This time last year, we reported on the Upper Tribunal’s decision in Avon Ground Rents -v- Cowley and others [2018] UKUT 92 (LC) (see here).

In that case, the UT found that the residential leaseholders were not required to make any contribution towards the costs of remedial works, as the NHBC was liable to pay the full amount of the costs of the works apportioned to the private let residential leases. The UT held that the full cost of the remedial works was not a reasonable advance payment in circumstances where payment was anticipated by the NHBC.

The freeholder appealed the UT’s decision to the Court of Appeal, who handed down their judgment at the end of last month.

The Court of Appeal’s decision

The Court of Appeal upheld the earlier decisions of the UT and the First-Tier Tribunal, and held that credit must be given to the residential leaseholders for the sums anticipated to be received from the NHBC, such that the leaseholders did not have to pay any on-account service charges in respect of the amounts to be received from the NHBC.

The Court of Appeal was not persuaded that any third party payment should only be taken into account when they are received and applied as a balancing charge back to the leaseholders at that stage.

In approving the approach taken by the UT, the Court of Appeal said that :-

“whether an amount is reasonable as a payment in advance is not generally to be determined by the application of rigid rules but must be assessed in the light of the specific facts of the case. A number of considerations ought or may properly have to be taken into account in determining the question of reasonableness under section 19(2) which would include the time at which the landlord would, or would be likely to, become liable for the costs and how certain the amount of those costs is”.

The Court of Appeal stressed that it is for the FTT to reach a decision in each individual case based upon the evidence, and the question of whether the possibility of a third party payment can be taken into account when deciding what might reasonably be demanded on account will depend on the specific facts of the individual case.

The Court of Appeal held that it was not necessary for the third party payment to be certain. The Court of Appeal said that if certainty were required, that would constrain the discretion of the FTT when in reality what is required is a test which allows account to be taken of all relevant matters and appropriate weight will be attributed to those matters. This is especially so given that the purpose of the statutory provision under Section 19(2) of the Landlord and Tenant 1985 is to protect leaseholders from unreasonable demands.

The Court of Appeal went on to say that to disregard the possibility of a third party payment was to ignore the reality of many situations, and that it would otherwise result in unnecessary expenditure by leaseholders having to pay higher service charges than were reasonable and potentially having to embark on lengthy and costly litigation to recoup those overpaid charges.

Three relevant factors were taken into account in the present case :-

1.            An effective policy of insurance was in place in respect of the repair works which would cover the majority of the works;

2.            The freeholder had agreed to give credit to the leaseholders for any sums received from the NHBC by way of insurance; and

3.            The amount of the insurance contribution was not hypothetical (the sums payable had been identified).

Conclusion

This remains and interesting decision, particularly the concept that the mere possibility of a future payment from a third party may render an advance service charge payment unreasonable. The Court of Appeal was at pains to stress that each case will turn on its own facts and that there were no “rigid rules” to be applied when considering whether a service charges is reasonable, thereby building in flexibility for future decisions.

However, it has little benefit to landlords or management companies when compiling a budget and deciding whether to include the cost for future works which may be funded by a third party; in most cases, an insurer.

The only advice that can be given in such circumstances is for the landlord or management company to make a pre-emptive application to the FTT, for a determination as to whether those costs are reasonable, taking into account the evidence in terms of the likelihood of such a payment being made, how much and when.

Should you have any questions regarding this Legal Update, please contact Faye Didcote on 01435 897297 or Faye.Didcote@kdllaw.com.

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