Landlord and tenant – Service charges – Certification – Appellant landlord appealing against decision of First-tier Tribunal on application by respondent leaseholders for determination of liability to pay service charges – Lease requiring certification of leaseholder’s liability by chartered accountant – Whether factual findings by chartered accountant sufficient – Whether audit required – Appeal dismissed
The appellant purchased the freedhold of 43 Grand Parade, Brighton, a substantial Victorian house which had been converted into 5 self-contained flats each of which was let on a long lease. The lease of flat 3 was vested in the respondents.
The lease contained a conventional service charge provision at clause 3(2) by which the lessee covenanted to pay 18% of the annual costs expenses and outgoings incurred by the lessor in complying with its obligations. Clause 3(2)(ii) explained how the service charge was to be calculated and paid and included a provision that the liability of the lessee was to be certified by a chartered accountant to be appointed by the lessor.
The respondents applied to the First-tier Tribunal (FTT) under section 27A of the Landlord and Tenant Act 1985 for the determination of their liability to pay the service charges billed by the appellant for the year ending June 2019. The FTT dismissed a series of challenges by the respondents to those charges but held that no sum was yet payable because the accounts produced by the appellant’s accountant in support of the charges had not been certified by a chartered accountant, as the FTT considered they ought to have been to satisfy the contractual requirements of the lease. The accounts were instead certified by the appellant’s managing agent but included a factual report by a firm of accountants based on a limited review of material provided to them by the managing agents. The report confirmed the consistency of the accounts with those records.
The appellant appealed. The appeal was determined on written representations.
Held: The appeal was dismissed.
(1) In every case, the function and significance of the certificate would depend on the terms of the agreement. The same was true of the form of a certificate. The certificate had to be clear with the intention of complying with the requirements of the particular contract; and it had in fact to comply with those requirements. The general function of a certificate was to provide confirmation of facts relevant to the obligations of a party under a contract. Where the certificate was provided by a third party, as was often the case where the certificate concerned service charges payable under a lease, it was also intended to provide an assurance to the paying party that an independent person, usually with some relevant professional qualification, had satisfied themselves that the facts being certified were true: Token Construction Co Ltd v Charlton Estates Ltd (1973) 1 BLR 48 and Urban Splash Work Ltd v Ridgway [2018] UKUT 32 (LC) considered.
(2) In the present case, clause 3(2)(ii)(b) first required that “the respective annual costs expenses and outgoings… shall be calculated”. The clause did not say by whom those costs and expenses were to be calculated. Next, the clause required that the lessee’s share of the annual costs should be compared to the aggregate of the sums paid by the lessee on account. It was only if the lessee’s share of the costs and expenses exceeded the sums paid on account that any further payment was required.
The lessee’s obligation to make a further payment was to be made “forthwith upon the production of a certified account”, so that the obligation to pay did not arise until that certified account was produced. The lease therefore made the lessee’s obligation to pay any shortfall between their share of the costs and expenses and their payments on account conditional on an account of that liability being certified by a chartered accountant. The lease did not require that the annual service charge accounts themselves be certified, but that the amount of the lessee’s liability be certified. That required consideration of the lessee’s share of the total expenditure and the lessee’s payments on account, and certification of the difference between the two.
The lease did not prescribe exactly what steps had to be taken by the chartered accountant before certifying the lessee’s liability. Those steps were left to the judgment of the accountant appointed by the lessor to perform the task of certification.
(3) There was no document in this case which purported to certify the liability of the respondents under clause 3(2)(ii). The accountant’s report of its factual findings did not refer to the liability of any individual lessee, nor did the managing agent’s certificate which referred only to the service charge expenditure. The certificate contemplated by the lease was a bespoke document for each lessee, showing their individual liability, and it appeared that no such document had ever been certified.
Therefore, the costs incurred by the appellant which it found to have been reasonably incurred were not yet payable. However, those costs would not become payable when the service charge accounts alone were certified. What was missing was an account, certified by a chartered accountant, stating the individual lessee’s share of total expenditure, the payments made on account, and the resulting shortfall or surplus. Once that document was provided (with the necessary statutory information) the respondents would “forthwith” be required by clause 3(2)(ii)(b) to pay the certified amount.
(4) The lease did not require that the service charge accounts be audited; it required that the individual lessees’ liability be certified. Nor did Tech 03/11, the guidance produced by the ICAEW on accounting and reporting in relation to service charges, require that service charge accounts be audited before they could be certified. It was clear that the accountancy profession did not consider that an audit was an essential precursor to certification of accounts or other forms of service charge document. In some cases, an audit might be necessary because the lease required one. In other cases, as a matter of professional judgment, an accountant instructed to provide the necessary document might consider that they could not certify the matters stated in the document as being correct without carrying out an audit. In this case, there was no such requirement in the lease.
Although the report of factual findings was the normal arrangement where the lease did not specify the form of examination of the accounts, and was appropriate for this building, the document was deficient because it did not certify the liability of the individual leaseholders as required by the lease.
Eileen O’Grady, barrister
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