Lessees overpaying service charges — First respondent keeping overpayments in reserve account — Whether such payments held on trust under section 42 of Landlord and Tenant Act 1987 — Whether first respondent entitled to use contents of reserve account to fund legal costs against appellant — Appeal allowed in part
The appellant was one of 41 leaseholders who leased flats from the second respondent. Under the terms of their leases, the lessees paid service charges to the first respondent (M). They were also charged a sum that was paid into a reserve fund to be used for improvements or repairs to the property, although no proper mechanism existed within the terms of the leases for the establishment of such a fund. Payments into the reserve fund regularly exceeded expenditure, and the outstanding balance was kept in the fund by M and used to ameliorate any cash flow problems relating to the ordinary service charges.
A number of the lessees contended that the overpayments at year end should be repaid to them, and that M’s failure to do so was in breach of section 42 of the Landlord and Tenant Act 1987. They queried M’s retention of the interest payments in respect of such sums and in respect of the late payment of rent or service charges, and challenged M’s contention that it was entitled to utilise the reserve fund monies to finance its legal costs in response to various actions relating to that matter.
Neither the appellant nor M were satisfied with the first instance findings of Green J, and each appealed that decision.
Held: The appeal was allowed in part. The cross-appeal was dismissed.
The terms of the lease allowed the landlord to establish and maintain a reserve fund. However, detailed accounting of the way in which these monies were spent was to be provided to the lessees, and appropriate provision made for repayment of any overpayments at the end of the year. Section 42 of the Landlord and Tenant Act 1987 provided that service charge contributions were held on trust, and it was a breach of that provision for the landlord or lessor to retain monies overpaid in respect of one identified expense for other, unidentified, future expenses. The appeal was therefore allowed in part on this issue.
The interest on the late payment of the ground rent and service charges was to be paid to M. The natural and ordinary meaning of the words contained in the relevant clauses in the lease was that M was entitled to such interest. Therefore the appellant’s claim on these grounds was dismissed.
On a proper construction of the lease, it was clear that M was not able to charge legal costs as part of the service charge. Therefore the appeal on this point was allowed and the cross-appeal dismissed
Edward Cousins (instructed by Cawdery Kaye Fireman & Taylor) appeared for the appellant; Paul Letman (instructed by Morgan Cole) appeared for the first respondent; Gary Cowen (instructed by Memery Crystal) appeared for the second respondent.
Vivienne Lane, barrister
