The amount of a service charge which a tenant can be required to pay in advance towards anticipated future expenditure is limited by section 19(2) of the Landlord and Tenant Act 1985. The amount must be reasonable, and after a relevant cost has been incurred “any necessary adjustment must be made by repayment, reduction or subsequent charges or otherwise”.
In Brett and another v Harlow Court Ltd [2022] UKUT 52 (LC), the Upper Tribunal (Lands Chamber) had to consider whether interim service charges paid by lessees that were found to be unreasonable in amount within the meaning of section 19(2) should be repaid rather than being offset by the lessor against future anticipated expenditure.
The appellants were the former leaseholders of a flat situated within Harlow Court in Reigate, Surrey. In June 2013, the respondent company, owned by the lessees of the block, acquired the freehold.
Under their lease, the appellants were required to pay a maintenance charge equal to 1/18th of the annual cost incurred by the lessor. Pursuant to clause 3(2)(ii) of the lease, the annual cost was defined as the expenditure “incurred or to be incurred” by the lessor in carrying out its obligations in the lease in any accounting period or as a “forward payment” towards any large item of expenditure to be incurred in a subsequent accounting period.
By clause 3(2)(b) the appellants were to pay in advance and on account of the maintenance charge an amount specified by the respondent’s surveyor as being a fair and reasonable interim payment. The interim payment was to be paid in equal instalments twice a year. The lease allowed for an end-of-year reconciliation and for the appellants to meet any deficit between the expenditure actually incurred and the payments on account. Clause 3(2)(e) of the lease provided that the lessor would accumulate any surplus and apply the same towards expenditure in future years. Clause 7.2.3 placed an obligation on the lessees that within 14 days of a demand they would pay “a proportion of the administration and other costs (including professional fees) of the lessor, such proportion being reflective of the tenant’s shareholding in the respondent company.
In practice, rather than follow the service charges machinery contained in the lease, the respondent made bi-yearly service charge demands in the sum of £800 for each period. The monies were used in part to meet annually recurring expenditure, with the remainder accumulated in a reserve fund. By 2014, the payments on account were insufficient to meet the annual recurring costs, resulting in a deficit. It transpired that the respondent had erroneously used some of the reserve fund to meet the company’s running costs.
In June 2020, the appellants disposed of their flat. Prior to the sale, they paid on account service charges that had been demanded in March. In September 2020 they applied to the First-tier Tribunal for a determination of the reasonableness and payability of service charges for the years 2018-2019; 2019-2020 and 2020-2021. This was their third application. In light of the FTT’s previous decisions, the appellants argued that the March 2020 on-account demand was unreasonable because the respondent held funds to the appellants’ credit, which had been used by the respondent as a payment to meet company expenditure pursuant to clause 7.2.3 of the lease rather than being refunded back to them.
The FTT determined that the sum of £712.55 was reasonable for the respondent to collect on account from the appellants. The UT agreed. The appellants would not pay more in the current year than the respondent needed to provide the covenanted services and would be spared the additional expense of flawless accounting. The UT underscored that in cases such as this, the UT had no power to substitute its own view of what was a reasonable amount to be collected as an interim service charge if the FTT had properly exercised its discretion in that regard.
The UT also reiterated that section 19(2) did not confer a broader jurisdiction on the FTT than that which it had under section 27A. The FTT’s jurisdiction under section 27A was declaratory in nature. It could not order the repayment of sums paid in excess of the relevant statutory service charge limit.
Elizabeth Dwomoh is a barrister at Lamb Chambers
