Elizabeth Haggerty considers how landlords and right-to-manage companies can best recover caretaker rent
Traditionally, it was the landlord of a block that would seek to recover, as service charge, rent paid (or rent foregone) for providing a caretaker with accommodation in one of its retained flats. Where a right-to-manage (“RTM”) company has taken over the management functions under a lease or underlease, it will be the RTM that is trying to recover the cost of housing the caretaker but in a flat which (in many cases) the landlord still controls.
Landlords are well used to the arguments that they have to advance when seeking to establish that they are able to recover the cost of providing accommodation for a resident caretaker. The starting point is inevitably the wording of the lease in question. If the charge is contractually permissible, the reasonableness under section 19 of the Landlord and Tenant Act 1985 (the “1985 Act”) is then considered; it is a two-stage process: see Carey-Morgan v De Walden [2013] UKUT 0134; [2013] PLSCS 67.
Cost: real or notional?
If rent is being paid for the accommodation and the wording of the lease can be construed to allow for such actual costs, then the position is relatively straightforward. If, however, the flat is in the control of the landlord then, very often, the cost to that landlord is notional; no actual rent is being charged and the cost is usually asserted to be that the possibility of charging rent to some third party has been foregone. In such cases, the landlord must be prepared to show that the service charge charging provision allows the recovery of such rent foregone – that this notional cost is one that can legitimately be passed on to the lessees. Again, of course, the success of such an argument will depend on the construction of the lease in question.
Notional rent was permitted in Agavil Investment Co v Corner (unreported, 3 October 1975); Lloyds Bank plc v Bowker Orford [1992] 2 EGLR 44 and Earl Cadogan v 27/29 Sloane Gardens Ltd [2006] 2 EGLR 89. However, in the often cited Gilje and others v Charlgrove Securities Ltd [2001] EWCA Civ 1777; [2002] 1 EGLR 41, the wording was found to be too narrow to allow such a notional rent. Similarly, in Leasehold Valuation Tribunal decisions 2 Culford Gardens LON/00AW/LSC/2007/0116 and Oakland Court Worthing CHI/45UH/LIS/2011/0031 the tribunals were not persuaded to allow a notional cost to form part of the service charge. As an aside, it may be that if a lease would allow a “real” cost but not a “notional” cost, the landlord could ensure that it does have real costs to pass on – perhaps by creating an intermediate tenant who could properly charge rent and/or by paying the caretaker an increased salary from which rent has to be paid.
RTMs
Increasingly, RTM companies have been created to manage blocks. The Commonhold and Leasehold Reform Act 2002 operates to transfer the management functions under the lease to such companies but not to transfer the interest in land (such as a caretaker’s flat). Therefore, if the RTM company wishes to continue to use a flat retained by the landlord to house a resident caretaker, the basis of that occupation (and the charges for it) will have to have been subject to a separate negotiation. If it can, the landlord will almost invariably seek to charge a rental to the RTM company and what would have been a notional cost to the landlord becomes a real cost for it.
Accordingly, so far as the lessees and RTM company are concerned, the question of a “notional” rent in all likelihood disappears and the lease will have to be carefully scrutinised to see whether an actual charge can be recovered from the leaseholders. If the RTM company is in the position of being liable for a rent to the landlord, it is of real importance that it can be recovered from the lessees. Lessees that challenge the recoverability of such items should do so in full knowledge that if the RTM company has to pay the rental to the landlord, a refusal by lessees to contribute to such costs may put the company in a financially perilous position.
In summary
When looking at the recoverability or otherwise of caretaker rent, before considering reasonableness under the 1985 Act, it is important to ask whether any such rent is theoretically recoverable under the lease. If a real (as opposed to a notional) cost is permitted, consider whether the arrangement can properly be constructed so as to ensure that a real cost has to be met – this may solve the problem going forward.
In cases where the rent has been notional, the creation of an RTM company increases the likelihood that it will be an actual rental that is being paid and for which a contribution is being sought. If lessees seek to argue that such a service charge does not have to be paid under their leases, then they must be aware that they could be placing the position of the RTM company in jeopardy.
Elizabeth Haggerty is a barrister at Lamb Chambers
