Landlord and tenant – Service charge – Landlord and Tenant Act 1985 – Appellant members of tenants’ association challenging amounts demanded by respondent landlords on account of service charges under long leases of holiday chalets – Section 19(2) of 1985 Act – Whether first-tier tribunal’s decision on reasonableness required to take into account that certain items of anticipated service charge expenditure included in demands not ultimately incurred during relevant year – Appeal dismissed
The appellants were members of a tenants’ association that represented the interests of long leaseholders of chalets in a holiday park in St Merryn, Cornwall. The leases provided for the payment of a service charge to the respondents, as freeholders of the holiday park, by way of an advance payment in December of each year on account of the estimated expenditure for the forthcoming year; the actual expenditure was then to be certified at the end of the year.
There was a long-running dispute between the appellants and the respondents over the service charges for the chalets; that dispute had been the subject of court proceedings (see Phillips v Francis [2014] EWCA Civ 1395; [2015] EGLR 8), and the charges for 2008 to 2014 were still being contested in the first-tier tribunal (FTT).
The appellants also applied to the FTT, under section 27A of the Landlord and Tenant Act 1985, for a determination of the reasonableness of sums demanded by the respondents in December 2014 on account of anticipated service charge expenditure for 2015.
By the time of the FTT’s decision in relation to the 2015 charge, it was known that certain items of anticipated expenditure for that year had not in fact been incurred, including the proposed employment of a new site manager at a cost of £50,000 and the refurbishment of a children’s play area at a cost of £36,000. The FTT ruled that it should not take that fact into account in determining whether the sum demanded on account was reasonable within section 19(2) of the 1985 Act, since the validity of the service charge demand should not be affected by post-liability events. After making certain deductions, it determined that the leaseholders were each liable to pay £1,757.52 on account for 2015.
The appellants appealed. They contended that, where items of anticipated expenditure were known not to have been incurred during the relevant period, the FTT should reduce the on-account charge accordingly, either as part of the assessment of reasonableness or pursuant to the second limb of section 19(2) dealing with “adjustment by repayment, reduction of subsequent charges or otherwise” after the relevant costs had been incurred.
Held: The appeal was dismissed.
(1) The starting point for the FTT’s consideration was the contractual position between the parties. The contractual position, in the absence of section 19(2) of the 1985 Act, was that each appellant was obliged to pay on account their proportion of the total budgeted sum in December 2014. The effect of section 19(2) was to modify the contractual obligation so that no greater amount than was reasonable was payable before the relevant costs were incurred. The language of the subsection suggested that the statutory ceiling applied at the time when the leaseholder’s liability arose. If, at that date, the on-account payment was greater than a reasonable sum, then the leaseholder’s contractual obligation was only to pay the lesser, reasonable sum.
(2) The FTT was correct in principle to disregard matters which became known only after the appellants’ contractual liability for the on-account charge arose. Those facts did not turn what had been a reasonable sum into an unreasonable sum. The question of what sum ought reasonably to be paid on a particular date, or ought reasonably to have been paid at an earlier date, necessarily depended on circumstances in existence at that date, and should not vary depending on the point in time at which the question was asked. In that context, considerations of certainty, predictability, and the effective operation of service charge arrangements were of greater significance than the principle that a court “should not speculate when it knows”: Curwen v James [1963] 1 WLR 748 distinguished. The ability of a landlord to collect funds in advance of expenditure was an important part of most service charge schemes, was for the benefit of both parties, and should not be undermined. Parliament was likely to have intended that the statutory protection afforded by section 19(2) should do no more than protect leaseholders from unreasonable demands. For a leaseholder’s liability to be a moving target, reasonable one day and unreasonable the next depending on events that could not be known at the date on which payment fell due, would be destabilising and therefore undesirable.
(3) Section 19(2) did allow matters that were not known to a landlord when its budget was set to be taken into account in determining a reasonable sum to be paid in advance. If those matters became known after the budget was drawn up, but before a particular payment became due, they could also potentially affect the reasonableness of the sum to be paid. There was no reason why, in such a case, section 19(2) should not modify the contractual obligation by reference to circumstances as they were known at the payment dates. However, a line should be drawn at the date on which the payment becomes due, so as to exclude from consideration matters which could not have been known at that date, because they had not yet occurred.
In the instant case, it was correct to allow the reasonable cost of the proposed refurbishment of the play area and of employing the proposed new site manager, despite the expenditure not having been incurred on either item by the end of 2015. The reasonable sum required as a payment on account did not retrospectively become an unreasonable sum once it became clear that the expenditure had been avoided.
(4) The second limb of section 19(2) did not confer jurisdiction on the FTT to direct repayment of any sum which had been collected in advance by a landlord but which exceeded the expenditure actually incurred during the period in question. The FTT’s jurisdiction under section 27A of the 1985 Act was restricted to determining the amount that was payable as a service charge, and other specific questions relating to service charges. A service charge was an amount payable by a tenant and the expression was not apt to describe a sum payable by a landlord. Section 19(2) itself made no reference to the FTT and did not seem to expand the jurisdiction conferred by section 27A. The true purpose of the second limb of section 19(2) was unclear but, in any event, it did not allow any role for the FTT. Moreover, it would not have been appropriate to direct any adjustment to the appellants’ liability in the instant case since, as the FTT had found, the balance of account between the parties was at present wholly unclear pending the FTT’s decision on the sums payable from 2008 to 2014 and the production of the respondents’ final year accounts for 2015.
Rawdon Crozier (instructed by Fursdon Knapper Solicitors, of Plymouth) appeared for the appellants; Jonathan Chew (instructed by Enigma Solicitors, of Plymouth) appeared for the respondents.
Sally Dobson, barrister
