Landlord and tenant – Service charge – Sinking fund – Appellant holding flat on long underlease from respondent headlessee – Respondent paying sums into sinking fund maintained by freeholder under terms of headlease – Whether respondent entitled to recover proportion of such sums from appellant through service charge – First-tier tribunal finding such sums recoverable — Appeal allowed in part
The appellant was the long leaseholder of a flat on the fourth floor of a building in London W1S under an underlease dating from 2007. His immediate landlord was the respondent, who held a headlease from the freeholder of the residential parts on the upper four floors of the building, excluding any structural parts; the freeholder retained the commercial premises on the ground floor of the building and let them to tenants.
The terms of the headlease entitled the freeholder to recover a service charge from the respondent in respect of the cost of repairing, maintaining and decorating the structural parts of the building, and also contemplated the retention of a sinking fund for that purpose.
The appellant was in turn liable to pay a service charge to the respondent in respect of costs incurred in performing its obligations under the underlease, including “all costs and expenses payable to the superior landlord under the headlease in respect of … services relating to the Building”. The services in respect of which the service charge was payable were set out in a schedule, which included, as one of the items, the setting aside of a sinking fund in such amount as was reasonably required to such meet such future costs as the respondent reasonably expected to incur in replacing, maintaining or renewing items for which it was responsible under the underlease.
For several years, the respondent included in the service charge a “landlord estate charge” representing an amount that it had paid to the freeholder, as superior landlord, under the terms of the headlease in respect of various matters including a sinking fund. Just over 20% of the total service charge was allocated to the appellant. The landlord estate charge increased from 2011 onwards and, in the years 2011 to 2013, the appellant withheld payment of it.
The respondent brought a county court claim against the appellant to recover £11,815.51 in respect of the unpaid landlord estate charge. The matter was referred to the first-tier tribunal (FTT) to determine whether the charge was payable and reasonable. The FTT determined that the respondent was entitled to recover such a charge pursuant to the sinking funds provisions in the underlease and that the sums claimed were reasonable. The appellant appealed.
Held: The appeal was allowed in part.
(1) The respondent’s claim in respect of each year was for a payment of service charge on account. The appellant’s liability to pay a service charge that included an element in respect of a sinking fund was not limited to cases where that liability arose under the clause of the underlease dealing specifically with the retention of such a fund. The wording of the service charge provisions was wide enough to include sums properly payable to the freeholder under the headlease, notwithstanding that such payments included a payment towards the freeholder’s sinking fund.
(2) This was a case where the respondent landlord, which held under a headlease, was seeking to recover service charge payments from a residential tenant who held his flat on an underlease. In such a case, questions might emerge as to the reasonableness, for the purposes of section 19 of the Landlord and Tenant Act 1985, of amounts demanded from the tenant by way of on-account service charges where they were based in part on sums that the landlord had paid to the freeholder. It was not sufficient for the landlord merely to show that it had paid the sum to the freeholder. Where the tenant raised a question as to the reasonableness of the amount claimed, and produced material suggesting that the amount might not be reasonable, then it was for the landlord to justify the reasonableness of what was claimed. That might involve the production of evidence and, in producing such evidence, the landlord might have to seek assistance from the freeholder or the freeholder’s managing agent so as to justify the sum that it had paid to the freeholder, and a proportion of which it sought to recover from the tenant through the service charge.
In the instant case, the appellant had advanced sufficient evidence to raise a question as to the reasonableness of the disputed sums. The respondent had not produced any evidence to justify the reasonableness of those sums. It was not appropriate for the Upper Tribunal to decide itself, without evidence, what was a reasonable sum to include in the service charge demands in respect of the sinking fund contributions. However, having regard to the freeholder’s service charge budgets, drawn up by an experienced firm of managing agents and produced at the hearing, a sinking fund of £40,000 was appropriate. No satisfactory explanation had been given for the larger sinking fund of £70,000 to which the respondent had contributed in 2011 to 2013. Accordingly, the appellant’s liability to contribute through the service charge to the sinking fund was limited to the lower figure. It followed that the amounts claimed by the respondent from the appellant were unreasonably high. The amount properly payable was £8,549.04.
Dafydd Paxton (instructed by direct access) appeared for the appellant; Nicholas Grundy QC (instructed by the legal department of Southern Land Securities Ltd) appeared for the respondent.
Sally Dobson, barrister
Click here to read transcript: Balkhi v Southern Land Securities Ltd
