Landlord and tenant – Service charges – Certificate of annual expenditure – Landlord applying for interim service charges – Amount demanded approximately twice actual expenditure – Tenants in arrears of service charges – Landlord failing to supply certificates of annual expenditure – First-tier tribunal upholding demands in full – Whether certificate condition precedent to liability for interim service charges – Whether landlord establishing demands reasonable proportion of anticipated expenditure – Whether demands reasonable within section 19(2) of Landlord and Tenant Act 1985 – Appeal allowed in part.
Spembly Works, 13 New Road Avenue Chatham was a former office and factory building converted into 33 residential flats in about 2000. The respondent landlord was the residents’ association owned or managed by some of the tenants. The appellant tenant had purchased 13 of the flats from fixed charge receivers in 2010. By clause 5.1 of the lease, the tenant covenanted to pay the landlord a proportionate sum as the landlord considered fair and reasonable on account of service charge and on receipt of the certificate of annual expenditure to pay any balance of the service charge found to be owing.
The respondent sent demands for payment of interim service charges to the appellant in each of the years between 2010 and 2016. The appellant challenged the sums demanded on a number of technical grounds principally relating the failure by the respondent to supply certificates of annual expenditure in accordance with clause 6.2 and Schedule 4 of the lease. In substance, the First-tier Tribunal (FTT) upheld each of the demands in their entirety.
The appellant appealed on the single issue of whether the practice of the respondent in not issuing service charge certificates, where the sums demanded by way of interim payments (but in many cases not paid) were in excess of the expenses for the relevant year, was relevant to the issue which the FTT had to consider under section 19(2) of the Landlord and Tenant Act 1985, namely, whether the interim service charges were reasonable.
Held: The appeal was allowed in part.
(1) The provision of certified accounts would not generally be a condition precedent to liability to pay service charges. In the present case, certification was not a condition precedent to the tenant’s liability to pay an interim service charge under clause 5.1 of the lease. The meaning of clause 5.1 was clear. There was nothing in the first half of the clause which made the payment of the interim charge dependant on certification; that requirement was only imposed for the balancing charge. The interim payment was set by reference to what the landlord should consider fair and reasonable and not by reference to what might be certified. The appellant was not without a remedy if the respondent failed in its obligation to certify the balancing charge. The remedies potentially open to the appellant were either an action for damages, an action for specific performance or for an account or an application to the FTT under the 1985 Act for the determination of the service charges payable.
(2) As a matter of construction the interim service charge could not be higher than 100% of the estimated expenses. By virtue of section 19(2) of the Landlord and Tenant Act 1985, where a service charge was incurred before relevant costs were incurred, no greater amount than was reasonable was payable. The sum claimed had to be objectively reasonable. The absence of proper certification might be relevant to the question of reasonableness. At the commencement of the lease it would have been impossible for the obligation to pay the estimated service charge to be made conditional on the preparation of audited service charge accounts. In subsequent years, it would be a practical impossibility for the estimated service charge in one year to be based on the audited accounts in the immediately preceding year. As a matter of contract, the payment of the estimated charge was not conditional on the provision of audited accounts. The reasonableness of the demand had to be assessed by what was known at the time the tenant’s liability arose. In this case all of the invoices were dated after the due date specified in the lease. The relevant date for assessment was the date of the invoice: Pendra Loweth Management v North [2015] UKUT 91 (LC); [2015] PLSCS 105 and Knapper v Francis [2017] UKUT 3; (LC) [2017] PLSCS 11 followed.
(3) An application under section 27A concerning service charges based on end of year accounts showing sums actually incurred was different from an application for interim service charges. In an application of the former type, the FTT was determining the reasonableness of the costs incurred. In an application concerning interim service charges, the FTT was assessing the reasonableness of the estimate assessed when liability arose. There were a number of problems with the FTT’s decision. There was an increasing amount of knowledge available to the respondent of the level of actual expenditure at the property at the time of demands. Although the respondent did not take over management until 2011, it would have had some idea of the actual expenditure incurred historically by the date of the first demand. The onus was on the respondent to establish the reasonableness of, and to justify, the estimate. The FTT appeared to have thought that the expenditure would have been higher if there had been no arrears and to have justified the demands on that basis. That was an inference not open to the FTT in the absence of evidence. The amounts claimed in the demands were not reasonable within the meaning of section 19(2) of the 1985 Act and the decision of the FTT could not stand.
(4) If the matter were remitted to the FTT for a fresh determination, it was unlikely that there would be better evidence available. Accordingly, the Upper Tribunal would accede to the respondent’s request and remake the decision. The claim for 2009/2010 would be allowed in its entirety. It was submitted in late 2011 and there was an undated document setting out the expenses for that year. However, all of the other claims fell to be reduced. Doing the best it could, the tribunal would reduce them by 50%.
Annette Cafferkey (instructed by Scott Cohen, of Henley-on-Thames) appeared for the appellant; Jonathan Upton (instructed by Bradys, of Nottingham) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Wigmore Homes (UK) Ltd v Spembly Works Residents Association Ltd
