Debra Wilson (née Mo), Partner
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In 1995, a successful press campaign drew attention to the position of leaseholders, particularly flat owners in London and the south-east, who claimed that they were not receiving quality service from their freeholders and that service charges were exorbitant. This was followed up by the government’s 1995 policy paper An End to Feudalism, which encapsulated in its title the power struggle that had been going on for years in the leasehold system.
Lessee owner-occupiers holding the greater stake of the equity in a building, were often at odds with their recalcitrant or remote freehold landlord. The change to the balance of power in favour of leaseholders has taken about seven years, culminating in the passing of a series of five commencement orders over the course of 2002–05, under the Commonhold and Leasehold Reform Act 2002 (CLRA 2002).
Leaseholders are undoubtedly now more aware of their rights to challenge service charges. They have the support of the government-funded Leasehold Advisory Services, which provides a good source of information and preliminary help to leaseholders. The difficulties encountered by lessees inenforcing those rights continued, however, despite amendments by the Housing Act 1996, which made a number of important changes to lessees exercising their rights.
Before the Housing Act 1996 (HA 1996), only a county court had jurisdiction to deal with service charge and related disputes. HA 1996 was the catalyst towards transferring jurisdiction over such disputes from the county court to the Leasehold Valuation Tribunal (LVT). As time has proven, however, further reforms have been required if the LVT was to have an impact.
Leasehold Valuation Tribunal
The LVT derives from the Rent Assessment Committee (RAC) established to hear appeals against fair rents under the Rent Act 1977. The LVT was conceived to deal with valuation and other related matters arising from enfranchisement claims. The origins of the LVT’s power to deal with service charge come from the Landlord and Tenant Act 1985 (LTA 1985). Further, under the Landlord and Tenant Act 1987, the court was also given additional power to appoint managers of properties (for cause). These powers were transferred to the LVT by the Housing Act 1996. The tribunal consists of a panel of experts comprising three members, who are usually surveyors or lawyers. The LVT and RAC are collectively known as the Residential Property Tribunal Service. There are offices in London, Manchester, Birmingham, Cambridge and Chichester. In London, there are dedicated hearing rooms at Alfred Place, London WC1. Outside London, LVT hearings are often held in hired rooms.
The LVT is a quicker and cheaper means to a remedy than the court. To ensure the smooth running of procedures, the LVT has a general power to order costs against a party who has behaved "frivolously, vexatiously, abusively, disruptively or otherwise unreasonably". Currently an award of costs under this power is limited to £500 (CLRA 2002, Sch 12 para 10(3)(a)). Lessees often found it difficult to exercise their rights because of the prohibitive costs of court proceedings. The LVT offers a relatively straightforward process, and it is generally easier to bring a claim in the LVT than the court for the following reasons:
- A wider number of factors can be cited than a judge would allow (see A case in point at the end of this article).
- An application form to the LVT is relatively easier to complete. There are prescribed application forms for the common disputes that the tribunal encounters.
- The hearing is more informal than court proceedings. The expert panel can act in a more interventionist way than in a usual court hearing.
The limited jurisdiction previously allowed to the LVTs had, however, led to fragmentation between the court and tribunal as to what leasehold disputes were to be heard between them. The LVT’s jurisdiction was confined to deciding whether service charges are reasonable. Section 19(2a) of LTA 1985 enabled an application to be made to the LVT in order to determine if service charges had been reasonably incurred, or whether the services were provided to a reasonable standard. It did not, however, enable the LVT to decide on any issue as to whether or not a leaseholder was liable for such charges.
The court had the power to transfer a case to the tribunal on any question arising on reasonableness of service charges. The case of R v London LVT ex parte Daejan Properties Limited 2002 HLR 25 held, however, that there was no jurisdiction to determine the reasonableness of any costs where service charges had already been paid.
Invariably, this dichotomy between the court and tribunal powers meant that where a dispute raised questions about issues in addition to the reasonableness of service charges, the court would retain jurisdiction to decide the entirety of the dispute. This was often done in the interests of saving costs. It limited, however, the potential for cases to be dealt with by the LVT.
Changes to the LVT
CLRA 2002 introduced important changes to the LVT’s jurisdiction. The raft of substantial changes are now largely in force. The notable changes are as follows:
Assessment of charges
The LVT can now determine whether or not leaseholders are liable to pay service charges, as well as the reasonableness of such charges (s 155, CLRA 2002). This effectively allows the LVT to determine matters of lease construction, which is a major departure from what has predominantly been court business. Furthermore, the LVT is now able to consider service charge disputes where a tenant has already paid the sum in dispute. The LVT cannot, however, order the repayment of any money found not to be payable. This can only be achieved in the county court (see s 27A(2), LTA 1985).
Determining statutory compliance
The power to determine whether a landlord has complied with statutory consultation procedures represents a further transfer of the court’s role to the LVT. The tribunal can now consider applications for waiver of the requirement for consultation (s 20, LTA 1985) in cases where the LVT considers it reasonable to grant dispensation from the procedures (see s 20ZA, LTA 1985).
Adjudicating on issues of forfeiture
A major change came into force on 28 February 2005 (CLRA 2002 (Commencement No 5 and Saving and Transitional Provisions) Order 2004 (SI 2004/3056)) to limit forfeiture proceedings being brought by a landlord. Under the well known provisions in s 146 of the Law of Property Act 1925, landlords were able to serve a forfeiture notice, which often scared leaseholders into compliance. The new reforms (CLRA 2002, s 168(1)–(2)) modify s 81 of the Housing Act 1996 to prohibit the commencement of forfeiture proceedings, including the issue of a notice under s 146, in respect of non-payment of service charges or administration charges. "Administration charges", payable for such matters as grant of approvals or those incurred in enforcing leasehold obligations (CLRA 2002: s 158 and Sch 11), are now additional matters that can be challenged in the LVT. The LVT can vary a lease to deal with charges or unreasonable formulas, so as to prevent future disputes arising on the same question.
Landlords will have to reconsider their approach to leasehold management. They will no longer be able to use the blunt instrument of forfeiture proceedings to make tenants comply. The LVT affords a real opportunity for the parties to set the record straight on service charge disputes. Seeking legal advice early in a dispute is to be encouraged, as is considering whether mediation is suitable. The LVT has a pilot mediation scheme.
CLRA 2002 prevents forfeiture for small amounts. Now landlords cannot forfeit for failure to pay sums consisting of rent, a service or administration charge (or a combination) unless the sum exceeds the "prescribed sum" (£350) or has been unpaid for a "prescribed period" (three years).
A s 146 notice can not be served unless:
- the breach is first approved; or
- the charge has been agreed or admitted by the lessee, a court or LVT.
Part-payment of a service charge in dispute does not constitute agreement. In practice, this means only a clear agreement, arising either from the compromise of a court action or as a result of successful mediation, will oust the LVT’s jurisdiction.
If the reason for forfeiture is therefore the failure to pay service charges, the LVT must first make a determination on what is due, and as to whether it is a reasonable charge.
The commencement of forfeiture proceedings for other breaches is also prohibited unless a court or LVT has determined that the breach occurred. Even then, a s 146 notice cannot be served until 14 days after the determination.
There is a greater potential now for the court to transfer to the LVT much of the proceedings that relate to the determination of issues over which the LVT has jurisdiction. It will be more common for the court to adjourn matters pending the determination of the LVT proceedings. Once those issues have been determined by the LVT, the court will then give effect to the LVT’s determination in the court order.
LVT decisions
LVTs are not bound by their own decisions. They are bound by decision-s of the High Court, Court of Appeal and the House of Lords. An appeal from a decision of the LVT is made first to the tribunal itself, and then to the Lands Tribunal. The LVT will in practice follow the decisions of the Lands Tribunal. The main source of reported cases are from the Leasehold Advisory Service and Residential Property Tribunal Services websites (www.lease-advice.org and www.rpts.gov.uk/html/decisions.htm). Cases are rarely reported elsewhere.
New challenges
The LVT’s caseload is increasing. This will bring new challenges as a result of its increased jurisdiction on matters such as the interpretation of leases, or applications for the variation of leases. There will be a shift in the power balance between landlords and leaseholders through the new rights and obligations under CLRA 2002. It is hoped that the new obligations on landlords will reinforce the position of the good landlord, and drive out those whose tactics were basically reliant upon threatening forfeiture.
The government is keen to expand the jurisdiction of the LVT even further. There have been discussions about the LVT becoming a specialised section of the couty court. Sir Andrew Legatt’s Report of the Review of Tribunals March 2001 recognised, however, that the existing overlapping jurisdiction between the court and LVT on property disputes made it difficult to arrive at a comprehensive solution, as changes to the underlying law would be required. Reform to the LVT was not therefore included in the Legatt report, as it was considered that the Law Commission’s help should be enlisted to remove the overlaps, when the commission makes its proposals for reform of the substantive law of housing and tenancies. Developments are, however, likely to impact further on the powers of the LVT.
A case in point
A recent case involved a freeholder, the London Borough of Southwark, deciding to undertake a £1.5 million programme of improvements to the first two of six tower blocks on the Brandon estate. The improvement programme included fitting new UPVC windows. The leaseholders objected to the proposal to replace the original softwood windows, which are a common feature of medium/high-rise public housing built in the 1950s and 1960s.
The objections were various among the leaseholders, ranging from environmental grounds, aesthetics and costs. One of the leaseholders, Sally Redway, an architect, applied to the LVT motivated by the aesthetics of the windows. She was adamant that the old single-glazed window should never have been replaced. In Housing Today ("Glazed and confused", 4 March 2005, www.housing-today.co.uk) she was quoted as saying: "I couldn’t believe my luck when I found the flat. It is architecture of quality. The windows were integral to that—they comprised a whole external wall, forming the façade of the flat. All that has changed and I find the new windows aesthetically abhorrent."
Five leaseholders on the estate successfully challenged the council’s decision to replace the windows. The LVT accepted the evidence presented by a surveyor for the leaseholders, who noted that the windows were still in a fair to good condition, so the works were unnecessary. The LVT held that the council had failed to prove that it was necessary to replace the windows. The tribunal found that the council’s decision was made with little regard as to the actual state of the windows, but had been premised on standard industry text, which stated that the maximum life of timber windows was 35 years.
Southwark could not charge each resident £5,200 to cover the cost of replacing windows. The council was limited to making each leaseholder pay a standard maintenance cost of £1,644.
This case illustrates how landlords will have to re-think their management of leasehold properties. Assumptions cannot be made when seeking to incur costs that are to be sought by way of service charges against lessees; even if, as was assumed by Southwark, that there would be no objection to what the freeholder considered to be an improvement.
Debra Wilson is a partner with Anthony Gold Solicitors. For further information email Debra or call 020 7940 4000.
Useful websites:
www.lease-advice.org
www.rpts.gov.uk/html/decisions.htm
www.landstribunal.gov.uk
