Landlord and tenant – Service charges – Calculation – Deputy district judge resolving service charge dispute in favour of respondent landlords – Appellant lessees appealing – Whether respondents entitled to charge specified amount every year if actual expenditure never exceeded that figure – Whether estimated service fell within definition of service charge within section 18 of Landlord and Tenant Act 1985 – Appeal allowed
Each of the appellants held a lease for 999 years from 1 January 2003 of a holiday lodge at Forest Park Lodges, High Bickington, Umberleigh, Devon. Both leases were granted in April 2004, by the then lessors to the original lessees. The appellants were the current lessees and the respondents were the current lessors.
Each lessee covenanted to pay the rent and each lease contained a reddendum which provided that the lessee was liable to pay, as further and additional rent, a service charge in advance on 1 January each year which was the greater of: (a) the sum of £250 per annum multiplied by the relevant RPI; or (b) the sum which was one-twentieth of the sum calculated in accordance with the fourth schedule, which set out the calculation of the service charge.
Issues arose between the parties whether it was open to the respondent to charge £250 (revised for RPI) every year, even if the actual expenditure on the services covenanted to be provided never exceeded that figure; and whether the estimated charge fell within the definition of a “service charge” within section 18 of the Landlord and Tenant Act 1985 and therefore attracted the benefit and protection of that Act.
A deputy district judge determined both issues in favour of the respondents. He concluded that, to the extent that the £250 multiplied by RPI was the higher figure, the charge would be classed as a fixed charge and sections 18 to 30 would not apply to it. Accordingly, there was no legal basis for considering the reasonableness of the charge in any particular year. The appellants appealed.
Held: The appeal was allowed.
(1) The charge being made by way of additional rent in the second part of the reddendum was a single charge, described as a “service charge”, which was the greater of the two alternative calculations, subject to a “floor” below which the demand for payment could not fall.
Paragraph 1 of the fourth schedule to the lease required the landlord to tell the tenant what was the amount of service charge demanded for the forthcoming year. It was plainly an estimate, because the real costs were not then known. After the end of any given year, the landlord’s accountants would work out and certify what was the actual amount of expenditure. Since the current year during which they were doing the work was still ongoing, that had to be a reference to the previous year’s service charge and not to the current year. Paragraph 2 then contemplated the comparison between the estimated service charge payable at the beginning of the previous year and the actual costs incurred during that year and the resolution of that comparison.
The latter operation was binary. If the actual service charge was greater than the sum paid in advance in the previous year, then the excess would be due from the tenant in the “ensuing year” (beginning on the next 1 January). It would be added to whatever would otherwise be estimated and charged for the following year. If on the other hand the actual service charge was less than the sum that was paid in advance for the previous year, the balance would be held to the credit of the tenant and deducted from whatever would otherwise be estimated and charged for the following year. Therefore, the judge below fell into error on that point.
(2) There was no doubt in the present case that the charge sought to be made by the second part of the reddendum constituted “an amount payable by a tenant of a dwelling as part of or in addition to the rent … which is payable, directly or indirectly, for services, repairs, maintenance [improvements] or insurance or the landlord’s costs of management” within section 18(1) of the 1985 Act. The fact that it related to future or estimated costs did not matter, as the references in section 18(2) to “estimated costs” and costs “to be incurred” and the reference in section 18(3) to costs “to be incurred” made clear. The dispute between the parties centred on section 18(1)(b), namely whether this charge was one “the whole or part of which varies or may vary according to the relevant costs” .
The decision in The Anchor Trust v Waby [2018] UKUT 370 (LC); [2018] PLSCS 196 showed that a charge might satisfy the statutory test in one year but not in another. However, in that case that was because the formula itself changed after the first year. Here the formula did not change. There was only one estimated service charge, to be demanded in advance, and the amount of it was calculated by reference to actual expenditure on services (paragraph (b)), albeit subject to a floor below which (as a demand for payment in advance) it could not go. That said nothing about what happened when the figures for the year were in and the actual service charge could be calculated and compared to the estimate.
What happened then was dealt with by paragraphs 1 and 2 of the fourth schedule dealing with the calculation of service charges. Section 18(1)(b) did not require that the charge had to vary according to the relevant costs. It required only that it “may vary”, which in the present case it did. And the case in Re Southern Housing Group Ltd [2011] L&TR 7 showed that, even if the variation occurred only because the landlord chose to make it, nevertheless that charge “may vary” for that purpose.
The present case was in fact stronger than that because, unlike the landlord’s express power in that case, here it was not within the landlord’s control as to whether the costs of complying with his covenants did or did not exceed the “floor”. For example, a blockage in the sewers might necessitate expensive works of repair: see clause 5(2)(b). The judge below fell once more into error. This was clearly a case where the service charge “may vary according to the relevant costs”. As a result, sections 18-30 of the 1985 Act applied.
Leslie Blohm QC (instructed by Fursdon Knapper Solicitors, of Plymouth) appeared for the appellants; Sancho Brett (instructed by Laker Legal Solicitors) appeared for the respondents.
Eileen O’Grady, barrister
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