Landlord and tenant – Service charge – Appellant managing holiday village – First-tier tribunal finding respondent lessees not liable to pay service charges to appellant on ground that charges not demanded in accordance with requirements of lease – Whether lease requiring provision of budget of service expenditure or audited service charge accounts as pre-condition of liability to pay service charges – Whether charges not payable by virtue of section 47 of Landlord and Tenant Act 1987 by reason of failure to include name of landlord in demands – Appeal allowed
The appellant was the management company for a holiday village near Falmouth, Cornwall, which comprised 116 separate cottages set in landscaped grounds. The cottages were let on long leases which provided for the lessees, including the respondents, to pay a service charge for the services provided by the appellant. That charge was payable on account in an estimated sum for each service charge year, in an amount representing “a fair and reasonable interim payment having regard to the service expenditure estimated by the Management Company”. The appellant covenanted to give notice in advance to the lessees of the estimated service charge and to take all necessary steps to collect it on the due date. It also covenanted to keep proper accounts and to provide lessees with an annual audit of the service charge accounts verified by an independent firm of chartered accountants.
The respondents and other lessees applied to the first-tier tribunal (FTT), under section 27A of the Landlord and Tenant Act 1985, for a determination of whether they were liable to pay the estimated service charges demanded by the appellant for the years 2006 to 2013. The FTT held that the charges were not payable since they had been demanded in a manner which did not comply with the terms of the leases. It found that no audited service charge accounts had been produced as required by the leases and the appellant had instead relied on company accounts and budgets when preparing the estimates. It considered that, as a result of that practice, the lessees had never been put in a position where they could have any assurance that the estimated service charge was a fair estimate of the cost of services provided by the appellant, disentangled from other elements of the appellant’s operations such as loans between associated companies, director’s remuneration and the costs of advertising.
The FTT also found that, for the years 2006 to 2010, the service charge demands had not contained the name of the landlord and therefore did not meet the requirements of section 47 of the Landlord and Tenant Act 1987. The appellant appealed.
Held: The appeal was allowed.
(1) The charge which the appellant was entitled to demand, and which the lessees covenanted to pay, was in the discretion of the appellant as management company and was to be “a fair and reasonable interim payment having regard to the service expenditure estimated by the management company” in accordance with the leases. That was the only description that the leases gave of the estimated service charge. There was no requirement for the notice of the estimated service charge to state in terms that the sum demanded was a fair and reasonable interim payment having regard to the service expenditure estimated by the appellant. No particular form of words was required. There was no defect in the form of the notices given by the appellant.
Further, the leases did not require, as a pre-condition of liability to pay the estimated service charge, that the estimate had been prepared by reference to a budget which followed strictly the categories of expenditure listed in the lease as service expenditure and excluding from consideration any other items. The sum itself was in the discretion of the appellant, as management company. If the appellant considered that the budget which it had prepared for its own activities in the forthcoming year was a suitable approximation of its likely expenditure on service charge items in the same period, there was no reason to interpret the lease as requiring some process of stripping out items of expenditure which might not fall strictly within the service expenditure. Where parties agreed that one of them was to be trusted to make an estimate which the other was required to pay, subject to an account being taken at a later date, and the estimate was made in good faith, there was little or no scope to challenge the estimate except by relying on the requirement, in section 19 of the 1995 Act, that the sum should be reasonable. That requirement placed a statutory limit on estimated charges, even where they had been estimated in good faith. In the instant case, there was no allegation of bad faith or deliberate overcharging by the appellant. Since it was not alleged that a deliberately inflated estimate had been submitted, or an entirely arbitrary figure had been chosen, it was not possible to find, without recourse to the statutory cap on advance payments, that the estimate was not payable in full: Paragon Finance Ltd v Nash [2001] EWCA Civ 1466; [2002] 1 WLR 685 applied; Princes House v Distinctive Clubs Ltd [2007] EWCA Civ 374; [2007] 1 P&CR DG20; [2007] 2 EGLR 75; [2007] 27 EG 304 distinguished.
Similarly, there was no requirement that the service charge demand be accompanied by sufficient information to enable the lessee to satisfy himself that the sum demanded was a fair and reasonable interim payment. Although it would be good practice to provide such information, the lease did not make compliance with good practice a condition precedent to the lessee’s liability to pay the estimated service charge. In any event, there was evidence that annual budgets had been provided showing, in some detail, the total expenditure which the appellant intended to incur in the coming year.
It followed that the FTT had erred in concluding that the estimated service charge was wholly irrecoverable because it was not shown to have been based on an estimate unpolluted by other activities of the appellant. If the FTT took the view that the estimated service charge was inflated by items which could not form part of the service expenditure, then it could, in due course, have reduced the charge by the application of the limitation in section 19 but it was not appropriate for it simply to write off the whole of the estimated service charge liability for the relevant period.
(2) The appellant’s performance of its role of management company was deficient so far as it had failed to provide the audited service charge accounts required by the lease. Compliance with that requirement was not optional but was an essential safeguard for the lessees whose money the appellant was entrusted to spend. Each lessee was individually entitled to insist on the production of annual certified service charge accounts. Nonetheless, a failure by the appellant to provide the annual certified accounts did not suspend the lessee’s obligation to pay the estimated service charge on demand. There was no connection between the performance by each of the parties of their respective obligations. The obligation to pay the estimated charge was not expressed as being subject to the production of the audited accounts. The absence of the accounts did not prevent the appellant from being in a position to make an estimate each year. The absence of proper accounts for previous years might provide grounds for treating the estimate with circumspection or even suspicion, and it might make it easier to justify a reduction under section 19(2) on the ground that there was little to suggest that the estimate was reasonable, but as a matter of contract the payment of the estimated charge was not conditional on the provision of audited accounts.
(3) The requirement in section 47(1) of the 1987 Act to include the name and address of the landlord in “any written demand” applied only where the demand in question fell within the definition in section 47(4) as a “demand for rent or other sums payable to the landlord under the terms of the tenancy”. The word “landlord in that context meant the immediate landlord and there was no statutory extension to include any person with the right to enforce the payment of a service charge. The obligation of the lessees was to pay the various charges to the management company, not the landlord. The sanction in section 47(2) did not apply since the sums in issue were not payable to the landlord and the demand for their payment was not a “demand” for the purpose of s. 47. An alternative analysis was that the only effect of the sanction, if it were applicable, would be to cause the charges not to be “due from the tenant to the landlord”. Since the charges were due to the management company, the lessee’s obligation to pay them would be unaffected.
Jonathan Seitler QC (instructed by Preston Goldburn Solicitors, of Falmouth) appeared for the appellant; Charles Knapper of Fursdon Knapper, of Plymouth, appeared for the respondents.
Sally Dobson, barrister
Read a transcript of Pendra Loweth Management Ltd v North and another here
