Liability to pay a service charge is dependant upon the terms of a tenant’s lease. If a condition precedent has to be satisfied before a service charge is due, the landlord must comply with that condition in order to collect the service charge.
The decision in Leonora Investment Co Ltd v Mott Macdonald Ltd [2008] EWHC 136 (QB); [2008] PLSCS 47 illustrates how such principles operate in practice. The landlord granted a tenant separate leases of four floors of a multi-storey building. The leases provided that the tenant would pay a fair proportion of the service charge for the building (which could, if appropriate, be the entire amount), assessed on a reasonable and proper basis.
In December 2002, the service charge year expired and the landlord sent the tenant statements indicating that it had spent less than the sums collected from the tenant during the year. It also sent four separate credit notes for the overpayments. However, in January 2003, the landlord sent the tenant an invoice requiring payment of a substantial contribution towards the costs of redecoration during the previous year.
The tenant refused to pay. It argued that the landlord should have provided separate invoices and that a demand for a single sum in respect of all four leases was ineffective as a demand under any of them. The tenant also claimed that it had already fulfilled its obligations to the landlord because the landlord was entitled to raise only one balancing charge statement at the end of each year.
The landlord contended that the service charge provisions should be given an effect that fulfilled, rather than defeated, their evident purpose. However, the judge ruled that it would be wrong to presume that tenants must pay service charges in all circumstances. If a condition precedent has to be satisfied before a service charge is due, it must be complied with, and cannot be avoided by an appeal to the purpose of having the service charge.
The tenant’s share of the service charge expenditure was indefinite. The basis upon which costs were to be apportioned between tenants was changeable. The tenant might be liable for the entire service charge in any one year if all the services were provided for its benefit, or for none at all. Without information about the total costs incurred and the proportions being demanded from it, the tenant would be unable to evaluate whether the amount being demanded was fair and had been assessed on a reasonable and proper basis, as required by its leases. Consequently, the tenant was not liable to pay the sum demanded by the landlord.
However, the judge refused to construe the leases as limiting the landlord to one balancing charge statement in each year. He ruled that it would be strange and harsh if the landlord were unable to revise a statement to correct an error (but that the invoice provided was not a revised balancing charge statement for the purposes of the tenant’s leases).
Allyson Colby is a property law consultant