The Landlord and Tenant Act 1985 enables the tribunal to determine whether a “service charge” is payable and, if so, by whom and in what amount. Consequently, we need to know what constitutes a “service charge”. Section 18 of the 1985 Act defines a service charge as “an amount payable by a tenant of a dwelling as part of or in addition to the rent (a) which is payable directly or indirectly for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management and (b) the whole or part of which varies or may vary according to the relevant costs”.
In The Anchor Trust v Waby [2018] UKUT 370 (LC); [2018] PLSCS 196, the Upper Tribunal had to decide whether management charges, which were one of the elements of a service charge, fell within the scope of section 18. The charge in question was not fixed during the first service charge year because the parties had agreed that the charge would reflect the management costs actually incurred in that year. But, in subsequent years, the parties had agreed that the management charge would increase in line with inflation.
Following a change of landlord, the incoming landlord, a housing association, increased the management charge annually using a calculation provided by its regulator, instead of increasing it by inflation. Could the First-tier Tribunal substitute an alternative calculation? The landlord argued that, to be a service charge over which the tribunal has jurisdiction, a charge must be one that “varies or may vary” according to the costs incurred by the landlord. And a charge that varies in accordance with an external index did not qualify.
The judge accepted that any discrete part of a composite service charge that fails to satisfy the definition in section 18 will fall outside the statutory protection provided by the 1985 Act (disagreeing with suggestions to the contrary in Longmint v Marcus LRX/25/2003 and Warwickshire Hamlets Ltd v Gedden [2010] UKUT 75 (LC)). For the tribunal to have jurisdiction, it will not suffice that a charge is one of the components of a service charge that does contain elements that satisfy section 18.
A management charge was clearly capable of falling within the scope of the provision. But Arnold v Britten [2015] UKSC 36 was a particularly striking example of the non-availability of statutory protection where a service charge varies by reference to a factor other than the amount of the costs concerned. In that case, a fixed initial service charge of £90 was to be increased on a compound basis by a formula that would push the service charge to over £1m a year by the end of a leasehold term. But the 1985 Act was of no assistance because the service charge did not vary in accordance with the costs incurred.
The tenants’ leases created a hybrid. The management charge in the first year was susceptible to challenge because it mirrored the cost of the service. And it could be assumed that that charge was reasonable because, if it had not been, the leaseholders could have had it reduced. But, thereafter, the management charge fell outside the statutory definition and the First-tier Tribunal did not have the jurisdiction to alter the management charge. The 1985 Act was designed to protect leaseholders from fluctuating and unpredictable costs – and the only unpredictability about the ongoing management charges would result from inflation.
Allyson Colby, property law consultant
