Fairness … is to be achieved by the avoidance of double recovery
On 4 April 2017 the Court of Appeal heard a freehold owner’s appeal from the Upper Tribunal regarding double recovery of a service charge (Sheffield City Council v Hazel St Clare Oliver). This case will be interesting for freeholders, landlords and long leaseholders because the court discussed when a cost will be incurred by the landlord and why service charges should be off-set by funding or contributions received from third parties. Many councils and public housing bodies receive Government funding towards costs of refurbishment and improvement works. In this case, the Decent Homes Programme and the Community Energy Saving Programme (“the CESP”) provided nearly £3million towards the refurbishment of several blocks of flats.
Ms Oliver lived in a block of flats owned by Sheffield City Council (“the Council”) on an estate in Sheffield. The estate consisted of around 1000 flats, 77 of which were let on long leases. Ms Oliver became a long leaseholder after purchasing a 125 year lease pursuant to section 129 of the Housing Act 1985.
Under Ms Oliver’s lease, she was required to pay, from time to time as part of the service charge, a reasonable part of the costs and expenses incurred by the Council in carrying out repairs and improvements to the structure and exterior of her flat and the block her flat was located in.
In June 2011 the Council undertook a large scale refurbishment of the estate, which included repair and improvement works. The works completed in August 2013 costing over £11million. Under the service charge provisions, the Council sought to recover £615,323.64 from the long leaseholders.
The Council sought to recover £9,378.72 from Ms Oliver. This amount included the exterior cladding, a contribution towards the costs of the work to the block, a contribution to the costs of work for the super-block in which the block was located as well as a small admin fee. The Council did not charge Ms Oliver in respect of replacing her boiler and thermostatic radiator valves. The CESP granted £2,210.41 for the work done specifically to Ms Oliver’s property. In addition to this, there was a ‘whole house bonus’ for the works carried out, meaning an uplift of 100% to the grant.
Ms Oliver applied to the Leasehold Valuation Tribunal for the Northern Rent Assessment Panel (“the LVT”) under a more general challenge to the recoverability of this service charge and whether it was reasonable. Ms Oliver failed on the main issue of recoverability. Appealing this decision to the Upper Tribunal, Ms Oliver failed on this point again; however, the Upper Tribunal held that prohibition of double recovery was necessary to interpret the terms of the lease. Ms Oliver was awarded a significant reduction to her service charge. Further, the Upper Tribunal held that costs in relation to the works were not incurred if they were subject to CESP funding.
The Upper Tribunal held that Ms Oliver was entitled to set off her service charge by the monies received by the Council from third parties in relation to her flat. In regard to the ‘whole house bonus’ it was held that Ms Oliver could offset her service charge with 50% of this benefit because it applied to works which she paid for and also works which the Council did not charge for. If the Council had charged for all the works to her flat, it is likely that Ms Oliver would have been entitled to offset her service charge with the entire bonus.
The Council appealed to the Court of Appeal. The main issue in this appeal was whether a Council was prohibited from double recovery of a service charge.
The Court of Appeal dismissed the appeal. The appellant argued that in the absence of a clause in the lease prohibiting double recovery, it should be permitted. Lord Justice Briggs drew comparisons to recovering insurance monies, enforcing guarantees or the award of damages. It was held that it would be unfair, under the lease, to allow double recovery of the service charge. In addition, it was found that double recovery was prohibited “upon the simple basis that the Lease would otherwise lack common sense”.
In regard to the meaning of ‘incurred’, the Court of Appeal held that the Upper Tribunal was incorrect to use interpretation of this word under the lease to avoid double recovery. Instead, the court sought to rely on the fair proportion due under the lease and that this must give credit to the CESP funding received in relation to Ms Oliver’s flat. Lord Justice Briggs held: “Fairness in this context is to be achieved by the avoidance of double recovery.”
When considering the fair proportion of Ms Oliver’s service charge, the Court of Appeal would have used a different calculation than simply reducing the benefit of the ‘whole home bonus’ by 50%. However, it did not depart from the decision of the Upper Tribunal because their calculation would not produce a different monetary outcome.
This decision is unlikely to be welcomed by councils and public housing bodies. Frequently left to cover substantial refurbishment and improvement works, double recovery helps fund irrecoverable costs because many flats may be subject to social housing tenants. Double recovery of service charges is unlikely to be permitted under most leases, leaving large sums spent on works to be recovered elsewhere.