Jonathan Seitler QC and Miriam Seitler debate moot points in property law – this time, service charge recovery
Question: Is the law on service charges a minefield for landlords?
YES: Jonathan Seitler QC, barrister at Wilberforce Chambers, argues that the current regime can blow up the innocent landlords – as well as the guilty ones
1. It is one thing to expect a landlord of property (whether commercial or residential) to comply with the contractual requirements of the lease when looking to recover service charges from tenants. I can live with that.
But tenants’ lawyers poring over the wording of lease schedules that outline what can be recovered as service charge are like geeks removing the wings off dead flies.
This has led to the cases in this area showing that the slightest failure to abide by the terms of lease, or to comply with the often detailed and complex contractual machinery, can be fatal to a landlord’s attempt to recover service charges.
Indeed, it is all made nightmarish for landlords by the fact that requirements of the contractual machinery are often regarded as conditions precedent to recovery.
2. As if all that is not bad enough, the position is made incalculably worse in the residential sector, where there are statutes that intervene. These create further hurdles that a landlord or managing agent must overcome before being entitled to recover service charges from tenants.
The offending provisions are found in sections 18-30 of the Landlord and Tenant Act 1985 (the 1985 Act). The rules in these provisions apply to any variable service charge which is payable by a tenant of a dwelling.
3. The first and probably foremost landmine which these provisions put under the smooth recovery of service charges is found in section 19 of the 1985 Act.
This imposes a requirement on the landlord to establish the relevant costs have been reasonably incurred, and, where they are incurred on the provision of services or carrying out of works, that the services or works are of a reasonable standard.
It goes without saying that this gives the tenant the widest scope to argue that costs have been unreasonably incurred. All arguments are up for grabs.
This is because reasonableness involves scrutiny of all sorts of factors – both those relevant to whether the landlord’s actions were reasonable, meaning whether the decision-making process has been acceptable, and also those relevant to whether the outcome itself is reasonable, meaning whether the amounts actually incurred are reasonable in extent.
And this applies both to service charges which relate to costs already incurred and also to interim charges in advance, by reason of section 19(2).
4. The second major landmine is the strict time limit for the demand for payment from a tenant imposed by section 20B of the 1985 Act.
A landlord must demand payment for the service charge no more than 18 months after the relevant costs taken into account in determining that service charge was incurred. This is then given real teeth by the rule that a tenant is not liable to pay an amount of service charge relating to costs incurred more than 18 months prior to the demand.
Furthermore, any such demand must be accompanied by a summary of the rights and obligation of tenants of dwellings in relation to service charges. The form and content of such summary is prescribed by the Service Charges (Summary of Rights and Obligations, and Transitional Provision) (England) Regulations 2007.
5. The third landmine is constituted by the infamous consultation requirements found in section 20. This applies to all works costing more than £250 per lessee, and any long-term agreement for services that lasts for more than 12 months and which costs more than £100 per lessee.
The consultation requirements include a series of prescribed notices set out in Schedules to the Service Charges (Consultation Requirements) (England) Regulations 2003. Failure to comply with the consultation requirements means the contribution of each tenant will be capped at £250 in relation to qualifying works, leaving the landlord to make up the shortfall. Compliance consists of a four-stage process requiring:
i. giving the tenant notice of intention to do the works and having regard to their observations;
ii. seeking estimates for the works, including from any nominee identified by the tenants or residents’ association;
iii. issuing a statement with estimates to the tenant and allowing inspection of those estimates; and
iv. giving a statement to tenants with the reasons for having chosen someone other than the nominee or the lowest estimate.
It is a major faff with potentially significant consequences if it goes even slightly wrong. And it is not a machinery which operates in an obvious way, on the ground. The complex treatment of the common situation in which the landlord carries out groups of works needs a Court of Appeal case to explain the position: Phillips v Francis [2014] EWCA Civ 1395; [2015] EGLR 8.
6. The fourth issue is comprised in section 20C, which restricts the landlord’s ability to recover the legal costs of proceedings through the service charge.
Even if legal costs are contractually recoverable under the lease – for which clear words are needed (see Sella House v Mears [1989] 1 EGLR 65) – section 20C allows a tenant in any event to apply to the court or tribunal, for an order that all of the costs incurred or to be incurred in connection with any proceedings are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant.
The tenant’s success in the proceedings will be highly relevant to whether an order is made under section 20C, as will the conduct and circumstances of the parties.
It all amounts to the imposition of landmine after landmine for a landlord, even one trying in good faith to recover service charges for necessary expenditure. Of course, rogue landlords should be reined in. But this regime blows up the innocent, as much as it ever would the guilty.
NO: Miriam Seitler, barrister and Landmark Chambers, says the rules are flexible enough to be fair to both parties
1. It is easy to rail against rules: these rules, however, contain flexibility and therefore can work accurately.
The strict contractual position, for instance, is nowhere near as uncompromising as has been made out, and a failure to comply with the contractual machinery will not always be fatal to a landlord’s claim for service charges.
First, even where a landlord has omitted to comply strictly the first time, it will often have the opportunity to trigger the service charge machinery a second time: see Leonora Investment Co Ltd v Mott MacDonald Ltd [2008] EWCA Civ 857; [2008] PLSCS 217. Second chances abound.
Also, as a matter of practice, in many instances the judge in the court or tribunal will take a more realistic approach, rather than insisting on the technical requirements of the lease.
In Southwark LBC v Woelke [2013] UKUT 349 (LC); [2013] PLSCS 264 the lease required the year-end notification of the service charge to state the total service charge for the entire year. The landlord instead invoiced the tenants separately for major works. The tribunal held that there was no reason to construe the lease as requiring a single document containing all the information as a condition precedent to recovery.
2. When scrutinising the reasonableness of the landlord’s processes and outcomes, the landlord is accorded a significant margin of appreciation by the tribunal (see Waaler v Houslow London Borough Council [2017] EWCA Civ 45; [2017] EGLR 19), and where a landlord chooses a course of action which leads to a reasonable outcome, the costs of pursuing that course of action can be regarded as reasonably incurred – even if there was a cheaper outcome which was also reasonable.
In practice, therefore, judges are not as hard on landlords as perhaps the legislation strictly allows them to be.
3. This can also be seen in two of the areas that landlords complain about most – the section 20B limitation period, and the consultation requirements.
As regards the first, the fact is that the limitation period imposed by section 20B has been somewhat emasculated in recent years.
In OM Property Management Ltd v Burr [2013] EWCA Civ 479; [2013] 2 EGLR 84, the Court of Appeal decided that costs were “incurred” when the landlord’s costs were demanded or paid, not when the services were provided to the landlord. This is inevitably a later date.
In Paddington Walk Management Ltd v Governors of the Peabody Trust [2009] 2 EGLR 123, it was held that the section 20B limitation does not ordinarily apply to interim service charges – the usual machinery used in residential leases – although it does apply to any demand for “balancing” service charges over and above any interim charges that had been levied.
Finally, in Holding & Management (Solitaire) Ltd v Sherwin [2010] UKUT 412 (LC); [2011] PLSCS 8, the tribunal held that as far as balancing charges are concerned, section 20B only “bit” on the excess of expenditure over the interim charge. Time, therefore, only started to run under section 20B on the date that the landlord incurred expenditure above the relevant costs it had estimated and included in the interim service charges.
If a landlord’s interim estimates of expenditure closely followed (or exceeded) its actual relevant costs in any one service charge year, the 18-month period did not start to run until very late – if at all.
4. As regards the consultation requirements, the watering down of the strict position is similar. In circumstances where a landlord has legitimate reasons for not being able to comply with the strict requirements of consultation, it can apply for dispensation under section 20ZA.
The First-tier Tribunal has power to dispense with all or part of the consultation requirements where it is satisfied that it is reasonable
to do so.
Dispensation is likely to be granted where the failure to comply has not affected the extent, quality and cost of the works: see Daejan Investments Ltd v Benson [2013] UKSC 14; [2013] 2 EGLR 45.
Compliance with the requirements is not an end in itself, and dispensation is not to be refused simply by reason of a serious breach. The factual burden of identifying some relevant prejudice falls on the tenants.
The oft-heard complaint that service charge law is a landmine for landlords is unfair. The rules are flexible enough so they bite when they need to, and can be relaxed when they don’t.
Main image © Keystone/Zuma/Shutterstock
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Jonathan was last month’s resounding winner, leaving Miriam 4-3 in front overall. Who will triumph this time?
