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Service Charge: JB Leitch secures win for landlord in application to determine service charges

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JB Leitch represented the landlord in its successful defence to a First-tier Tribunal application made by leaseholders in respect of the costs incurred in repairing a retaining wall adjacent to parts of the boundary of the property.

The background

In this matter, JB Leitch’s client was the respondent landlord of a retirement development of 32 leasehold flats constructed in around 2008. A retaining wall, which formed part of the external landscaping to the west boundary, had failed. The landlord’s appointed managing agents commissioned an inspection of the wall in 2018 following receipt of a notification about the wall’s condition.

A report by the structural engineers identified a number of areas where the wall had failed, or where it was vulnerable. The anticipated cause of the failure was as a result of timber headers and stretchers not having been pre-treated, granular infill material not meeting design specification and restricted drainage as a result of vegetation growth.

Further inspections of the wall were completed in 2019 which determined that the whole of the wall required remediation work. The landlord’s managing agents sent out correspondence to the residents updating them of the report and the proposed works, confirming that the damage that had occurred was not covered by buildings insurance. By September 2020, the managing agents had received two tenders for the works, confirming to the leaseholders that it would review the options available and the phasing of the works.

In March 2021, the managing agents updated the residents confirming that two tenders had been received and the lowest of which was quoted at £116,856 plus remaining fees of £10,481. The shortfall between the estimated costs and reserve funds was identified and an example figure was given for the amount it was anticipated would need to be paid by each leaseholder to cover the costs of the works. This was between approximately £710-£1065.

Leaseholders were supplied with updates from the managing agents and the work was completed by the end of June 2022.

The applicant leaseholders sought to establish a claim for set off against the service charges demanded for the repair works. The leaseholders’ position was that, whilst accepting that historic breach of the covenant to repair or maintain the wall was not material in determining whether costs for its repair were reasonably incurred, it may be material in relation to payability of the service charge demanded. Furthermore, since the failure of the wall is due to an inherent structural defect, the leaseholders argued that the cost of its repair cannot be classed as repair within the terms of the lease.

The landlord accepted that it is responsible for the maintenance of the wall and it was submitted that there is no disagreement between the parties that the cost of the repair works is recoverable from the leaseholders under the terms of the lease. Further, the works had been carried out within a reasonable time frame and to a reasonable standard, such that the costs were reasonably incurred.

The decision

The First-tier Tribunal (“FTT”) dismissed the application for an equitable set off, finding in favour of the landlord. The reasons for the Tribunal’s decision are summarised as follows:-

  1. Expert evidence

The FTT found that none of the evidence upon which the leaseholders were entitled to rely supported their claim for equitable set off.

The FTT also found that none of the evidence submitted on behalf of the applicant leaseholders explained why the delay in starting the repair works made a difference to the cost (and quality) of the repair to the wall.

  1. Historic breach of covenant

In order to succeed with this submission, the FTT stated that the leaseholders needed to evidence a breach of the landlord’s covenant to repair.

The FTT held that the leaseholders submitted no evidence to support a submission of a historical breach of covenant, and the landlord acted promptly once the condition of the wall was evident and identified.

  1. Inherent structural defects

The leaseholders did not dispute liability to pay the service charges demanded for the repair of the wall; rather, what was questioned was whether the works were reasonable. It was suggested that, because the works potentially go beyond repair, these do not fall within the definition of “reasonable” within Section 19 of the Landlord and Tenant Act 1985, as it was suggested that the works were effectively replacement works, which are not repairs at all and are therefore not reasonable.

The FTT stated that the leaseholders had not demonstrated that the landlord had been negligent. In any event, had the leaseholders been able to convince the FTT of the landlord’s negligence, it would have still been necessary for them to demonstrate the effect of that conclusion on service charge liability, which they had not.

The leaseholders claimed a 100% reduction in liability because the wall was structurally defective. Under the terms of the lease, they were obliged to contribute towards the cost of repairs even if these arise as a result of a structural defect. The FTT determined that the leaseholders had not shown that the landlord was negligent or, even assuming that it was, that the alleged negligence resulted in additional repair costs being incurred. The leaseholders omitted to take account of the fact that the wall had lasted for more than 10 years.

In relation to the contingency fund, which contains monies paid in advance by leaseholders for future repairs, the FTT stated that reliance on the fund would have been reduced had a claim for set off been established. Therefore, the leaseholders’ suggestion that, in addition to a claim against 100% of its service charge liability, they should be compensated in respect of a depletion of the contingency fund, is mathematically unsound.

  1. Increased costs of repair

This submission was interpreted as relating to the claim for set off in respect of the leaseholder’s liability on account of the landlord’s failure to promptly repair the wall.

The FTT found that the leaseholders failed to consider the timescale of a repair involving major works, which will inevitably arise out of the requirement for a landlord to comply with Section 20 consultation requirements. The FTT found that there had been no unreasonable delay by the landlord in repairing the wall. Works had commenced in September 2021 and were intended to be completed in June 2022. Whilst there were some delays, the FTT found that the explanation of the delays was transparent.

The FTT commented on how it had not been provided with any evidence from the leaseholders as to why or how any delays could have been avoided.

  1. Life of repair works

The FTT confirmed that it did not have jurisdiction to make an order in respect of the lifespan of the repair works, which the leaseholders claimed should last for more than 25 years. No evidence was presented to demonstrate the lifespan of the repair works, or to enable the FTT to assess whether it was possible to carry out repair works which would last longer than 25 years.

  1. Failure to insure

The leaseholders had not evidenced the availability or terms of insurance which may have covered the repair costs.

The FTT commented on how comprehensive buildings insurance generally covers only consequential losses arising from the disrepair, rather than the disrepair itself. This submission was dismissed.

Further, the FTT stated that any reference or imputed knowledge on the part of the landlord or its managing agent in relation to another development is not relevant. A situation which has arisen in relation to another property with which the landlord may or may not be associated would have no bearing on this application.

  1. Dismissal of claim against NHBC

The FTT did not consider this submission in detail. The leaseholders had argued that the landlord could make a claim against NHBC.  However, the FTT commented on how NHBC cover relates only to retaining walls which are an integral part of a building, and that such cover is limited to a maximum of 10 years. The FTT confirmed that it would not have been sensible for the landlord to make a claim against NHBC, nor would it have been cost effective to investigate this.

  1. Repair work delivering a wall that will function until 2068

The leaseholders argued that the repaired wall should function effectively until 2068. The FTT concluded that it had no jurisdiction to make an order in this regard.

From the information provided, the FTT concluded that repair works of the type carried out to the wall are unlikely to have a lifespan equivalent to the anticipated lifespan of a new wall.

9. Landlord should not benefit from leaseholders paying for the wall

This submission relates to the allegation that the landlord obtained a financial benefit from the repair of the wall. The FTT confirmed that they did not understand this submission and that the FTT had no jurisdiction to address this submission.

  1. Recovery of all repair costs during current service charge year

The leaseholders submitted that the landlord should not seek to recover all the repair works during the current service charge year. The FTT confirmed that this was a contractual matter. The landlord was entitled to recover the costs of services in accordance with lease provisions.

The FTT dismissed the application, determining that the leaseholders had made no valid submissions regarding their claim for equitable set off.

The landlord had not disputed that the wall had failed. Therefore, had the leaseholders been able to demonstrate that the repair costs would not have been incurred, or would or might have been less had the landlord acted sooner, those submissions may have been a defence to payment of some or all of the service charge if formulated as a claim for damages resulting from the landlord’s breach.  The leaseholders failed to submit any admissible evidence, or to consider or submit a realistic quantification of a potential claim.

Advice and action for landlords

JB Leitch is pleased to have delivered a satisfactory conclusion for our client. It is clear from the Tribunal’s decision that the retaining wall in this case was compromised by its initial poor construction, but action by our landlord client would not have prevented or lessened the repair costs incurred.

Our client acted promptly and reasonably, and costs incurred were reasonable. The sums demanded were payable by way of service charge by the leaseholders.

The First-tier Tribunal dismissed the application for equitable set off finding in favour of the landlord. The leaseholders could not demonstrate that, had the landlord acted sooner, repair costs would not have been incurred or would have been less.

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