Service charge disputes are all too common. Many arise when landlords spring unwelcome surprises on tenants and demand reimbursement for large sums that tenants were not expecting to have to pay. The litigation in Leonora Investment Co Ltd v Mott MacDonald Ltd [2008] EWCA Civ 857; [2008] PLSCS 217 illustrates the importance of adhering to the provisions in a tenant’s lease, particularly when seeking payment in such circumstances.
The tenant entered into leases of four floors in the landlord’s building and agreed to pay a fair proportion of the service charge, which was to be assessed on a reasonable and proper basis. The tenant was liable to contribute to the estimated service charge by equal quarterly payments in advance. At the end of each service charge year, the tenant was entitled to receive a statement showing the sums spent and how the landlord had apportioned them before paying any shortfall or being credited for any overpayments to the landlord.
The landlord followed the procedure for the disputed service charge year and, at the end of that year, sent the tenant a schedule of actual expenditure and credit notes for overpayments made by the tenant. However, at the beginning of the following year, the landlord sent the tenant a further invoice demanding an additional contribution in excess of £250,000 for redecoration during the previous year. The tenant argued that the sum was not included in the service charge statement that it had received and refused to pay.
The landlord pursued the case to the Court of Appeal, where, in order to get the judgment against it overturned, it advanced different arguments to those used in the High Court. It claimed that it was required only to submit a service charge statement explaining how it had used sums paid in advance. It argued that it was entitled to require the payment of the expenditure in question separately, and on demand, because it had always been treated as a separate and additional item and had not been included in the service charge estimate for, and prepayments made in, the preceding year.
The Court of Appeal rejected the landlord’s arguments. It ruled that the landlord was not entitled to submit invoices outside the service charge machinery laid down in the lease. The landlord had failed to include the work in the service charge statement provided to the tenant and the tenant was entitled to refuse to pay the invoice.
Tenants will welcome the judgment. A decision to the contrary might have suggested that landlords can ignore the carefully crafted service charge provisions in their leases and make service charge demands outside the contractual machinery that they have agreed, for up to six years.
However, landlords will also welcome Tuckey LJ’s comments that provisions of this kind should not be seen as procedural obstacle courses and, in the absence of any provisions in the lease to prevent the landlord from doing so, the landlord was free to revise its statement and rectify the error.
Allyson Colby is a property law consultant