Property ManagerFILE September 2011

Property Management Alliance “State of the (Property Management) Nation” Annual Survey

Brethertons has conducted the first annual “State of the (Property Management) Nation” survey amongst members of the Property Management industry. The firm undertakes a considerable amount of work within Property Management and we believe that now is an appropriate time to conduct some sector research to get an effective snapshot of what the industry is like as of Summer 2011.

Our research team spent two weeks contacting those companies that registered to take part, compiling the responses and collating the information into a report which will be distributed to all those who participated in the survey.

Topics covered included:

The results provided very interesting reading and raised many surprising points. The exercise seemed to prove valuable to all those involved and we propose undertaking the State of the (Property Management) Nation Survey each summer.

We will be inviting our Property Management Alliance members to take part again next year.

To find out more about our Property Management team visit the Brethertons website at www.brethertons.co.uk or, if you have a case you would like to discuss, contact Alison McCormack The Head of Property Management  01295 270999 or  email

 alisonmccormack@brethertons.co.uk

Have you got Section 20b sussed?

Generally, service charges must be demanded within 18 months of being incurred by the landlord.  Alternatively, within the same 18-month period, the tenant must be notified in writing that the costs have been incurred and that they are required, under the terms of the lease, to contribute to them by payment of a service charge i.e. the Section 20B notice. 
 
The provisions, however, do not have any application where:

• payments on account are made in respect of service charges;
• the actual expenditure does not exceed the payments on account; and 
• no further requirement for payment is made, or needs to be made.

The provisions do, however, have a very limited application where (as in many leases) service charges are payable on account, with a subsequent balancing charge.
 
So for example, if  under the lease terms  the “on account” sums were insufficient, and a balancing payment was needed, then the correct approach is to work out:

1. the date at which the on account payments had been exhausted;
2. the date of the demand for the balancing payment; and, 
3. to disallow only those charges that were both incurred after the date in (1) and more than 18 months earlier than the date in (2).  

This is the approach that has recently been held in the Holding and Management (Solitaire) Ltd v Sherwin [2010] UKUT 412 (LC). 

This approach was further clarified in a recent High Court decision delivered on 29 June 2011 in London Borough of Brent v. Shulem B Association Limited in which the High Court has strictly applied the statutory legislation on the 18-month time rule. 

Following this decision, landlords and managing agents should take extra care when sending out service charge demands and notifications to recover service charges from residential long lessees as technical errors could lead to non-recovery of significant sums.

London Borough of Brent v. Shulem B Association Limited

The landlord, Brent Council owns five blocks of flats in Willesden, north-west London.  Shulem is a tenant under long leases for 15 flats within the blocks. 

The leases require the tenants to pay a service charge to cover the usual repairing covenants.

In 2003, the landlord decided to carry out major works. Estimates were obtained and the Section 20 consultation process was undergone.  In March 2004 tenants were informed of the proposed works and given a breakdown of likely costs – circa £19,000 per flat.

Works began in 2004 and were completed by April 2005.  The cost of the works was £640,000 but the Landlord did not serve a formal demand on the lessees based on the actual cost of the works until December 2006.

On 23rd February 2006 the landlord invoiced tenants for their proportions of the costs based on estimates as the actual costs were yet to be calculated. 

Shulem contended that it had no liability to contribute to the cost of the works as the landlord had failed to send a demand for service charges or a Section 20B Notice within 18 months of the costs being incurred.

The landlord sought to rely on the letter dated 23 February 2006 sent to the lessees enclosing an invoice specifying the estimated total cost of the works and tenant’s individual contribution as either a service charge demand under the terms of the Lease or a valid Section 20B Notice.

The Judge allowed Shulem’s appeal on the basis that 23rd February 2006 letter was not a valid demand under the Lease nor did the letter amount to written notification under Section 20B as this required the landlord to state the actual costs incurred whereas the letter made it clear that the invoice related to estimated costs.

The Judge held that Section 20B requires the landlord to state the costs it has actually incurred.

Health Warning:  Surely this is a practical difficulty as Section 20B frequently arises where the landlord does not currently know the actual costs incurred, for example, where the annual service charge accounts have not yet been certified by an accountant?

The Judge did, however, state that landlords should err on the side of caution and include a figure in the Section 20B Notice which it feels will suffice to enable it to recover its actual costs once the precise costs are known! The Judge made it clear that if the landlord puts forward a figure for actual costs in the Section 20B Notice and the actual costs turn out to be less than that specified in the Section 20B Notice, the landlord has satisfied the provisions of Section 20B.

Question is, is this really practical??

Akorita v Marina Heights (St. Leonards) Limited [2011] UKUT 255 (LC)

In this case a long leaseholder refused to settle service charge demands because it was claimed the freeholder had failed to comply with a term of the lease when submitting the demand.

Akorita’s main argument was that service charges are only payable when the amount to be paid has been properly certified by the freeholders surveyor, in this case no such certificate had been provided.

The case concerned the interpretation of the following clause in the lease: 

“To reimburse to the Lessor a sum (hereinafter referred to as “the Service Charge”) equal to one seventh (or such other proportion as may be determined by the Lessor’s Surveyor depending upon the number of Units eventually using the access drains or other communal parts) of the costs expenses outgoings and matters mentioned in the First Schedule hereto the Service Charge to be due and payable on demand and the amount of the Service Charge to be ascertained and certified by the Lessor’s Surveyor acting as an expert and not as an arbitrator once a year up to the Thirtieth day of June in each year (or if such ascertainment shall not take place on the Thirtieth day of June then the said sum shall be ascertained as soon thereafter as may be possible as if such sum has been ascertained up to the Thirtieth day of June aforesaid) commencing on the Thirtieth day of June”.

The Upper Tribunal held that on the proper construction of the clause it was a condition precedent to any liability of Akorita to make payment once Marina Heights has obtained a certificate (see underlined parts). Consequently it was held in the absence of a certificate, that Akorita had no service charges to pay and until the certificates are obtained the liability will remain nil.

The case is even more interesting in that the Upper Tribunal also made a comment about the correct approach to s.20C, LTA 1985.  

As most of you will know, in general terms, the Leasehold Valuation Tribunal and Upper Tribunal have exceptionally limited powers to award costs. In some cases the lease also gives the landlord the power to charge legal costs to a leaseholder as a service charge. In those circumstances, the LVT / Upper Tribunal has a power (s.20C, LTA 1985) to prohibit the landlord from relying on that clause in whole or part.
In practical terms, sometimes it is difficult at the end of the LVT hearing to quantify costs incurred and some LVTs therefore take the view that they can leave s.20C to see if a demand is ever made and, if it is, they can then assess whether anything is contractually due under the lease and what sum would be reasonable.

HHJ Huskinson does not appear to agree with this analysis. In his view, an application under s.20C necessarily includes an application to determine whether there is any contractual power to claim the costs – see paragraph 33 of the Judgment.

Landlord and managing agents who come to resist a s.20C application, should be prepared to argue the contractual entitlement point.

Amendments to Ground Rent Notice

Ground Rent is a regular payment made by a leaseholder to the landlord under the terms of a lease. Since February 2005, any demand for Ground Rent by a landlord must be made in a “prescribed form” which is set out in Section 166 of the Commonhold & Leasehold Reform Act 2002 (the “2002 Act”).

The Landlord and Tenant (Notice of Rent) (England) Regulations 2004 sets out the information to be contained in the Ground Rent demand.

The prescribed form of Ground Rent Demands contains a reference to Section 167 of the 2002 Act. This section provides that a landlord cannot use the forfeiture procedure under the lease unless the amount owed for ground rent, service charges or administration charges (or a combination of these) is more than £350. However, the forfeiture procedure can be used even if the amount is less than £350, if it has been outstanding for more than three years.

Court of Protection Comes to Rescue of Problem Tenant

Dealing with tenants who cause serious nuisance to other tenants is a common problem for social landlords. One of the most difficult situations to deal with is when a tenant develops a ‘hoarding habit’ and becomes obsessed with amassing refuse. This can lead to serious problems due to infestation by vermin and so on.

The problem is that such individuals are often mentally ill, and thus not capable of engaging with the various enforcement procedures available to the local authority responsible. As a result, the tenant cannot participate in defending proceedings against them and this renders impractical the use of many of the measures available. This can lead to the council seeking a possession order as the only practical way to rectify the problem.

In a recent case, an elderly man developed paranoia. He denied the council access to his home to undertake annual gas inspections on the property, with the result that he was considered to pose a danger to his neighbours. He also refused to allow the council to convert his home so that it was all electric, which would have removed the need for the inspections.

The problem was dealt with by an application to the Court of Protection, which came about as a result of cooperation between the Official Solicitor, the council and social services. The Court of Protection deals with the affairs of those who are unable to do so themselves owing to incapacity. The Court is often involved when someone lacks mental capacity and it must act in the best interests of that person.

The Official Solicitor applied for an order from the Court to require the works to be done and for the man to be required to reside in a specified care home for the period during which the works were being carried out. It allowed him daily access to his property, so that he could see what was being done. Although this was stressful for him, it was less stressful than being served by a bailiff with a notice of eviction would have been.

Landlords Face Costs in Disputes

The general principle that ‘the loser pays the costs of the winner’ does not apply to disputes brought before the Leasehold Valuation Tribunal (LVT). The maximum amount the LVT can require the loser to pay is £500, and only then in exceptional circumstances.

Given that cases brought before the LVT can often last a considerable time, it is normally a good idea for a professional landlord to avoid an appearance before the Tribunal unless it is absolutely necessary. This is particularly so where the dispute concerns a property that has been professionally managed, as there will be additional fees incurred for landlords to prepare their evidence and attend the hearing. Where the landlord is successful, the costs incurred in the course of the proceedings are often prevented from being passed on by way of service charges as the tenant or tenants who bring the action can apply for an order to prevent this happening. However, such an order will only stop the costs being passed on to the lessee(s) bringing the action, not to any other tenants.

However, if the lease allows it, the landlord’s costs may be recoverable if a tenant has breached a covenant in the lease. Because of the likelihood that a tenant may seek an order to prevent the recovery of costs, a negotiated, rather then a litigated, solution to the dispute is often advisable.

Problems with Insolvent Landlords

It is not only tenants that go broke: increasingly, overstretched landlords are in danger of becoming insolvent.

If you are a commercial tenant and have a rent review coming up, it makes sense to do some research into your landlord’s finances and to make sure that you protect your position if necessary.

If you have paid a rent deposit and it is not legally separate from the landlord’s other assets, it may be lost if the landlord becomes insolvent. Check your lease. It may be possible to persuade your landlord to refund the deposit or to agree to vary the lease to allow the deposit to be protected.

If the landlord fails to comply with its covenants, it is possible that the breach may be sufficiently serious to allow you to repudiate the lease, should you so wish.

Another common problem arises where the insolvent landlord is itself a tenant and defaults on its covenants with the head landlord. If this results in the forfeiture of the landlord’s lease, this could lead to the loss of the right to occupy the premises.

If you have concerns about what your position would be in the event of the insolvency of your landlord, we can advise you and assist in any necessary negotiations. Contact Edward Bible, Head of Insolvency at Brethertons LLP.