Category Archives: Service Charges

Service charge wording too narrow to cover costs of suing defaulting tenants.

Does the language of a service charge provision in a lease permit the landlord to recover money which it has spent in contesting legal proceedings against the leaseholders of flats in a residential building?

In Arnold v Britton [2015] Lord Neuberger of the Supreme Court said “the court should not “bring within the general words of a service charge clause anything which does not clearly belong there”.

In the Upper Tribunal (Lands Chamber) case of Geyfords Ltd v O’Sullivan & Ors [2015] paragraph 6 of the service charge covered:

“All other expenses (if any) incurred by the Lessors or their managing agents in and about the maintenance and proper and convenient management and running of the Development”.

The tribunal said “management” may sometimes include obtaining professional advice, including legal advice, and in some circumstances it might involve litigation. E.g. the assistance of the court may be required because the leases of flats are unclear, so the outcome of the proceedings is of concern to both the landlord and to every leaseholder.

It could be said “running” suggests a focus on more day to day or mechanical activities, while “management” is more long term or strategic, but it was neither informative or helpful to dissect the language in that way. It might be said as well that both management and running, when used of a building and its immediate environment, are concerned with the condition of the building and activities there, and that the expression taken as a whole is inappropriate to refer to litigation over the liabilities of tenants to their landlord. Such litigation was concerned with enforcing personal rights and obligations rather than with the physical fabric of the building. The qualifying words “proper and convenient”, might also be thought to be words of limitation, suggesting expenditure which is routine rather than exceptional.

Proceedings to enforce the obligation of an individual leaseholder to make a payment to the landlord did not naturally fall within the scope of “management and running”.

The parties to a lease were unlikely to think such general words were enough to show an intention that any money lost by the landlord in litigating against tenants should be recharged to all the tenants in the building. In the Court of Appeal case of Sella House Ltd v Mears [1989] Taylor LJ said he would “”require to see a clause in clear and unambiguous terms” before being persuaded the parties had intended that a tenant who paid his rent and service charges would be obliged to subsidise the landlord’s costs of proceedings against his fellow tenants who were defaulters”.

Accordingly paragraph 6 was less clear than was to be expected if the cost of litigation against defaulting leaseholders had been intended to be recovered as costs and expenses of “proper and convenient management and running of the Development”.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Can a Landlord recoup defence costs and damages from own breaches?

Can a landlord recoup damages and legal costs arising from it’s own breach of covenant through a service charge?

In the Upper Tribunal (Lands Chamber) case of Fairbairn v Etal Court Maintenance Ltd [2015] one of the services the landlord could recharge under the service charge was doing “all other acts and things for the proper management administration and maintenance of the blocks of flats as the Lessor in its sole discretion shall think fit.”

The Tribunal said such a general charging provision was, in principle, wide enough to cover the costs of legal advice or even, where appropriate, of litigation.

However a sum paid to meet a successful damages claim for breach of covenant is not expenditure on the proper management and administration of the buildings.

Also, the legal work here was not so much advice on whether repair work was within the landlord’s covenant. It was rather defending the landlord’s failure of compliance.

In short, the steps required of the landlord resulted from the landlord breaching it’s own obligations under the lease.

The landlord’s repairing covenant required it to maintain the unlet parts of the buildings, including their foundations and structure, in good and substantial repair and condition.

It was precisely because the proper management and administration of the building had been neglected, for however short, that proceedings were commenced by the tenant. So the damages and legal costs were not recoverable through the service charge.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Landlord’s surveyor could not unilaterally apportion residential service charges

A service charge clause may say the Landlord’s surveyor will decide how the Landlord’s service costs are to be divided between residential tenants and that that decision will be “final and binding.”

However Section 27A(6) of the Landlord and Tenant Act 1985 renders void any parts of any agreement that, in effect, provide for any question to be determined in any particular way, if that question could be referred to the appropriate tribunal under s.27A(1).

A clause that provides for determination of proportions by the landlord’s surveyor is such a provision, whether it is said to be “final and binding” or not. So Section 27A(6) deprives the landlord’s surveyor of his role in determining the apportionment.

Any service charge provision which purports to give the landlord’s surveyor that role is to be read as if that method of ascertaining a fair apportionment was omitted from the clause altogether.

That being the case in the recent Upper Tribunal (Lands Chamber) case of Gater & Ors v Wellington Real Estates Ltd & Anor [2014] where similar facts applied, the tribunal ruled that:

1. Where the provision for determining an apportionment was void under section 27A(6), then, unless the parties could agree what was fair, the fair apportionment fell to be determined by the appropriate tribunal.

2. Here it had been for the Leasehold Valuation Tribunal to decide what fair proportion of the cost of communal services was payable by the respondents.

3. The appropriate tribunal would consider what valid parts of the parties’ agreement remained.

4. In that particular case, what the tribunal thought had survived was the parties’ agreement that the tenant’s share would be:

4.1 a due and fair proportion of the service costs

4.2 to be divided having regard to “the relevant floor areas within the Building or other reasonable factors”.

5. As the tribunal thought the provisions at 4 above did not in their effect provide for a determination “in a particular manner”, they did not offend section 27A(6). We might disagree and think they had precisely that effect. But the key factor may be that the clause wording claiming to RELEGATE the tribunal’s discretion to apportion the service costs under those provisions TO “the landlord’s discretion” had been declared void by the tribunal and cut out of the lease.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice individual cases.

Flat balcony works could be recharged as common parts’ cost

The Upper Tribunal (Lands Chamber) case of Castle Rock 2002 Management Ltd v Jeffery [2014] concerned an apartment block at Castle Rock, highly located and overlooking Woolacombe Bay with uninterrupted views.

The middle ground floor flat was constructed with a wooden-decked balcony with a balustrade.

The lease contained service charge provisions.

The Management Company had carried out the following works but it’s ability to recoup the costs through the service charge was challenged:

1. Works to the decked balcony.

The decking of the balcony and the material immediately below the decking was removed, and a paved patio was installed (“the patio works”).

The patio works were disallowed from service charge recovery by the Leasehold Valuation Tribunal (“LVT”) because the works were carried out in relation to parts of Castle Rock which were not common parts but were let to individual tenants

2. The removal of a fence and the installation instead of a low retaining wall (“the wall works”).

The costs of the wall works were similarly disallowed because the works were not needed or required to repair or maintain the building or its safety and had in fact been carried out to enhance and improve the views from the building.

The Upper Tribunal said only the surface of floors were let with the flats and there were excluded from the lets “all such parts of the Building as are below the floor surface.” Those words were not limited to excluding from the lets all such parts of the building as were below the floor surface inside the flats. They also excluded all such parts of the building as were below the floor surface of the balconies.

The works which were carried out to Flat 2’s balcony went below the surface of the decked area, and the Flat 3 balcony patio works went below the surface of it’s patio.

So the patio works for both Flat 2 and Flat 3, involved works to the common parts. So the LVT’s reason for disallowing the inclusion of the costs of those works within the service charge was wrong. The costs could be included.

There was nothing before the Upper Tribunal to enable it to conclude that the LVT was wrong in finding that the cost of the wall works was a cost not reasonably incurred. Accordingly, the cost of the wall works was not recoverable from the respondent.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Service Charge covered Management Company’s Directors’ expenses

In the case of uncertainty or ambiguity, payment provisions in leases are generally to be interpreted in a way that favours the paying party. What follows is a case where common sense dictated that they be resolved in favour of the billing party.

In the Upper Tribunal (Lands Chamber) case of Solarbeta Management Company Ltd v Akindele [2014], the Management Company (“the appellant”) claimed to include its directors’ expenses in flat service charges relying on clause 6.2.1 of the Leases, which enabled the Management Company to “discharge all proper fees salaries charges and expenses payable to such agents or such other persons who may be managing the Estate.”

This was not thought wide enough to cover directors’ expenses by the first Tribunal. The directors managed the company, not the Estate.

On appeal by the Management Company, the Upper Tribunal (Lands Chamber) had other ideas:

The Management Company was a single-purpose tenant-owned company which by clause 6.2 of the leases was required to manage the Estate and to “provide and perform the Services”.

It had no source of funding other than the Service Charge.

If it could not defray the costs of running itself and of performing those functions which it could not delegate to a managing agent, it would become insolvent and therefore disabled from discharging its contractual obligations under the leases.

To be able to manage the Estate it had to manage itself and stay in existence.

Not being a human being, a company could only operate and perform its contractual obligations through the agency of its directors.

So the directors performed two functions:

1. They represented the company in considering and discharging its contractual duties under the leases, and in managing the Estate whether that be appointment and supervision of a firm of managing agents or doing some or all of the work itself or in some other way.

2. Managing the company itself in ensuring compliance with the Companies Act and other company regulations and the filing of all appropriate annual returns failing which it would be stuck off and no longer able to comply with the leases. This would all have been in the contemplation of the person who drafted the leases as was to the Upper Tribunal self-evident from the leases, though it’s not clear how that might have been the case.

No interpretation of clause 6.2.1 could draw any sensible distinction between the management of the Estate and the management of the Management Company. There could not be one without the other. The Management Company’s obligations and functions overlapped and were all integral to the management of the Estate.

It was too restrictive to interpret the clause as:

– allowing the Estate to be managed only by one firm of managing agents and

– the appointment of such firm as precluding the Management Company from recharging it’s administration costs of any of it’s retained functions or obligations provided of course such were reasonable.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Getting terrorism cover was reasonable exercise of insurance discretion

In the Upper Tribunal Lands Chamber case of Odime Ltd v Bath Building (Swindon) Management Co Ltd and Others [2014] the appellant was the landlord of a four-storey building containing l3 flats let on leases.

The landlord had an obligation under the leases to “keep the Building including the Demised Premises insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in accordance with the Council of Mortgage Lenders (“CML”) recommendations from time to time and such other risks as the landlord may in its reasonable discretion think fit to insure against”.

The insurance obtained by the appellant’s insurance broker placed the building in “Zone B”, which carried the same risk as central London and other similar places.

Furthermore, the RICS Code, said serious consideration should be directed to the taking out terrorism insurance.

The respondents here were the flat management company and 11 of the tenants.

They disputed the cost of terrorism insurance for the years 2010/11, 2011/12 and 2012/13 by an application to the Leasehold Valuation Tribunal (“LVT”) under section 27A of the lord and Tenant Act 1985.

The LVT disallowed that item on the ground that terrorism insurance was not a matter covered by the insuring obligations in the leases or in respect of which the appellant had exercised its “reasonable discretion”.

The Upper Tribunal ruled that the “usual comprehensive risks” against which the landlord was obliged to insure included terrorism as per the CML recommendations.

Where those recommendations referred to insuring against explosion, that included insuring against a terrorist attack. In its ordinary meaning “explosion” included explosions caused by terrorism.

The obligation was to insure against explosion, without differentiation being made between any particular methods by which an explosion might be caused.

If the tribunal were incorrect to think the above, the appellant was nevertheless entitled in the exercise of its power to insure against “such other risks as the Landlord may in its reasonable discretion think fit to insure against”, to insure against terrorism.

The test was whether, in the circumstances, a lawful decision had been reached falling within a range of reasonable decisions – as opposed to being perverse.

The absence of any particular terrorist threat did not make the appellant’s decision to insure against terrorism necessarily unreasonable.

The exercise of a discretion in accordance with the RICS Code was a reasonable exercise of that discretion.

It followed that the appellant had been entitled to recover the cost of insuring against terrorism, either because it had to obtain such insurance under the terms of the leases, or, because it’s decision to do so had been a proper and reasonable exercise of it’s discretion under the leases.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Landlords not final say on share of residential service charge

Section 27A(6) of the Landlord and Tenant Act 1985 (“the 1985 Act”) makes void any agreement (other than a post-dispute arbitration agreement) by the tenant of a dwelling in so far as it claims to oust the Leasehold Valuation Tribunal (LVT)’s jurisdiction to determine anything which may be the subject of an application under sub-sections (1) or (3) of section 27A of the 1985 Act. Such questions include the amount of the service charge payable by the tenant.

The fact that sub-section (4) specifically excludes from the scope of sub-section (1) an application in respect of a matter which has been the subject of a post-dispute arbitration agreement demonstrates that dispute resolution provisions in general are not afforded any exemption from these anti avoidance provisions.

In the Upper Tribunal (Lands Chamber) case of Windermere Marina Village Ltd v Wild & Anor [2014] the lease of a residence provided for the tenant to pay a fair apportionment of the cost of services. That apportionment was “to be determined by the surveyor for the time being of the Lessor whose determination shall be final and binding”.

The principal issue in the appeal was whether section 27A(6) made void that agreement in the lease that the landlord’s surveyor’s decision on the apportionment of the service charge was to be final and binding.

The tribunal said the question referred to the LVT in this case was what proportion of the expenses incurred by the appellant was to be paid by the respondents.

By paragraph (2) of the Schedule to their leases the respondents had already agreed that they were to pay such proportion as was determined by the appellant’s surveyor, whose decision was to be final and binding.

That agreement was void because it had the effect of providing for the manner in which an issue capable of determination, by the LVT, under section 27A(1) was to be determined, i.e. by a final and binding decision of the appellant’s surveyor.

The effect of sub-section (6) was to strike out so much of an agreement as made such alternative provision.

The LVT had been entitled to consider what was the fair proportion of the expenses payable by the respondents, because the contractual mechanism for identifying that fair proportion, being the words “(to be determined by the Surveyor for the time being of the Lessors whose determination shall be final and binding)”, had been struck out by section 27A(6) of the 1985 Act.

Section 27A had completely deprived the landlord’s surveyor of his role in determining the apportionment: even if the alternative method, which it barred out, may also have been fair.

There may be other forms of lease in which the provision of a certificate or the making of a determination is a pre-condition of the tenant’s liability to make a payment. It may well be that that contractual procedure continues to bind the landlord and tenant, so long as the eventual content of the certificate or determination is still open to challenge before the LVT under section 27A.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Landlord’s earlier structural work wouldn’t have reduced residential service charges

Where a structure for which the Landlord is responsible fails, are residential tenants entitled to deploy the argument that earlier remediation work would have resulted in a reduced cost and that they are only liable to reimburse that reduced cost through the service charge?

In Daejan Properties Ltd v Griffin & Anor [2014] a steel beam which supported a parapet and some residential flats, at Crown Terrace, partially failed with the rest needing replacement before it followed suite.

Were the tenants (the respondents) entitled to run the above argument?

The earliest date that any of the respondents became the registered proprietor of a leasehold interest of a flat at Crown Terrace was in 1983

None of the leaseholders had any entitlement to damages referable to breaches of covenant committed by the appellant landlord between 1973 and the date on which the leaseholder acquired his or her own interest in their lease.

The court said an assignee of a lease granted before 1 January 1996 could not sue for a breach of covenant which occurred before the assignment (Woodfall’s Law of Landlord and Tenant, para. 16.133).

The same was true of a lease granted after that date by virtue of s. 23(1), Landlord and Tenant (Covenants) Act 1995.

The only route by which an allegation of historic neglect might provide a defence to a claim for service charges was if it could be shown that, but for a failure by the landlord to make good a defect at the time required by its covenant, part of the cost eventually incurred in remedying that defect, or the whole of the cost incurred in remedying resultant defects, would have been avoided.

In those circumstances the tenant to whom the repairing obligation was owed would have a claim in damages for breach of covenant, and that claim might be set off against the same tenant’s liability to contribute through the service charge towards the cost of the remedial work.

The damages which the tenant could claim, and the corresponding set off available in such a case, would be made up of two elements:

first, the amount by which the cost of remedial work had been increased as a result of the landlord’s failure to carry out the work at the earliest time it was obliged to do so; and

secondly, any sum which the tenant was entitled to receive as general damages for inconvenience or discomfort if the leased property was itself affected by the landlord’s breach of covenant.

On the first point, substantially the same work would have been required at any time in the 30 years preceding the commencement of the works in 2008.

So, no real savings would have been made had the beams been inspected and work carried out at any relevant earlier time.

The views of the experts did not support the conclusion that a lesser amount of work might have been sufficient had the corrosion of the beams had been addressed at any time after 1980.

That period covered all of the dates when the current leaseholders first became the registered proprietors of their leases.

So the Landlord’s appeal against the findings of the Leasehold Valuation Tribunal was allowed.

This blog has been posted as a matter of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Aged service charge costs only “incurred” when geriatric water bills served on correct landlord

In a large residential complex a large bill for the supply of water to three blocks of flats, builds up, but relates to water supplied to the three blocks between June 2005 and April 2011.

A recent case about this considerably increases the scope for landlords to reopen service charges for costs which, regardless of semantics, relate to many years past and predecessors under leases.

In the Upper Tribunal (Lands Chamber) case of Ground Rents (Regisport) Ltd v Dowlen & Ors [2014] Abbey Mills was a modern development of purpose built flats comprising Vista House (69 flats), Prospect House (55 flats) and Independence House (40 flats) making 164 flats in total.

For many years Thames Water Utilities Ltd had delivered invoices for water consumed at two of the buildings to the original developer while the appellant, which acquired the freehold of Abbey Mills on 1 October 2006, received invoices only for the third building.

In the mistaken belief that the invoices they received related to all three buildings, the appellant’s managing agents, apportioned those sums and collected them through the service charges payable by all 164 leaseholders of flats at Abbey Mills.

The developer had not paid the invoices for the other two buildings, nor did it pass them on to the appellant.

Both the appellant and the individual leaseholders believed that all of the sums due from them in respect of water had been paid.

The mistake was eventually discovered in 2010 and since then Thames Water had sought to recover the arrears from the developer and from the appellant, which in turn had sought to pass them on in full to its 164 leaseholders.

The Leasehold Valuation Tribunal for the London Rent Assessment Panel (“the LVT”) decided that the leaseholders were not liable to contribute to the historic water bill through their service charge to the extent that the water invoices had first been raised before 30 January 2009.

The LVT reached that decision because the appellant had first included the arrears of water charges in the service charges demanded in June 2010, and section 20B(1) of the Landlord and Tenant Act 1985 (“the 1985 Act”) said that if any of the relevant costs taken into account in deciding the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge was served on the tenant, then (subject to sub-section (2)), the tenant should not be liable to pay the service charge to the extent that the costs incurred were that historical.

Many of the original leaseholders who had owned the flats between 2005 and 2010 had sold them. So in many cases the current leaseholders were now being faced with additional charges for water which had not been supplied to them but to their predecessors.

When the appellant appealed from the decision of the LVT to the Upper Tribunal (Lands Chamber) it identified the main issues as:

1. Whether the fourth schedule of the leases permitted the appellant to charge leaseholders for water supplied during a service charge year for which accounts had already been finalised, demands had been issued and payments had been made in full by the leaseholders;

2. Whether, assuming such a charge was permitted by the parties’ lease contract, the leaseholders were entitled to rely on section 20B as a defence against their liability to pay part of those charges.

Paragraph 4 of the fourth schedule of the leases provided for the calculation of a service charge adjustment after each service charge year end.

Paragraph 5 of the fourth schedule was also significant, and provided that (subject to paragraph 3.3 of the Schedule) a certificate signed by the Lessor purporting to show the amount of the service charge adjustment should be conclusive of such amount save as regards manifest errors.

In this case the Tribunal ruled that a certificate given by the appellant purporting to record expenditure on water and sewage charges for the year ending 30 June 2010 might be conclusive of the amounts actually expended in that year (save as regards manifest errors), but that would not prevent the inclusion in a certificate for a future year of expenditure in that future year which related to the water supplied in a previous year or years.

This was because the service charge adjustment to be determined under paragraph 4 and certified under paragraph 5 was the amount by which the estimate of expenditure likely to be incurred in a particular service charge year fell short “of the actual expenditure in the service charge year” in question.

Here before June 2010 there was no “actual expenditure” on the supply of water to Prospect House and Independence House.

Where successive landlords were liable for the same costs, it was the liability of the landlord for the time being which was relevant, since only costs incurred by a person in the capacity of landlord could be included in the service charge.

Neither the appellant nor its predecessor landlords had had a liability to pay for water under Section 142 of the Water Industry Act 1991 until a demand had been received by them. So the appellant had no existing liability to make a payment for the water supplied to Prospect House or Independence House until at least April 2010.

So for the purposes of section 20B no relevant cost was incurred by the appellant for water supplied to Prospect House and Independence House, until it received the first demands for payment in April and June 2010.

As a result, when calculating and certifying the service charge adjustment for the year ending 30 June 2011 and for subsequent years, pararaph 5 of the fourth schedule of the leases did not preclude the appellant from including expenditure, actually incurred in those years, in discharging any liability which the appellant could be shown to have in April and June 2010 when it began to receive demands, in its own right, albeit for water supplied in the period from 1 October 2006 up to then.

This was because paragraph 5 only precluded such service charge demands in relation to historic liabilities incurred, and though the water and its recipients were historic, the liabilities for it were only “incurred” by Thames Water serving the relevant water demands on the appellant in April and June 2010. Though these were only belatedly served on the correct recipient, the appellant’s service charge demands seeking to recoup those extra costs from its 164 tenants were served well within the 18 month period, allowed under section 20B(1) of the 1985 Act, from that liability being incurred.

This blog is posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Service charge: apportioned against last broken year but no further

What happens if a lease specifies that the service charge is to be calculated by reference to a Financial Year ending on 31 December of each year but the actual lease runs out on a 31 March, and is, in fact, terminated on an earlier 31 March under a break clause?

Question 1 Does the tenant who breaks the lease prematurely on that 31 March have to reimburse through the service charge costs incurred between then and 31 December?

Question 2 Does the tenant have to pay through the service charge for costs to be incurred the calendar year after the lease was ternimated just because the lease says the service charge can make provision for future expenditure and the next calendar year would have been within the lease term if the tenant had not exercised the break clause?

In Friends Life Management Services Ltd v A & A Express Building Ltd [2014], where Questions 1 and 2 applied, the High Court answered the questions as follows:

Question 1 Yes but only 83/365ths of them. The Landlord had to operate by reference to financial years to make the operation of this lease uniform with all the other ongoing leases in the estate. You could not have one lease operating to a much shorter financial year just because it had been terminated three months in. The proportion of that year’s costs were to be ascertained on a time apportionment by reference to the proportion of the financial year as a whole for which the tenant’s lease still existed.

Question 2 Applying the precedent of Brown’s Operating System Services Ltd v Southwark Roman Catholic Diocesan Corp [2008], where again no sinking fund had been provided for, had the lease run its full course unbroken to 31 December 2013, the Landlord could not have charged, in the last accounting period, for expenditure to be incurred in 2014 after the contractual term of the lease had expired. The fact that the lease had ended under a break clause, rather than expiry, made no difference, the Landlord could not charge the tenant in relation to expenditure which would only be incurred after the end of the lease term. Moreover the demand had been made at at time when it was already known that would be the case.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.