The methodologies adopted when calculating and apportioning service charges in mixed use developments – where service charge costs are divided into separate schedules and apportioned to occupiers according to usage – are relatively new and untested by the courts. Consequently, the decision in Hotspur Land Investments 2000 Ltd v Smith [2011] PLSCS 261 provides useful guidance for practitioners.
The county court case concerned a mixed use development comprising residential accommodation, offices and studios. The service charge was to be apportioned by reference to gross internal floor areas or, if the landlord considered that this was inappropriate, by reference to what was fair and reasonable in the circumstances. As the development began to mature, the landlord began to divide service charge expenditure unequally between the tenants according to usage, by reference to different service charge schedules.
The tenant of the studios complained that the landlord had never formally concluded that its previous methodology was inappropriate, but the judge took the view that this was unnecessary. It was clear that the landlord had decided that its previous methodology had become unfair. The judge also rejected the tenant’s argument that only one scheme of charging could satisfy the criterion of what was “fair and reasonable”. It might be possible to justify alternative methodologies, in which case the landlord could legitimately choose between them.
The judge refused to characterise the inclusion of the tenant’s roof garden as part of the demised premises as unfair or unreasonable. The garden might – or might not – form part of the gross internal area that had been let to the tenant, but the landlord had decided to apportion the service charge costs in accordance with what was fair and reasonable. The roof garden formed a significant part of the premises and added value to the demise. Consequently, it could reasonably be attributed to the tenant. By contrast, it was unreasonable to attribute a courtyard with less amenity value to the tenant (although it might be reasonable to ask the tenant to contribute something for this space) and inconsistent to exclude balconies used by the residential tenants when calculating the lettable areas and apportioning the service charge.
Practitioners will be particularly interested in the treatment of mezzanine floors. The landlord had decided to include mezzanines constructed before the development was let in its calculations, but to exclude mezzanines installed by the tenants themselves, because it thought it wrong to take tenants’ improvements into account when calculating the service charge. The judge noted that the RICS Commercial Service Charge Code recommends that landlords should give careful consideration to the effect of tenants’ alterations to ensure that apportionments remain fair and reasonable. He accepted that improvements may increase the service charge burden, but felt unable to interfere with the landlord’s carefully considered approach – subject, however, to the caveat that professional opinion might in future shift and push the landlord’s approach to, or beyond, the margin of reasonableness.
Finally, the judge refused to allow the landlord to sidestep a cap on management fees by making an extra charge for site visits. However, the provision of an out-of-hours helpline for tenants was a “genuine extra”, which fell outside the cap – if it was a legitimate head of charge.
Allyson Colby is a property law consultant