UPPER TRIBUNAL (LANDS CHAMBER)

	
UT Neutral citation number: [2015] UKUT 0205 (LC)
UTLC Case Number: LRX/24/2013

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charges – replacement of district heating system under PFI Contract – whether lessees liable to contribute to maintenance of replacement system – appeal allowed

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE
LEASEHOLD VALUATION TRIBUNAL FOR THE
LONDON RENT ASSESSMENT PANEL

BETWEEN:	
ONE HOUSING GROUP
Appellant
and
(1) MR IAN KINGHAM AND MRS JANE KINGHAM
(2) MS JANE BERRYMAN
Respondents

Re: 29 Spinnaker House,
Byng Street,
London E14 8LQ

Before: Martin Rodger QC, Deputy President
Sitting at: Royal Courts of Justice, Strand, London WC2A 2LL
on
23 April 2015

Ranjit Bhose QC instructed by Judge & Priestley, Solicitors for the Appellant
The Respondents did not attend and were not represented.

No cases are referred to in this decision.

© CROWN COPYRIGHT 2015

	DECISION
1.	In the Tribunal’s original decision in this appeal given on 25 June 2014 it determined:
(a)	that a charge in respect of environmental works to the Barkantine Estate as a whole (and not simply to the common parts of Spinnaker House) was properly included as part of the interim service charge payable by the respondents (paragraph 51); and
(b)	that the cost of maintaining the Barkantine Heat and Power System (“the BHP system”) was part of the cost of the compliance by the appellant with its obligations under clause 5(5)(g) of the respondents’ leases and that those costs were properly included in the Total Expenditure towards which the respondents were required to contribute through the service charge.  
2.	In paragraphs 78–99 of the Tribunal’s decision two further issues were identified, which had been canvassed in the course of the hearing without there having been sufficient evidence or opportunity for argument to enable a concluded decision to be reached.  The first of those issues was whether the leaseholders were liable to contribute towards the capital cost of providing the BHP Plant.  The second issue was a question of construction of clauses 5(5)(g) and (h) of the lease and of a reservation in paragraph 5 of the Third Schedule.  It was recognised that those issues would arise only if the respondents were correct in their suspicion that the payments made by LBTH to BHP Co included a contribution towards the capital cost of providing the BHP Plant. 
3.	In order to enable those issues to be investigated more fully, the Tribunal gave directions for the disclosure of the PFI contract under which LBTH is required to make payments (which are subsequently passed on to the appellant under the stock transfer agreement by which the appellant acquired its interest in the Barkantine Estate).  A copy of the agreement (which is described on its front sheet as a “concession agreement”) was provided by LBTH and exhibited to the witness statement of a director of the appellant, Mr Matthew Saye,  made on 27 November 2014.  On behalf of the respondents Mr Kingham submitted a further witness statement dated 15 December 2014 and a further hearing was then arranged to enable the parties to make submissions.  In the event Mr Kingham was unable to attend that hearing through illness but did not request that it be postponed and relied on the contents of his most recent witness statement as sufficiently setting out the respondents’ remaining contentions.
4.	It is clear from the PFI agreement and the stock transfer agreement that the charge made to the appellant by LBTH does not include any contribution towards the capital cost of the BHP Plant.  Mr Kingham did not suggest on the contrary in his witness statement and I will therefore explain the contractual position briefly.
5.	It is not in dispute that the appellant is required by clause 13.2.1 of the stock transfer agreement under which it acquired its interest in the Barkantine Estate to make the annual payments to LBTH in respect of LBTH’s continuing liability under the PFI agreement which are set out in Part II of the Third Schedule of the stock transfer agreement.  That schedule was described in paragraph 82 of the Tribunal’s previous decision.  The sums payable annually for each year of the agreement are set out in tabular form and comprise the aggregate of three elements (maintenance repair and capital replacement, “operator” and a 15% margin).  The “housing share” of the annual total is 57% which is divided amongst the 534 units benefiting from the BHP Plant to produce an annual cost per flat which, in 2010/11, was £291.01.  With the addition of VAT this produced the total sum of £343.75 per flat which is claimed by the appellant from the respondents in this appeal.
6.	The PFI agreement itself requires LBTH to pay an “availability charge” to BHP Co throughout the 25 year supply period from 31 October 2000.  By clause 10.5 the availability charge is defined as comprising a capital element and a revenue element.  The capital element is explained as representing the cost of the BHP Plant and as including the costs of its design, procurement and project management through to commissioning and testing.  From the first schedule to the PFI agreement (at page 552 of the bundle) it is apparent that the capital cost of providing the system was £3,947,700 (a figure confirmed by LBTH in a letter dated 28 November 2014 at page 803 of the bundle).
7.	The revenue element of the availability charge is described in clause 10.5(b) of the PFI agreement as representing the fixed and variable costs associated with the operation of the plant, delivery of the heating service and other fixed overheads of BHP Co.  Once again the detail is provided in the First Schedule to the agreement at page 547.  The figures given for each year are identical to those which appear in the schedule to the stock transfer agreement  for “maintenance repair and capital replacement”, “operator” costs and the 15% margin.  The sum payable by the appellant to LBTH under the stock transfer agreement is limited to these three components of the revenue element of the availability charge, and no part of the capital element of the availability charge is included. 
8.	The revenue element payable by LBTH to BHP Co includes two further components (referred to as “risk assessment” and “uplift in risk assessment”).  In aggregate these additional sums exceed the revenue items passed on to the appellant under clause 13.2.1 of the stock transfer agreement.  The charge which the appellant is liable to pay to LBTH is, therefore, less than 50% of the revenue element of the availability charge and does not contain any part of the capital element.
9.	The only grounds on which the respondents now contest the inclusion of the BHP contribution in the service charge is explained by Mr Kingham in his most recent witness statement, and is that at no time prior to 2010/11 did either LBTH or the appellant consider it reasonable or appropriate to pass on the costs and maintenance of the BHP Plant to leaseholders.  Mr Kingham submits that on completion of the stock transfer by LBTH to the appellant it was their mutual intention that the appellant should meet the costs of its contributions towards the BHP Plant from its general revenue, rather than passing on its liability to leaseholders through the service charge.  Additionally, Mr Kingham submits that it is not reasonable to charge non-resident leaseholders for the cost of maintaining the BHP Plant because it is the residents (by which I take it he means the occupational sub-tenants of the leaseholders) and not the leaseholders themselves who may choose to use the heat and power supply by the BHP Plant.  
10.	As to the first of Mr Kingham’s points, I have already concluded in my previous decision that the maintenance of the BHP Plant is within the leaseholders’ contractual obligations under their leases.  LBTH was, of course, free not to pass those costs on to leaseholders but there was, in my judgment, no constraint preventing it from doing so.  The fact that the leaseholders were not charged for the maintenance of the BHP Plant for the first ten years of its life, does not mean that the appellant is now prevented from levying the charge which the lease entitles it to.  As to Mr Kingham’s second point, it is a matter for individual leaseholders and their tenants whether the cost of service charges is passed on or met by the leaseholders themselves.  As I have previously concluded, the appellant is entitled to recoup its contributions towards the maintenance of the BHP Plant from the respondents.
11.	I am satisfied that the reasonable fear which the respondents harboured before they had sight of the PFI agreement can now be seen to be unjustified.  The respondents and the other leaseholders on the Estate have not been called upon by the appellant to contribute towards the capital cost of providing the BHP Plant.  It is therefore unnecessary for me to express any concluded view on the other issues which emerged in the course of the previous hearing and which were left unresolved by the Tribunal’s original decision.
12.	I am, therefore, now able to allow the appeal in relation to the contribution towards the BHP Plant maintenance costs.  In the year 2010/11 which was the subject of the LVT’s consideration the charge payable by the respondents was £343.75.  

									Martin Rodger QC
									Deputy President

									Dated:  5 May 2015