Avon Ground Rents Limited & Anor v Mark Pilgrim & Anor

For the appellants Mr Granby focused on the way the FTT expressed its decision in paragraph 7.4 and following, beginning with the words: “…unless and until Avon is able to establish…”. He argued that the FTT has set up a condition precedent to the appellants’ being able to make any charge at all for the electricity to the common parts, and that that was not something the FTT could do in the absence of any such provision in the lease. Moreover, it is not a condition precedent that the appellants can satisfy because they have no means of knowing what is the total electricity usage of the building (including the private usage of all the flats) and therefore cannot show that the solar panels have generated 10% of it. He pointed out that it is necessary for the building to have mains electricity in order to provide back-up for when the sun is not shining and insufficient power is produced by the solar panels; the effect of the FTT’s decision is that the appellants cannot even recoup the standing charge.

Mr Granby also pointed out that there is no obligation at all on the freeholder and management company to use the output from the solar panels to power the common parts. They are free – to take a purely hypothetical example – to devote all the output to operations of their own in the retained parts of the building, or – again hypothetically – to devote just to one individual flat the output from the solar panels installed to service the common parts. There is nothing in the lease or in the planning permission that says the output from the solar panels has to be used to power the common parts nor that the benefit of the solar panels is to be shared between the leaseholders.

As to the shortcomings of Mr Gurvits’ evidence, Mr Granby explained that the case the appellants thought they had to meet was that the respondents were saying they had used the power output for their own ends and pocketed a feed-in tariff. The appellants’ answer to that was that the solar panels connected up to power the common parts were in fact switched off; they had therefore met the respondents’ challenge.

Mr Pilgrim said that the simple issue is that in the respondents’ view they are paying too much for electricity. As to the feasibility of the FTT’s condition, he pointed out that at the hearing before the FTT the appellants had produced certificates from the manufacturers of the solar panels serving the flats indicating that the capacity of each panel, and that it is therefore easy to see what is the production capacity of all the panels and perfectly possible to meet the FTT’s condition.

I agree with the appellants that the lease makes no reference to solar panels and that the appellants are under no contractual obligation to use solar-powered electricity at all. Nor does the planning condition require them to use the solar panels for the common parts of the building; it requires only the use and maintenance of the approved system, without saying what the power output is to be used for, although it was obviously the intention of the local planning authority that it be used to supply power to the building.

More generally, where the freeholder of a building with solar panels on its roof has chosen to grant long leases of flats in the building, it is under no contractual obligation to use those panels for the benefit of its leaseholders unless it has covenanted in the leases to do so.

However, the factual background to the present proceedings, and the nature of the FTT’s jurisdiction, mean that that is not the end of the matter.

The FTT’s jurisdiction under section 27A of the 1985 (set out at paragraph 9 above) Act is to determine whether service charges are payable, and if so in what amount. When it is invoked by leaseholders, they must raise a prima facie case that indicates that a cost was not reasonably incurred, or that an estimated charge was not reasonable. Once they have done so the evidential burden shifts to the landlord or management company (both in this case, although the FTT focused on the first respondent as landlord) to show that the expenditure, or the charge (as the case might be), was reasonable.

In my judgment the respondents did all that was required to shift the burden to the appellants in the FTT. The essence of their case was this: first, that the development was given planning permission on condition that it benefited from solar power up to at least 10% of its needs, second, that the solar panels are connected up so as provide power for the common parts, and third, that for three years they appear to have done so with the result that the leaseholders were not required to pay anything. The respondents therefore wanted to know why the appellants were paying an outside supplier for electricity for the common parts from 2019/20 onwards. It is hardly surprising that they took the view that the appellants must be using the panels for their own ends. Why waste them?

At first sight the FTT’s decision lacks findings of fact. The FTT did not decide whether the absence of a charge in the first three years was because the solar panels were providing it for free, nor did it decide when they were switched off, nor why. It did not make any finding of fact to the effect that the panels would provide all the power needed for the common parts. My initial reaction, which I discussed with the parties at the hearing, was that the matter needed to be remitted to the FTT for further findings to be made.

On reflection, I take the view that the FTT did not make those findings because it did not need to. It heard the respondents’ prima facie case and it looked to the appellants (as respondents in the FTT) to show that the costs and charges were reasonable. It heard Mr Gurvits’ evidence and rejected it as neither useful nor reliable. It concluded that “there is no satisfactory evidence before us in relation to the position on Avon’s part”; in other words, the appellants had not discharged the evidential burden. The FTT was left with the respondents’ prima facie case that the power for the common parts could be and had been provided by the solar panels. That was consistent with its own observation that the solar panels were connected to a switch on the control panel labelled “Communal solar” and that it is off, whereas the panels for the individual flats are switched on (there is a picture of the control panel in the appeal bundle). In the circumstances, where the appellants had provided nothing to refute the respondents’ evidence that the solar panels had powered the common parts for three years, and no explanation for their being unused and apparently wasted, the FTT found that the costs for the first three years in issue had not been reasonably incurred and (as I agree we can infer) that the estimated charges for the last two years were not reasonable.

I see no flaw in that finding and the appeal fails insofar as it is a challenge to the FTT’s findings about the years 2019/20 to 2023/24.

That does of course leave the appellants unable to charge the respondents for their share of the communal electricity for the three years from 2019/20. But the appellants did not adduce any satisfactory evidence to explain why a mains supply was needed from that year onwards when it apparently had not been in the first three years. The FTT’s finding was therefore inevitable.

As to the two years 2022/23 and 2023/24, only the estimated charges were in issue before the FTT. If the leaseholders choose to challenge the final charges for those or any later years then the appellants will need to answer that challenge, and the FTT’s decision gives them a lot of assistance by setting out the points on which they will probably need to produce evidence.

However, the appellants’ concern is that the FTT’s decision in paragraphs 7.4 to 7.6 appears to impose a precondition that they must satisfy before any future charges, including presumably the final demands for 2022/23 and 2023/24, can be regarded as reasonable.

It is not entirely clear to me whether that was what the FTT intended to do. But it is easy to see the appellants’ point; it appears that the FTT was making a judgment, rather than merely obiter observations, about future charges. And in its refusal of permission to appeal the FTT appeared to confirm that view of what it said in paragraph 7.6 by saying:

“Our decision is that unless and until the obvious discrepancies in the estimated charges on which the bills are based has been investigated with the supplier and if necessary challenged, it is not reasonable for the Respondent either to pay those bills or to seek to recover them from the lessees.”

The FTT has jurisdiction under section 27A(3) to decide “whether, if costs were incurred for services … of any specific description, a service charge would be payable for the costs…”. But in the present case the respondents did not apply for any such determination; their application was made only in relation to the electricity charges for the years 2019/20 to 2023/24. There was no application to extend the scope of the application to future years and to costs then not yet incurred, and the appellants did not know they had to meet a case that related to future charges. For that reason paragraphs 7.4 to 7.6 are set aside insofar as they purport to make a judgment about the reasonableness of future charges or to restrict the appellants’ ability to incur costs or demand service charges after the date of the FTT’s decision.

That said, as a matter of commonsense it will be apparent to the appellants that there are points they will probably need to address if further service charges are challenged, and they may find it useful to contemplate the FTT’s words in paragraphs 7.4 to 7.6. It may or may not be right that it is not possible to tell whether the solar panels are providing 10% of the building’s electricity needs, but the planning condition is something of a red herring; the real question they are likely to have to answer is why are the solar panels are not all being used. There may or may not be a good answer to that. And even if charges to external providers are found in principle to have been reasonably incurred, again the appellants can anticipate that it may be difficult to justify charges that are all estimates and have never been reconciled. I say that by way of obiter comment intended to assist both parties to the appeal, and of course the Tribunal makes no determination about what points will have to be proved in future proceedings.

Two different sets of management charges were in issue before the FTT. The conclusion on one of them is not appealed but it has a bearing on the other which is.

As I said above the building is managed by Y & Y Limited. The respondents challenged the annual fee, which was reflected in the service charge, on the basis of poor management, and the FTT determined at paragraph 12.5 of its decision that the charge was to be reduced by 50%; in other words, 50% of the annual fee charged by Y & Y was a cost reasonably incurred by the appellants and only to that extent was the service charge payable. Neither party appeals that conclusion.

The FTT had sight of the contract setting out Y & Y’s terms and charges. It contains an Appendix listing matters not covered by the annual charge and for which an additional charge would be made, and the list includes monitoring building works, “dealing with s20 consultations, including serving the required notices”. The additional charge for such work is set at 15% + VAT, meaning 15% of the contract price.

The management charge that is in issue in the appeal is a charge made in accordance with that item in the Appendix, for the management of a consultation (as required by section 20 of the Landlord and Tenant Act 1985) in relation to the installation of a key fob entry system for the building. Both the contract price of £10,800 and the management fee of 15% of that sum were challenged by the respondents.

The FTT found that the contract price was reasonably incurred. As to Y & Y’s management charge it said:

“It is manifestly inappropriate that Y & Y should be paid a management charge of 15% of the contract price of £10,800. Quite apart from any question as to the competence with which Y & Y has managed the s.20 process, Y & Y is already being paid a management fee at the top end of the normal range for its work in relation to the Building. That work includes or ought to include, the management of projects which are integral to that management function, such as the security of the entrance doors. It is not therefore reasonable for Landlord to incur any additional costs paying it to manage a project which it ought to have been managing anyway.”

That is the decision the appellants appeal.

The appellants’ point is simple. First, the contract with Y & Y did not include work done in connection with a section 20 consultation. Second, the FTT had already decided what was a reasonable cost for Y & Y’s management on the terms of that contract, i.e. without including work on a section 20 consultation. Therefore it was illogical for the FTT then to decide that that price was also a reasonable charge for work that was not within the scope of that contract; put another way, it was inconsistent for the FTT to approve a management charge as reasonable in amount and then say that that charge should have included further work by the agent, at no extra cost, that was not within the terms of the agreement.

The respondents’ argument focuses on the poor quality of the section 20 consultation and of the work done; they said that the building remains insecure.

In my judgment the appellants are right as a matter of logic. There is some doubt as to whether the FTT was right to say that the annual fee was “at the top end”; the appellants say that that is not what Mr Gurvits said, although Mr Granby acknowledged that it is not open to them to appeal that finding of fact. But that “top end” fee was in any event reduced by 50%, to produce what the FTT regarded as a reasonable annual charge for the regular work done by Y & Y. That must have been intended as a charge for the work done in return for the annual fee according to the terms of the contract. To then say that further work should have been done at no extra charge is inconsistent, because that reasonable charge for the regular management should not have included any slack, so to speak, for additional work that was not within the terms of the contract.

Accordingly I take the view that the FTT’s conclusion was illogical and has to be set aside.

The respondents’ share of that management charge was £16, and it is not proportionate to remit the matter to the FTT for it to be decided afresh. The FTT made clear the very dim view it took of Y & Y’s management performance. I substitute the Tribunal’s decision – taken on an extremely broad brush pragmatic basis – that the charge for the section 20 work was reasonable at half the level charged, namely 7.5% of the contract price plus VAT, and that the respondents’ share should be adjusted accordingly.

On the main point in issue, namely the charge for communal electricity for the years in issue, the appeal fails. The appeal succeeds in so far as the appellants ask the Tribunal to set aside any determination made by the FTT about future electricity charges. The appeal also succeeds in relation to the management fee and the Tribunal has substituted its own decision that a charge of 7.5% of the contract price was reasonably incurred.