Landlord and tenant – Service charge – Reasonableness – Respondent challenging on-account service charge demanded by appellant under long lease of flat – Sum demanded considerably less than that specified by lease – Lease acknowledged to contain drafting error in service charge provisions – Whether sums demanded reasonable in light of contractual service charge provisions – Appeal allowed
The respondent was the long leaseholder of a flat in a development on the site of a listed former hospital building in Wallingford, Oxfordshire. His lease had been granted in 2013 by the appellant as the freeholder of the hospital site. The development included 31 units of affordable housing. Pursuant to a planning agreement with the local planning authority, the service charge payable by the occupier of each affordable housing unit was capped at £522 pa at the time of first sale, increasing thereafter in in line with the retail prices (all items) index.
The appellant sought to recover any shortfall in its service charge recovery in respect of the affordable housing units by charging more to purchasers of the remaining flats, which, as in the case of the respondent’s flat, were sold open-market private leases.
The respondent’s lease specified a service charge of 10% of the appellant’s aggregated service charge expenditure for the entire development. That provision involved a drafting error, in that the percentages payable for all the open-market flats together amounted to about 3,000% of the appellant’s expenditure. There had been no application to vary the service charge provisions pursuant to section 35 of the Landlord and Tenant Act 1987. However, in practice, the appellant did not calculate the service charges according to the lease percentages. Instead, it calculated the service charge expenditure for the whole of the respondent’s building, then deducted the amount recoverable for the social housing before dividing the rest between the other flats according to a set formula based on the number of bedrooms in each.
For each of the years 2013 to 2015, the appellant demanded an on-account service charge of more than £2,000 from the respondent. Determining an application by the respondent under section 27A of the Landlord and Tenant Act 1985, the first-tier tribunal (FTT) held that the terms of the lease imposed no express or implied obligation on the respondent to subsidise the occupiers of the social housing units and that, so far as they included any such subsidy, the service charges were not reasonable.
The appellant appealed. It contended that, since it was charging a much lower sum than the percentage for which the lease provided, the FTT should have found that the amounts demanded were reasonable.
Held: The appeal was allowed.
(1) The FTT’s task on the section 27A application was to decide, in relation to each of the three service charge years before it, whether a service charge was payable by the respondent to the appellant and, if so, the amount which was payable. The FTT’s conclusion that the service charge was not reasonable if it included a subsidy of the social housing was not an answer to the question posed to it. It did not constitute a decision on the amount payable in respect of any of the three years and, accordingly, the FTT’s decision could not stand.
Further, the FTT had approached the problem in the wrong way so far as it had construed the lease, not by examining the meaning of the words which it contained, but instead by starting from an assumption that a service charge that included a subsidy in respect of the social housing units was not payable by the respondent unless there was an express or an implied term to the effect that the respondent was to subsidise the social housing tenants. Additionally, the FTT’s attention had not been drawn to the fact that the payments demanded were on account rather than a final payment for the years in question.
(2) The appellant could not succeed in arguing that the respondent was contractually liable to pay a larger sum and could therefore have no defence to the demand for a smaller sum. It was relevant that the sums demanded for each of the three years were payments of service charge on account. The appellant had never worked through the accounts or demanded a final payment in accordance with the terms of the lease and so, whatever might ultimately be the position if the appellant tried to demand a much larger sum on the basis of a final calculation, that position had not yet been reached. The provisions of section 19(2) of the 1985 Act applied in respect of each of the three on account payments, such that no greater amount than was reasonable was payable.
A demand for an on-account payment based on the drafting error, so as to require the respondent to pay about £12,000 pa and so as to give the appellant about 3,000% recovery of its expenses, would involve the demand of a greater amount than was reasonable. Accordingly, this was not a case where, at the date of the relevant demands, the appellant could say that it was owed a very large sum and was being reasonable and moderate in demanding much less. Instead, this was a case where, as at the date of the relevant demands, only a reasonable sum was payable in any event.
(3) In assessing the amount that it was reasonable to pay, the tribunal should not have in mind the prospective liability for the much greater sum which, on the appellant’s argument, might arise in due course arise on the basis of the drafting error. There was no prospect that the respondent or the other leaseholders would ever become contractually liable to pay the very large sum based on the drafting error since, if the appellant ever attempted to recover such a sum on the basis of finalised accounts, that would inevitably give rise to the making of an application under section 35 of the 1987 Act for a variation of the lease. There was no prospect that, on such an application, the FTT would conclude that the lease should remain unvaried and that the appellant should continue to be able to enjoy about 3,000% recovery. Any order varying the terms of the lease could be backdated to the date when the defect in the lease arose: Brickfield Properties Ltd v Botten [2013] UKUT 133 (LC); [2013] 2 EGLR 70; [2013] EGILR 11 applied.
(4) Nonetheless, each of the sums demanded by the appellant constituted a reasonable sum which complied with section 19(2). In that regard, it was relevant that: (i) the sums demanded for 2013 equated to the amount notified to the respondent at the date when he took his lease, to which he had not objected at the time, and the sums demanded for the following two years were in line with the 2013 amount; (ii) the sums demanded for 2014 and 2015 were each less than 10% of the relevant costs assessed solely by reference to the appellant’s building, thereby removing the main effect of the drafting error; (iii) the demands were for on-account payments, so that there remained the prospect of the amount finally due for the relevant year being assessed in the future and a balancing payment being made one way or the other, possibly in the light of a varied lease after a section 35 application. It followed that the amounts demanded by way of on-account payments for the three relevant years were properly payable by the respondent.
Thomas Talbot-Ponsonby (instructed by Boyes Turner LLP, of Reading) appeared for the appellant; the respondent appeared in person.
Sally Dobson, barrister