In a decision with potentially far-reaching implications for all local authority landlords, the High Court has ruled that the London Borough of Southwark has for many years been overcharging its tenants for water and sewerage services. The decision opens up the possibility of claims being brought by tenants for recovery of overpaid service charges, and claims for possession based on rent arrears being defended on the grounds that the overpaid charges should be off-set against any arrears.

Facts of the case

London Borough of Southwark ("the Council") owns around 37,000 tenanted properties. Those properties are not fitted with water meters. The properties are served by Thames Water ("TW") for both water supply and sewerage services. In 2000 the Council and Thames Water entered into an agreement under which TW supplies water and sewerage services to all of the Council's un-metered rented properties. TW issues 'global' invoices to the Council with details of the charges applicable to each individual property. The Council then recovers those sums from the tenants by way of a service charge. To reflect the fact that TW does not have to collect the charges from each tenant, and that the Council takes on the cost of collection, and the risk of bad debts and voids, a discount is applied to the invoices issued by TW to the Council. Any surplus collected by the Council over and above the value of the discounted invoice, goes into the Housing Revenue Account. This is a common arrangement between social landlords and water companies. TW alone has 69 such agreements with councils and housing associations.

The Water Re-Sale Order 2006

The Water Re-Sale Order 2006 restricts the amount that a purchaser of water can charge when re-selling the water to the final consumer (in this case the Council's tenants). In effect the Order entitles re-sellers to impose only very modest administration charges. Section 150 of the Water Industry Act 1991 gives water consumers a right to recover any charges paid in breach of the Water Re-Sale Order.

The High Court decision

The Council argued that it was not the purchaser of water from TW, but was merely acting as TW's agent (in which case the Water Re-Sale Order would not have applied). The court disagreed. The court carefully looked at the terms of the agreement between the Council and TW and decided that the terms were inconsistent with a relationship of principal / agent. This was not the first time this argument had been made against the Council. In London Borough of Southwark v Ofogba [2012] the tenant argued, in defence to a claim for possession based on rent arrears, that overpaid water charges levied by the Council in breach of the Water Re-Sale Order should be off-set against his arrears. That issue was settled by consent, the precise terms of which are unknown, but in response to that case the Council executed a Deed of Variation which sought to make clear that the arrangement with TW was indeed an agency agreement. In the present case the claimant argued that the Deed was invalid, and the court adjourned consideration of that question in order for TW to be joined as a party. The case of Rochdale Borough Council v Dixon [2011] has previously considered a similar, but not identical, agreement between Rochdale and United Utilities, and had found that the agreement was indeed an agency agreement (and hence the Water Re-Sale Order did not apply).

What this means for local authorities

Local authorities may now find themselves facing claims for overpaid water charges going back many years, subject to the six year limitation period. The value of individual claims may be be relatively small but for authorities with a large number of properties the potential total liability could be very significant

Because the Water Industry Act gives individuals a statutory right to recover charges levied in breach of the Water Re-Sale Order, local authorities may also find that claims for possession based on rent arrears are complicated by counter-claims for those overpaid sums. In relation to longstanding tenants the value of the counter-claim might reduce (or even extinguish) the arrears such that the ground for possession is not made out.

An unfortunate consequence of this decision is that some authorities may decide to terminate these agreements, leaving it to tenants to set up and manage individual accounts with the water company in question. This is unlikely to benefit tenants, who would pay the same amounts previously paid as services charges. However, the consequences of termination for an authority's Housing Revenue Account could be very significant at a time when authorities need the money more than ever. Southwark estimates that termination of their agreement with TW would cause a loss of £2.3m to their HRA, with the consequential detrimental impact on service provision.

In order to limit potential liability going forward and to ensure the arrangements they have in place operate as intended, local authorities with similar agreements in place should:

  • review and if necessary re-draft those agreements in order to make it clear that the authority is acting as collection agent on behalf of the water company;
  • consider whether they need to make any consequential amendments to their tenancy agreements. This may require consultation with tenants under the Housing Act.

Our highly experienced Litigation, Advisory and Regulatory team is able to provide bespoke advice to authorities on whether the arrangements you have in place are vulnerable to challenge. This could include reviewing your agreements with water companies and your related tenancy agreements and advising on whether you should seek to terminate or vary those agreements now and if so how to do so.

It may also be possible for local authorities to save costs by getting collective advice on how to manage claims should any be made and to establish standard agreements for this kind of arrangement. This builds on our experience in successfully managing large scale collective actions including the Property Searches and Icelandic Banks litigation. 

If you would like to speak to one our team about this please contact:

Virginia Cooper, Partner

Trevor Watt, Solicitor

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