Landlord and tenant – Service charge – Reserve fund – Landlord and Tenant Act 1985 – Respondent landlord applying for determination under section 27A of 1985 Act that service charges reasonable and payable by appellant lessees – Whether obliged to meet relevant costs out of reserve fund – Whether such obligation arising notwithstanding that fund not held in trust as required by terms of lease – Appeal allowed
The appellants were the long lessees of seven of the 34 flats in a property in London, W1U. The respondent, their landlord, held a headlease of the property. In July 2013, the respondent applied to the first-tier tribunal (FTT), under section 27A of the Landlord and Tenant Act 1985, for a determination of the appellants’ liability to pay, and the reasonableness of, service charges demanded for the years 2010 to 2013. The appellants had refused to pay those charges in protest at the lack of information provided by the respondent.
The respondent failed to give details of the disputed items pursuant to directions given by the FTT and, at a hearing in November 2013, the FTT made further directions and, with the consent of the parties, adjourned the case until March 2014. At the March 2014 hearing, one of the issues was whether the respondent was obliged to pay for repairs in the relevant years out of a “reserve fund” which it held. Although the terms of the lease required the respondent to set up a specially designated trust fund pursuant to section 42 of the Landlord and Tenant Act 1987, out of which the cost of repair, renewal and maintenance was to be met, the respondent had not in fact established such a trust to hold the reserve fund. The FTT held that, since the reserve fund was not held in a trust, the respondent was not obliged to expend it towards the cost of repairs in the relevant years. It found that the service charges demanded were reasonable and would be payable on service by the respondent of correct certification complying with the requirements of the lease.
The FTT also ordered the respondent to pay £1,500 in costs to the appellants and made an order, under section 20C of the 1985 Act, that the respondent’s costs of attending the earlier November 2013 hearing only should not be recoverable from the appellants through the service charge. The appellants appealed.
Held: The appeal was allowed.
(1) On the proper construction of the service charge provisions in the leases, the respondent was obliged to establish a “specially designated trust fund” in which certain of the sums paid by the appellants as service charges were to be invested in compliance with section 42(5) of the Landlord and Tenant Act 1987. The terms of the lease were quite specific in stipulating that any expenditure in respect of repairs, renewals and maintenance during any accounting period were to be met first out of the specially designated trust fund so far as there was sufficient credit in that fund to allow for such sums to be so met. They could not be read as applying to a fund which was not a specially designated trust fund. However, the respondent was in breach of covenant by failing to establish a specially designated trust fund. In those circumstances, the sums paid to it could not be owned by it beneficially and had to be held pursuant to a trust whereby the respondent was obliged, as trustee, to use or invest those sums for the purposes stated in the lease. The parties had never intended that the respondent would become beneficial owner of the sums paid by the appellants.
Consequently, the reserve fund, being made up of service charge payments by the appellants and other lessees, was itself held on trust. Although the trust had no express terms, the parties’ intentions, as objectively ascertained from the terms of the lease, were that the trust should give effect to the provisions of the lease as far as that could be done. The respondent was therefore under a liability to deal with that fund as trustee of the sums paid by way of service charge and, when repairs, renewal and maintenance were carried out, it was obliged to defray those costs out of that fund. It followed that those costs were to be paid first out of the reserve fund, and, in the event of there being sufficient credit in the reserve fund to pay those costs, the respondent would have no legitimate recourse to the appellants for any further amount in respect of expenditure of that kind. Having admitted one breach of covenant, the respondent should not be allowed to take advantage of its own wrong and assert immunity from further breaches which flowed naturally and inexorably from the first. It followed that the FTT had erred in determining that there was no obligation on the respondent’s part to expend the sums of money shown in the relevant accounts towards the costs of repair, renewal and maintenance.
(2) Weighing the relative success of the parties and the parties’ conduct throughout the proceedings, it was not appropriate to expect the appellants to fund the respondent’s application out of their service charges. It was just and equitable in all the circumstances to order that none of the costs incurred by the respondent in taking the proceedings before the FTT should be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the appellants. The FTT’s decision not to make a section 20C order in respect of the costs of the March 2014 hearing was therefore reversed. In addition, since the appellants had been wholly successful in their appeal, it would normally be just and equitable to make a section 20C order that the costs of the respondent in opposing the appeal should not be regarded as relevant costs. However, that issue was adjourned to give the respondent an opportunity to make representations.
John Furber (instructed by Thrings LLP) appeared for the appellants; Steven Woolf (instructed by direct access) appeared for the respondent.
Sally Dobson, barrister
Click here to read transcript: Caribax Ltd v Hinde House Management Co Ltd
