Service Charges & Estate Management Update – October 2012 update
1st October 2012
London Borough of Havering v Smith  UKUT 295 (LC)
Facts: The Appellant local authority appealed against the decision of the LVT that the Respondent lessee was not liable to pay all of the sums claimed as service charges, in particular with respect to the charges for works listed in a notice served pursuant to s.125A of the Housing Act 1985.
The original long leaseholder had purchased the premises from the local authority in 2001 pursuant to the “Right to Buy” legislation in the Housing Act 1985. The s.125 notice provided that the estimated service charge in respect of works of repair was set out in Appendix 1 to the notice which provided that the total estimated service charge was £1580.21, being £380.21 for capital repairs and £1200.00 for redecoration.
The Respondent lessee bought the long lease of the premises on 30 July 2004.
In 2005 – 2006 the local authority complied with the consultation requirements of s.20 and estimated the lessee’s proportion of the cost of major works to be £7,665.56. By a further notice dated 15 September 2006, the local authority recalculated the price of the major works and reduced the figure to take into account the limitations imposed by s.125. The figure estimated was then £1,568.23.
On 14 July 2009 the local authority served on the lessee a final account setting out that the proportion of the actual cost attributable to the premises was £4,643.24. Adding the professional fee and the administration fee and taking away the s.125 reduction the final account service charge was £4,758.87.
The reason for the substantial difference between the estimate and the final account was that the works had been carried out, in the main, outside the 5 year reference period (during which there is a limitation on the amount to be paid with respect to works not itemised in the s.125 notice). The local authority had adopted a system of apportionment known as “straddling” so that the Respondent lessee was charged fully for the 49.29 weeks of the 54 week contract which fell outside the reference period and the items of work included in the s.125 notice had their limits pro-rated for the 4.71 weeks of the contract, subject to the statutory allowance for inflation.
The LVT accepted that the method of apportioning costs for works which “straddled” the reference period was a proper method of apportioning costs: namely charging in full for those works carried out after the reference period and charging a pro-rata sum for those works carried out during the reference period. The LVT, however, also decided that, while the formula used by the local authority in straddling cases was not unreasonable, the decision to apply the straddling formula had to be reasonable. In this case the local authority had not demonstrated that it applied the formula reasonably: “It would seem unreasonable that having [given the s.25 notice] a lessor can circumvent the guarantee by delaying the planned work and then charge the full amount for it. There might often be cases where the planned work was delayed through no fault of the lessor, but the lessee had no control at all over that matter, and any loss should properly lie with the lessor.” The LVT decided that the reasonable cost of doing the works should be limited to an amount not greater than the amount specified in the s.125 notice with an amount added for the appropriate statutory inflation figure.
Held on Appeal (HHJ Walden-Smith)
(1) “Straddling” the costs over the period that falls within and outside the reference period is an acceptable method of dealing with costs for works which fall both within and outside the reference period. Such a method of calculating the service charge does not fall foul of the statutory provisions contained in ss.125 and 125A of and para16B of Sch 6 to the Housing Act 1985; (2) contrary to the findings of the LVT, the landlord is not prohibited from charging for any previously unplanned work. Para 16B(3) of Sch 6 to the Housing Act 1985 expressly provides for the limitations for charging for such works; and (3) the s.125 notice does not guarantee that works will be carried out within a particular period or that the costs estimated will in fact be incurred during that period.
The local authority’s appeal on the principle succeeded but HHJ Walden-Smith also held that the local authority was estopped from denying that the cost of the works was limited to that set out in the s.125 notice because of representations made to the lessee which the lessee relied upon when purchasing the premises. This does not affect the UT’s findings as to the principle in issue on the appeal.