Social Housing Speed Read – water and sewage ruling

Background

In Jones v London Borough of Southwark (2016) the High Court ruled that the London Borough of Southwark (Southwark) had been overcharging its tenants for water and sewerage services. Southwark is one of the largest social landlords in the country, owning about 52,000 residential properties, approximately 37,000 of which are tenanted and the majority have unmetered water supply. Miss Jones is one of these tenants.

In 2000 Southwark and Thames Water (TW) entered into an agreement under which TW supplied water and sewerage services to all of Southwark’s un-metered rented properties.

TW issued ‘global’ invoices to Southwark with details of the charges applicable to each individual property. Southwark then recovered the sums from the tenants by way of a service charge. A discount was applied to the invoices issued by TW to Southwark on account of their administration. Any surplus collected by Southwark over and above the value of the discounted invoice, goes into the Housing Revenue Account. Worryingly, this is a common arrangement, TW told the Court that they have “similar arrangements” with 69 councils and housing associations.

The facts

The key issue in this case was whether Southwark was acting as TW’s agent in collecting water charges from their tenants, or whether Southwark was actually a ‘re-seller’ for the purposes of The Water Resale Order 2006. This is significant because the 2006 Order imposes maximum charges on re-sellers and allows only for modest administration charges and the savings should have been passed on to the tenants.

Southwark put forward the argument that their relationship with TW was effectively an agency agreement and they were simply debt collecting on behalf of TW.

However, it transpired that Southwark pays TW a quarterly lump sum, which is reduced by 5% to reflect voids and 18% for Southwark’s commission fee. It further transpired that Southwark kept any extra monies raised from direct demands on their tenants. The reductions from TW were not reflected in tenants’ water bills and the tenants were charged the full rate.

Additionally, TW and Southwark entered into a deed of clarification and amendment on 23 July 2013. It was believed that if this was effective, the deed would stop Southwark being a ‘re-seller’. The effectiveness of the deed was disputed, but as TW were not a party to the case, any decision on the validity of the deed was adjourned to enable TW to be joined.

The decision

Mr Justice Newey said the case was “of considerable importance” because of the number of Southwark’s tenants and the implications for other landlords. He found that:

• Unless and until the 2013 Deed took effect, the relationship between TW and Southwark was not one of principal and agent but involved Southwark buying water and sewerage services from TW and re-selling them to its tenants;
• As a result, the 2006 Order applied and served to limit what tenants could be charged; and
• The amounts that Southwark charged Miss Jones exceeded the “maximum charge” allowed under the 2006 Order.

A further hearing in the High Court is to take place to decide whether Southwark’s overcharging ceased in around July 2013, when Southwark and TW entered into a deed of clarification. It is accepted that, if the deed is effective, Southwark has not been a water re-seller since that time. Please click here to view the judgement.

The implications

Southwark will to have to pay a total of £2.3m for each year between 2010 and 2013 to all its tenants. The period is currently limited to 2013 pending the decision reached in relation to the deed of clarification, as described above. The implications of this ruling are threefold:

Firstly, many more councils and housing associations may be affected by the recovery of overpaid service charges. It is likely that Southwark will appeal the decision but if they are unsuccessful the repercussions will be expensive and sweeping.

Secondly, this could potentially impact every rent arrears possession brought by tenants on the grounds that the overpaid charges should be off-set against any arrears.

Lastly, if you have an agreement with a water provider and are concerned about its content please contact John Murray or a member of our expert Social Housing Team.