Service charge – Reasonableness – Full-time residential caretaker – Landlord and Tenant Act 1985 – Appellants required under terms of headlease to employ full-time residential caretaker for building to reside rent-free in basement flat – No caretaker necessary for running of building but appellants employing one in response to threat of court proceedings from freeholder – Whether entitled to recover proportion of cost of employing caretaker and of notional market rent for basement flat from respondent leaseholders under terms of lease – Whether reasonable to include sum for those costs in estimated service charge on account – Appeal allowed
The appellants held a headlease of a building that contained four flats and a maisonette. Although the nature of the building was not such as to need a resident caretaker, the headlease contained a covenant prohibiting the use of the basement flat other than as rent-free accommodation for a full-time caretaker. The respondents held a long lease of the maisonette from the freeholder on terms that, until the expiry of the appellants’ headlease, the appellants would hold the rights, burdens and liabilities of the freeholder under the lease. Those rights included the right to employ such caretaking staff as it deemed necessary in its absolute discretion and to recover the costs of doing so from the respondents through the service charge, including the market rent of any accommodation provided for the caretaker.
Until 2008, the appellants retained no caretaker and let the basement flat at a commercial rent. However, when the freeholder complained about that breach of covenant and threatened court proceedings, the appellants entered into a contract of employment with a full-time caretaker, to reside in the basement flat rent-free. They then sought to recover the costs of employing the caretaker, including the market rent of the basement flat, from the lessees of the other flats and the maisonette through the provisions in the leases for advance payment on account of estimated service charges for the year.
The appellants brought county court proceedings for a declaration that the sums demanded were payable. The matter was transferred to the leasehold valuation tribunal (LVT) to determine the reasonableness of the charge. The LVT held that it was reasonable for the appellants to provide and accommodate a caretaker and to charge the leaseholders for that service, in light of their powers under the lease and the need to avoid a breach of the covenant in the headlease. However, it further held that, where the building did not need a full-time caretaker and the appellants were only employing one to protect their commercial interests, it was not reasonable within section 19(2) of the 1985 Act to charge leaseholders in advance for the full cost; it found the leaseholders liable only for the lesser cost of employing a cleaner, which was admitted to be necessary. The appellants appealed.
Held: The appeal was allowed.
Since the LVT was dealing with estimated service charges payable on account, it had not been concerned, at that stage, with the quality of the services actually provided or whether the entire amount paid to the caretaker was all reasonably incurred; nor had it been concerned with the proper assessment of the market rent for the basement flat. Instead, when deciding whether the amounts estimated for service charge payments on account for the forthcoming years were reasonable, the LVT had been concerned with the principle of whether it was proper to include an estimate for the wages of a caretakers and for the national loss of a market rent on the basement flat. Where, having regard to the proper construction of the lease and the provisions of section 19 of the 1985 Act, the appellants were in principle entitled to charge for those matters, then it was reasonable to include an estimated amount in respect of them in the “on account” service charge. It was appropriate to take a two-stage approach, first asking whether the appellants were entitled to recover for those matters under the terms of the lease, and if so, then asking whether the operation of section 19(2) rendered it unreasonable to include estimated sums in respect of them within the estimated service charges on account.
As to the lease terms, the appellants were entitled to employ a full-time resident caretaker notwithstanding that it was unnecessary for the proper day-to-day running of the building. Neither the respondents nor any of the other leaseholders would be able to enjoy the building at all if the headlease were forfeited for a breach of covenant in failing to employ a caretaker. It had therefore been prudent and reasonable for the appellants to employ one in order to remedy the breach of covenant, in light of concerns that the freeholder might try to forfeit the headlease. In those circumstances, the appellants had been entitled to deem it necessary, within the meaning of the respondents’ lease, to employ a full-time residential caretaker. There was no qualification in the relevant lease provision to indicate that the deemed necessity had to arise from a perception that such caretaking services were needed for the purpose of the day-to-day enjoyment of the building, as opposed to being needed to avoid forfeiture of the headlease. In principle, the appellants were therefore contractually entitled to include within the service charge the costs of employing the caretaker.
Section 19(2) of the 1985 Act did not operate to make it unreasonable to include an amount for those costs in the estimated service charge on account. Although section 19(2) limited the “absolute discretion” that the lease conferred on the appellants, so that they could only include within the service charge the costs of employing such caretaking staff as they reasonably deemed necessary to provide caretaking services for the building, the factors relevant to reasonableness again included the need to avoid forfeiture proceedings and were not confined to what was reasonably needed for the day-to-day running of the building. The LVT had erred in excluding the need to avoid forfeiture from its consideration of the issue of reasonableness. Taking that factor into account, the costs of employing a caretaker would be reasonably incurred within section 19(1)(a) once the final accounts were prepared, such that an estimated amount for the “on account” service charges that included a sum in respect of that matter would, in principle, be a reasonable amount. The appellants were not limited to the cost of employing a cleaner.
Since the costs of employing a full-time residential caretaker could reasonably be included in an estimated service charge on account, a sum could also be included in respect of the notional loss of the market rent of the basement flat. The respondents were therefore liable to pay, as part of the estimated service charges on account, the appropriate proportion of the estimated costs of employing the caretaker and of the notional market rent of the basement flat.
Timothy Dutton QC (instructed by Wilson Barca LLP) appeared for the appellants; Helen Galley (instructed by direct access) appeared for the respondents.
Sally Dobson, barrister
Service charge – Reasonableness – Full-time residential caretaker – Landlord and Tenant Act 1985 – Appellants required under terms of headlease to employ full-time residential caretaker for building to reside rent-free in basement flat – No caretaker necessary for running of building but appellants employing one in response to threat of court proceedings from freeholder – Whether entitled to recover proportion of cost of employing caretaker and of notional market rent for basement flat from respondent leaseholders under terms of lease – Whether reasonable to include sum for those costs in estimated service charge on account – Appeal allowedThe appellants held a headlease of a building that contained four flats and a maisonette. Although the nature of the building was not such as to need a resident caretaker, the headlease contained a covenant prohibiting the use of the basement flat other than as rent-free accommodation for a full-time caretaker. The respondents held a long lease of the maisonette from the freeholder on terms that, until the expiry of the appellants’ headlease, the appellants would hold the rights, burdens and liabilities of the freeholder under the lease. Those rights included the right to employ such caretaking staff as it deemed necessary in its absolute discretion and to recover the costs of doing so from the respondents through the service charge, including the market rent of any accommodation provided for the caretaker.Until 2008, the appellants retained no caretaker and let the basement flat at a commercial rent. However, when the freeholder complained about that breach of covenant and threatened court proceedings, the appellants entered into a contract of employment with a full-time caretaker, to reside in the basement flat rent-free. They then sought to recover the costs of employing the caretaker, including the market rent of the basement flat, from the lessees of the other flats and the maisonette through the provisions in the leases for advance payment on account of estimated service charges for the year.The appellants brought county court proceedings for a declaration that the sums demanded were payable. The matter was transferred to the leasehold valuation tribunal (LVT) to determine the reasonableness of the charge. The LVT held that it was reasonable for the appellants to provide and accommodate a caretaker and to charge the leaseholders for that service, in light of their powers under the lease and the need to avoid a breach of the covenant in the headlease. However, it further held that, where the building did not need a full-time caretaker and the appellants were only employing one to protect their commercial interests, it was not reasonable within section 19(2) of the 1985 Act to charge leaseholders in advance for the full cost; it found the leaseholders liable only for the lesser cost of employing a cleaner, which was admitted to be necessary. The appellants appealed.Held: The appeal was allowed. Since the LVT was dealing with estimated service charges payable on account, it had not been concerned, at that stage, with the quality of the services actually provided or whether the entire amount paid to the caretaker was all reasonably incurred; nor had it been concerned with the proper assessment of the market rent for the basement flat. Instead, when deciding whether the amounts estimated for service charge payments on account for the forthcoming years were reasonable, the LVT had been concerned with the principle of whether it was proper to include an estimate for the wages of a caretakers and for the national loss of a market rent on the basement flat. Where, having regard to the proper construction of the lease and the provisions of section 19 of the 1985 Act, the appellants were in principle entitled to charge for those matters, then it was reasonable to include an estimated amount in respect of them in the “on account” service charge. It was appropriate to take a two-stage approach, first asking whether the appellants were entitled to recover for those matters under the terms of the lease, and if so, then asking whether the operation of section 19(2) rendered it unreasonable to include estimated sums in respect of them within the estimated service charges on account.As to the lease terms, the appellants were entitled to employ a full-time resident caretaker notwithstanding that it was unnecessary for the proper day-to-day running of the building. Neither the respondents nor any of the other leaseholders would be able to enjoy the building at all if the headlease were forfeited for a breach of covenant in failing to employ a caretaker. It had therefore been prudent and reasonable for the appellants to employ one in order to remedy the breach of covenant, in light of concerns that the freeholder might try to forfeit the headlease. In those circumstances, the appellants had been entitled to deem it necessary, within the meaning of the respondents’ lease, to employ a full-time residential caretaker. There was no qualification in the relevant lease provision to indicate that the deemed necessity had to arise from a perception that such caretaking services were needed for the purpose of the day-to-day enjoyment of the building, as opposed to being needed to avoid forfeiture of the headlease. In principle, the appellants were therefore contractually entitled to include within the service charge the costs of employing the caretaker.Section 19(2) of the 1985 Act did not operate to make it unreasonable to include an amount for those costs in the estimated service charge on account. Although section 19(2) limited the “absolute discretion” that the lease conferred on the appellants, so that they could only include within the service charge the costs of employing such caretaking staff as they reasonably deemed necessary to provide caretaking services for the building, the factors relevant to reasonableness again included the need to avoid forfeiture proceedings and were not confined to what was reasonably needed for the day-to-day running of the building. The LVT had erred in excluding the need to avoid forfeiture from its consideration of the issue of reasonableness. Taking that factor into account, the costs of employing a caretaker would be reasonably incurred within section 19(1)(a) once the final accounts were prepared, such that an estimated amount for the “on account” service charges that included a sum in respect of that matter would, in principle, be a reasonable amount. The appellants were not limited to the cost of employing a cleaner.Since the costs of employing a full-time residential caretaker could reasonably be included in an estimated service charge on account, a sum could also be included in respect of the notional loss of the market rent of the basement flat. The respondents were therefore liable to pay, as part of the estimated service charges on account, the appropriate proportion of the estimated costs of employing the caretaker and of the notional market rent of the basement flat.Timothy Dutton QC (instructed by Wilson Barca LLP) appeared for the appellants; Helen Galley (instructed by direct access) appeared for the respondents.Sally Dobson, barrister