Avon Ground Rents Ltd v Cowley & Ors

Section 19(2) of the Landlord and Tenant Act 1985 limits an advance service charge to a reasonable amount. Reasonableness is fact-sensitive and is not governed by rigid rules. The tribunal may consider all relevant circumstances at the hearing, including when liability for costs is likely to arise, the certainty of the costs, and the likelihood and amount of a third-party contribution. Certainty of payment is not required. Where anticipated works are reasonable and a realistic contribution is expected, the landlord must give credit for that anticipated payment when assessing the reasonable advance charge.

The appellant, the freehold owner of a mixed commercial and residential development, sought to recover in advance the estimated cost of remedial works to the central courtyard. An NHBC warranty was expected to meet most of the cost. The First-tier Tribunal determined the residential leaseholders’ liabilities after taking the anticipated insurance contribution into account and reduced the appellant’s recoverable costs under section 20C of the Landlord and Tenant Act 1985.

The Upper Tribunal (Lands Chamber), in [2018] UKUT 0092 (LC), dismissed the appellant’s appeal. The central issue before the Court of Appeal was whether anticipated third-party payments could be taken into account when assessing a reasonable service charge payable before the relevant costs were incurred.

1. Disposition. Lady Justice Nicola Davies gave the judgment, with Lord Justice Coulson and Lord Justice McCombe agreeing. Ground one and the appeal as a whole were dismissed. Ground two, concerning the section 20C costs order, did not arise once ground one failed.
2. Contractual and statutory framework. The contractual service-charge provisions were the starting point. Section 19(2) of the Landlord and Tenant Act 1985 operated as a statutory overlay, modifying the contractual obligation so that no greater amount than was reasonable was payable before the relevant costs were incurred. This approach was consistent with Knapper v Francis [2017] L&TR 20.
3. Reasonableness. The assessment under section 19(2) was not governed by rigid rules. The tribunal had to consider the specific facts and all relevant circumstances existing at the hearing, giving each factor appropriate weight. Relevant considerations included the likely time of the landlord’s liability for the costs, the certainty of the amount, and the likelihood and amount of any third-party contribution. The flexible approach reflected Parker v Parham [2003] EWA Lands LRX/35/2002.
4. Third-party contribution. It was permissible to take an anticipated insurance payment into account even though receipt was not certain. Here, an effective NHBC policy covered most of the works, the appellant had agreed to credit sums received, and the expected contributions were identified rather than hypothetical. The FTT was therefore entitled to reduce the advance charges accordingly.
5. Double recovery and final order. Avoidance of double recovery was a necessary objective in construing service-charge provisions, as recognised in Oliver v Sheffield City Council [2017] 1 WLR 4473. The FTT had properly exercised its discretion, the Upper Tribunal had correctly upheld its decision, and the section 20C order remained undisturbed.

• Court of Appeal (Civil Division): dismissed the appeal from the Upper Tribunal; [2019] EWCA Civ 1827.
• Upper Tribunal (Lands Chamber): dismissed the appeal from the First-tier Tribunal and upheld the taking into account of anticipated NHBC payments; [2018] UKUT 0092 (LC).
• First-tier Tribunal (Property Chamber): determined the residential leaseholders’ liabilities after allowing for anticipated NHBC contributions and ordered that only 50 per cent of the appellant’s costs be recoverable through the service charge.