A recent ruling in the High Court in a test case on water re-selling has led to claims that local authorities and housing associations could face having to refund millions of pounds to tenants. Simon Kiely and Anna Moon analyse the judgment.
Since at least the mid 1960’s, Kingston Council, along with many other local authorities throughout the country, had been collecting payments from its social housing tenants towards the water and sewerage charges for their council homes at the same time as collecting rent from them. Since this time, both local government and the water industry have changed immeasurably, especially as a result of the privatisation of the water industry in the 1990’s.
Since privatisation, all water in the Kingston borough area has been supplied by Thames Water Utilities. The contractual terms under which Kingston Council has collected water charges changed a number of times since the 1960’s. In 2003, Kingston Council and Thames Water entered into a formal agreement which included provisions for the council to receive commission for providing these services, as well as an allowance in respect of any properties throughout the borough which may been empty or ‘void’ and therefore not using any water or sewerage services. Under these arrangements, no council tenants paid any more for their water and sewerage than they would have paid if they had been paying Thames Water directly. In addition, these arrangements provided additional benefits to both the council and its tenants. The benefit to the council was that the commission it received represented an additional source of HRA income specifically reserved for spending on its housing stock. The benefits to the council’s tenants were that they only had to pay one organisation for both their rent and their water and sewerage charges, and that they were able to pay for their water and sewerage charges on a weekly basis, rather paying a larger sum on a monthly basis across 10 months of the year.
Kingston’s 2003 agreement with Thames Water was in standard terms. A large number of other councils in London and the Thames Valley entered into near identical agreements with Thames Water around this time. One such council was the London Borough of Southwark.
In 2016, a High Court decision involving Southwark (Jones v Southwark  EWHC 457 (Ch)) decided that the terms of Southwark’s agreement with Thames Water meant that rather than providing these water collection services as an agent of Thames Water, Southwark were instead a ‘water reseller’. This meant that Southwark were held to have effectively been buying water services from Thames and then selling these services on to their tenants. Under the Water Resale Orders of 2001 and 2006, there is a maximum charge of £5 that any ‘water reseller’ can charge to those people to whom water is resold, and Southwark were found to have charged their tenant amounts in excess of that limit. They were therefore ordered to reimburse their tenant for the amount they had been overcharged. Southwark did not appeal this decision, and instead resolved to reimburse all of their affected social housing tenants with any amounts overcharged. It was reported that this cost the council over £28.6m.
Due to the potential consequences for other local authorities in London and potentially throughout the rest of the country if they were found to be required to reimburse their tenants for similar amounts, the Local Government Association brought together a number of local authorities nationwide to discuss the consequences of the Southwark decision and discuss options moving forward. Kingston were part of these discussions. These discussions included the prospect of further litigation to try and overturn the Southwark decision.
Following the Southwark decision, one of Kingston’s social housing tenants wrote to the council to enquire about their entitlement to a refund of any excess water and sewerage charges paid since the commencement of their tenancy. In March 2018, Sharpe Pritchard was instructed by Kingston Council and the Local Government Association to issue a claim in the High Court against this tenant, seeking a declaration from the Court to the effect that the council was not a ‘water reseller’. It was argued that Kingston was instead either ‘acting on behalf of’ Thames Water, acting as Thames Water’s agent, or that Thames Water had assigned its right to collect water and sewerage charges to Kingston.
This claim came to trial at the High Court in October 2019 before Mr Justice Morgan, who handed down his judgment in Royal Borough of Kingston-Upon-Thames v Moss  EWHC 3261 (Ch) on Friday 29 November 2019. Ranjit Bhose QC leading Ruchi Parekh, both of Cornerstone Barristers, appeared for Kingston.
Morgan J’s decision reflects his in-depth consideration of Kingston’s 2003 agreement with Thames Water. He analysed the four possible ways in which the relationship between Kingston and Thames Water could be defined using the 2003 agreement they had reached. These were as follows:
- Thames Water were to provide water and sewerage services to certain properties owned by Kingston and Kingston would pay Thames Water for those services;
- Kingston, acting as agent for Thames Water, would collect and recover charges for water and sewerage service from the tenants of certain properties;
- Kingston, acting on behalf of Thames Water, but not strictly as agent, would collect and recover charges for water and sewerage service from the tenants of certain properties;
- Kingston, by way of assignment, was given Thames Water’s rights to recover charges for water and sewerage service from the tenants of certain properties.
The claimant argued it was unnecessary to review the terms of the 2003 agreement at all. Seeking to rely on provisions of the Local Authorities (Goods and Services) Act 1970 and the Water Consolidation (Consequential Provisions) Act 1991, Mr Bhose QC suggested that Kingston had the power to collect and recover charges on behalf of Thames Water. It was argued that because the 2003 agreement was an exercise of Kingston’s power under these statutes, it was sui generis, and therefore its effect didn’t require analysis – save as “to conclude that it was something different from an agreement for the provision of services”. Morgan J rejected this and proceeded to consider the 2003 agreement on the grounds that there were statutory provisions, other than those highlighted by Mr Bhose QC, which were relevant to this case. In particular, Morgan J focused on Section 144(1) of the Water Industry Act 1991, which sets out that “supplies of services are treated as services provided to the occupiers of premises ‘except in so far as provision to the contrary is made by an agreement to which the undertaker is a party’’. The question then became how the 2003 agreement could be viewed against Section 144(1) – i.e. was Kingston paying Thames Water for a service or was their contractual relationship something different?
The council also argued that analysis of the 2003 agreement should be influenced by the context of the agreement. In particular, Mr Bhose QC asked Morgan J to consider the historic arrangements made between Kingston and Thames Water Authority in 1977/1978, and continued by Thames Water prior to 2003. Morgan J considered the ruling set out by Rix LJ in HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co  CLC 1480 at , that “where the terms of the contracts differ… the second contract involved a deliberate decision to depart from the wording of the earlier arrangements”. Thus, he concluded that whatever the terms were of the pre-2003 arrangements between Kingston and Thames Water Authority, they were unlikely to be of assistance here. He also highlighted that the statutory provisions regarding water charges changed in 1989 when the industry was privatised and so, contextually, the position was slightly skewed when the 2003 agreement was being negotiated. Morgan J refrained from concluding whether or not prior arrangements were admissible or inadmissible, but argued they were not of assistance to this matter.
Turning then to consider the possible interpretations of the contractual relationship between Thames Water and Kingston arising solely under the 2003 agreement, Morgan J assessed whether Kingston had been acting as “agent” for Thames Water. He decided there was “so little” in the 2003 agreement to support that Kingston were acting as an agent for Thames Water. He reasoned that “there is no term in the agreement which either authorises…or requires…” Kingston to collect and recover charges from its occupiers and that “if Kingston did recover charges from occupiers, Kingston would keep the monies for itself and would not be required to pay them over to Thames Water”.
In consideration of whether or not the agreement amounted to a relationship of assignment, i.e. that Thames Water provided Kingston with the benefit of charges that would be payable by occupiers, Morgan J reached a similar conclusion. He reasoned that “there is really no wording in the agreement to support that suggestion”.
Turning to the other proposed interpretation of the relationship formed under the 2003 agreement – that Kingston were acting “on behalf of” Thames Water when collecting and recovering the charges, but not as an agent – Morgan J considered how “on behalf of” had been read in previous cases to be synonymous with “for the benefit of”, “in place of”, “instead of”, “for”. Morgan J concluded that the relationship under the 2003 agreement did not fit any of these interpretations and, in particular, stressed that he could not see that Kingston’s charges collection was for Thames Water’s benefit. He reasoned that “the benefit to Thames Water was derived not from the collection and recovery by Kingston but instead from Kingston’s contractual obligation to pay the charges to Thames Water, albeit at a discounted rate”.
Morgan J, having considered the above interpretations, ultimately concluded that the relationship was one of service provision. On this point, Morgan J interpreted the wording of the 2003 agreement as, “clearly enough suggest[ing] that the payment of charges is in return for the provision of services”. He reasoned that the wording referred to properties “which will have the benefit of the services” and that these properties included some which Kingston managed “in its capacity as local housing authority”. Morgan J concluded that “the fact that Kingston is to pay Thames Water for the provision of services to properties owned by Kingston makes it relatively easy to say that Kingston is agreeing to provide services to Kingston”.
Mr Bhose QC argued against interpreting the 2003 agreement as one in which Thames Water supplied water and sewerage services to Kingston, on the basis that such an arrangement would be so uncommercial that the parties could not have intended it. Mr Bhose submitted that because the Water Resale Orders 2001 and 2006 were relevant to the arrangements, Kingston would have been restricted in what it could recover from its tenants and the commission and voids allowances received by Kingston may have been significantly reduced. Kingston would thus have been taking on the administrative burden of collecting charges without receiving any benefit in return. Morgan J agreed that if the Water Resale Orders did apply, then “the result would be an uncommercial one for Kingston”, but he was ultimately swayed by Lord Neuberger PSC’s judgment in Arnold v Britton  AC 1619. In that case, Lord Neuberger reasoned that:
“the purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised”.
In view of his conclusion that Thames Water were providing a service for water and sewerage to Kingston, Morgan J reasoned that Kingston were therefore supplying these services to their tenants and in this case, their tenant Mr Moss. The Court therefore decided that, as with Southwark, Kingston were a ‘water reseller’ and had accordingly been overcharging its tenants for water and sewerage charges.
To determine the extent that Kingston had been overcharging its tenants, and the relevance of the voids and commissions benefits Kingston received under their 2003 agreement with Thames Water, Morgan J considered the contractual agreements Kingston had in place with its tenants. In relation to Mr Moss, Morgan J assessed the wording of his more recent tenancy agreement, which set out that Mr Moss would have to pay the “amount payable for the property to the water authority”. The Court highlighted that this wording does not explicitly reference that Kingston would be taking money from the tenant. It was concluded that the tenancy agreement “restricts Kingston to recovering from Mr Moss the amount payable by Kingston to Thames Water for the property, and therefore the “amount payable by Kingston is the amount reduced by” the commission. In relation to the voids allowance however, Morgan J set out that Mr Moss was not entitled to this deduction on the grounds that:
“The void allowance was an allowance in relation to several thousand properties to reflect the fact that some of those properties would be vacant and not liable for water charges. As Mr Moss’s property was not vacant at any relevant time, the exact amount payable for his property is not reduced by a void allowance given to reflect the possibility of other properties being vacant”
The case then turned to the consideration of the charges schemes which were made by Thames Water and were in place between 1 April 2002 and 31 March 2010. In particular, submissions were made as to one provision of the charges scheme – paragraph C under heading ‘Payment of Charges in respect of unmetered supplies’ - which set out that the owner of a property would be liable for water and sewerage charges if the tenant was living there on a lease of less than 12 months. Mr Bhose QC for the council argued that Thames Water did not have power under statute to make a scheme that imposed liability on individuals who would otherwise not be liable. This was accepted by Morgan J, contrary to the findings of Newey J (as he then was) in the Jones v Southwark case.
As result of these findings, the Morgan J gave two declarations. Firstly, that from the commencement of Mr Moss’s tenancy on 14 January 2003 and 3 August 2017 (the date on which Kingston entered into a new agreement with Thames Water – more on which below) Kingston was, in relation to water and sewerage charges for Mr Moss’s property, a water re-seller within the meaning of the Water Resale Orders 2001 or 2006. Secondly, that over that same period Kingston charged Mr Moss sums in excess of the maximum charges set by the Water Resale Order 2001 or 2006.
The Court therefore ordered Kingston to reimburse the tenant against whom Kingston pursued its claim for all such sums overcharged. In this instance the total amount overcharged was £425.39.
Kingston sought permission to appeal from Mr Justice Morgan, but this was refused. It is anticipated that an application for permission to appeal will now be renewed before the Court of Appeal instead.
If this decision stands on appeal, then it is likely that not only Kingston, but all local authorities who had similar agreements with Thames Water (or another regional water company), will now need to reimburse all social housing tenants for any such amounts similarly overcharged. As with Southwark, these figures could run into tens of millions of pounds per authority, and hundreds of millions of pounds nationwide. In addition, as such sums were received into each authorities’ Housing Revenue Account, the money for these reimbursements will need to come out of authorities’ Housing Revenue Accounts as well. This could lead to significant shortfalls in council’s housing budgets as a consequence.
As mentioned above, Kingston entered into a new contract with Thames on 3 August 2017 to the extent that from that date Kingston was definitively acting as Thames Water’s agent, and not as a ‘water reseller’. Sharpe Pritchard advised Kingston (and other authorities) on the terms of this new agreement with Thames Water which clarified the basis upon which the council collected water and sewerage charges from its tenants. If any authority wishes to review the terms under which they are collecting water and sewerage charges from their tenants, then please contact us directly to discuss.
In addition, Kingston subsequently resolved to stop collecting water and sewerage charges from its tenants altogether, and its arrangements with Thames Water came to an end with effect from 1 April 2018. More recently Thames Water has resolved to insource the collection of water and sewerage charges from all social housing tenants across its area over the next few years, with the first insourcings having commenced in some areas earlier this year.