Landlord and tenant – Service charges – Lessee’s obligation to contribute towards lessor’s costs of management – Contribution variable in first year of term by reference to costs incurred – Contribution to increase thereafter by retail prices index (RPI) – Whether variable service charge – Appeal allowed
The appellant owned a property at Betterton Court in Pocklington, a purpose-built development of 32 retirement flats let on long leases each of which included provision for a service charge. The respondents were leaseholders of the flats. The First-tier Tribunal (FTT) ruled in favour of the respondents on the reasonableness of the service charges for the years from 2013 to 2018.
The FTT determined that the management allowance had not been calculated in accordance with the requirements of the lease and directed that it should be recalculated using the fee levied by the appellant in 2005 as the starting point to which the retail prices index should be applied to up-rate it for each subsequent year. In reaching that conclusion the FTT rejected the leaseholders’ case that the management allowance should be recalculated based on the sum allowed in 1998, the earliest year for which there was evidence of the sum charged for management.
The FTT also directed that once the management allowances had been recalculated the sums overpaid by the leaseholders should be refunded by the appellant to the service charge account. It rejected the appellant’s case that the funds should be held by it to be repaid on request to individual leaseholders or their estates for the period when they held their leases.
The appellant challenged the decision on the reimbursement of overpaid management allowances. It also contended that the FTT had no jurisdiction to make any determination in relation to the disputed management allowance because it was not a “service charge” within section 18(1) of the Landlord and Tenant Act 1985 because it was not a cost which varied, or might vary, the costs of management but varied instead by reference to an index.
Held: The appeal was allowed.
(1) A charge for management was clearly within the scope of section 18(1)(a) of the 1985 Act. Nevertheless, the statutory protection against unreasonable service charges given to tenants by section 18 to 30 of the 1985 Act was not applicable to every charge under a lease simply because it was payable directly or indirectly for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management. It was additionally necessary that the charge should satisfy the requirement of section 18(1)(b) that the whole or part of it varied or might vary according to the relevant costs, i.e. the costs of providing services. It would be wrong for a tribunal to assume jurisdiction to consider the reasonableness of a charge which was fixed, or which varied by reference to an index. Such a charge fell outside section 18(1)(b) and, for the purposes of the statutory protection, was not a service charge at all.
(2) Where, as in this case, a charge was to be variable in the first year but fixed thereafter, increasing only by the application of an index to the first year’s figure, it was clear that, in the first full year at least, the charge for management was a service charge within the meaning of section 18(1). After the first year the allowance for management ceased to be variable by reference to the cost of providing the service and was not a service charge. A service charge was simply “an amount payable” which otherwise satisfied the description in section 18(1); it was necessary to determine in relation to each amount payable whether it was or was not a service charge within the statutory definition. If it was in respect of a matter within section 18(1)(a) and was capable of varying with the cost of services it would be a service charge; if it became variable otherwise than by reference to the landlord’s costs there was no reason why a change in the basis on which the charge was calculated should not have the effect that the charge was no longer one to which section 18 to 30 of the 1985 Act applied. In this case it was the first year’s charge which was variable by reference to relevant costs, and therefore a service charge, but the following years were not. The result was that since 1995 the charges for management had not been service charges within the meaning of section 18 of the 1985 Act: Coventry City Council v Cole [1994] 1 EGLR 63 followed.
(3) For the FTT or the Upper Tribunal to have jurisdiction in relation to a charge, it was not enough that it be included as one component of a larger charge some elements of which satisfied the statutory definition of a service charge. Any discrete part of a composite charge which failed to satisfy that definition fell outside the scope of sections 18 to 30 of the 1985 Act. In this case, after 1994, the management allowance payable as part of the service charge by the respondents did not fall within section 18(1) because it was not variable according to relevant costs. Therefore, the FTT did not have jurisdiction to determine the amount properly payable in respect of management and its decision had to be set aside: Longmint v Marcus [2004] 3 EGLR 171, Warwickshire Hamlets Ltd v Gedden [2010] UKUT 75 (LC); [2010] PLSCS 164, Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC); [2014] 3 EGLR 12; [2014] EGILR 38 and Gateway (Leeds) Management Ltd v Naghash [2015] UKUT 333 (LC); [2105] PLSCS 163 considered.
Justin Bates (instructed by Direct Access) appeared for the appellant The respondents appeared in person by their representative.
Eileen O’Grady, barrister
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