Where a residential service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable: section 19(2) Landlord and Tenant Act 1985.
Balkhi v Southern Land Securities Ltd [2016] UKUT 239 (LC); [2016] PLSCS 164 was a case in which an intermediate landlord sought to recover service charge payments from a residential undertenant. The litigation concerned the reasonableness of the amounts demanded, which included sums to offset the intermediate landlord’s own contributions to a sinking fund established by the freeholder in accordance with provisions in the headlease.
The tribunal accepted that the service charge provisions in the underlease were wide enough to encompass contributions to the freeholder’s sinking fund because the undertenant was liable to contribute to “all costs and expenses payable to the superior landlord under the headlease in respect of insurance and services relating to the building”. The question was: was the amount demanded reasonable?
The building in question was situated on a corner in Mayfair and comprised commercial premises on the ground floor and basement, and residential accommodation on four upper floors. The service charge budgets included documents showing that an experienced firm of managing agents had considered it reasonable to establish a £40,000 sinking fund for external redecoration, which was to be carried out in 2012.
However, that figure had increased to £70,000 without any satisfactory explanation of the reason why and without the decorations having been carried out within that timeframe. Furthermore, the tribunal had not been provided with any evidence justifying the reasonableness of the amounts claimed from a person with expertise in building maintenance.
The tribunal made it clear that it is not sufficient for a landlord merely to say “I have paid this sum to the freeholder and so it is reasonable for me to recover a proportion of it from you through the service charge”. Where an undertenant produces material suggesting that the amount claimed by the landlord may not be reasonable, the landlord must justify the reasonableness of the amounts being claimed. This may involve the landlord producing evidence justifying the reasonableness of the sums paid to the freeholder and may mean that the landlord has to ask the freeholder, or the freeholder’s managing agent, for assistance in producing such evidence.
Bearing in mind the nature and location of the building, the tribunal was prepared to accept that a sinking fund of £40,000 was a reasonable amount to collect for the purpose of prospective external redecoration. However, the tribunal was not satisfied that the intermediate landlord had acted reasonably in paying over money to the freeholder based upon a £70,000 sinking fund without obtaining justification for it. It followed that the amounts claimed from the undertenant were unreasonably high and should be adjusted accordingly.
Allyson Colby is a property law consultant
