Sam Madge-Wyld considers the practice of local authorities charging tenants for water as part of the rent.
In 1989, the water industry was privatised. In London, the responsibility for providing, and charging for, the supply of water and wastewater services was transferred to Thames Water. Since 1989 many housing associations and local authorities, including the London Borough of Southwark, have entered into agreements with Thames Water – and other similar companies throughout the country – to collect the charges for water and wastewater services from many of their tenants (usually from tenants living in flats or in other unmetered properties). Authorities and associations do this by making it a condition of the tenancy agreement that the tenant pay, in addition to rent, water charges. This is a very common arrangement: Southwark alone has 37,000 tenants who live in properties that are not fitted with a water meter.
According to Thames Water, “the purpose of these arrangements is to enable [it] to collect charges from tenants in a more efficient way”, as the local authority assumes the risk for the non-payment of such charges and bad debts. As a result, Thames Water agrees to pay the authorities and associations that collect such charges for it a commission for doing so.
This method of collecting water charges has proved unpopular with some tenants on the ground that they believe they are required to pay more for the water they are supplied than those people whose charges are collected by Thames Water. This is especially true for those who pay regularly. Ms Jones – in Jones v Southwark LBC  EWHC 457 (Ch) – is the latest tenant to challenge the legality of this arrangement. Happily for her, she is also the first so far to have been successful.
Before considering the Jones case, it is first necessary to consider two earlier unsuccessful challenges. In Lambeth LBC v Thomas (1997) 30 HLR 89, Lambeth had entered into a similar agreement with Thames Water to collect the charges for the supply of water and wastewater services from its tenants. Twice a year Lambeth paid Thames Water the total water charges for all of the relevant properties. This sum was, however, discounted to take into account unoccupied properties and its cost of collection. This discount was retained by Lambeth and ensured that each year it obtained a surplus, which it used to off-set other costs in its housing revenue account. The Court of Appeal held that this arrangement was lawful and Ms Thomas was legally obliged, under the terms of her tenancy, to pay Lambeth the water charges. Moreover, if she failed to do she was at risk of being evicted.
More recently, in Rochdale BC v Dixon  EWCA Civ 1173;  HLR 6, Rochdale had entered into an agreement with United Utilities for Rochdale to recover on behalf of United Utilities the water charges, already fixed by United Utilities, from its tenants. In 2005, Rochdale amended the terms of all of the tenancy agreements with its secure tenants so as to enable it to do so. Rochdale, in consideration for collecting the charges, were paid a commission, i.e. a fixed charge of £28 per property and a variable charge of 8 per cent of the water charges. The fixed charge was intended both to cover Rochdale’s costs of collection and to provide a profit. The variable charge of 8% was intended to allow for vacant properties and bad debt. On four dates in each financial year, the authority paid one quarter of the total water charges for the year and the company paid one quarter of the Commission.
Mr Dixon contended that Rochdale’s power to enter into an agreement with United Utilities was governed by s.1, Local Authorities (Goods and Services) Act 1970. Section 1, as amended by the Water Consolidation (Consequential Provisions) Act 1991, provided that while an authority could enter into an agreement with a water undertaker, it only had the power to enter into an agreement “for the collection and recovery by the authority, on behalf of any water undertaker or sewerage undertaker, of any charges fixed by the undertaker”. Mr Dixon argued that Rochdale had in effect purchased the supply of water and sewage services from United Utilities and was re-selling it to its tenants at a profit; it was not therefore collecting water charges on behalf of United Utilities. The Court of Appeal, however, disagreed and held that United Utilities remained the water undertaker, i.e. it still supplied the water to Rochdale’s tenants, and that Rochdale was simply its agent. The charges had been fixed by United Utilities and it was simply that the mechanism for the collection and recovery of those liabilities had been undertaken by Rochdale for United Utilities. It was irrelevant that Rochdale paid United Utilities in bulk or that it charged an additional sum for collecting the charges.
Jones v Southwark
Southwark had a similar arrangement with Thames Water, which had been entered into in 2000 (albeit had been subsequently amended in 2013 after another case was settled; the court did not consider the meaning of the latest agreement as Thames Water needed to be joined to the proceedings). Under the 2000 agreement, Thames Water determined the water and sewerage service charge for each “unmeasured property” that it was agreed Southwark would collect the charges from. Thames Water then billed Southwark the total sum of all such charges less two sums: for void allowances (5%) and a collection commission (18%). Southwark accepted in evidence that this was an important source of funding for it and that the void allowance did not always correspond to the actual number of voids, for example in one year the number of voids was around 1% but the void allowance assumed 5%.
The agreement described Thames Water as the provider and Southwark as the customer. It further provided that Southwark would pay for Thames Water to provide water and sewerage services to some of its premises.
Ms Jones argued, like Mr Dixon, that the 2000 Agreement involved Thames Water supplying Southwark with water and sewerage services and Southwark’s tenants in turn buying such services from Southwark. Ms Jones further argued, unlike Mr Dixon, that Southwark was a re-seller of water and sewerage services within the meaning of the Water Resale Order 2006. The 2006 Order defined a Re-seller as being any person, other than a relevant undertaker – i.e. a supplier of water and sewerage services under the Water Industry Act 1991 such as Thames Water – who provides to a Purchaser, i.e. a person who occupies any dwelling and who buys from a Re-seller any water or sewerage services, a supply of piped water or sewerage service which a Water Undertaker has supplied, directly or indirectly, to the Re-seller.
Ms Jones also argued that under Thames Water’s charging scheme that had persisted until 2010, she was not in any event liable to pay Thames Water for water or sewerage services as Thames Water’s charging scheme had provided that where the relevant premises to which the supply is made is let on a tenancy of less than twelve months or licence, the owner of the premises shall be regarded as the occupier and be liable for charges except where some other person has paid the charges or is liable by agreement with Thames Water. As Ms Jones was a weekly periodic tenant Southwark had been liable to pay Thames Water for the supply of water and sewerage services and had, in turn, passed the cost onto her.
Whether Southwark was a re-seller of water within the meaning of the 2006 Order was important because the 2006 Order imposed a maximum charge for water and sewerage services that could be levied by the re-seller. It did not allow a re-seller to recover a commission for collecting unpaid charges or to make a profit on the voids allowance. Ms Jones argued that she, and all of Southwark’s other tenants who paid Southwark for water and sewerage services, had therefore been overcharged.
Southwark argued that, as in Thomas and Dixon, the 2000 agreement provided for it to collect the water charges on Thames Water’s behalf and that it was merely Thames Water’s agent. Newey J, however, disagreed. The 2000 agreement was different to the one between Rochdale and United Utilities: it contained no reference to tenants being liable to pay water or sewerage charges to Thames Water, to Thames Water authorising Southwark to collect such charges on its behalf, to Southwark owing any duty of skill and care or to Southwark having any obligation to invoice tenants or in respect of complaints from them. Moreover, the commission paid to Southwark was nothing of the sort; it simply reduced what Southwark had to pay Thames Water and was not conditional on a service being performed.
Perhaps most importantly, however, until 2010 it was Southwark who had been liable to pay Thames Water for water charges; it could not therefore have been Thames Water’s agent during that time as its tenants were not liable to pay Thames Water.
That final point seems the most important as it is hard to see any real distinction between the arrangement in Rochdale, Lambeth and Southwark. They all proceeded on the same model of agreement.
The impact of this decision
Obviously for Southwark this decision has very wide-ranging implications. Some 37,000 of its tenants appear to have been over-charged for water and sewerage services over a period of 10 years. Although the decision does not quantify the amount at stake, one bill from 2005 put the discount (i.e. the commission and void allowance) at £126,000. It is not just Southwark, however, who this may affect. Thames Water gave evidence that it had “commercial agency arrangements” in place with 69 local authorities and housing associations that covered 375,000 properties.
It is important to note at this stage two points: this decision will almost certainly be appealed and seeing as contrary decisions were reached in Thomas and Dixon the prospects are not fanciful. Secondly, the decision only concerned whether Southwark had been entitled to levy the charges that it did. The decision did not decide whether or how much Southwark had to reimburse tenants who had been overcharged. Ordinarily, where money has been paid to another in circumstances where it was not due such money can be recovered by a restitutionary claim. Such a claim can, however, be defended on the basis that the authority has, in good faith, paid the money to a third party and, but for the payment by the tenant, would not have paid the third party. Any surplus, one assumes, has been credited to the housing revenue account and used to pay third parties, e.g. contractors.
However, this defence is unlikely to apply to Southwark, because s.150(5), Water Industry Act 1991 gives Ms Jones, and other tenants in her position, an express statutory right to recover from Southwark any overpayment she has made. It does not appear therefore that she will need to rely on the law of restitution to recover the sums paid. Presumably, however, as s.9, Limitation Act 1980 will apply, any sum that can be recovered will be limited to six years from the date that her claim was issued.
In the meantime, tenants with arrears who are being brought to court by Southwark in possession proceedings, or indeed any other association or authority with a similar agreement with Thames Water, would be wise to dispute the level of the arrears in respect of any water charges and to put Southwark to proof. Presumably, any such defence would also include a counterclaim. It is going to very difficult for Southwark, for the time being at least, to be able to prove what water rates were payable before 2013. This is likely to cause Southwark some difficulty in litigating possession claims unless it agrees to waive the water charge.
Finally, if Southwark has been using this revenue to off-set the housing revenue account, it will have to find other ways of doing so. Historically, the easiest and most obvious way of doing so would have been to increase the rents of its secure tenants. However, this will soon no longer be an option, as the Welfare Reform and Work Bill, once passed, will require it to cut rents by 1% per year for four years.