A landlord’s power to levy service charges on residential tenants is governed by the provisions of its leases and controlled by statute. Tenants are not obliged to pay for services for which they are not contractually liable. In addition, the Landlord and Tenant Act 1985 restricts recovery to costs that are reasonably incurred and for services of a reasonable standard and enables leaseholders to challenge amounts billed or paid.
In Warwickshire Hamlets Ltd v Gedden [2010] UKUT 75 (LC); [2010] PLSCS 164, a tenant challenged service charge payments dating back to 1987. Her dispute concerned the amounts that the management company charged in respect of rent payable to the freeholder under a lease of the common parts. The rent was initially set at £3,010 pa until the first review, and was then subject to three-year upward-only rent reviews to an open market rent assessed in accordance with a formula contained in the lease.
The landlord claimed that the rent was not a service charge item for the purposes of the 1985 Act because it was not payable in respect of “services, repairs, maintenance, improvements, insurance or the landlord’s costs of management”. The judge disagreed. He ruled that the management company had to pay rent for the common parts in order to provide the services. The rent was one of the ingredients of, and was recoverable through, the service charge. Consequently, the 1985 Act did apply.
The service charge covered “all rates taxes duties charges assessments and outgoings whatsoever (whether parliamentary parochial local or of any other description) assessed charged or imposed upon or payable in respect of the maintained property or any part of it”. The landlord argued that this was sufficiently wide to cover rent for the common parts, but the judge disagreed.
The judge noted that the lease included separate covenants by the tenant to pay rent and outgoings. However, the list of service charge items made no mention of rent and referred solely to the payment of outgoings. The judge saw no reason to construe identical provisions drawn from different parts of the lease in different ways. Consequently, the obligation to contribute to outgoings in the service charge provisions did not extend to the rent payable for the use of the common parts.
Did the Limitation Act 1980 prevent the tenant from pursuing a claim that dated back more than six years? The judge reasoned that: (i) residential service charge contributions are subject to the trusts imposed by section 42 of the Landlord and Tenant Act 1987; (ii) the landlord had used the service charge fund to pay amounts that did not properly form part of the service charge; and (iii) the Limitation Act does not apply where a trustee is in breach of trust.
The decision provides practitioners with yet another reminder of the statutory protections that are available to residential leaseholders. It also illustrates the importance of ensuring that service charge provisions include a comprehensive list of items that will be included in the charge.
Allyson Colby is a property law consultant