In March of this year we reported on the decision of the Upper Tribunal (“UT”) in Stampfer -v- Avon Ground Rents Limited [2022] UKUT 68 (LC) in which the UT overturned a finding of the FTT that a landlord could charge an administration fee of £30 plus VAT for serving a rent demand notice pursuant to section 166 CLRA2002.  See our March 2022 Legal Update here. 

The same case was appealed by the unhappy landlord ("Avon") to the Court of Appeal ("CA") whose decision was handed down on 24 October 2022 and upon which we report now.  See the full CA decision here.

There had initially been three aspects of the case for the FTT to decide:-

1. Was Avon’s administration fee actually for the drafting and provision of the rent demand (as distinct from some other service)? - The FTT and UT had found on statements provided in those actions that that is exactly what the fee was for - despite contrary assertions by Avon;

2. Was the fee of £30 plus VAT for the work involved in the preparation of the s.166 notice reasonable, pursuant to the requirements of s.19 Landlord and Tenant Act 1985?  Whilst the FTT had found that the fee was reasonable, the point became academic if no charge could be raised under the provisions of the lease (see 3 below).  That said, note below the comments of the CA on the question of reasonableness in any event; and

3. Did the lease provide a contractual basis enabling Avon to charge the fee for preparation and service of the s.166 notice?

Questions 1 and 2 were appealed but permission to run those issues was refused both by the UT and the CA.  Accordingly, the earlier findings of the UT on those points stood, that being that Avon’s fee was for the preparation and service of the s.166 notice rent demand and that the question of reasonableness only arose if the fee was payable in the first place.

So, the only question before the CA was - Did the lease provide to the landlord with a contractual basis to charge the leaseholder a fee of £30 plus VAT for drafting and serving the s.166 notice?

The lease contained the following provisions:

“The Tenant must pay to the Landlord the full amount of all costs, fees, charges, [etc etc] … incurred by the Landlord in relation to or incidental to: …

5-10.2 the contemplation, preparation and service of  notice under the Law of Property Act 1925 Section 146, or the contemplation or taking of proceedings under Sections 146 or 147 of that Act …

5-10.3 the recovery or attempted recovery of arrears of rent or other sums due under this Lease…”

and

“If the Landlord or a person connected with the Landlord or employed by the Landlord attends (where permitted by law) to:

7-2.3.2.1 the supervision and management of the provision of services for the Building,

7-2.3.2.2 the preparation of statements or certificates of the Landlord’s Expenses,

7-2.3.2.3 the auditing of the Landlord’s Expenses, or

7-2.3.2.4 the collection of rents from the Building

then an expense is deemed to be paid or a cost incurred by the Landlord, being a reasonable fee not exceeding that which independent agents might properly have charged for the same work.”

Based upon the above lease terms, the CA agreed with the UT in finding that the lease did not provide to the landlord a contractual means to raise a fee for the specific administration charge here.  Helpfully, the lease terms are of a type seen in most leases and so the decision will have wide ranging relevance.

The rationale behind the decision is a simple one.

The UT correctly highlighted that the effect of s.166 of the 2002 Act is that rent cannot be collected unless and until the s.166 notice is served. In other words, the covenant in the lease to pay rent  imposes only a potential or future liability on the leaseholder, which does not become an actual liability until the s.166 notice is served. The effect of giving the notice is therefore to make payment due on the date specified in the notice, which cannot be earlier than either the date specified in the lease or 30 days following service of the s.166 notice.  

If no s.166 notice is served, rent never becomes due, notwithstanding any contrary provision in the lease (ie, that rent is payable whether or not demanded - such provision is overridden by the content of s.166 CLRA2002).

There is a difference between “making the rent due” and “collecting” it. Serving the s.166 notice turns the lessee's potential liability to pay rent into an actual liability later, on expiry of the notice period (not less than 30 days after the service of the notice). That is a necessary prerequisite to the collection of rent, as without it the rent does not become due and cannot be collected at all, but it is not itself the collection of rent. It is a logical prior stage. 

Accordingly, it cannot be said (for clause 5-10 to apply) that the rent was in arrears at the date of the production of the s.166 notice as the rent did not fall due until at least 30 days after its production and service.  The same logic applies to clause 7-2 because rent is not due, and thus collectable, until (at least 30 days) after the s.166 notice has been served.  Accordingly, it cannot be said that the production and service of the notice is the act of collection either.

Both UT and CA decisions referred to the fact that whilst it was open to the parties to have agreed and included in the lease a provision that would specifically enable the £30 charge sought, that provision would need either to be express or, at the very least, take the form of a reference to ancillary or incidental costs.  As there was no such reference in Mr Stampfer’s lease, the charge could not be due.

Reasonableness

Interestingly, the CA commented, but notably has not made judgment (as the point was not actually before them), on the issue of reasonableness in respect of the £30 plus VAT per leaseholder, per half yearly demand for what the CA considered would be an automated or semi automated not “very difficult or time-consuming, involving little more than the press of a button or two” process. 

They considered that the ability to raise such a charge would come under clause 7-2.3 of Mr Stmafer’s lease and that those costs were subject to two separate limitations for the protection of lessees, namely:-

• that they be reasonable (contractually and by virtue of s.19 LTA 1985); and

• that they not exceed what independent agents might properly have charged (and, in any event, limited to what is reasonable by s.19 LTA 1985 above);

Accordingly, even if an independent agent would in fact have charged Avon £30 + VAT per notice, it does not follow that it would have been reasonable for Avon to charge or recharge the same amount to the leaseholder, whether it was merely passing on to the leaseholders a cost that it, itself, had incurred to the agent appointed to do the work or whether it had done that work itself.  The sum payable by the leaseholders would depend on evidence as to what work by Avon/Avon’s agent was actually involved and an assessment of what fee would be reasonable for that work.

Conclusions

Whilst this decision is based upon the specific terms of the specific lease relating to the leaseholder who challenged this administration fee, it is fair to say that Mr Stampfer’s lease (on this issue at least) contains provisions which are common to most leases.  As we said in our Legal Update in March, it would be, in our experience, unusual for a lease to provide a basis that would enable the landlord’s time for issuing a s.166 demand to be charged as a separate expense.

Whilst a managing agent’s agreement with its landlord client might enable a charge to the landlord for such work within their management fee, it is not the case that that all (or any) of those costs can simply be passed on to the leaseholders (either as a direct re-charge or as a service charge expense), and the landlord should give careful consideration to what the lease actually provides for before seeking to pass a charge to the leaseholders. If in doubt, legal advice should be sought in order to avoid a potentially costly FTT challenge.

On the point of reasonableness, it has always been the case that, where a charge is raised, the landlord must be capable of justifying the calculation of that sum.  Accordingly, where the charge relates to time spent or a service provided, it would be wise to work out and retain a record of:-

-          what work was actually involved in the provision of that service;

-          who undertook each part of the task;

-          their respective qualification/experience; and

-          relevant hourly rates. 

If the reasonableness of the charge is ever disputed, you will have a clear record of what was done, by whom, at what rates and thus an explanation as to how you worked out the (inevitably rather round looking) fee charged.

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