Long lease of flat – Service charge – Major works – Service charge provisions in respondent’s lease providing for appellant landlord to provide estimate of annual service charge at commencement of year and notice of actual amount as soon as practicable after year end – Appellant carrying out programmes of major works – Cost of those works omitted from annual service charge notifications and instead invoiced separately – Whether separate invoicing consistent with requirements of lease – LVT finding cost of works not presently payable by respondent – Appeal dismissed
The respondent held a long lease of a flat in one of 19 blocks on an estate owned by the appellant council as landlords. The respondent’s lease was in the appellants’ standard form for long leases granted under the “right to buy” provisions of the Housing Act 1985. A schedule to the lease contained detailed provisions concerning the annual service charge payable by the respondent, which was defined as a fair proportion of the costs and expenses incurred in the year in providing the relevant services. The appellants were to make a reasonable estimate of the annual service charge amount at the commencement of each year and to notify the respondent of that amount, which the respondent was to pay by quarterly instalments. As soon as practicable after the end of each year, the appellant was to ascertain the actual amount of the service charge and notify the respondent of that amount, setting out a summary of the relevant costs incurred and any balance due. Time was not of the essence for service of any notice under the schedule.
Between 2003 and 2010, the appellants carried out two programmes of major works to the estate, first to replace windows and then to replace windows and cold water storage tanks. Leaseholders were consulted in respect of both of those programmes. The cost of the works were not included in the annual service charge estimates for the relevant years, but were instead notified to the leaseholders separately from the more routine, recurring charges. The respondent refused to pay the service charge demanded in respect of the works and the appellants brought county court proceedings against him to recover more than £4,000.
The claim was transferred to the leasehold valuation tribunal (LVT) to determine whether that sum was payable. The LVT decided that the terms of the lease required a single annual bill for service charges and that the separate billing in respect of the major works contribution did not accord with that requirement. It concluded that the service charge was not yet payable since it had not been demanded in accordance with the terms of the lease. The appellants appealed.
Held: The appeal was dismissed.
(1) The extent of a leaseholder’s obligation to pay service charges would depend on the particular terms of the lease under which the obligation arose. It was necessary to identify the minimum requirements laid down by the lease before the obligation to pay the service charge would be created, and then to consider whether the circumstances of the case satisfied those minimum requirements. In considering each of those matters, it was not appropriate to adopt a technical or legalistic approach. The service charge provisions of leases were practical arrangements, which should be interpreted and applied in a business-like way. However, because the payment of service charges was a matter of routine, a business-like approach to construction was unlikely to permit very much deviation from the relatively simple and readily understandable structure of annual accounting, regular payments on account and final balancing calculations with which residential leaseholders were very familiar. When entering into long residential leases, the parties had to be taken to intend that the service charge would be operated in accordance with the terms they had agreed. Leaseholders should be able to work out for themselves whether a sum was due to be paid by reading the lease and comparing the process that it described with the information provided in support of the demand by the landlord, without the involvement of lawyers or other advisers.
(2) The definition of the service charge in the lease clearly connected the sum payable by the leaseholder to the appellant’s expenditure in a particular service charge year. The initial payments for any year were to be paid quarterly in response to a notification by the appellant of its reasonable estimate of the amount of service charge for the forthcoming year. The appellant was required to notify the leaseholder of its estimate before the commencement of the year, although some flexibility was introduced by the direction in that time was not to be of the essence for service of any notice. The effect was that, if the appellant failed to give notice of its reasonable estimate before the commencement of each year, it was not prevented from giving such notice thereafter and remained under an obligation to do so; however, the leaseholders would be under no obligation to make a payment in advance until it had done so.
The appellant was not entitled to omit from its estimate some component of the expenditure which it could reasonably anticipate would be incurred. Although there would be occasions when there was uncertainty over whether work would be undertaken in one service charge year or in the next, the lease did not require certainty, only a reasonable estimate. The appellant’s obligation to provide an estimate was not merely ancillary to the leaseholder’s obligation to make advance payments but performed an important function in providing the leaseholder with advance warning of the contribution that he would be expected to pay for the services to be provided in the forthcoming year. The appellant could not waive the requirement for an estimate since, on ordinary contractual principles, one contracting party could not unilaterally waive terms of the contract that conferred benefits on another party.
Accordingly, if the appellant reasonably anticipated that its expenditure would include expenditure on major works, as it could have done in the instant case, it was required to include that expenditure in its estimate. The omission of such expenditure from the estimate was not consistent with the contract. However, that omission did not prevent the appellant from recovering the cost of the major works altogether; that cost remained part of the service charge for the year or years in which it was incurred, whether or not it was included in the original estimate. Normally, the only practical consequence of a failure to take account of major works in the estimate would be that the appellant could not collect advance payments from the leaseholders that included any contribution towards the cost of those works.
(3) Likewise, a contractually compliant notification was an essential precondition of the leaseholder’s liability to pay the balance of the service charge in the event that the charge for the year exceeded the amount paid in advance. It was essential to the validity of such a notification that it contained the information specified by the lease, including a summary of costs and an explanation of how they had been apportioned among the flats. Those details were indispensable information to enable the leaseholder to verify the appellant’s assessment. However, approaching the lease requirements in a non-technical manner, it was not necessary that all of the information be provided in a single document or even on a single occasion. Service charges for major works could be identified in a separate document if that was thought to be more convenient, provided that the leaseholder was also provided with a statement of the total service charge and the balance due for the year. If, after notice had been given of the service charge for the previous year, a previously overlooked item of expenditure were discovered, it would be sufficient for the appellant to provide a statement of the nature and amount of that additional expenditure without repeating its previous summary of the whole of the costs and expenses incurred in the year. It would be essential, however, for the relevant notification to state the total service charge for the year, recalculated to take the additional item into account, to identify the method of apportionment that had been adopted and to state the new balance due.
As with a failure to comply with contractual stipulations as to time, a departure from the minimum requirements for effective notification was not irremediable. The provisions of the appellant’s standard lease did not give it one opportunity to get its demands right; however, in the absence of agreement or acquiescence by leaseholders, they did require that, when the appellant sought to collect the contributions to which it was entitled, it should provide a revised or additional notification, which, either alone or in conjunction with material previously supplied, was compliant with the lease and allocated costs to the years in which they were incurred: Leonora Investment Co v Mott Macdonald Ltd [2008] EWCA Civ 857; [2008] PLSCS 217 applied. However, the invoices for the major works did not fulfil those requirements and, accordingly, were not compliant with the requirements of the lease.
Philip Rainey QC and Michael Walsh (instructed by the legal department of Southwark London Borough Council) appeared for the appellants; Clare Parry (instructed by Housing & Property Law Partnership) appeared for the respondent.
Sally Dobson, barrister