Landlord and tenant – Service charges – Building managed by superior landlord – Intermediate landlord claiming recovery of charges paid to superior landlord for services provided in two annual accounting periods – Whether sums recoverable from occupational leaseholder as balancing charge for one annual accounting period – Appeal allowed
The appellant held the headleases of a number of flats at 2 Boleyn Road, London, N16. The parties to each of the headleases were TW as landlord, the appellant as tenant and a management company. The usual services were to be supplied to the building by the management company, and the fifth schedule to the headlease comprised covenants by it to repair, insure and maintain the building.
The respondent was the leaseholder under a shared ownership lease granted to him by the appellant on 20 December 2016. He had a 40% share of the leasehold interest for a term of 125 years less five days.
By clause 7.1 the respondent covenanted to pay the service charge during the term by equal monthly payments in advance on the first day of each month, with the first payment to be made on the date of grant of the lease.
The rent payable under the lease was £7,177.50 a year, and the monthly service charge contribution which the respondent was required to pay under clause 7.1 was £135.50.
Although the lease required the respondent to pay the first monthly instalment of the service charge on the date on which the lease was granted, administrative delays meant that the appellant was not prepared to accept any payment from him until July 2017. A schedule prepared by the appellant suggested that payments made by the respondent in July 2017 totalled £3,231.94. The respondent considered that he had paid a sum sufficient to meet rent and service charge instalments for each month from January 2017 to March 2018.
The appellant required a sum of £1,599.40 as a balancing charge for the service charge year ending on 31 March 2018. The respondent made an application to the First-tier Tribunal (FTT) under section 27A of the Landlord and Tenant Act 1985 arguing that he had paid all of the sums which he was liable to pay.
The respondent did not dispute the reasonableness of any costs incurred by the appellant but considered that it was not reasonable for him to be expected to pay two years of service charge in one year. He also asserted that he had paid 24 monthly instalments of service charge contributions totalling £3,252 in the period from January 2017 to December 2018 and that there should therefore be no amounts owed by him to the appellant for that period as the aggregate of the management company’s estimated charges for those two years was £3,128.76.
The FTT concluded that the respondent was not liable for the charge. The appellant appealed.
Held: The appeal was allowed.
(1) The FTT’s primary reason for concluding that the disputed sum was not due from the respondent was that he had not been provided with a proper estimate of service charges in accordance with his lease. However, the sum demanded by the appellant was not an estimate; it was the balancing charge calculated by deducting the payments made by the respondent from the total charges incurred by the appellant during the 2017/18 account year. The fact that those sums included the estimated management costs payable by the appellant under the headlease for the 2018 calendar year did not make the balancing charge an estimate or require that it be collected from the respondent only by monthly instalments. Contrary to the FTT’s view, the appellant was not required by the lease to apportion the charges it had incurred during the account year so as to differentiate between charges paid in respect of the account year itself and charges paid in respect of some future period.
(2) The relationship between the payment provisions of the lease and those of the headlease was poorly designed and was liable to result in large sums becoming payable in advance despite the lease seeking to avoid unexpected fluctuations. Under the headlease, the estimated management cost for the calendar year was payable by a lump sum in advance which fell due three months before the end of the lease’s account year. That lump sum would always be recoverable from the leaseholder by means of the balancing charge in the lease. The obvious intention of the lease itself was that the service charge should be paid in equal monthly instalments with only a balancing charge due at the end of the year, but in practice the leaseholder was required to pay up to nine months’ in advance.
The lack of attention given by the drafter of the lease to the operation of the service charge provisions and their relationship to the headlease did not change their meaning. The appellant was clearly entitled to include the sums it paid on account for 2017 and 2018 when calculating the balancing charge payable under the lease for its 2017/18 account year.
(3) The respondent did not seek to uphold the FTT’s interpretation of the service charge provisions of the lease. He believed he had paid all of the sums demanded of him on account for the 24-month period covered by the management company’s estimated charges and that the appellant had failed to take all of his payments into account when calculating the suggested shortfall. The FTT sympathised with that proposition but it had not undertaken a proper accounting exercise to determine what service charges were payable, how much had been paid and what, if any, surplus or deficit remained. The material provided for the appeal did not enable the tribunal to carry out that exercise and so the application under section 27A of the 1985 Act for a determination of the respondent’s liability to pay the disputed sum would be remitted to the FTT for further consideration.
Justin Bates (instructed by Network Homes Ltd) appeared for the appellant; the respondent appeared in person.
Eileen O’Grady, barrister
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