LVT RESULT 2005

The applications

There were four applications before the tribunal relating to the estate known as "The Village" at Gosport ("the property") that were before the tribunal. Each of them was accompanied by an application (whether made at the time of the application or at the hearing) to the tribunal under section 20(C) of the Landlord & Tenant Act 1985 ("the Act") to limit the amount of the landlord's costs of the proceedings in question that may be regarded as relevant costs to be taken into account in determining the service charge in the relevant year. In the order in which the applications were made, they were:

a) an application by Rowner Estates Limited ("Rowner") under section 27A of the Act to determine service charges for 2004; b) an application by Mr & Mrs Munch under section 27A of the Act to determine service charges for the year 2003 and 2004; c) an application by Mr V Burt under Part II of the Landlord & Tenant Act 1987 ("the 1987 Act") for the appointment of a receiver and manager of the property; and d) an application by Rowner Estates Limited under section 27A of the Act to determine service charges to be charged in the year 2005.

This tribunal accepts that Re the change by the landlord from 13.7& to 5% Mr Concannon told us that it had been generally accepted over the years as appropriate. Since that time, Caseacre had entered into a Deed of Variation formalising the 5% figure as its contribution to the service charge costs for the commercial premises. Mr Munch said that the variation could only have been effected by agreement with all of the parties including the leaseholders, so that Caseacre should still pay 13.7% of the cost.

28. Mr Faulkner pointed out that the previous tribunal had not said that Caseacre must pay 13.7% of the service charge cost. It had merely said that the leaseholders should pay 86.3% of it. That was the limit of its jurisdiction, and it could not this is a correct statement of the position. On the face of the matter it would then fall for either Caseacre or Rowner to bear the balance to the extent that there may be any shortfall of service charge payment from the commercial lessees.

29. Mr Munch produced documents to show the structure of Caseacre and Rowner at the hearing. He said that Rowner, in particular, had been structured so that it may be difficult to enforce judgments against it, and that Mr Baker-Harber who was involved in the previous hearing in 2002 as well as in the court proceedings, and whom he believed still to be the person primarily interested as landlord, was no longer named as a director of either company.

This tribunal is not bound by the decision of the previous tribunal, but sees no reason to depart from its findings upon the question of the division of the service charge between the residential and the commercial parts of the property. The evidence before it is that this was the division adopted apparently without any material dispute, for many years, and that it is only in the last two or three years that any attempt has been made to depart from that position. There has been no evidence adduced to suggest why such a departure may have been justified. Mr Faulkner has not attempted to justify the change to the requirement for the commercial parts to pay 5% of the service charge only within the context of these proceedings. The tribunal has had the benefit of seeing the estate as a whole, and of satisfying itself from that inspection, as well as from the evidence before it, that the 86.3% - 13.7% split between residential and commercial appears to be reasonable and appropriate.

The shortfall of £142490.01

31. It is common ground between the parties that there is a shortfall of £142,490-01 in the 2003 accounts. It appears in the balance sheet as an asset under the heading "cash difference", and would seem to be made up of monies, contributed by service charge payers that are unaccounted for in that year. The issue between the parties is that of whether this shortfall should be investigated to establish what has happened to it, the chances of its recovery and, if any part may appear to be recoverable, what amounts should be expended on doing so. The accountants concerned have felt unable to certify the 2003 accounts in the usual way. Mr Munch says that, because this money is unaccounted for, the service charge should be reduced by that amount.

This is money that on the face of it should be available for the benefit of the service charge account but appears, for no reason that is presently known, to be missing from it. The first thing is to seek to discover what has happened to it and whether it, or any of it, is indeed available.

The tribunal has sought to balance the plain desirability of recovering this sum to the benefit of the service charge account against the practical possibility of identifying who may owe it and the possibility then of recovering the sum from them. The competing interests advanced before it were an estimate of £5000-00 from Messrs Menzies (formerly Messrs Wilfred Green), the accountants who have prepared the accounts to date, and of £2000 from Messrs Tenon. The estimate from Messrs Menzies (page 138 of the applicant's bundle relating to the 2005 budget) envisages a considerably more extensive initial investigation than does that from Messrs Tenon dated 12 March 2005 handed to the tribunal at the hearing.

In the circumstances the appropriate and reasonable course in the tribunal's judgement will be to authorise accountants (whoever may be chosen) to carry out an initial (it is likely to be no more than that) enquiry up to a cost of £2000 exclusive of VAT, and to report at that point upon the progress they have been able to make. They should at that time also report upon the likelihood or otherwise that further expenditure will be justified in terms of the likelihood of recovery of the whole or some part of the sum in question, and give an indication of the extent of the further investigations that will be required and of their cost, as well as an assessment of such prospects of recovery as they are at that time able to establish. This will enable the parties to consider the extent to which the service charge payers, in whose interest any further expenditure is to be incurred, is made, might reasonably underwrite the cost of further investigation

The account from Friars Secretarial Services Ltd.

Mr Munch challenged the inclusion in the service charge accounts for 2003 of a sum of £399-50 charged on 31^st December 2002 by Friars Secretariat Ltd.. The account in question appears at page 162 of his bundle. The charge was expressed to be for work done in connection with New Horizons Management Company Limited. It included dealing with the annual return, with preparation and filing of forms of change of directors' particulars in June and December 2003, the preparation of various notices, and a meeting with "the Director" in December 2003 for signing various documents. Mr Faulkner said that the invoice was for company secretarial work up to the end of 2003 and that Jordan's would have charged £500 for the same work.

" The tribunal had the benefit of seeing the details of the various transactions relating to New Horizons, Caseacre and Rowner contained in Mr Munch's supplemental bundle. It is satisfied from that information that the work described in the Friars' account, other than that concerned with the 2002 annual return, had far more to do with the liquidation of New Horizons, and the setting up of the arrangements for Rowner and Caseacre. Apart from the annual return, it is difficult to see, in the light of the details of the transactions mentioned above, and of the background relating to an order made by the Portsmouth County Court that New Horizons should carry out works at the property at its expense, that the work was primarily for the benefit of leaseholders.

For reasons that are not explained, the Annual Return was rejected twice. The tribunal accepted that one rejection may sometimes occur prior to acceptance, but would not have expected that it should have been rejected twice before acceptance when it had been professionally prepared. The tribunal is of the view that the work related to the annual return should have had a value of not more than £100 plus VAT. The amount to be included in the 2003 service charge account for the work of Friars Secretariat Limited is thus to be limited to £ 117-50 inclusive of VAT.

The evidence in connection with the closure of the lifts was not, in its essence, contradicted. So far as the lifts adjacent to Hillary Court are concerned there was a substantial fire in the staircase, fuelled by rubbish that had not been properly removed, in March 2001. The lifts adjacent to Livingstone Court were switched off in March 2002 because the insurance cover had lapsed. Since then they have been damaged to the extent that it would cost (said Mr Munch) £54000 to repair them. It was understood that Mr Baker-Harber had lodged an insurance claim in respect of the lifts adjacent to Hillary Court in 2001 or in early 2002 as appeared from a letter from him to Mr Munch dated 9 January 2002 at page 210 of Mr Munch's bundle. No-one, including Mr Faulkner, had any knowledge of the outcome, if any, of that claim, and nothing more had been heard by Mr Munch from Mr Baker-Harber on the subject.

The letter and bill for the tenancy agreement. (187-8). Mr Faulkner said that this account was for work undertaken by solicitors in 2003 for preparing the short term tenancy agreement by Caseacre to Rowner of the reversion in respect of residential parts of the unit. He says that the work was for the benefit of the leaseholders because an entity had to take the place of New Horizons in the management of the estate following the liquidation of New Horizons. The form itself appears to be a rather hasty adaptation of a form of tenancy agreement usually used in creating assured tenancies, and the letter accompanying the bill in 2004 is dated just a year later than the agreement, and might be regarded as somewhat oddly worded. In this case the tribunal felt able to take the practical view, having the benefit of Mr Munch's evidence about the nature of the structure of Rowner, that the arrangements appeared to be potentially far more appropriate to the benefit of the ultimate beneficiary of the chain of companies now set up to hold the reversions than they were to the benefit of the leaseholders, and it would be quite unreasonable to expect the latter to pay for them. They did not qualify as management of the estate but rather as management for the convenience of those who ultimately benefit from any income derived from Caseacre. That being so, the total sum of £293-75 inclusive of VAT is disallowed.

It was apparent during the tribunal's inspection that some gardening and some exterior painting had been done very shortly before it took place. Both paint and earth, as the case may be, were very fresh. It was equally apparent that the estate was then quite tidy, but that the nature of grass-cutting that had been done, and the almost unusually tidy nature of some of the areas of the estate where clutter would normally accumulate in a short time, indicated that quite a lot of work had been done shortly before its visit. The witness statements attached to the Respondent's reply bore testimony to leaseholders' dissatisfaction with this element of the work. The tribunal had to do the best it could with what was before it.

There was no indication of any sort available to it to suggest what would have been a reasonable cost for what was done to the standard to which it was done. Using its collective knowledge and experience of the likely cost of doing the works required by the lease in this connection to a reasonable standard, it concluded that it would be appropriate to allow a sum of £70,000 instead of £86224.78 referred to in the accounts for the costs of landscaping and cleaning as a reasonable payment for what seems likely, on the evidence before it, to have been provided.

The matter of the patch repairs to the roof is not of itself a matter requiring a decision from the tribunal. Mr Faulkner has conceded that where the damage has arisen at points where the aerials have been installed following that work then it is for the companies concerned and not for the leaseholders to pay its cost.

The matter of landscaping and cleaning is dealt with at paragraphs 66 ' and 67 above. The figure to be substituted for 2005 is £72100, being £70000 determined in respect of 2004 plus 3% for inflation. The tribunal is satisfied from its own knowledge and experience that it will be possible to replace the present poor and expensive standard of work with a satisfactory standard at that price.

There was considerable discussion at the hearing about the rate of interest that would be applicable to a loan made by the landlord to fund the shortfall in the service charge. Mr Faulkner explained that the service charge sums presently being collected were just about enough to pay the insurance premiums. The tribunal observes that the leases do not appear to make the payment of the service charge a precondition of the performance of the obligations expressed to be by the company towards the leaseholders. It notes too the provision in clause 3(b) of the leases that in the event of the company failing to comply with its obligations then the landlord will perform them.

Whilst it accepts that there may be more to the matter than it has heard, the tribunal is, on the information that it has, not at all clear why Rowner had to be introduced into the system. On the basis of what Mr Concannon said of the law upon the matter, both with regard to the lease and with regard to the operation of sections 62 and 141 and 142 of the Law of Property Act 1925 and which the tribunal entirely accepts, there appears to be no doubt at all that whatever intervening arrangements have been made Caseacre remains ultimately liable for the performance of those obligations.

77. Mr Faulkner says that no bank would countenance such a loan and that accordingly his clients can almost specify their own rate. The tribunal does not accept that. First of all it is not sure that a loan is necessary if indeed Caseacre ought to underwrite the cost of the works. It does, however, accept that it is hardly likely to do so without powerful compulsion unless it sees a reasonable prospect that the service charges will be paid as they should be so that it is not left out of pocket for any greater period than is necessary. In any event, on that analysis any loan should be made to Caseacre rather than to Rowner, or if made to Rowner should at least be underwritten by Caseacre. As indicated at paragraph 27 above, it does indeed appear from what Mr Munch said that Rowner, at least, has been structured in such a way that it may be difficult to enforce judgements against it, so that it is in turn unlikely that any Bank would have wanted to lend to it. Mr Concannon argues that because Caseacre has property this would be a secured loan to which a rate of 5% or 5.25% may be applicable.

78. If, against that background, a loan is necessary at all then the tribunal can see no reason why it should not be at a proper commercial rate of interest applicable to the risk involved. Caseacre is ultimately responsible for seeing the work done and may be expected to underwrite the loan if it does not actually take it. The tribunal has been shown that Caseacre owns the freehold, including that of the "other parts of the estate", over which the leaseholders seem (on the papers before the tribunal, although it does not have a fully coloured copy of the lease plans, which may show a different position) to have rather limited rights . It has been told that it has it in mind to develop some parts of that land for residential purposes. In short it may perfectly well be able to negotiate a loan on suitable commercial terms. There would no doubt be some risk attendant upon delays in paying service charge that have historically arisen. The comparable enquiries produced by Mr Faulkner envisaged a loan to New Horizons only. That would have been a quite different lending proposition, and in the light of subsequent events it is not surprising that banks were unwilling to undertake it.

79. Taking all of that into account, and if a loan is really required to carry out the scheme of the leases, the tribunal determined that a rate of 4% over base rate from time to time in force would be reasonable. That also happens to be the rate of interest under the lease payable in respect of arrears pursuant to paragraph 14 of Schedule 5 (page 106 in Mr Munch's trial bundle). More particularly it takes into account the fact, a part of the tribunal's collective knowledge and experience that as an expert tribunal it is entitled to take into account, that a bank when fixing a rate of interest would look not only at security but also at the cash flow from which the money was to be repaid. The arrears of service charge payments at The Village do not encourage a rosy view of that cash flow. The opposing arguments of Mr Faulkner and of Mr Concannon seek to emphasise the cash flow aspect on the one hand and the security aspect on the other, and the fact is that the two interact.

The 'landlord' wanted to charge us 8% above the base rate.

The application to appoint a manager

Mr. Burt made application to the tribunal on 29th September 2004 pursuant to sections 21-24 of the Landlord & Tenant Act 1987 for the appointment of Mr Martyn Brown of Messrs Daniells Harrison of Fareham to be the receiver and manager of The Village. A notice under section 22 of that Act was served on the landlord on the same day, but no issue was taken before the tribunal as to whether the notice did or did not precede the application.

The tribunal is satisfied that there are grounds upon which it could make an appointment. The failure to maintain the lifts is a plain breach of the landlord's obligations in the lease. It has continued for several years past and still continues. It is clear from inspection that the exterior decorating covenants have not been strictly fulfilled, and Mr Faulkner does not challenge the point. Similarly the lack of attention to the stairwell damaged by the fire was also apparent from the inspection. The history of the estate over the last few years exhibits an almost complete breakdown of relations between the landlord and the leaseholders, and that feature alone would in the tribunal's judgement be sufficient to render it just and convenient to appoint a receiver and manager. However his firm may seek against difficulties to try to manage the estate Mr Faulkner's firm was appointed by Mr Baker-Harber, and are still appointed by Caseacre and Rowner. They are plainly, from all that the leaseholders said before us, seen as being 'landlord's men'.

Whilst Mr Brown was clear that he would seek to deal with the factions on the estate by meeting both of them equally, the tribunal was satisfied from his evidence that he had not thought through either what he was being asked to do nor for whom he was being asked to do it before allowing his name to be put forward for this position. It was left with the clear impression, which it gained in part from Mr Brown's uncertainty, and in part from Mr Burt's wish that the leaseholders wanted 'to choose their own destiny', that Mr Brown expected, and was expected by those who nominated him, to represent their interests. Whilst no doubt Mr Brown is capable of managing the estate, the tribunal is in no doubt having heard all the parties that he would be seen as the 'VRA's man'. That would not be a great advance on the present position of Mr Faulkner's firm. It considers that it would not be just and convenient in those circumstances to appoint him because he could not be seen to have the degree of clear independence that would be essential if a receiver and manager is to be able to take decisions that are not only independent of the different factions on the estate and of the landlord, but that are seen to be so.

93. For these reasons the tribunal is not prepared to appoint Mr Brown. It is however prepared to make an appointment of someone well experienced in estate management of this sort who could command the degree of independence of all parties that would allow him or her to tackle the problems in The Village, and to provide an opportunity for the estate at last to advance from its present unfortunate position. The need for independence may perhaps even indicate a desirability to look for an appointee outside of the immediate Portsmouth/Gosport /Fareham area, although that is not essentially a matter at present for the tribunal.

The tribunal is however prepared to adjourn the application upon the basis that it now for Mr Burt to nominate another person, if he so wishes, who is thought to meet these criteria. He may do so within three months after the date of the issue of these reasons by writing to the tribunal with the details of such a nominee, and simultaneously sending a copy of that letter to the other parties. If he does so then the tribunal will reconvene to consider whether or not to appoint that person, but if he does not then the application will at that date become finally determined upon the simple basis that the tribunal was not prepared to appoint Mr Brown. The tribunal will not in any case consider any further nominations beyond the one nomination provided for in this paragraph because of the need, so far as reasonably possible against the background of this application, to provide certainty in the continued management of The Village.