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Validity of Service Charge Demands: Key lessons from the Court of Appeal

Landlords and managing agents should be aware of the recent Court of Appeal decision in No.1 West India Quay (Residential) Limited v East Tower Apartments Limited which clarified the rules on 2 key management issues:

  1. Serving service charge demands within 18 months of the costs being incurred;
  2. Landlord’s recovery of legal costs in Tribunal proceedings where a leaseholder challenges the reasonableness of service charges.

Background

The root of the recent Court of Appeal decision relates to utility charges demanded between 2008 and 2012 by the Landlord of a mixed tenure building comprising of a hotel and residential properties.

Standing charges

One of the matters in dispute between the parties was in relation to a “standing charge” which encompassed the reading of meters and the preparing of bills relating to the consumption of gas, electricity and water levied by the utility provider for the building. The Landlord had sought to recover these sums as a “utility charge” under the Lease.

Following decisions in the First Tier Tribunal (FTT) and the Upper Tribunal (UT) it was determined that these sums were not payable by the Tenant because the Landlord had demanded them under an incorrect service charge provision. They had sought to recover the sums as a “utility charge” rather than as a general “service charge”.

Therefore, for the “standing charges” to be recoverable they would need to be re-demanded. Unfortunately for the Landlord, by the time of this determination, the ’18-month’ time limit in Section 20B Landlord and Tenant Act 1985 had long passed rendering the charges irrecoverable.

The Landlord sought to argue that a new service charge demand was not required because the sum could be “re-allocated” under a different Lease covenant. The Landlord also suggested that Section 20B was not engaged because a demand for payment of the sums had been made within 18 months, despite the Tribunal already deciding that it had been made for the wrong amount and under the incorrect provisions of the Lease.

Legal costs

The UT also considered as a preliminary issue on appeal whether the Landlord was entitled to recover its legal costs of defending the numerous Tribunal proceedings (approximately £500,000) under the terms of the Lease. The relatively common costs provision of the Lease is at Clause 3.10.1 which states that the Leaseholder is:

“To pay to the Lessor on demand all proper costs charges and expenses (including legal costs and surveyors’ fees) which may be incurred by the Lessor: –

3.10.1 under or in contemplation of any proceedings under Sections 146 or 147 of the Law of Property Act 1925 by the Lessor in the preparation or service of any notice thereunder respectively and arising out of any default on the part of the Lessee notwithstanding that forfeiture is avoided otherwise than by relief granted by the Court.”

The UT found in favour of the Leaseholder and decided that for legal costs to be recoverable under this covenant there must be tenant default and/or the contemplation of proceedings under Section 146 or 147 Law of Property Act 1925 (including forfeiture). Neither of these issues were in dispute here.

The Landlord appealed to the Court of Appeal on both issues:

The Court of Appeal decision

Appeal dismissed unanimously. The Court of Appeal agreed with the UT and concluded that:

  1. For a service charge demand to be valid it must be served in strict accordance with the provisions of the Lease and as per Section 20B (1) which imposes a limitation period of 18 months. In this case, the Landlord had not served a contractually valid demand for the standing charges within 18 months of the costs being incurred.

This is an important reminder of the practical importance of landlords and managing agents being fully aware of the wording of the service charge clauses in their leases and to keep to the strict 18-month deadline when issuing service charge demands. If the demand cannot be served within 18 months it may be possible to rely on Section 20B (2), however landlords and managing agents should be cautious and consider taking legal advice on a case-by-case basis.

  1. The wording of the specific cost covenant in the Lease required there to be a “default” by the Leaseholder and/or the contemplation of proceedings under Sections 146 and 147, which was not the case here. This dispute had been brought by the Leaseholder to determine whether there had been an overcharging on the utilities by the Landlord and therefore no “default” on the part of the Leaseholder had occurred.

Although this decision was based on the explicit construction of the language in the Lease (albeit very common wording in practice), landlords and managing agents should always ensure that where they intend to seek legal costs that their leases make provision for it. Landlords should also notify leaseholders early on of their intention to recover such costs.

In consideration of this decision, landlords and managing agents may want to consider the wording of cost covenants at lease renewal to specifically allow for fee recovery when defending proceedings brought by leaseholders. One way in which this could be achieved is by making it recoverable as a service charge.

The full Court of Appeal decision can be read here: No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119 (21 July 2021) (bailii.org)

In practice, the decision by the Court of Appeal is relatively unsurprising. However, it serves as a useful reminder of the key principles in service charge recovery and the seeking of legal costs. However, watch this space as the Landlord has recently sought permission to appeal to the Supreme Court!

If you are a residential or commercial landlord and require further advice on service charge recovery under your lease, please contact our specialist team on 01753 876 800 or by email at propertydisputes@owenwhite.com.

Correct at the time of drafting

30 September 2021

 

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