Legal

Can subsequent events be taken into account in determining the reasonableness of interim service charge contributions?

Legal

Allyson Colby

19 January 2017

Practice points

Residential service charges

PP 2017/11

However, section 19(2) of the Landlord and Tenant Act 1985 limits on-account payments made before relevant costs are incurred to such amounts as are reasonable. The question that the tribunal had to answer in Knapper and others (members of the Point Curlew Tenants Association) v Francis [2017] UKUT 3 (LC); [2017] PLSCS 11 was whether it was relevant to the reasonableness of the interim payments demanded that the landlord had not actually incurred some of the anticipated expenditure during the relevant accounting period.

The First Tier Tribunal had ruled that each of the 171 tenants of a holiday park was liable to pay the landlord £1,757.52 on-account of service charge expenditure in 2015. This was the case even though it was now known that the landlord had spent approximately £500 per unit less than the amount demanded because he had not employed a new site manager or refurbished the children’s play area, as planned, during the service charge year. Could post-liability events be taken into account in determining the reasonableness of the interim service charge contributions demanded from the tenants?

The Upper Tribunal stated that, if there was doubt about the time at which proposed expenditure might be incurred, or about whether it might be incurred during the relevant accounting period at all, it might not be reasonable to require the whole payment in advance. But the tenants had not suggested that the landlord did not intend to employ a site manager or to refurbish the play area when he prepared the 2015 budget. Therefore, the tenants were obliged to pay their proportion of the total budgeted sum for 2015, on account, on the date specified in their leases.

The tribunal ruled that a reasonable sum required by way of an interim payment did not become an unreasonable sum retrospectively, simply because expenditure had been avoided. The amount due should not vary depending on the point in time at which its reasonableness was considered; that would be destabilising and undesirable.

In this case, the tenants’ interim payments fell due on a single date immediately before the start of the calendar year. However, many landlords collect interim payments on a half-yearly basis, or even quarterly in advance. In such cases, the Upper Tribunal did not see why section 19(2) could not be used to modify contractual obligations by reference to the circumstances known at the quarterly or half-yearly payment dates. If matters became known after a budget was drawn up, but before a particular payment becomes due, they could potentially affect the reasonableness of the sum to be paid. But the tribunal drew the line at the date on which payments fall due and considered that facts that could not have been known on that date should be excluded from consideration.

Allyson Colby is a property law consultant

Most service charge clauses require tenants to make periodic payments towards the cost of services before they are actually provided by the landlord and the final cost is known. Such contributions are usually based on an estimate of the expenditure expected to be incurred during the relevant accounting period. However, section 19(2) of the Landlord and Tenant Act 1985 limits on-account payments made before relevant costs are incurred to such amounts as are reasonable. The question that the tribunal had to answer in Knapper and others (members of the Point Curlew Tenants Association) v Francis [2017] UKUT 3 (LC); [2017] PLSCS 11 was whether it was relevant to the reasonableness of the interim payments demanded that the landlord had not actually incurred some of the anticipated expenditure during the relevant accounting period. The First Tier Tribunal had ruled that each of the 171 tenants of a holiday park was liable to pay the landlord £1,757.52 on-account of service charge expenditure in 2015. This was the case even though it was now known that the landlord had spent approximately £500 per unit less than the amount demanded because he had not employed a new site manager or refurbished the children’s play area, as planned, during the service charge year. Could post-liability events be taken into account in determining the reasonableness of the interim service charge contributions demanded from the tenants? The Upper Tribunal stated that, if there was doubt about the time at which proposed expenditure might be incurred, or about whether it might be incurred during the relevant accounting period at all, it might not be reasonable to require the whole payment in advance. But the tenants had not suggested that the landlord did not intend to employ a site manager or to refurbish the play area when he prepared the 2015 budget. Therefore, the tenants were obliged to pay their proportion of the total budgeted sum for 2015, on account, on the date specified in their leases. The tribunal ruled that a reasonable sum required by way of an interim payment did not become an unreasonable sum retrospectively, simply because expenditure had been avoided. The amount due should not vary depending on the point in time at which its reasonableness was considered; that would be destabilising and undesirable. In this case, the tenants’ interim payments fell due on a single date immediately before the start of the calendar year. However, many landlords collect interim payments on a half-yearly basis, or even quarterly in advance. In such cases, the Upper Tribunal did not see why section 19(2) could not be used to modify contractual obligations by reference to the circumstances known at the quarterly or half-yearly payment dates. If matters became known after a budget was drawn up, but before a particular payment becomes due, they could potentially affect the reasonableness of the sum to be paid. But the tribunal drew the line at the date on which payments fall due and considered that facts that could not have been known on that date should be excluded from consideration. Allyson Colby is a property law consultant