Landlord and tenant – Service charges – Management fees – Respondent holding long leases of four flats on estate – Appellant landlord adopting tiered system in calculating management fees as part of annual service charge – Respondent being charged flat fee – Upper Tribunal deciding respondent not liable to pay fee – Appellant appealing – Whether fee charged in accordance with terms of leases – Appeal was allowed in part
The respondent was the long leaseholder of four properties on an estate in Yarm, near Stockton-on-Tees. There were 10 freehold houses and 128 flats located in several blocks. Of the flats, 31 were the subject of long leases granted under the “right to buy” provisions of the Housing Acts 1980 and 1985. The remaining 97 were let to social tenants on assured tenancies.
An issue arose whether the terms of the leases entitled the appellant landlord, which managed the estate, to levy an annual service charge which included a fee for management services set on a standardised basis.
The appellant levied charges for the management services using a tiered system. A flat fee of £300 was payable by flat owners under long leases, including the respondent. Other properties paid £150 per annum and the assured tenants paid 15% of the rest of the service charges.
The respondent applied to the First-tier Tribunal under sections 20C and 27A of the Landlord and Tenant Act 1985, challenging the fee. It argued that the £300 charge was excessive and unfair. The FTT found in favour of the appellant.
The Upper Tribunal allowed the respondent’s appeal deciding that the lease required each part of the annual service charge to be calculated as a single proportion or fraction of a global sum. Therefore, the management fee was not charged in accordance with the lease: [2022] UKUT 273 (LC). The appellant appealed.
Held: The appeal was allowed in part.
(1) The general purpose of clause 5 of each lease was to require the tenant to pay a sum to the landlord by way of partial reimbursement in respect of the costs and expenditure incurred in managing and/or maintaining the buildings of which the demised flat formed part. That was consistent with the statutory definition of a service charge in section 18(1) of the Landlord and Tenant Act 1985 (as amended).
When construing clause 5(1), part of the admissible background was that the lease was anticipated to be one of a number of leases, in similar terms, of the flats in the buildings on the estate. However, although the definition of “buildings” in the leases included all the flats on the estate, and the definition of annual service charge referred to the amounts spent in relation to the management and maintenance of the buildings, the leases did not expressly state whether, and if so how, the freehold owners should be obliged to pay a proportion of the annual service charge. Thus, when construing clause 5(1), it could not necessarily be assumed that the same (or any) proportion of the annual service charge would be payable by a freehold owner as by a tenant under a lease.
(2) Clause 5(1) did not refer to a “single proportion” but to a “proportionate part” or a “fair proportion”. The ordinary and natural meaning of those words was not necessarily limited to an “equal part” or an “equal proportion”. Proportionality or fairness was often synonymous with equality, but not necessarily so.
It was self-evident that a tenant was to be charged annually a single amount which was part of the total annual service charge. But it would not necessarily be “proportionate” or “fair” to divide all costs equally across all the properties on the estate.
Clause 5(1) in effect provided for the division of the total and the recovery of a part of it from each of the individual tenants. Although clause 5(1) was flexible, it did not give the appellant the freedom to determine a “proportionate part” or a “fair proportion” of the annual service charge on an entirely subjective basis. The division had to be objectively justified.
If the nature of the tenure of a lease required a greater level of work to be done by the appellant in managing the tenancy, then it would be able, if it could justify the differential, to charge a different rate to the different tenants. But that would depend on the facts.
(3) The purpose of the definition of “annual service charge” in clause 5(2) was to define and limit the total costs which the landlord was entitled to seek to recover from all tenants of properties on the estate.
It was clear from the reference in that definition to “the total of all sums actually expended or provided … in connection with the management and maintenance of the Buildings …” that clause 5 was only intended to cover sums actually expended or provided for by the landlord in connection with the management and maintenance of the properties on the estate. There was no basis for including any amounts expended or provided for in connection with the management or maintenance of any other properties that were not on the estate.
Consistent with the overriding words at the start of clause 5(2), the express limitation in the first part of clause 5(2)(d) was that the landlord could only include in the annual service charge fees etc of agents which it employed in managing and maintaining the buildings.
It was also implicit that the second part of the clause 5(2)(d), dealing with “in-house” costs where works were undertaken by staff and employees of the landlord, “without employment of an agent”, that such “works” did not relate to any other properties owned by the landlord.
The aggregate sum had been defined by reference to work done on properties that were not on the estate at all, and it had been divided by a number that included properties that were also not on the estate. Whatever the appellant might consider to be realistically necessary, or more convenient, for it in the conduct of its national business, was irrelevant to what it was contractually entitled to charge under clause 5.
(5) Accordingly, the appeal would be allowed against the Upper Tribunal’s limited interpretation of the wording of clause 5(1). However, its decision would be upheld that the flat rate management charge set by appellant, by reference to its costs of dealing with properties not on the estate, was not permitted by clause 5(2).
Justin Bates (instructed by Trowers & Hamlins LLP) appeared for the appellant; Anthony Verduyn (instructed by DWF Law LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Howe Properties (NE) Ltd v Accent Housing Ltd
