One of the cardinal rules of service charge management, which applies to commercial and residential properties, is that landlords should adhere to the service charge provisions in their leases.
The Lands Tribunal decision in Bhambhani v Willowcourt Management Co (1985) Ltd [2008] PLSCS 130 illustrates the dangers of taking shortcuts when administering service charges. The tenant’s lease required the tenant to pay £100 pa towards service charge expenses and to make any requisite balancing payment at the end of the service charge year. The tenant’s contribution was subject to an annual revision, on the service of a notice increasing its contribution to an amount certified by the landlord’s surveyor as its contribution for the following year.
No such certificate was issued in respect of any of the service charge years with which this case was concerned. The management company merely wrote to the tenants annually, advising them that the service charge contributions were being increased in accordance with company resolutions passed after consideration of its accounts and financial forecasts. The tenant argued that, in the absence of a surveyor’s certificate, she was liable to pay service charge contributions on account at the rate of £100 pa.
The management company (which was seeking to recover £200 per quarter) argued that the tenant was liable to pay at least £150 per quarter. It relied upon the fact that the tenant had been chairman of the management company and, while in office, had supported and implemented an increase in interim service charge contributions to that amount.
The tenant argued that the service charge provisions in the lease required interim service charge contributions at the rate of £100 pa, and that this amount could be properly displaced only in accordance with the terms of the lease. She also argued that it was too late for the management company to rectify the position and that it had lost the right to seek any balancing charges to make up the difference between the amounts that she had paid on account and the amounts that she would have been required to pay had the management company administered the service charge correctly.
The Lands Tribunal agreed that the default figure under the lease was £100. However, it also ruled that the lease did not set any time limits for obtaining end-of-year certificates certifying the service charge amounts payable in previous years. Consequently, the absence of surveyors’ certificates could still be rectified (although the management company would be unable to charge the tenant interest on the sums due from her because the lease did not provide for the payment of interest on the shortfall once it was eventually certified).
Certification of expenditure is vitally important to service charge management. A quick internet search will identify businesses keen to advise tenants upon how to minimise their service charge liabilities. Businesses like this will focus on the terms of a tenant’s lease; landlords would be well advised to do so too.
Allyson Colby is a property law consultant