When determining whether a service charge payable on account is ‘reasonable’ under s.19(2) of the Landlord and Tenant Act 1985, the FTT should disregard matters not known to the landlord at the time when the tenant’s contractual liability to pay service charges arose.
This case concerned a number of long-leaseholders owning chalets in Cornwall who applied to the FTT pursuant to s.27A of the Landlord and Tenant Act 1985. Their leases required them to make payment of service charges on account, to be a fair proportion of the sum “actually expended” by the landlord to maintain and manage the holiday park in which the chalets are based.
Two key costs anticipated by the landlord of the chalets at the time of the service charge demand did not in fact arise: a site manager was not hired and a children’s play area was not refurbished. The tenants argued that the sums demanded were therefore not reasonable pursuant to s.19(2) LTA85, as there had been no actual expenditure on these items.
The first and main issue concerned the application of the first limb of s.19(2) Landlord and Tenant Act 1985. Was the FTT required or permitted to take into account facts that were not known at the date of a demand for a service charge payment made on account, when determining the reasonableness of the sum under that section?
The second, subsidiary, issue was the meaning of the second limb of s.19(2), that: “after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction, or subsequent changes or otherwise.”
The FTT reduced the anticipated salary of the site manager to a sum it found reasonable and allowed the full estimated cost of refurbishment, even though these items had ultimately not been paid for by the landlord at all. The Tribunal concluded that it was obliged to disregard that fact as it had not been known to the landlord at the time it issued its service charge demand. The tenants could expect to be ultimately refunded in any event, as the landlord’s end of year account should reconcile the difference between anticipated and actual expenditure.
The Upper Tribunal identified a two-stage process in determining the amount of service charge payable under a s.27A application.
Stage 1 is to consider the contractual position. In this case, the lease required the tenants to pay such sum as might reasonably be required on account of the service charge. It was not contested that at the time of the demand, the landlord did believe that it would be employing a site manager and refurbishing the play park.
Stage 2 is to consider whether the on-account payment exceeded the statutory limit imposed by s.19(2) LTA, which modifies the contractual obligation so that no greater payment than that which is reasonable must be made before the costs are incurred.
The UT borrowed a phrase from Harman LJ in Curwen v James  1 WLR 748: “a court should not speculate when it knows.” The Tribunal distinguished cases of damages which look at actual loss known to have been suffered at the date of assessment. The context of a breach of duty was said to be different to a determination of the reasonableness of a sum due under a contract.
As to issue 1, the UT therefore upheld the FTT ruling that “the reasonable sum required as a payment on-account did not retrospectively become an unreasonable sum once it became clear that the expenditure had been avoided.”
As to issue 2, the UT found that the “necessary adjustment” to be ‘made’ according to s.19(2) did not imply that the FTT should make that adjustment. The appellants had submitted that those words permitted the FTT to order the repayment of any sum collected in advance by a landlord but not actually spent. The UT did not conclude on the exact meaning of that word, noting that its purpose was ‘unclear’, but didn’t see how the provision expanded the jurisdiction of the FTT conferred by s.27A.
As a point of procedure, at paragraph 8 of the judgment it was noted that the claim had originally been brought in the name of a tenant’s association. The FTT found that as the association was unincorporated, it had no legal personality and that its being named as a party could lead to uncertainty. The Tribunal instead provided that every member of the association who wished to participate in the claim should be individually identified. At the start of the hearing those leaseholders were then substituted as the appellants.