Anyone regularly acting in service charge disputes will have come across the concept of “historic neglect”.
At one end of the spectrum, service charge demands will be met with a response of “why should I pay when the access door hasn’t worked properly for years!”. Especially when the service charge recovery is for something unrelated to the access door, such as roof repairs.
At the other end of the spectrum, there will be a high stakes challenge to major works, on the basis that they might have been cheaper if they were carried out years earlier.
The First Tier Tribunal has recently grappled with the extreme latter end of the spectrum in the long running matter of Four Courts Proprietors Limited BIR/00CN/LSC/2021/0008.
The Four Courts litigation arose because of what is known as “Regent Street Disease” [“RSD”]. This affects buildings constructed in the 1900s-1950s which have a stone façade. The stone will be supported by an internal steel frame. Over decades, moisture will penetrate through the stone and cause that steel to corrode. When steel corrodes, it expands. The steel will not have any kind of expansion gap, and as a result, the stone will be put under a high degree of stress, and ultimately crack.
In Four Courts, the landlord had carried out some remedial works for stone cracking in the 1980s, and was put on notice of a continuing problem by a schedule of dilapidations in 1999.
In Four Courts the RSD was advanced, and the only available remedy was to expose, repair/replace and then treat the steel frame, which was a very expensive exercise. One of the leaseholders’ challenges was that the RSD amounted to a breach of the landlord’s repairing obligations, and that if the obligation had been complied with in a timely manner, before the RSD was as advanced, the costs would have been substantially lower.
The FTT agreed with the leaseholders and found that if the works had been carried out earlier, they would have been cheaper. Difficult questions then arose in terms of apportionment, periods of liability and the effect of inflation.
This article is not intended to be a casenote, but rather to highlight some of the common issues practitioners may wish to consider in more complex historic neglect cases.
The following will be considered:
- Recap of the Legal basis
- Measure of damages and period of liability;
- Inflation;
- Landlord’s decision-making process;
- Proper pleadings and expert evidence;
- What’s the point?
RECAP OF THE LEGAL BASIS
Historic neglect does not (or should not) factor into the Tribunal’s consideration of whether service charges are reasonably incurred for the purposes of s19 LTA 85. This was confirmed by the Upper Tribunal in Continental Property Ventures v White [2007] L&TR 4.
However, historic neglect may be taken into account for the purposes of s27A(1) and s27A(3) LTA 85 – whether a charge is payable per se. If the Tribunal determines that a leaseholder could raise an equitable set-off against a service charge liability, the Tribunal can reduce the leaseholder’s liability by the amount of the set-off.
This was confirmed by the UT in Daejan Properties Ltd v Griffin [2014] UKUT 206. The underlying facts in Griffin were not wholly different to Four Courts, although the conclusion was different. The UT in Griffin found that, had the works been carried out earlier, there would have been no change in their scope, and therefore no decrease in the cost.
MEASURE OF DAMAGES AND PERIOD OF LIABILITY
Griffin confirmed that leaseholders could set-off:
- The amount by which the cost of remedial work has increased as a result of the landlord’s failure to carry out the work at the earliest time it was obliged to do so; and
- Any sum the leaseholder is entitled to receive in general damages for inconvenience or discomfort.
It must also follow that a leaseholder could set-off any other consequential damages which they would have been entitled to, providing those damages were capable of forming an equitable set-off.
The primary measure of damages is therefore the extra service charge being sought from leaseholders that would not have been sought but for the landlord’s breach.
The quantum of damages depends on the liability period being applied. In a simple case, the period will simply be the time between when the breach first arose, and when the repairs were carried out. If the breach occurred during the terms of the current leases, there will be no complexity.
However, in some cases, the measure will be different for different leaseholders. This happens when some or all leases began after the breach first occurred. The landlord’s repairing obligation only comes into existence for a given leaseholder when that particular landlord and tenant relationship begins. The liability period is necessarily limited to the period of that relationship – see para 91 of Griffin.
The way to look at this is to assume that a given lease commenced on Day 1. On Day 1, the landlord was (depending on the scope of the repairing covenant) liable to carry out all necessary repair works. The landlord could then legitimately pass those costs onto the leaseholder. The leaseholder would only have a set-off if the landlord delayed in carrying out the repairs to, say, Day X. The measure of the set-off would be the difference between the costs of the works at Day 1 and the costs of the works at Day X.
The set-off can vary from leaseholder to leaseholder, because each leaseholder may have a different Day 1. The difference between Day 1 and Day X will therefore change.
Following the above, it can also be argued that the Limitation Act 1980 applies very simply. Assuming a 12 year limitation period, it will simply put a cap on how early Day 1 can be. As a breach of a repairing obligation re-accrues each day, the earliest day it can accrue is capped at 12 years pre-action.
In Four Courts, the FTT accepted this “Day 1” approach both in respect of the commencement of the L&T relationships and the application of the Limitation Act 1980.[1]
INFLATION
This was a thorny issue in Four Courts. If the difference between the costs at Day 1 and Day X included inflation, the set-off would be far higher than if not.
The answer depended on a careful analysis of the measure of damages:
- If the measure of damages was a straight question of “what is the difference in the cost of works at Day 1 and the cost of works at Day X”, then inflation needed to be accounted for; but
- If the measure of damages was “what extra works are required at Day X compared with Day 1” then inflation would not need to be accounted for, as we are simply costing the additional works at Day X.
The Tribunal in Four Courts preferred the second interpretation, for the following practical reasons:
- Taking inflation into account would mean any delay by the landlord, no matter how short, in complying with the repairing obligations would create an equitable set-off. This is because the effect of inflation would mean there would always be a measurable difference between the Day 1 costs and the Day X costs. This would have serious consequences;
- If inflation were taken into account, there would potentially be double counting in favour of leaseholders. If the landlord had complied with the repairing obligation on Day 1, the service charge would have been demanded at that time. By the landlord delaying to Day X, the leaseholders had the benefit of additional money, which would have been more valuable in the past.
- In its detailed analysis in Griffin, the UT did not take inflation into account, with the UT specifically finding in Griffin that:
substantially the same work would have been required at any time in the 30 years preceding the commencement of the works in 2008. Accordingly, we consider that no real savings would have been made had the beams been inspected and work carried out at any relevant earlier time.
Whilst this question is not settled, the Tribunal in Four Courts must have been justified in ignoring inflation. The loss to the leaseholders caused by the landlord’s breach was that the building had fallen into further disrepair. The measure of loss was to identify what that further disrepair was, and cost it. Inflation is not relevant to that exercise.
LANDLORD’S DECISION-MAKING PROCESS
It should be remembered that a landlord can decide how to comply with its repairing obligation, providing the decision is reasonable. A reasonable decision might not lead to the most cost-effective, cheapest or permanent solution to disrepair.
This is important in historic neglect cases, and was touched upon in Four Courts. Let’s say on Day 1, to comply with its repair obligations, the landlord could have either:
- Carried out a permanent repair; or
- Carried out a patch repair.
A permanent repair on Day 1 might have prevented substantial further deterioration, and meant that less works were needed than those ultimately needed on Day X. A set-off would apply.
However, a patch repair on Day 1 might have led to years of additional cyclical maintenance and additional patch repairs over the years. The aggregate cost of this might have ended up being more than the permanent repair on Day X. Providing that approach was a reasonable course for the landlord to have taken, it is arguable that no set-off can apply, even if there is a clear case of breach.
PROPER PLEADINGS AND EXPERT EVIDENCE
Sometimes statements of case in Tribunal cases are a bit woolly (if they exist at all). However, in any case where historic neglect is alleged, the leaseholder is asserting that they have a cause of action against the landlord. The legal and factual burden shift firmly onto the leaseholder’s shoulders, and the Tribunal’s inquisitorial approach should not apply.
It is good practice therefore for leaseholders to plead historic neglect as though they were drafting Particulars of Claim. Landlords should insist on this, and request that Tribunals direct such particulars if they are not forthcoming. This will mean the issues are clearly defined, and the parties know where they stand. Otherwise, leaseholders will have a distinct procedural advantage compared to bringing a claim at Court.
Similarly, expert evidence needs to be tailored to the issues related to a landlord’s breach, with the terms of the instructions being clear and dictated by the Tribunal if necessary. This was an issue in Four Courts, with multiple subsequent reports being required. Experts should comment on the following broad topics:
- Whether there has been a breach of the landlord’s repairing obligations;
- When that breach likely first arose;
- What different repairs the landlord could have undertaken when the breach first arose;
- Whether more disrepair has arisen due to the repairs not being carried out earlier;
- The cost of remedying that additional disrepair;
- Whether any of the repair options, if carried out when the disrepair first arose, would have themselves led to further maintenance or repairs over time, and if so, how much that would have cost.
WHAT’S THE POINT?
This is often missed.
A successful historic neglect set-off may leave a substantial deficit between the cost of works and the amount which can be recovered from leaseholders.
In the common situation where the landlord holds no assets, or is an RTM company, it probably has no means to plug the deficit. Thus, the ability to carry out the works (or even continue in existence) is wholly dependent on full recovery of service charges from leaseholders.
The set-off could easily mean that the works therefore never get done, or that the landlord is simply wound up. Leaseholders need to carefully consider the ramifications of this. Parties are always best advised to work with each other, rather than against each other.
CONCLUSION
This is a difficult area, requiring expert evidence, potentially large numbers of calculations and complex legal submissions.
This article was intended to highlight some of those complexities, to allow practitioners to be better prepared in meeting them.
[1] There could be some interesting arguments on the application of the Limitation Act 1980. It is clear that the FTT’s determinations under s27A LTA 85 are declaratory only – Termhouse (Clarendon Court) Management v Al-Balhaa [2022] 1 WLR 1529. The Limitation Act 1980 operates as a procedural bar – it does not extinguish substantive rights. It is therefore arguable that, as no action founded on contract has been commenced, the Limitation Act has no role. It could only be raised in any subsequent enforcement proceedings. This rather highlights the odd nature of the Tribunal dealing with historic neglect cases. I am also mindful of the fact that there are conflicting decisions on the application of the Limitation Act in the Tribunal’s other jurisdictions.
Whilst every effort has been taken to ensure that the law in this article is correct, it is intended to give a general overview of the law for educational purposes. Readers are respectfully reminded that it is not intended to be a substitute for specific legal advice and should not be relied upon for this purpose. Please also note that this article represents the opinion of the author and does not necessarily reflect the view of any other member of St Philips Chambers.
