy agreements, with the costs of upgrading the fire alarm system at the development at Elliott Gardens.  
2.	The development is a retirement complex comprising 36 residential units, namely 28 flats and 8 bungalows.  It is an older style development dating it seems from the 1960s.  The development was built to meet the special needs of retired people.  A typical tenancy agreement contemplated that the occupants may be people with low or no income.  The tenants all hold assured monthly tenancies with a requirement to pay rent and pay service charge.
3.	In August 2010 the appellant contacted the tenants (including the respondents, who comprise the tenants of 28 of the units) to advise that the fire alarms in the development did not comply with the latest standards and that they wished to upgrade the system at an estimated cost of just over £50,000.  The appellant made clear it was not proposing to charge all the money at once but instead intended to spread the cost among the tenants over the following 15 years, such that this would result in an extra service charge of £7.77 per month for each unit.  The work was carried out and the total cost rose to £57,311 resulting in a proposed charge of £8.85 per month for each unit for the next 15 years.  The tenants objected and made an application under section 27A of the Landlord and Tenant Act 1985 as amended to the LVT to determine whether the amount requested to be paid as service charge by the appellant was reasonable in accordance with legal requirements. 
4.	There were before the LVT copy agreements for six of the flats.  The LVT observed that there were minor differences in the wording of some of the agreements but the substance was similar.  The LVT continued in paragraphs 11, 12 and 13 as follows:
“…Clause 3(b) of the agreement says that the monthly charge is made up of three elements, rent, service charge and rates although the present application is only in respect of this one item of the service charge. 
The paragraph covering service charges says:
“This is your contribution towards the costs we incur, or expect to incur, providing services for your home. These costs may be incurred before, during or after the month we are charging you for.  An explanation of these charges is attached.  They include a contribution of a reasonable amount to a sinking fund to cover future costs.
We review the service charge each year according to the income we received and the costs we incurred during the previous 12 months.  We may also take account of any reasonable known or expected costs for the next 12 months.  When we review the service charge, any variation in the cost of any of the services provided to your home will be divided equally between you and other tenants receiving the services in question and living in similar Anchor homes…(our italics in both paragraphs).”
5.	The tenancy agreement also contained a schedule of services which stated:
“Not all our schemes have all these services – the range of services provided will depend upon the nature of each particular scheme.”
Within this schedule of services there was included in paragraph 5 under the heading “Provision for renewal of equipment.”  The following matters namely:
	“Fire detection alarm and smoke dispersal system
	 Fire-fighting equipment.”
6.	Various objections were raised by the respondents to the making of the proposed charge by the appellant (i.e. the charge phased over 15 years) in respect of the fire alarm works.  These objections included arguments that the new alarm system was unnecessary as the existing system had been upgraded in 2009; that the appellant had failed properly to consult the tenants regarding the proposed works; and that the works represented poor value for money.
7.	In response to these objections the appellant stated that fire safety standards had increased; that they were now covered by a 2005 Order; and that a fire risk assessment had been carried out in 2010 when it was found that the previous fire detection equipment at Elliott Gardens did not comply with the latest statutory requirements such that a number of areas needed upgrading including the fire detection and warning system, smoke detectors in common areas, emergency lighting and illumination to show alarm points and other matters.  The appellant contended that as a responsible landlord and a housing association it had no alternative but to comply with the report’s recommendations and upgrade the system.  As regards consultation the appellant said that it had fully complied with all the relevant requirements of section 20 of the 1985 Act.  As regards costs the appellant said that the work had been advertised and put out to tender.  
8.	The LVT analysed the question of whether the proposed service charges for the fire alarm system were recoverable under three headings, namely: were the charges recoverable as a matter of contractual liability upon the proper construction of the tenancy agreements; were the charges recoverable having regard to the statutory limitations upon and restrictions regarding the levying of service charges contained in the Landlord and Tenant Act 1985; and whether there was some common law restriction upon liability.  The LVT concluded on the first question that (subject to the question of an implied term, see below) the appellant was contractually entitled to make the charges.  As regards the second point the LVT concluded under section 19 of the Act that the work was “reasonably incurred” (I take this as a finding that the costs were reasonably incurred within section 19(1)(a)); that the works were carried out to a reasonable standard; and that the appellant had carried out full consultation with the tenants in accordance with statutory requirements.  The LVT found (in reliance upon the appellant’s specialist report) that the fire alarm system needed renewal and improvement.  However these findings were expressed by the LVT to be subject to the fact that the word “reasonable” appears twice in the relevant provisions of the tenancy agreement (see the words in italics which the LVT emphasised in the passage set out in paragraph 4 above).
9.	The LVT did not find that the proposed charge for the fire alarm works contravened the express contractual provisions of the tenancy agreement – i.e. the LVT did not find that either of the words “reasonable” which were expressly included in the relevant clause of the tenancy agreement (see paragraph 4 above) prevented recovery of the proposed service charge for the fire alarm works.  However the existence of these two words “reasonable” appears to have formed some part in the LVT’s reasoning which led it to its conclusions under the heading of “Common Law Liability” in paragraphs 29-34 of its decision which are in the following terms:
	“29. However, in addition to these tests, the work also needs to satisfy the over-riding requirement of a service charge that the expenditure has to be fair and reasonable in accordance with Finchbourne v Rodrigues [1976] 3 All E.R. 581 to be recoverable from the tenants.
30. We find that it fails the best because the parties cannot have intended that the tenants should pay such a high sum when entering into the Tenancy Agreement.  The sum of £8.85 per month may be a minor amount to employed members of the public but to the retired tenants living at the property who are required to be on low income to satisfy Housing Corporation requirements (per para 1 definitions in the Agreement), it could be a substantial sum.  This was one of the points made by Mr Corbett for the Applicants and on which Anchor had not responded.  We further note (although not referred to by the parties’ submissions) that it represents around 2% of the current single person’s national pension.
31. The Agreement twice referred to ‘reasonable’ costs in connection with the sinking fund and to give efficacy to the agreement, we import a further implied term of reasonableness to the costs referred to in the present application.
32. Unlike most of the other items of service charge in clause 5 of the Schedule (e.g. cleaning equipment, refuse containers, laundry equipment), we note from our own inspection that the fire detection equipment is hard-wired and effectively a fixture and fitting that is part of the building.  It is not a weekly consumable item and on the landlord’s claim it would be expected to last 15 years.  It would therefore be unreasonable to expect the tenants to pay for renewal of part of the landlord’s structure, even though it may be reserved by the lease.
33. We also note that there has to be a check on costs to ensure they are kept within reasonable limits, otherwise, as pointed out by the Applicants’ submission there would be a risk that the cost could become excessive and too expensive for the tenants, what Mr Corbett described in his Statement of Case as the ‘target market’.
34. For all these reasons we find the amount requested by Anchor for the improvements and replacement of the fire detection service of £8.85 per month for 15 years from each tenant to be unreasonable and irrecoverable.”
The appeal to the Upper Tribunal
10.	In granting permission to the appellant to appeal against the LVT’s decision the learned Deputy President stated as follows:
“The LVT’s decision was based on an application of the decision of the Court of Appeal in Finchbourne v Rodrigues [1976] 3 All ER 581 from which the LVT reasoned that it was an overriding requirement of a service charge that the expenditure has to be fair and reasonable, and that the application of that requirement in the circumstances of this case prevented the Applicant from recovering the cost of the new fire alarm equipment.  There is a realistic prospect that the LVT was wrong on either or both counts in view of its other findings.
Subject to the views of the leaseholders of the flats at Elliott Gardens, this appeal would appear to be suitable for determination on written representations as requested by the Applicant.
The Applicant’s application for permission to appeal will stand as its notice of appeal and statement of case.
The appeal will be dealt with as a review of the LVT’s decision and no new evidence will be taken.”
11.	The appeal has preceded to a decision upon written representations.  This appeal proceeds by way of a review of the LVT’s decision.  No new evidence has been received.  The appellant has made submissions in writing prepared by Mr Justin Bates of counsel in the Grounds of Appeal document and in the Reply document (submitted in response to the respondent’s submissions).  The respondents have submitted a document from Mr Tom Corbett entitled “Grounds for Our Objections” with accompanying documentation and also a letter dated 11 November 2013 with accompanying documentation submitted in response to the appellant’s Reply document.
12.	In summary, appellant’s submissions are as follows:
(1)	The LVT correctly determined certain matters (and in any event there is no appeal by the respondents against any of these determinations) namely: the replacement and improvement of the fire alarm system was properly chargeable as a service charge under contractual provisions of the tenancy agreement; the statutory consultation procedures had been properly complied with; there was no reason to believe that the works were not necessary; the works had been put out to tender and there was no reason to believe that the costs were excessive; the costs were reasonably incurred for the purposes of section 19; and the works were of a reasonable standard for the purposes of section 19.
(2)	The case of Finchbourne Limited v Rodrigues [1976] 3 All ER 581 is not authority for the proposition that there is an over-riding requirement at common law that service charges must be “fair and reasonable”.  All that Finchbourne v Rodrigues decided was that on the facts of that particular case it was appropriate to imply a term into the contract to such an effect, see the analysis of Cairns LJ.
(3)	In the present case there was no basis for implying any such term.  It was not necessary to do so in order to give business efficacy to the contract within the analysis in The Moorcock (1889) 14 PD 64 at 68.  The contract functions perfectly well without any such implications.  Further and in any event the present tenancy agreements were entered into against the background of the existence of the Landlord and Tenant Act 1985 which makes statutory provision preventing a tenant from being required to pay towards costs which are unreasonably incurred or which do not represent works of a reasonable standard.
(4)	The approach of the LVT amounts to a re-writing of the contract so as to exclude certain costs which were found to be within the scope of the contractual service charge provisions and which have been found to meet all statutory pre-requisites.  The LVT was wrong to do this. 
(5)	Having concluded that the appellant was contractually entitled to the sums claimed, that the appellant had complied with the consultation requirements, and that the sums were reasonable within the meaning of section 19, the LVT should have determined that the sum of £8.85 was payable each month as demanded.
(6)	The LVT’s order under section 20C of the Landlord and Tenant Act 1985 cannot stand if the LVT’s decision on the principal point is reversed.
13.	After receiving the respondent’s Grounds for Our Objections document the appellant replied by advancing in summary the following arguments:
(1)	Many of the matters raised by the respondents in their document constitute a challenge to aspects of the LVT’s decision which they have not obtained permission to appeal against nor have they appealed against.  These findings by the LVT on points favourable to the appellant’s case must stand.  
(2)	There was no overriding common law requirement that costs must be fair and reasonable such that a term to that effect had to be implied into the contract.  If there was such a common law requirement there would have been no need for Parliament to intervene by enacting section 19 of the 1985 Act.
(3)	Whether a term should be implied into a contract is a matter of fact in each individual case.  In the present case there is no basis for implying any such term.  There is no lacuna to fill and no suggestion that the contract will fail without such a term being implied.
(4)	The only basis upon which the LVT implied the term was that it could not have been the intention of the parties that tenants would pay such a substantial sum (see paragraph 30 of the LVT’s decision).  However it could not have been the intention of the parties that the appellant would subsidise the service charge costs (particularly not, as the rent is itself below market value).
(5)	The statutory provisions in sections 18-30B of the Landlord and Tenant Act 1985 as amended provide the extent of protection for tenants and is all that either party bargained for.  Those provisions were fully satisfied in the present case.  The LVT erred by adding an additional gloss – i.e. by implying some additional term on the basis of an alleged over-riding common law requirement.
14.	On behalf of the respondent Mr Corbett advanced the following points in the Grounds For Our Objections document: 
	(1). There was inadequate consultation of the tenants.
	(2). The LVT supported the arguments of the tenants that the fire alarm works were structural works and were not a variable item chargeable via the service charges.
	(3) The fire alarm system fitted in 2009 was an excellent system which gave very good service.  In substance the 2010 replacement works were unnecessary.  
(4) The costs were not reasonably incurred – the respondent observed that “to spend over £16,000 on each one bed-roomed property making marginal improvements to the fire detection system was, to put it mildly, throwing all caution to the winds”.  In short the works were unnecessary.
(5) Almost all the tenants were retired with many of them living on benefits.  The present is a David and Goliath situation.  Attention was drawn to the appellant’s operating surplus and to the level of the Chief Executive’s pay and benefits package.  It is encumbant upon the appellant to have due regard to their client base so as not to drive them into penury by saddling them with huge increases in service charges.
15.	In their letter of 11 November 2013 and accompanying documents the respondents repeated their request that the matter should be dealt with on written representations and they included the following further submissions:
(1)	They made further observations regarding the inadequacy of the consultation undertaken.
(2)	They contended that the 2009 fire alarm system did meet the relevant legislative requirements.
(3)	The appellant was acting unreasonably and with lack of understanding or compassion in seeking to saddle the respondents with this huge financial burden.
Discussion
16.	It is important to notice that the LVT made various findings of fact, favourable to the appellant, upon points in relation to which there is no appeal before me.  In particular the appellant is entitled to draw attention to and rely upon the favourable findings made by the LVT as recorded in paragraph 8 above.  In short, all the requirements of consultation under section 20 of the Landlord and Tenant Act 1985 and of “reasonably incurred” and of “reasonable standard” in section 19 of that Act were complied with.  Also upon the proper construction of the tenancy agreements, and leaving on one side the question of any implied term as found by the LVT, the charges for the fire alarm were contractually recoverable.
17.	Accordingly the LVT’s decision can only be upheld if the LVT was correct in its analysis upon what it called “Common Law Liability” in paragraphs 29-34 of its decision.
18.	Finchbourne Limited v Rodrigues was a case which was concerned with whether there should be implied into the particular tenancy agreement in that case a certain term (it may also be noted that the case had in any event been decided upon a separate point such that only brief consideration was given to the question of the implied term).  The court concluded that there must on the facts of that case be implied a term that the costs claimed were to be “fair and reasonable” because:
	“It cannot be supposed that the plaintiffs were entitled to be as extravagant as they chose in the standards of repair, the appointment of porters etc….  In my opinion the parties cannot have intended that the landlords should have an unfettered discretion to adopt the highest conceivable standard and to charge the tenant with it.”
	(Per Cairns LJ).
19.	However under the tenancy agreements with which this case is concerned the tenants have the protection of the Landlord and Tenant Act 1985.  This protection was not available to the tenant in Finchbourne v Rodrigues.  Applying the approach in Finchbourne v Rodrigues the question to ask would be whether, having regard to the terms of the present tenancy agreements and the operation of the Landlord and Tenant Act 1985, it can properly be said that:
	“…. the parties cannot have intended …”
that the appellant should be under no restrictions regarding the reasonableness of service charges beyond the contractual terms of the tenancies and the provisions of the 1985 Act.  The answer to this question is in my judgment plainly: No that cannot properly be said.  Adopting the test of the officious by-stander, if such an officious by-stander had asked the parties whether there should be a further restriction upon the appellant in levying service charges beyond the restrictions imposed by the contract and the 1985 Act, it cannot properly be said that both parties would immediately have responded “of course”.
20.	It may be noted that the term implied by the LVT goes not merely to the quantum of the charge (i.e. to the question of whether any charge for a particular item is unreasonably high) but also to the subject matter of the charge (i.e. to the question of what the charge was for).  Under the implied term as found by the LVT the term is to the effect that it is not sufficient for a particular item of charge to be contractually recoverable as an item that can be charged for and for it to be recoverable in accordance with the 1985 Act – it is also necessary that it is “fair and reasonable” for the parties to have agreed that this item could be charged for.  I see no justification for the implication of such a term which, as pointed out by representations on behalf of the appellant, effectively involves re-writing the provisions of the contract.  These provisions expressly contemplate that the service charge may include charges for the renewal of equipment for fire detection alarm and smoke dispersal system and for fire fighting equipment.
21.	Bearing in mind this express provision in the tenancy agreements I can see no justification for implying a term that such items can only be charged for provided the item cannot be described as equipment which “is hard-wired and effectively a fixture and fitting which is part of the buildings.”
22.	Two further points may be noted.  First even if (contrary to my conclusion) there could be found a common intention that the parties could not have intended that the tenants should pay as much as £8.85 per month for a fire alarm system, that is no reason to conclude that the parties must have intended that nothing whatever was payable by way of service charge for such an item.  However the LVT has concluded, wrongly in my judgment, that nothing whatever is payable.
23.	Secondly, in paragraph 32 the LVT notes that the fire alarm system is to last for about 15 years and that it would therefore be unreasonable to expect the tenants to pay for renewal of such an item (which the LVT considered to be part of the landlord’s structure) even though it may be reserved in the lease.  If the appellant had sought to recover the entirety of the fire alarm costs, which was expenditure on equipment which was to last for 15 years, in one single year’s service charge then further arguments might have arisen.  However the appellant is not seeking to do this.  The appellant is seeking to recover through the service charge over a period of 15 years the cost of installing equipment which it is estimated will last for 15 years.  Even if there were some kind of implied term as found by the LVT, I do not see why a recovery on this basis by the appellant would be unreasonable.
Conclusion
24.	In the result therefore I allow the appellant’s appeal.  I find that the cost of the fire alarm works is properly recoverable from the respondents through the service charge provisions at the rate of £8.85 per month.
25.	The LVT made an order under Section 20C of the Act.  It stated that its reasons for doing so were “As the cost of the work is irrecoverable we grant a s.20C Order in the tenants’ favour.”  Bearing in mind that I have reversed the LVT’s decision and concluded that the cost of the work is recoverable, I conclude that in those circumstances, the section 20C Order cannot stand.  I therefore quash the section 20C Order.
								Dated:  19 November 2014
								His Honour Judge Huskinson