2013 was a quiet year for reported cases in the service charge field. Duncan Freeman considers why this should be and whether 2014 will be any different
Commercial tenants are on a crusade to drive down service charge costs and to improve the quality of service charge reporting by landlords. Tenants will not tolerate high service charge costs without first subjecting them to a forensic review. Yet, despite this increased scrutiny, in 2013 there was only one reported case that dealt with a commercial service charge dispute.
Why aren’t more cases coming before judges? Is this likely to change? And what’s in store for the remainder of 2014?
Commercial v residential
Last year all but one reported decision concerning service charge disputes – Arnold v Britton and others [2013] EWCA Civ 902; [2013] EGILR 25 – involved residential property.
The disparity between reported residential and commercial service charge cases can be explained by reference to the respective processes for resolving those disputes. For example, in the First-Tier Tribunal (Property Chamber) – the forum for resolving residential service charge disputes – as a general rule, the loser does not pay the winner’s costs. Consequently, the risk profile for these cases is far lower, while the potential upside for residential tenants is considerable. As a general rule, if a tenant succeeds in challenging the landlord’s statutory consultation procedure, the tenant’s contribution towards certain works is capped at £250.
In commercial service charge disputes, there is no such regulatory framework. Instead, the lease terms are key and disputes often centre on the precise meaning of the words used in the service charge provisions. For example, whether traditional sweeper clauses permit the landlord to recover costs not catered for specifically in the definition of services. And that is only part of the story. Before the dispute gets that far, the parties will first have to undertake a detailed examination of the audited service charge accounts and supporting documents.
As such, these disputes tend to be based on competing, arguable interpretations without a clear winner. The cost of the initial forensic review can be expensive as it requires specialist advice and there is no guarantee that such a review will yield gains sufficient to make the enterprise worthwhile.
Alternative dispute resolution
If the courts aren’t refereeing and determining commercial service charge disputes, then who is? The obvious answer seems to be that they are being resolved by alternative dispute resolution (ADR), although only anecdotal evidence supports this. However, if this is correct, it supports the view that landlords and tenants appear unwilling to place these fiddly disputes in the hands of the courts, which themselves are pushing parties to settle their disputes elsewhere.
There is also a growing trend to appoint forensic service charge consultants to challenge service charge accounts. A landlord at the receiving end of a challenge by the tenant’s consultant can deal with that challenge internally, tying up valuable management time, or appoint its own consultant.
The reconciliation of the service charge accounts is, in the main, an objective exercise with little scope for subjective interpretation. Therefore, the consultants are able to resolve any technical accounting points between themselves and distil the issues down away from the public glare of litigation. Often, all that remains to resolve is a discreet point of interpretation which may be ripe for expert determination, arbitration or even mediation. Either way, both provide a better prospect of preserving at least some goodwill between the parties, unlike the adversarial arena of litigation.
2014 and beyond
According to Deloitte Real Estate’s UK Real Estate Predictions 2014, this year will see the TMT sector driving London office demand and a continuing wave of overseas investors targeting the UK. This follows a surge of investment in 2013, which saw £45bn invested in UK real estate, representing 50% growth when compared with 2012. This could have a significant effect on commercial service charge disputes.
Increased deal volumes will lead to inevitable changes in building management as purchasers shift newly acquired assets into their existing property management structures. That shift can have a significant effect on the provision of and charge for services.
Speaking to Graham Pack of the Service Charges Recovery Group, who often comes across issues involving the apportionment of costs between the tenants, there is a tendency to rely on the percentages employed by the previous managing agents without undertaking a forensic review of the precise mechanism (where one exists) in the occupational leases. Another common cause for contention is the cost of improving or upgrading existing plant and equipment with the intention of improving the services and attracting higher rents. In fact, expected regulatory changes to the availability and use of certain gasses in air conditioning coolant may force such investment on landlords.
In either event, the decision is one over which tenants generally have little or no say. Even if tenants are inclined to litigate over issues such as whether replacing the heating, ventilation and air conditioning was reasonable, they are not prepared to do so before the courts.
One thing that has become clear is that the management systems deployed by landlords are becoming increasingly sophisticated and it seems that many of the complaints raised stem from the availability and quality of information required by sophisticated corporate occupiers in order that they may justify significant outlay against an ever increasing desire to rationalise costs. Where that information is more readily available and of a better quality, there is every reason to assume that the number of disputes before the courts will stay so low, rather than increase.
Duncan Freeman is a senior associate at CMS Cameron McKenna
