Landlord and tenant – Service charge – Overheads – Respondents holding leases from appellant local authority landlord – Leases providing for payment of service charge representing fair proportion of “costs and expenses of or incidental to” provision of relevant services – Whether overheads representing indirect cost of provision of services recoverable in principle – Leasehold valuation tribunal disallowing those costs – Appeals allowed
In two separate applications to the leasehold valuation tribunal (LVT), the respondents, as lessees of the appellant local authority, sought a determination under section 27A of the Landlord and Tenant Act 1985 of their liability for service charges. Under the terms of the relevant leases, the appellants were entitled to recover through the service charge a fair proportion of the “costs and expenses of or incidental to” the carrying out and provision of various categories of works and services, including compliance with the appellants’ repairing obligations under the lease and the maintenance and management of the building and estate. There was also provision for the addition of a further 10% to any of those items for administration.
In each case, the appellant sought to recover a sum in respect of overheads and in overseeing the provision of the relevant services. In each case, the LVT determined that the leases made no provision for the recovery of such overheads, or for a further administration percentage in respect of them, and found that the sums charged were in any event not reasonably incurred; it disallowed them accordingly.
On the appellants’ appeal from those decisions, one of the issues for determination was whether the charges for overheads and administration were recoverable in principle.
Held: The appeals were allowed.
There was a clear line of authority establishing the proposition that the overhead costs incurred in the maintenance and management of the building and estate fell within the provision “all costs and expenses of or incidental to…” the provision of the relevant services: Brent London Borough Council v Hamilton LRX/51/2005, Norwich City Council v Marshall LRX/114/2007; [2008] PLSCS 340 and Wembley National Stadium Ltd v Wembley (London) Ltd [2007] EWHC 756 (Ch); [2008] 1 P&CR 3; [2007] 2 EGLR 115 applied. Although each case was determined on its own facts with respect to whether a charge was reasonable, the issue of whether indirect costs properly formed part of the service charge was an issue of principle. Accordingly, the costs and expenses of or incidental to the provision of services under the terms of the lease were not limited to the direct costs of the provision of the services. The indirect costs of providing those services, such as staff costs and the costs of accommodation in arranging and managing those works, were all part of the costs and were all properly chargeable under the terms of the lease. The words used in the relevant clause of the lease were to be widely construed; there was no justification for limiting the ambit of the costs and expenses. The carrying out and provision of various categories of works and services included being able to recover all those direct and indirect costs and overheads, including management costs, incurred in connection with the various categories of works and services that the landlord was obliged to carry out. Whether the amount charged for overheads, and the method of charging, was reasonable was a separate point to the point of principle that overheads were a separate and chargeable cost. Moreover, the administration charge representing a percentage of costs could be raised on indirect costs, or overheads, as well as direct costs: Palley v Camden London Borough Council [2010] UKUT 469 (LC); [2012] PLSCS 16 applied. The LVT had therefore erred in law on that issue. Further, on the evidence, the amounts charged by the appellants had been reasonably incurred.
Philip Rainey QC and Angela Jack (instructed by the legal department of Southwark London Borough Council) appeared for the appellants; the respondents to the first appeal were represented by the first respondent; the respondent to the second appeal appeared in person.
Sally Dobson, barrister