-and- RESPONDENTS SUBMISSIONS PURSUANT TO THE TRIBUNAL S DECISION DATED 11 MAY 2016

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1 CASE REFERENCE: BIR/00CN/LSC/2014/0011 BIR/00CN/LSC/2014/0026 IN THE FIRST TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) BETWEEN: (1) THE KEW PHASE ONE RTM COMPANY LIMITED (2) THE KEW PHASE TWO RTM COMPANY LIMITED Applicants -and- THE LEASEHOLDERS AT THE PROPERTY Respondents RESPONDENTS SUBMISSIONS PURSUANT TO THE TRIBUNAL S DECISION DATED 11 MAY 2016 INTRODUCTION 1 These submissions are filed pursuant to paragraph 94 of the Tribunal s decision dated 11 May 2016 ( the Decision ) on behalf of John and Sarah McDermott, the Leaseholders of Apartment 432 of the development known as King Edwards Wharf, Sheepcote Street, Birmingham B16 8AT ( the Development ). The Decision is appended as Appendix 1. 2 Mr. and Mrs. McDermott hereby request the Tribunal to determine the question of whether they are or would be liable to pay a service charge to the Applicants in respect of repair costs incurred in circumstances where those costs could have been recovered from a third party. For the reasons set out below, Mr. and Mrs. McDermott seek a determination that they are not and would not be so liable. 3 In the alternative, should the Tribunal not grant the determination sought, Mr. and Mrs. McDermott seek a direction that the Leaseholders may request a determination of the reasonableness of the costs to be expended by the Applicants on remedial works once the method the Applicants propose adopt in procuring the works is known. 1

2 4 These submissions, together with their supporting appendices, have been provided to the Applicants Representative, being SLC Solicitors. PROCEDURAL MATTERS 5 These proceedings concern the joint application of the Applicants to the Tribunal under the Landlord and Tenant Act 1985 ( the 1985 Act ), section 27A, for a determination of the Leaseholders liability to pay, and the reasonableness of, service charges comprising the cost of repairs to certain structures forming part of the Development. 6 Mr. and Mrs. McDermott made submissions to the Tribunal in writing in advance of the Decision to the effect that, inter alia, paragraph 25 of the Sixth Schedule to the Leases prevents the Applicants from recovering under the service charge any costs if those costs were recoverable from a third party. 7 At paragraph 91 of the Decision, the Tribunal stated: On Mr & Mrs McDermott s subsidiary question of whether paragraph 25 of the Sixth Schedule prevents the Applicants from pursuing a service charge claim against the Respondents for any repair costs where there was a remedy against a third party, the Tribunal does not reject that argument in this decision, but does not determine it as it is not part of the Preliminary Issue. If Mr & Mrs McDermott wish to pursue it, they are referred to the directions made at the end of this decision. 8 The relevant directions appeared at paragraphs of the Decision. These submissions are filed in accordance with those directions. Mr and Mrs McDermott are unclear as to the Tribunal's intentions as regards future directions. Accordingly, they reserve the right to amend or supplement these submissions depending on those directions and any submissions served by the Applicants. FACTUAL BACKGROUND 9 The general factual background to these proceedings is set out in paragraphs 1 20 of the Decision and is not repeated here. The material facts for the purposes of these submissions are summarised below. 10 Phase 1 of the Development was built by Carillion and completed in Phase 2 was built by Norwest Holst and was completed in However, some of the apartments in 2

3 each Phase were completed and let much earlier than this. Mr. and Mrs. McDermott moved into their apartment in July Defects first emerged in the Development in or around June 2002, the effect of which was to allow water ingress into a number of the apartments. 12 The management of the Development was taken over on 23 July 2010 by management companies pursuant to the right to manage provisions in the Commonhold and Leasehold Reform Act The Applicants now manage Phase 1 and Phase 2 respectively. 13 The defects were construction defects. Responsibility for their rectification would therefore ordinarily lie with the builders and/or the developer. The remedy would ordinarily be in the hands of the landlord, being the freehold owner, and any parties benefiting from collateral warranties or other assigned rights relating to the Development. 14 Notwithstanding this, the Applicants took no meaningful and substantive steps (of which Mr. and Mrs. McDermott are aware) to: (1) Ensure, or seek to ensure, that the benefit of any collateral warranties and/or other rights in respect of the Development (e.g. in contract, tort, or pursuant to the Defective Premises Act 1972) was assigned to the Applicants at the time they took over management (or at any time thereafter); (2) Require or seek to require the builders and/or the developer to rectify all of the defects; (3) Recover or seek to recover the cost of rectifying all of the defects from the builders and/or the developer. 15 The Applicants previously submitted a schedule as part of the Additional Statement dated 15 October 2014 at Exhibit 8 (the Schedule) (see Appendix 9). The Schedule sought to identify when defects were notified to the Applicants (or those instructed on its behalf). Mr and Mrs McDermott (and presumably all Leaseholders) dispute the Schedule is an accurate record. For instance, the Schedule does not record any defects which were notified to predecessor management companies or to the builders/developer direct (e.g. on site customer care services). However, the Schedule is instructive in that it evidences the matters set out below. 3

4 (1) Even on the Applicants' own case, the defects were notified at a time when the relevant limitation period had not expired e.g. Apartments 443, 551, 552 and 651 notified in 2007 (perhaps earlier). (2) This notification continued after July 2010 when the Applicants assumed responsibility for the defects. (3) Remedial works to the defects were carried out by Carillion (e.g. Apartments 551 and 552) or by others (the identity of the contractor is unknown - see Apartments 521, 544, 653 and 654), which would have the effect of potentially extending the limitation period (in which case, even now the Applicants could pursue a claim against the builder in respect of any such apartments where remedial works were carried out). This also shows engagement by the builders, which the Applicants could and should have capitalised upon. 16 The Applicants failings in this regard are also evidenced by a letter distributed by the First Applicant on or around 11 August 2013 to those of the Leaseholders whose apartments suffered from defects, which stated: The legal advice we have received is that:- Other possible avenues that need to be considered as potentially to be held responsible for the repair of latent defects comprise: The original developer (MCD Ltd) The original builders (Carillion in the case of Phase One, Norwest Holst in the case of Phase Two). Considering these in turn: MCD Ltd has now been wound-up and hence no longer exists to be held accountable for latent defects The original builders The contract for the construction of KEW was between MCD Ltd and the respective builder of each KEW Phase. As the individual leaseholder was not a party to this contract, the leaseholder is not in a position to holder the builder in breach of contract. 4

5 The only grounds for redress that the leaseholder has against the builder are ones of negligence. However time-limits apply to raising such claims Should we prove unable to obtain redress from a responsible third-party, the cost of the repairs of latent defects will then have to be met by all KEW leaseholders, who will then very reasonably demand evidence that we have exhausted all other avenues before turning to them for funding. 17 The First Applicant s letter is appended to these submissions as Appendix 2. The Tribunal will note that the First Applicant made no reference in its letter, and accordingly does not appear to have considered as at that date, the possibility of obtaining an assignment of any collateral warranties and/or other rights in connection with the Development (e.g. the building contracts themselves). Moreover, despite the reference to redress against the builder in negligence, no proceedings were ever (as far as Mr. and Mrs. McDermott are aware) commenced by the Applicants against either Carillion or Norwest Holst in negligence or otherwise. 18 Mr. and Mrs. McDermott were, rightly, concerned about the deficiencies in this approach, and raised their concerns with the Applicants repeatedly, including as follows: (1) By a letter dated 26 August 2013, Mr. McDermott and Mr. Bigland (another resident at the Development) wrote to the Applicants as follows (see Appendix 3): We consider that the advice RTM has received from SLC Solicitors although well meaning is not the specialist advice we require given the current position. They specialise in commercial property matters. It is our view that RTM should seek specialist advice from construction solicitors who are experienced in resolving claims and issues arising out of building defects. Developers enter into a building contract with a contractor to construct the development. As part of the building contract, various warranties are issued by the contractor in favour of interested parties. This is so as to provide a direct contractual link for those parties to claim against the contractor should there be defects in the construction of the development. These warranties are usually granted in favour of any funders but importantly the management company. This is 5

6 normal because the developer wishes to retain no long term liability in relation to the development post sale of the units. The building contract is normally entered into in such a way that liability for the construction of the development is maintained for 12 years. We are concerned that RTM (and/or SLC solicitors) has not been provided with a full copy of the building contracts in relation to Phases 1 and 2 together with all the drawings, specifications and schedules that comprised those contracts. We are not sure if RTM has a full copy of the drawings showing what was actually built. If the remedial solution is likely to incur significant cost, we can then take specialist legal advice but must act quickly as the 12 year period must be close to expiring if it has not already. We are concerned that SLC has not advised RTM of this nor have they identified that there are statutory rights available to us/rtm under the Defective Premises Act. We would recommend that you press Mainstay for a copy of the building contracts (if you have not done so), and together with a copy of the warranty that the previous management company was given by the contractors in relation to each of the phases. Such warranties are usually capable of being assigned or passed onto other parties (such as the RTM companies) so they can step into the shoes of the Management Company. (2) The following day, by an dated 27 August 2013, Mr. McDermott wrote to Mr. Alan Stedall (being a representative of the Applicants) stating (see Appendix 4): It is your comments on behalf of the RTM companies under this point that this gives us the greatest concern over SLC s advice. Any contractual warranties would never have vested with MCD as developer. MCD would never have required a warranty as it already had a contractual relationship with the contractor under the building contract. As we mentioned in my letter, warranties are given to a number of parties who have an interest in the development such as funders or the management company. They are never intended to be granted to individual leaseholders and SLC should be aware of this. It is for the management company to bring a claim on the collective leaseholders behalf if there has been a breach of the original building contract i.e. defective design or construction. This is entirely normal practice and does not require the contractor s permission. 6

7 19 The Minutes of the Joint Board Meeting held by the Applicants on 30 August 2013 record that Mr. McDermott and Mr. Bigland s letter dated 26 August 2013 was discussed and that (see Appendix 5): (1) SLC Solicitors had, in response to Mr. McDermott and Mr. Bigland s letter, conceded that they were not specialist construction lawyers and that the advice of such specialist constructions lawyers might become necessary in due course; (2) A proposal to replace SLC Solicitors with a more high profile firm of solicitors was rejected by the Applicants; and (3) It was agreed by the Applicants that SLC Solicitors should be directed to provide formal, definitive advice on the matter of collateral warranties. 20 However, the Applicants have not (as far as Mr. and Mrs. McDermott are aware) taken any steps to pursue these matters. Moreover, the Tribunal will see that by his dated 26 August 2013, Mr. McDermott offered the assistance of his daughter, a specialist construction litigation lawyer, to the Applicants free of charge (see Appendix 3). That offer was never taken up, despite the Applicants have agreed to do so at the meeting on 30 August 2013 (see Appendix 5). 21 It is against this background that the Applicants now seek to recover the cost of rectifying the defects from the Leaseholders by way of the service charge. THE LEASES 22 The Leaseholders obligation to pay the service charge under the Leases (the terms of which are identical for present purposes) arises in the following way (see Appendix 6): (1) By clause 3 of the Leases, the Leaseholders agree to observe and perform the obligations set out in the Eighth Schedule to the Leases. (2) By paragraph 7 of the Eighth Schedule, the Leaseholders agree to pay the Lessee s Proportion of the First Maintenance Expenses and the Second Maintenance Expenses at the times and in the manner provided by this Lease 7

8 (3) The Lessee s Proportion is a percentage set out in clause 1.18 which is specific to each individual Lease. (4) The First Maintenance Expenses are defined by clause 1.14 of the Leases as The moneys actually expended by or on behalf of the Management Company at all times during the Term in carrying out its obligations specified in Part 1 of the Sixth Schedule. (The Second Maintenance Expenses do not arise for present purposes). (5) Part I of the Sixth Schedule provides in material part that the First Maintenance Expenses include: Moneys reasonably, properly and actually expended or reserved for periodical expenditure by or on behalf of the Management Company at all times during the Term in respect of the following:- 25. Any expenses reasonably and properly incurred in rectifying or making good any inherent structural defect in the Buildings or any other part of the Development (except in so far as the cost thereof is recoverable under any insurance policy for the time being in force or from a third party who is or who may be liable therefor) THE LAW Principles of construction 23 The Leases are to be given their natural and ordinary meaning in light of their overall purpose, the facts and circumstances known to the parties at the time they were executed, and commercial common sense: see Arnold v Britton [2015] UKSC 36 at paragraphs There is no presumption that service charge provisions will enable the landlord to recover 100 percent of its expenditure through the service charges: see Rapid Results College v Angell [1986] 1 E.G.L.R. 53 and Campbell v Daejan Properties Ltd [2012] EWCA Civ The fact that a landlord s management functions are exercised by a right to manage company does not affect the construction of the lease as regards service charge provisions: see Wilson v Lesley Place (RTM) Company Limited [2010] UKUT 342 (LC). 8

9 The 1985 Act 26 The relevant provisions of the 1985 Act are as follows: (1) Section 18: (1) In the following provisions of this Act service charge means an amount payable by a tenant of a dwelling as part of or in addition to the rent (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord s costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs. (2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable. (3) For this purpose (a) costs includes overheads, and (b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable in an earlier or later period. (2) Section 19: (1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period (a) only to the extent that they are reasonably incurred, (b) and the amount payable shall be limited accordingly. 27 In Veena SA v Eugene Cheong [2003] 1 E.G.L.R. 175 the Lands Tribunal held that for the purposes of an assessment of whether relevant costs are reasonably incurred under section 19: (1) Reasonableness should be read in the general sense and should be given a broad, common sense meaning. 9

10 (2) The question is not whether the costs in question are reasonable, but whether they were reasonably incurred: that is to say whether the action taken in incurring the costs and the amount of those costs were both reasonable (see paragraph 103). 28 In Continental Property Ventures Inc v White [2006] 1 E.G.L.R. 85, a landlord sought to recover the cost of remedial works from its tenants via the service charge, notwithstanding that the landlord could have had the relevant works carried out under a guarantee free of charge, but had chosen not to do so. The Leasehold Valuation Tribunal concluded, on the tenants application, that the costs of the work were not reasonably incurred for the purposes of section 19 of the 1985 Act. The Lands Tribunal rejected the landlord s appeal, stating: The landlord s proposition that s. 19(1)(a) of the Act of 1985 means precisely what it says raises no difficulty for the LVT s conclusion in regard to the Guarantee Works. The LVT held as a matter of fact that the landlord could have had the Guarantee Works carried out under the Guarantee at no charge. It concluded therefore that to carry out those works at a cost was to incur the cost other than reasonably. Unless there was evidence of some disadvantage or good reason to reject the availability of the works without cost in favour of incurring a cost, this seems to me to be incontrovertible. 29 The principle to be extracted from Continental Property Ventures is summarised by the learned authors of Woodfall: Landlord and Tenant at paragraph as follows: Costs arising from works that could have been done at no cost under a guarantee are not reasonably incurred unless there is some good reason to reject the no-cost option. SUBMISSIONS 30 It is submitted that Mr. and Mrs. McDermott are not and would not be liable to pay a service charge to the Applicants in respect of repair costs incurred in circumstances where those costs could have been recovered from a third party, on the grounds that such costs would not be reasonably incurred for the purposes of section 19 the 1985 Act. Further, it is submitted that, so far as the terms of the Leases are concerned, such costs: (1) Would not be Moneys reasonably, properly and actually expended for the purposes of the opening words of the Sixth Schedule to the Leases; 10

11 (2) Would not be expenses reasonably and properly incurred for the purposes of paragraph 25 of the Sixth Schedule to the Leases; and/or (3) Would amount to costs recoverable from a third party who is or who may be liable therefor and would accordingly be excluded from the service charge pursuant to the following words of paragraph 25 of the Sixth Schedule This reading of the 1985 Act and the terms of the Leases is supported by Continental Property Ventures, which is materially indistinguishable and should be applied. In particular, it can make no material difference whether the Applicants (1) failed to ensure that the benefit of any collateral warranty or other rights (e.g. the building contracts) were assigned to them at the date they took over management, and therefore failed to exercise any rights they would have had thereunder; or (2) had the benefit of a collateral warranty or other remedy, but failed to exercise it. Both scenarios amount to rejecting a no-cost option in favour of incurring a cost. To the extent it is said that MCD was not in a position to assign any rights due to its dissolution (wrongly referred to by the Applicants as 'wound up') then MCD could have been restored to the register for this purpose. 32 In the event, it appears highly likely on the facts of the present case that the Applicants have, or would once have had, precisely such a no-cost remedy, as: (1) First, Carillion, the builder of Phase 1, wrote to Mr. Bigland, a Leaseholder, on 9 December 2009, in terms which strongly suggest that it was or considered itself to be liable to the landlord in respect of the defects, stating (see Appendix 7): We were contacted by LMP earlier this year who advised us of a number of issues at King Edwards Wharf. Since then we have entered into a period of dialogue and action with MCD with the express intention of permanently resolving these unfortunate issues for the residents of King Edwards Wharf. 1 It is submitted that on a proper construction of this clause, the use of the present tense ( a third party who is or may be liable ) cannot exclude third parties in relation to whom limitation has expired, as the expiry of limitation does not extinguish the claimant s underlying cause of action and therefore has no effect upon the defendant s liability. 11

12 Rest assured we are also working with the designers and supply chain for the original contract works to ensure that any defective design or installation in relation to the issues identified is rectified. The only realistic basis on which Carillion could have written this letter is that Carillion believed itself to have a potential liability to MCD (the landlord). (2) Second, in their Application Notice, the Applicants stated that (see Appendix 8): There are issues on limitation. Logically the Applicants can only have encountered limitation issues if they had (or considered themselves to have) a remedy which they could have exercised had they not allowed it to become time-barred. 33 It is noted that the Applicants appear to have been acting, at least as at the date of the First Applicant s August 2013 letter, on the basis of legal advice obtained from SLC Solicitors (their present representatives). The full nature and content of that advice is not known to the Leaseholders. However, it is submitted that the fact that the Applicants were or may have been acting on advice cannot affect the above analysis, as: (1) If the Applicants were advised to, but did not, take steps to ensure that any collateral warranties and other rights were assigned to them (or to take exercise any rights so assigned), then plainly costs incurred as a result would not be reasonably or properly incurred. (2) If the Applicants were not properly advised, and incurred (or propose to incur) costs on the basis of incorrect and/or inadequate advice, then that is simply a result of their failure to appoint appropriate advisors or negligence on the part of those advisors. SLC Solicitors are not, and do not hold themselves out to be, specialist construction lawyers of the kind appropriate to a case of this nature. Mr. McDermott spelled this out in his letter dated 26 August 2013 (see Appendix 2) and his to the Applicants dated 27 August 2013 (see Appendix 3). SLC Solicitors themselves conceded that they were unable to provide specialist construction advice, and that such advice could become necessary (see Appendix 5). In those circumstances, costs incurred on the basis of SLC Solicitors advice would, again plainly, not be reasonably or properly incurred. 12

13 34 It is therefore submitted that in the circumstances of this case, absent evidence of some disadvantage or good reason to reject the no-cost option (of which there is none) 2, any repair costs incurred by the Applicants which could have been recovered from a third party (including any advisors engaged by the Applicants and/or the NHBC) cannot have been reasonably incurred for the purposes of the 1985 Act or reasonably and properly incurred for the purposes of the Leases (in addition to being costs recoverable from a third party who is or who may be liable therefor ), and therefore do not fall to be taken into account when determining the amount of the service charge payable under the Leases. 35 For those reasons the Tribunal is respectfully requested to make the determination sought. DIRECTIONS 36 Alternatively, should the Tribunal not grant the determination sought, Mr. and Mrs. McDermott seek directions as set out below. 37 The procurement of the works proposed by the Applicants is still in its early stages. It is therefore very difficult for the reasonableness of the costs proposed to be incurred to be assessed properly at this stage. However (in addition to the matters of set out above), Mr. and Mrs. McDermott presently have the following concerns: (1) It is understood that the Applicants are proposing to carry out the works on a traditional basis (by which the building contractor works to a design provided by the employer) rather than on a design and build basis. Mr. and Mrs. McDermott are concerned that this arrangement (a) absolves the building contractor of responsibility for the design of the works; and (b) will leave the Applicants open to claims for additional payment in the event that extra work is required. (2) Mr. and Mrs. McDermott are also concerned that the Applicants may face claims for loss and expense from the building contractor where access is not facilitated by individual Leaseholders, which would in effect then have to be paid by the 2 The Applicants are wrong to say, as they do in the Application Notice, that the builders are in liquidation. They are not. Carillion and Norwest Holst remain there to be sued. 13

14 Leaseholders collectively via the service charge. They consider that arrangements should be put in place to minimize the risk of such claims. 38 In light of these matters, Mr. and Mrs. McDermott consider that there is a real risk that the costs incurred by the Applicants in procuring the relevant works may turn out in due course to have been unreasonably incurred. However, they appreciate that at this early stage it is likely to be impractical for the Tribunal to make an assessment of the reasonableness of the Applicants proposal. The date by which such an assessment is likely to be possible is unknown and out of Mr. and Mrs. McDermott s hands. 39 Accordingly, the Tribunal is respectfully requested to direct that the Leaseholders may apply to the Tribunal to make a further determination of any question touching the payability of any service charges that may be levied for repairs to the disrepair found to be present in Mr. Robert s Report or otherwise, or the reasonableness or otherwise of incurring costs on those repairs, once greater detail about the Applicants proposals for those works and their procurement is known. 6 July

15 CASE REFERENCE: BIR/00CN/LSC/2014/0011 BIR/00CN/LSC/2014/0026 IN THE FIRST TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) BETWEEN: (1) THE KEW PHASE ONE RTM COMPANY LIMITED (2) THE KEW PHASE TWO RTM COMPANY LIMITED Applicants -and- THE LEASEHOLDERS AT THE PROPERTY Respondents LIST OF APPENDICES (1) Appendix 1 Tribunal's decision dated 11 May 2016 (2) Appendix 2 Letter from the First Applicant to affected Leaseholders in or around 11 August 2013 (3) Appendix 3 Letter dated 26 August 2013 from Mr McDermott and Mr Bigland to the Applicants (4) Appendix 4 dated 27 August 2013 from Mr McDermott to the Applicants (5) Appendix 5 The Applicants' meeting minutes dated 30 August 2013 (6) Appendix 6 Sample Lease (7) Appendix 7 Letter dated 9 December 2009 from Carillion to Mr Bigland (8) Appendix 8 The Applicants' Application Notice (9) Appendix 9 Exhibit 8 of the Applicants' Additional Statement 15