Service Charges & Estate Management Update – March 2013
1st March 2013
Morshead Mansions Ltd v Mactra Properties Ltd  EWHC 224 (Ch)
The tenant was entitled to an order for the furnishing of service charge accounts. Contrary to the landlord’s contention, the lease did not require “full accounts”, i.e. accounts prepared by accountants showing accruals, balances carried forward and contributions payable to and held in a reserve fund, to be provided.
The claimant is the leaseholder of several flats held under long leases in a residential block. The leases contain service charge provisions frequently included in such leases. The service charge regime provides for the tenant to pay an interim charge and a service charge. It requires the landlord to prepare an account of the service charge expenses “as soon as practicable after the end of each Accounting Year”. Where the actual service charge exceeds the interim charge the tenant is required to pay the balance. Where the actual service charge is less than the interim payment, the landlord is required to repay the tenant or credit the tenant’s service charge account. The lease also allowed for a reserve fund.
A Manager had been appointed by the LVT to manage the block in 2000. There was sufficient dissatisfaction with the way in which the Manager was (or more accurately was not) carrying out his role to justify the LVT suspending his appointment in 2003. The landlord then resumed responsibility for managing the block. The landlord was extremely critical of the service charge accounts produced by the Manager. The case proceeded on the basis that the Manager failed to return proper books and documents which would have enabled the landlord to prepare reliable accounts for the period during which the Manager held office. The knock-on effect of this was that it was not possible to prepare full accounts for the later years until the accounts for 2000 to 2002 (inclusive) could be prepared and certified.
The tenant applied for and, on a summary judgment application, obtained an order requiring the landlord to furnish service charge accounts for 2003 to 2007 (inclusive). The landlord complied with the order but appealed against the order granting summary judgment on the basis that the judge at first instance’s construction of the lease was wrong.
Curiously, the landlord asserted that its obligation was more onerous than that asserted by the tenant and found by the judge. It submitted that it was obliged by the 4th Schedule to the lease to provide “full accounts”, i.e. “accounts in the style of accounts drawn up by an accountant showing all relevant information on an accruals not a cash basis and showing balances carried forward and matters such as contributions payable and held by an account referred to in the accounts as the ‘Reserve Fund'”. The tenant submitted that something less sophisticated was required, namely a list of expenses falling within the meaning of “Expenses” as defined by the lease.
On appeal, rejecting the construction contended for by the landlord, Warren J held that the landlord was not obliged to provide “full accounts”. He drew a distinction between good accountancy practice and what the lease actually required.
The purpose of the 4th Schedule to the lease was to establish the amount of the actual payment which the lessee must make to the landlord. Neither the service charge nor interim payments are accounting entries: they are actual obligations.
The definition of “Expenses” includes provision for anticipated expenditure. The landlord has a discretion to effect an allocation of a reasonable proportion of expenses of a periodically recurring nature to a particular accounting year. It did not, however, dictate accounting on an accrual basis.
Warren J also held that the reserve fund is “an actual fund of money which ought to be invested in deposits at interest … The reserve fund is not an accountancy construct: it is a fund of actual assets accumulated in advance to meet the expected costs of identifying types of work.” The difficulties in producing a balance sheet and an income and expenditure account for the reserve fund did not provide a defence to the provision of an account of the “Expenses”. It was entirely unnecessary to know the balance of the reserve fund in order to prepare an account of the “Expenses”.
Applying Warren J’s construction of the lease to the facts, the landlord had a weak but arguable case that it was not able to provide an account for 2003. As regards an account for the year ending 31 December 2007, the Claim Form was issued on 27 February 2008. The landlord had not had a reasonable time in which to prepare an account and, as such, there was no cause of action in relation to 2007 when the Claim Form was issued. Accordingly, the tenant was not entitled to summary judgement in relation to 2003 or 2007. The tenant was, however, entitled to an order furnishing accounts for the years 2004 to 2006 inclusive.
The judgment provides a detailed analysis of the service charge provisions in the lease. It goes to 145 paragraphs and is not for the faint-hearted. The analysis is fact sensitive to the extent that it concerns the specific provisions of the lease in question but similar provisions are frequently found in long leases of residential flats and so the decision may be of wider significance. In many cases it will not be necessary for the landlord to provide the tenants will “full accounts”. A distinction must be drawn between good accountancy practice and the requirements of the lease. The decision is a ‘must read’ for managing agents and accountants.
Postponement of the establishment of the Property Chamber
The establishment of the Property Chamber has been postponed from 1 May to 1 July 2013. The ‘project board’ reviewed progress and considered that the Parliamentary timetable would simply not allow the necessary secondary legislation to be in place by the end of April.