Where a lease provides for payment of interim service charges, it will generally also make provision for a balancing payment at the end of the service charge year to balance the amounts paid by the tenant against its liability for the relevant period.
The litigation in Wrigley v Landchance Property Management Ltd [2013] UKUT 0376 (LC); [2013] PLSCS 298 concerned a lease that required the tenant to make interim payments twice a year. The lease also required the landlord to produce audited accounts as soon as practicable after the end of each service charge year and to deliver them to its tenants – but the landlord chose not to do so because of the cost involved. The tenant argued that the provision of audited service charge accounts was a condition precedent to payment and claimed that it was not liable for service charge payments until the landlord had complied with the requirements in the lease.
The landlord agreed that its failure to produce audited accounts would have been relevant if it were to ask the tenant for a balancing payment at the end of the service charge year to make good any shortfall in the tenant’s contributions. However, the lease provided for payments on account based on the landlord’s estimated expenditure and the obligation to make the interim payments arose before audited service charge accounts for the preceding year needed to be provided. Consequently, the landlord argued that the requirement for audited accounts was not relevant to the payments on account demanded.
The Lands Chamber of the Upper Tribunal applied the decision in Warrior Quay Management Co v Joachim LRX/42/2006; [2008] PLSCS 56. The lease did not state that the landlord’s failure to provide audited accounts would deprive it of the right to be paid any service charges at all (with the result that any interim payments would have to be credited or repaid to the tenant) and the landlord was entitled to ask for payments on account if it had made the relevant computations in accordance with the lease.
This did not mean that landlords can unilaterally prevent their tenants from seeking finality in respect of any particular year. A tenant can ask the tribunal for a binding decision instead. If the tribunal decides that the service charge payable for the relevant year is less than the sum paid on account, the landlord will have to refund any overpayment immediately. However, the tenant will not be obliged to make any balancing payment due to the landlord until the landlord has complied with the provisions of the lease.
The tribunal ruled in favour of the tenant on one important point. The landlord had failed to include the cost of insurance in its estimated annual expenditure and had demanded insurance premiums separately when they fell due, even though the lease made no provision for this. Consequently, the tenant was not liable to pay the sums demanded to cover the cost of insurance. However, the landlord could correct its underestimates and the tenant could become liable for the insurance premiums if the landlord were to produce audited accounts and submit a proper demand for the relevant shortfalls for the relevant years.
Allyson Colby is a property law consultant