Landlord and tenant – Service charge – Liability – Respondents holding long leases of flats – Service charge payable to appellant management company in respect of cost of services – Respondents disputing sums charged in respect of gym, concierge facility and CCTV system – Appellant itself paying rent in respect of those items – Section 18 of Landlord and Tenant Act 1985 – Whether first-tier tribunal having jurisdiction to determine reasonableness of disputed items – Whether those costs representing rent or fixed charge rather than “variable service charge” within section 18 – Appeal dismissed
The respondents were the long lessees of two flats in a mixed-use development in Leeds which contained a total of 640 residential units plus a hotel, office and commercial space and car parking. The appellant was a party to the respondents’ leases as the management company. The services which it was obliged to provide, in return for the service charge payable under the leases, included a gym, a concierge facility run from an adjoining office and a high-specification CCTV system. The appellant paid rent to the landlord for the gym and office under leases for terms of 10 and 20 years respectively, with provision for rent reviews, and also made fixed rental payments for the CCTV equipment under a five-year lease purchase agreement.
The appellant brought claims against the respondents in the county court for unpaid service charges for periods spanning early 2011 to June 2012. Those claims were transferred to the first-tier tribunal for a determination, under section 27A of the Landlord and Tenant Act 1985, of the respondents’ service charge liability. The respondents sought to challenge the costs of providing the gym, concierge office and CCTV system.
The FTT gave two separate decisions in relation to the two flats. In relation to the first respondent’s flat, it decided that the service charge payable for the gym should be reduced by 50%, and the charge for CCTV by 20%. In relation to the second respondent’s flat, it made similar reductions for the gym and CCTV and also reduced by 50% the service charge in respect of the rent of the concierge’s office.
The appellant appealed. It contended that the FTT had lacked jurisdiction to consider the respondents’ challenges to the charges for the gym, concierge office and CCTV since those items were not “service charges” within the meaning of section 18 of the Landlord and Tenant Act 1985. It submitted that those costs were either properly characterised as payments of rent or were a fixed charge, rather than a variable service charge within the meaning of section 18. It further submitted that the FTT had given inadequate reasons for reducing the charges.
Held: The appeal was dismissed.
In order to be a service charge within the meaning of section 18 of the 1985 Act, the amount payable by the tenant had to be a payment for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management and it had to be capable of varying, in whole or in part, according to the costs incurred by the landlord or management company.
The respondents’ payments in respect of the gym, concierge office and CCTV were properly characterised as service charges, namely payments for services, repairs, maintenance, improvements, insurance or management, rather than as rent. The normal usage of the expression “service charge” was to refer to a payment in return for services provided by a landlord to a group of tenants. It was not the case that a rent payable by a management company or landlord could never form part of its expenditure recoverable through the service charge. While an obligation to contribute towards the rent payable by the landlord to its own head landlord, which had nothing to do with the provision of a service, would be a rent and not a service charge, the sums payable by the respondents in respect of the rent on the gym, concierge office and CCTV were payments in connection with the provision of a service. The leases of flats in the development did not oblige the lessees to contribute a proportion of the rent paid by the appellant to its landlord for the concierge office or the gym, or to the finance company for the CCTV equipment, but instead obliged them to contribute to the appellant’s costs and expenditure incurred in respect of the categories of expenditure listed in the lease. The fact that part of the expenditure incurred in providing the services represented the cost of supplying the premises in which the services were provided did not mean that the lessees’ obligation to contribute to the cost of providing the services was converted into an obligation to pay a rent. By virtue of section 18(3)(a), the costs which formed part of a service charge were to include overheads, and premises costs were exactly the sort of overheads which were included: Warwickshire Hamlets Ltd v Gedden [2010] UKUT 75 (LC); [2010] PLSCS 164 applied; Bolton v Godwin-Austen [2014] EWCA Civ 27; [2014] 1 EGLR 13; [2014] EGILR 56 distinguished.
The service charges payable in respect of the gym, concierge office and CCTV could not be characterised as fixed but were instead variable according to the costs incurred by or on behalf of the appellant in connection with the provision of the services. A “service charge” was an amount payable by a tenant which might vary according to the costs incurred by the landlord. It did not matter that, for the time being, the costs incurred by the landlord were fixed; all that mattered was that the cost to the tenant could vary in accordance with the cost to the landlord. Not only were the costs of providing the concierge office accommodation and the gym subject to review under the terms of the gym and office leases, those leases were also for relatively short terms and, when they expired, the rent payable on a renewed lease would be a matter for negotiation. Although the charges for the provision of the CCTV equipment were fixed for the duration of the lease purchase agreement, that did not prevent them from forming a component of a variable service charge. The cost of providing the CCTV service might vary from time to time during the term of the respondent’s leases as the cost to the landlord of hiring or purchasing the equipment varied; it was irrelevant that, for any particular period, the payments which the landlord was required to make for the equipment were fixed.
It followed that the FTT had jurisdiction to determine the reasonableness of the service charges under section 27A of the 1985 Act. It had been entitled to find that the costs incurred in providing the gym, concierge office and CCTV were too high and had given sufficient reasons for its decision. The appellant had made no effort to provide the FTT with evidence supporting the charges which were levied. The absence of comparative evidence regarding the cost of providing such services in other developments did not preclude the FTT from making a reduction or from applying a robust, commonsense approach in circumstances where the landlord’s own managing agent had given evidence that the costs sought to be recovered were structured to recoup the developer’s costs of erecting the building: Country Trade Ltd v Noakes [2011] UKUT 407 (LC) applied.
Justin Bates (instructed by Brethertons LLP, of Banbury) appeared for the appellant; David Partington (instructed by Chadwick Lawrence, of Leeds) appeared for the respondents.
Sally Dobson, barrister
Click here to read transcript: The Gateway (Leeds) Management Ltd v Naghash and another
