Service charges – Reserve fund – Long lease granted to respondent under right-to-buy provisions of Housing Act 1985 — Whether service charge clause in lease permitting appellant landlords to maintain reserve fund for estimated costs of future repairs – Whether terms of notice served by appellants under section 125 of 1985 Act relevant to construction of lease – Appeal allowed in part
The respondent held a long lease of a property, dated April 2005, granted to him by the appellant council pursuant to the right-to-buy provisions of the Housing Act 1985. Clause 3(2) of the lease provided for the payment of service charges as a “fair proportion… of the reasonable costs or estimated costs… of any services incurred by the Lessor” as required under the lease “so far as such costs are chargeable to the Lessee by the Lessor under the provisions of Part III of Schedule 6 of the Act”.
On an application to the leasehold valuation tribunal (LVT) under section 27A of the Landlord and Tenant Act 1985, the respondent disputed his liability to pay instalments towards a reserve fund for future repairs, as demanded by the appellants. The appellants contended that the service charge provisions were sufficiently wide to cover the maintenance of a reserve fund. They submitted that clause 3(2) fell to be construed against the background of their 2004 notice, under section 125 of the 1985 Act, notifying the respondent, in connection with his right-to-buy claim, of the level of service charge that would be levied upon him during the initial five-year period. The notice included an estimate of the cost of anticipated repairs within that period and a projected estimate of anticipated repairs beyond it, along with a statement that: “The landlord will designate such funds as a reserve fund and apply the same accordingly.”
The LVT determined that: (i) clause 3(2) did not entitle the appellants to set up a reserve fund against future repairs; (ii) that provision covered only costs or estimated costs that had been incurred, or were to be incurred, in respect of services that had actually been performed; (iii) the background to the right-to-buy claim, and the section 125 notice, could not justify a wider interpretation since they were inadmissible as declarations of subjective intent; and (iv) even if the appellant were in principle able to recover such sums, certain of the items claimed should be disallowed. The appellants appealed.
Held: The appeal was allowed in part.
(1) On the proper construction of clause 3(2), the appellants were entitled to demand from the respondent the payment of a fair proportion of the reasonable estimated costs of future repairs incurred by the appellants in observing and performing their repairing obligations under the lease. They were entitled to build up a reserve fund, through the service charge, against the reasonable estimated cost of future repairs that were not yet needed but would be needed in due course. Such costs did not have to be incurred within any specific accounting year or time-frame. The appellants were not restricted to making a single, once-and-for-all demand for a fair proportion of the estimated costs but could require payment in instalments. However, their ability to demand such sums would be limited by the requirement to identify “reasonable… estimated costs” of services “to be incurred”, such that there had to be a properly prepared reasonable estimate of those costs; the appellant could not simply identify a sum that they considered it prudent to charge in respect of a property of a certain type.
In so construing the lease, the admissible background included the fact that it had been granted pursuant to the right-to-buy provisions of the 1985 Act and that the appellants had served a section 125 notice in accordance with their statutory obligation. The section 125 notice should be treated not as a subjective declaration of intent by the appellants, made in the course of negotiations regarding the terms of the lease, but as a statutorily required document that was intended to have, and did by force of statute did have, continuing legal effect after the execution of the lease. Moreover, clause 3(2), by stating on its face that sums would be payable in respect of estimated costs so far as they were chargeable under Part III of Schedule 6 to the 1985 Act, indicated an intention that the appellants should be able to recover service charges to the extent permitted by those statutory provisions, which limited the recoverable service charge by reference to the estimated amount shown in the section 125 notice.
(2) There was no basis for interfering with the LVT’s decision regarding the items that were to be disallowed in the event that a reserve fund was permitted.
Andrew Arden QC and Stephen Beresford (instructed by the legal department of Leicester City Council) appeared for the appellants; the respondent did not appear and was not represented.
Sally Dobson, barrister
