Lessee loses fight against local authority’s increased management charge

Blackpool borough council has triumphed in a legal row over whether they can claim payment for “discretionary services” in the annual service charge due from lessees. The Court of Appeal dismissed an appeal against a ruling by the Upper Tribunal (Land Chamber) that the council is entitled to include certain management/administration charges, which it was not obliged to provide but did nonetheless perform for lessees, under the standard leases granted to its lessees. Initially, one of those lessees, Ian Morris – who took action after the annual “management charge” under his lease tripled in 2011 – had succeeded before the Land Valuation Tribunal for the Northern Rent Assessment Panel (LVT). The LVT had taken the view that, in reality, the council was seeking to charge for the cost of carrying out its functions as a local housing authority, rather than for the execution of its contractual obligations under the lease, and found that it could not charge for “discretionary services”. It held that the management charge claimed of £194 was unreasonable, and that a fixed fee of £50 would be a reasonable management charge for the service charges from 2002 onwards. It ordered that any overpayment should be returned. However, Judge Huskinson, who overturned the LVT decision in the Upper Tribunal, found that the council was entitled to charge for the management costs of discretionary services. Gloster LJ said that the council, as the local housing authority, is the freeholder of almost 6,000 residential properties in the area, with approximately 5,500 of those properties rented to secure tenants paying weekly or monthly rents and the rest, around 400, held upon long leases at low rent by lessees, who have been enfranchised pursuant to the right to buy legislation. Blackpool Coastal Housing Ltd, an arms-length management organisation (ALMO), was responsible for the management of all the council’s tenanted properties, and funded through the payment of a management fee. Describing the charges for management costs that form a significant part of the annual total paid by lessees, she said: “The council charged the lessees for the management costs of ‘leaseholder services’, which included costs relating to direct staff costs, including the charge of a significant proportion of the time worked by senior staff and a lesser proportion of the time worked by business support assistants, the finance team, the human resources team, the information technology team, the anti-social behaviour team, the customer involvement team and the repairs hotline. Service costs and desk costs of some of these teams were also included.” Mr Morris acquired his flat at 42 Molyneux Drive, Blackpool, upon a long lease term of 125 years on 16 December 2002, pursuant to the right to buy provisions of the Housing Act 1985. In 2002, he paid a management charge of £50.50, which rose to £65.64 by 2010. The council then commissioned a survey to assess whether the amount being charged to lessees was appropriate, and as a result of the findings, the council raised its management charge. In April 2011, Mr Morris was sent an invoice for £435, which included a management charge of £194.78. Dismissing Mr Morris’ appeal against the Upper Tribunal decision, Gloster LJ said that she largely agreed with the reasons given by Judge Huskinson. She said: “The critical issue of construction is the effect of paragraph 14 of the Seventh Schedule. That schedule sets out the lessee’s covenants. Under the second part of paragraph 14: ‘Any costs or expenses incurred by the council preparing or supplying copies of such regulations or in doing works for the improvement of the Property, providing services or employing gardeners, porters or other employees shall be deemed to have been properly incurred by the council in pursuance of its obligations under the Eighth Schedule hereto notwithstanding the absence of any specific covenant by the council to incur them.’ “Accordingly, the question is whether the management costs of what have been described in the LVT and the UT as ‘discretionary services’ (i.e. services which the council was not obliged to provide but did nonetheless provide for lessees) come within the remit of the Eighth Schedule and were chargeable to the lessee pursuant to clause 3(i)(d).” She said that the exercise of contractual interpretation involved in the case was “a good example of the importance of the application of commercial sense and the consideration of the document as a whole”. And finding that the charge could be claimed, she went on: “Although I have little doubt that a provision conferring a discretionary power on the council to provide services could have been more elegantly placed in a separate provision in the main body of the lease, or indeed in the Eighth Schedule itself, coupled with appropriate wording preventing the giving rise to any obligation to provide such services, nonetheless, despite its somewhat unusual location, the sense of the provision is clear. “The relevant wording in the second part of paragraph 14 is plain; read in the context of the other provisions of the lease, it would objectively convey to a reasonable person, having all the knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, that, despite the absence of any obligation on the council to provide the particular service in question, a discretionary service in fact provided to a lessee would be deemed to have been properly incurred in pursuance of the council’s obligations under the Eighth Schedule, and that such lessee would accordingly be obliged to pay any management costs involved in their provision, pursuant to sub-clauses 3(i)(b) and (d) of the lease.” She added that the fact that sub-clause 3(i)(b) refers to “the services mentioned in the Eighth Schedule hereto” could not sensibly be construed as excluding services which, by virtue of paragraph 14 of the Seventh Schedule, are “deemed to have been properly incurred by the council under the Eighth Schedule”. Morris v Blackpool Borough Council and anr Court of Appeal (Jackson, McCombe and Gloster LJJ) 24 October 2014 Peter Knox QC (instructed by Fylde Law) for the appellant Sebastian Clegg (instructed by Blackpool borough council) for the respondents