Leaseholders’ victory over ‘contracts for eternity’ is overturned by Upper Tribunal

Bad news for blocks with long-term service contracts like communal heating

Leaseholders ensnared in contracts for eternity for services such as door entry systems or communal heating will be dismayed by the latest ruling concerning prime site St David’s Square in London’s Docklands.

The Upper Tribunal has overturned previous decisions in 2023 by the First-tier Tribunal that leaseholders had been overcharged £600,000 between 2018 to 2020.

This has left leaseholders fearing a six-figure legal bill for the landlord’s costs, to be dumped on the service charge, although the landlord declines to say how much it has spent at this stage.

On the plus side, the Upper Tribunal did order the landlord to pay back nearly £50,000 for overcharging the rented intercom system.

In addition, it ordered FirstPort to repay nearly £1,500 in secret insurance commissions.

The single biggest issue in the succession of disputes at St David’s Square concerns the near £500,000 cost of a rented intercom charged between 2018 and 2020. The intercom and other systems were installed by the developer, St George a subsidiary of Berkeley Group, in the year 2000 under a contract with Essex company Countryside Communications.

The landlord claimed that it had assumed the obligation to pay these charges in 2003 and again in either 2013 or 2014. The landlord was unable to produce any agreement between itself and Countryside, claiming all the paperwork was “lost”. All the landlord was able to produce were two of the five signed but undated contracts between the original landlord and Countryside.

The leaseholders argued that they could have bought and installed a brand new intercom system for less than half the cost charged by Countryside for rental and maintenance.

In May 2023, the FTT ordered FirstPort and the landlord to return roughly £400,000 of these charges to leaseholders.

The landlord, FIT Nominee Limited and FIT Nominee 2 Limited, both subsidiaries of the NatWest Group plc, claimed that it was bound by a contract entered into by the developer and could not change the price charged. The landlord did, in fact, negotiate a discount with Countryside from 2009 after leaseholders mounted an earlier legal challenge over the costs.

Both the landlord and Countryside said that they were unable to explain what the system cost originally, or why nearly £500,000 had been charged in the period 2018-20.

In a bitter blow to leaseholders, the Upper Tribunal has decided that the leaseholders cannot challenge the nearly £500,000 of costs incurred in 2018, 2019, 2020 because they cannot show that the contract was unreasonable in the year 2000.

This is despite the fact that neither one of the landlord, FirstPort or Countryside can explain why the costs are so high. The leaseholders also only sought to challenge the 2018-20 costs.

This decision opens the floodgates for landlords to avoid challenges to service charges by entering into long-term contracts.

As part of the drive to net zero, it is becoming increasingly common for sites to have long-term contracts for communal heating and hot water. Some modern developments are also required by the terms of their planning permission to connect to “district heat networks”. Often these involve contracts of anywhere between 15 to 25 years.

Leaseholders of local authorities and social housing providers also often find that there are long-term contracts in place for utilities, responsive maintenance and major works, often for periods ranging between five and 20 years.

If the Upper Tribunal’s decision stands, it will mean that all a landlord has to do to defeat a challenge to the costs incurred at any point under a long-term contract is to show it made a reasonable decision to enter that contract at the beginning, regardless of how one-sided the contract is, or how unreasonable the price paid by leaseholders eventually turns out to be.

In a small crumb of comfort to leaseholders, and despite the contract being in place until the end of 2020, the Upper Tribunal has told the landlord that its costs should be reduced by 50% for the second half of 2020, or 25% overall.

Leaseholders will receive back about £50,000 as a result.

Leaseholders claim the 50% discount, which leaves leaseholders paying £100,000 a year to rent systems more than 25 years old, is also unreasonable.

FirstPort made no effort to find out from Countryside how its prices were calculated. Nor did FirstPort negotiate with any other supplier to find out how much renting a 20-year-old system would cost before agreeing to continue with Countryside. FirstPort’s choice will leave leaseholders at the site paying Countryside £100,000 a year in perpetuity, even as the system ages and breaks down.

The Upper Tribunal’s decision now suggests that leaseholders may have to find evidence of what happened in the distant past to challenge charges related to long-term contracts. Lawyers say this will inevitably involve the expense of locating and briefing expert witnesses, making it even harder for leaseholders to challenge costs.

The leaseholders at St David’s Square are considering their options in relation to any further appeal.

Meanwhile, they fear that they are going to get a six-figure legal bill.

As with most modern leases, the landlord is entitled to use the leaseholders’ money to defend itself from leaseholder claims. This is a practice due to be banned when the Leasehold and Freehold Reform Act 2024 comes into force.

The participating leaseholders successfully obtained protection from paying the landlord’s costs of the FTT proceedings. The landlord ignored that order, charging more than £54,000 of costs in the 2022 service charge year.

This was later reversed, although the landlord is seeking to overturn the protection and make the participating leaseholders pay all of the costs of its appeal.

The leaseholders successfully appealed the FTT’s decision on FirstPort’s insurance commissions. FirstPort has been ordered to repay approximately £1,500.

Curiously, FirstPort’s head of insurance, Liza-Jayne Amies, did not attend the FTT hearing in January 2023 and therefore could not be cross-examined by the leaseholders.

The Upper Tribunal found that in the absence of Ms Amies, the landlord could not demonstrate FirstPort Insurance Services had done any of the work it claimed to perform in relation to the commissions.

The Upper Tribunal Judge Elizabeth Cooke states:

“In my judgment in going ahead without Ms Amies’ evidence the FTT ensured that the landlord was unable to answer the leaseholders’ challenge, which contrary to the landlord’s argument was enough to shift the evidential burden to the landlord to show that the price paid was reasonable, either by reference to the market and the available arrangements or by showing that the price paid reflected services carried out. The FTT therefore failed to take all relevant points into consideration and I set its decision aside.”

2022 accounts for FirstPort’s insurance arm reported that it earned more than £3.7 million in insurance commissions. These commissions not disclosed in insurance premiums charged to leaseholders, and the Leasehold and Freehold Reform Act 2024 contains measures to ban such commissions in the future.

The Upper Tribunal ruling can be read here:

https://www.leaseholdknowledge.com/wp-content/uploads/2024/07/StDavidsSquareUpperTribunal.pdf