Landlord and tenant – Service charge – Liability – Appellants bringing claim against respondent lessees for unpaid service charges – County court referring matter to first-tier tribunal to determine reasonableness of charges – Whether FTT erring in holding that no service charge due where appellants failing to comply with obligation to provide audited service charge accounts – Whether FTT having jurisdiction to determine that issue in light of terms of referral – Appeal allowed
The appellants were the management companies for two buildings containing residential flats. The first respondent was the lessee of four flats in one building and two in the other, plus a third which he held as a joint tenant with the second respondent, his wife. The leases provided for the payment of a service charge and, by clause 1 of the Fifth Schedule to the lease, the respondents were required to pay in October of each year “the amount of the Service Charge estimated by the Management Company as being required to enable the provision of the Services during that year”; any underpayment for a previous year was payable on demand. By clauses 5 and 6 of the Seventh Schedule to the leases, the appellants were obliged to keep proper books of account of all costs, charges and expenses incurred by them in carrying out their obligations, to provide in each year audited accounts prepared by a chartered accountant and, within one month thereafter, to serve a written notice on the respondents stating the amounts of service charge certified by the accountant as being due and payable by them.
The appellants brought county court proceedings against the respondents to recover unpaid service charges. By their defence, the respondents contended that the service charges were not reasonable and that appellants had failed to provide the required audited service charge accounts; they also counterclaimed for alleged breaches of the appellants’ repairing covenants. The county court referred the matter to the first-tier tribunal (FTT) to determine the reasonableness of the service charges.
The FTT held that, at the time when the county court proceedings were issued, the appellants had failed to comply with their obligations under clauses 5 and 6 of the Seventh Schedule to the leases and that accordingly no sum was due as service charge.
The appellants appealed. They contended that, inter alia: (i) the FTT was wrong to hold that compliance with clauses 5 and 6 was a condition precedent to payment of the service charge; and (ii) in any event, the FTT had lacked jurisdiction to decide that point since that matter was not in issue in the county court proceedings and the matter referred to the FTT was limited to the reasonableness of the charges.
Held: The appeal was allowed.
(1) The FTT had erred in holding that the service of a certificate complying with clause 5 and 6 of the Seventh Schedule to the leases was a condition precedent to any liability to make payment for the service charge. Such an interpretation was not in accordance with clause 1 of the Fifth Schedule, which clearly provided for payment based on a determination of the amount estimated as due by the management company. There was nothing in that clause which required the provision of the audited accounts and there was no reason to imply such a term. The FTT was therefore wrong to assess the service charges at nil: Redrow Homes (Midlands) Ltd v Hothi [2011] UKUT 268 (LC); [2011] 3 EGLR 25; [2011] 45 EG 98 and Pendra Loweth Management Ltd v North [2015] UKUT 91 (LC); [2015] PLSCS 105 applied.
Although the respondents had repeatedly requested audited accounts without success, they were not without a remedy in that regard. It would be open to them to apply to the county court to amend their counterclaim to include a claim for damages against the appellants or a claim for specific performance or for an account; alternatively, they could apply under the Landlord and Tenant Act 1985 for a determination of the service charges payable. However, such a course was probably unnecessary in the instant case in light of the directions given by the Upper Tribunal: these directed the appellants within 28 days to serve on the respondents fully audited accounts, in accordance with clauses 5 and 6 of the Seventh Schedule, in respect of any year for which a claim for service charge was included in the county court proceedings. Within 28 days of such service, the respondents were then to serve a document setting out which parts of the service charge were challenged and the grounds of the challenge, and the appellants were to serve a reply within a further 28 days.
(2) The question of whether the service charges were recoverable at all was in issue in the county court proceedings. The first respondent in his pleadings asserted that the appellants were in breach of the terms of the lease by failing to provide audited accounts. While he did not plead that, as a consequence of that failure, no service charge was payable, the pleading was wide enough to encompass such a submission, bearing in mind that these were proceedings in the county court and that the first respondent was a litigant in person.
Nor did the terms of the referral from the county court confine the jurisdiction of the FTT considering the reasonableness of the service charge. If, as a matter of law, no service charge was payable, it was difficult to understand how any figure could be said to be reasonable. Thus, adopting an appropriately generous interpretation, the county court’s referral order could be said to encompass the question of whether any service charge was payable at all: Cain v Islington London Borough Council [2015] UKUT 117 (LC); [2015] PLSCS 111 applied.
Andrew Dymond (instructed by Brown Turner Ross, of Liverpool) appeared for the appellants; the first respondent appeared in person for the respondents.
Sally Dobson, barrister