The litigation in Princes House Ltd v Distinctive Clubs Ltd [2007] 14 EG 104 (CS) hinged on the effect of a service charge cap in favour of a tenant that operated for a limited period. The landlord informed the tenant of its intention to replace the roof of the building during the last year in which the service charge cap was operational. Subsequent delays resulted in the work being completed after the service charge cap had expired and the project, which the tenant had been informed would cost £500,000, was eventually completed at a cost of more than £2m.
The tenant refused to contribute to the cost of the work, arguing that the landlord should have completed the work before the service charge cap expired. The landlord relied upon a clause in the lease that exonerated it from liability in respect of repairs unless notified by the tenant that the building was in disrepair and the landlord failed to remedy the problem within a reasonable time. The landlord argued that the tenant’s claim should fail because the tenant had neglected to notify it that the repairs were required.
The Court of Appeal ruled that the landlord’s argument was not a good defence to the claim, because the landlord had told the tenant that it was intending to do the work. By doing so, the landlord had made it clear that it was not relying upon the requirement for notice and, if it had used all reasonable endeavours to do so, it could have completed the work before the service charge cap expired.
This case illustrates typical service charge problems. The landlord had decided to include the cost of the project in its service charge demands, placing the onus on the tenant to challenge them. The managing agent had failed to consider whether the items for which it was invoicing properly fell within the service charge. The tenant had been charged four times the original cost estimates without being told why, and eventually became so frustrated that it advanced every possible argument to resist payment.
The RICS 2006 Code of Practice: Service Charges in Commercial Property came into force on 1 April 2007. It encourages communication and transparency between commercial property owners and occupiers. It states that best practice requires owners and managers “to recognise a duty of care to occupiers (who entrust the spending of their own business overheads and cash flow by funding the services)”. It is endorsed in the Code for Leasing Business Premises in England and Wales 2007.
The government is closely observing the commercial property market and has reiterated that legislation is still an option to promote flexible leases and fairness in landlord and tenant relationships. Residential service charges are closely regulated by statute and if the codes do not achieve the desired effect, there could be calls for legislation in respect of service charges levied on business tenants.
Allyson Colby is a property law consultant
