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Service Charges & Estate Management Update – April & May 2014

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10th June 2014

Friends Life Management Services Ltd v A & A Express Building Ltd [2014] EWHC 1463 (Ch)

The court set out how the service charge payable for the last accounting period of a commercial lease should be calculated.

Facts

The Tenant of office premises and a car park sought a determination of the service charge payable for the last accounting period under the lease. The tenant exercised a break clause to determine the lease on 24 March 2010. Thereafter, in 2010 and 2011 the landlord procured the carrying out of major works to the premises at a cost of £1,046,691.36. In a number of years, the landlord had included in the service charge accounts a sum which did not relate to actual expenditure in the service charge year but which was included by way of a provision for anticipated expenditure on services in future years (such sums amounted to £875,000 in total). The computation of the service charge depended in part on the gross annual expenditure incurred. Such expenditure was defined in the lease as “the aggregate of (a) all reasonable and proper costs fees expenses and outgoings actually incurred by the landlord during the Financial Year in or incidental to providing all or any of the Services…(b) all such reasonable and proper fees expenses and outgoings actually incurred by the landlord in the previous Financial Year and not previously taken into account in calculating Gross Annual Expenditure and (c) such reasonable and proper sums as the landlord shall in its reasonable discretion consider appropriate to charge in that Financial Year by way of provision for anticipated expenditure in any future Financial years in respect of any of the Services…”. The provisions in the lease dealing with the payment of the service charge contained a clause (para.1.2 of the Third Schedule) reading as follows: “the tenant shall pay by four equal quarterly payments in advance on the Payment Days for the next and each subsequent Financial Year a provisional sum calculated upon a reasonable and proper estimate by the landlord supplied in writing to the tenant of what the Annual Expenditure is likely to be for that Financial year”. Under the lease the Financial Year ended on 31 December each year.

Windermere Marina Village Ltd v Wild [2014] UKUT 0163 (LC)

Section 27A(6) of the 1985 Act renders void an agreement that the apportionment of service charges shall be in accordance with a determination of a third party whose decision is to be final and binding

Facts

The appellant was the freehold owner of Windermere Marina Village (“the Marina”), a mixed development on the banks of Windermere at Bowness, comprising moorings for 350 boats alongside a series of jetties, together with a variety of flats, boathouse apartments, holiday cottages, houses, a marina centre with offices for boat sales, a boatyard, car parking and other facilities. The respondent was the lessee of the boathouse apartment at the Marina. The long leaseholders covenanted “To pay a fair proportion (to be determined by the Surveyor for the time being of the Lessors whose determination shall be final and binding) of the expense of all communal services etc.” Thus, the task of determining that fair apportionment was entrusted by the parties to the appellant’s surveyor for the time being, and it was specifically agreed that the surveyor’s determination would be final and binding.

The appellant engaged a chartered surveyor, Mr D Pogson FRICS, to consider for the first time what would be a fair apportionment of the costs of communal services among the various users of the Marina who benefitted from them. It was the appellant’s intention that the long leaseholders they would be expected to contribute towards the expense of providing the services in the proportions determined by Mr Pogson; to the extent that the services benefitted the users of the commercial premises, holiday cottages or boat moorings, it was intended that the expense would fall on the appellant itself. Mr Pogson produced a thorough and impressive report in which he exhaustively explained the methodology he had adopted in apportioning liability for costs between the relevant interests on the Marina. That methodology was guided by the RICS Code of Practice on Residential Service Charges. As Mr Pogson noted in his report, the Marina is a large and complex property which created challenges for his assessment, but the LVT nonetheless congratulated him on “his professionalism and diligence” in undertaking the task he had been asked to perform. The respondents did not regard Mr Pogson’s determination as a fair apportionment of the charges and engaged their own chartered surveyor to produce an alternative scheme of apportionment.

First Instance

The LVT considered the different approaches contended for by the experts but preferred the apportionment determined by the leaseholders’ expert. The appellant did not question the tribunal’s jurisdiction to consider a challenge to the fairness of Mr Pogson’s apportionment.

Issue

Whether the LVT had jurisdiction to adjust the apportionment of the service charge determined by the appellant’s surveyor.

Decision on Appeal

The Upper Tribunal (Martin Rodger QC, Deputy President) held that section 27A(6) of the 1985 Act renders void an agreement that the apportionment of service charges shall be in accordance with a determination of a third party whose decision is to be final and binding.

s.27A(6) provides: “An agreement by the tenant of a dwelling (other than a post-dispute arbitration agreement) is void in so far as it purports to provide for a determination:

(a) in a particular manner, or

(b) on particular evidence,

of any question which may be the subject of an application under subsection (1) or (3).”

The Deputy President rejected the submission that the apportionment of service charges is not a question which arises under s.27A(1) or that s.27A(6) is directed only at provisions which purport to make a determination of the relevant expenditure by the landlord’s surveyor or accountant determinative.

Comment

The apportionment of service charges can be a complex matter in a building with a variety of modes of occupation (business, leisure, residential) or as between different buildings on a large estate. Different contributions may be appropriate to different users and there may be more than one fair or reasonable method which may be adopted. This case is a good example of that. If the first-tier tribunal is asked to substitute its own view of a proper apportionment because it is said that a contractual provision has been rendered void by section 27A(6) of the 1985 Act, it should bear in mind both the possibility of competing interests amongst different occupiers, and the fact that a determination under section 27A(1) binds only those who are party to it. The tribunal may therefore need to consider, at the case management stage, whether it is appropriate for notice of the proceedings to be given to any third party who may wish to make representations.

Friends Life Management Services Ltd v A & A Express Building Ltd [2014] EWHC 1463 (Ch)

Issue: what is to happen in a case where the Tenant, over a period of years, has been charged sums by way of service charge, which sums did not represent actual expenditure by the Landlord at the time the charges were made, but which were a “provision” in respect of expenditure on major works which were expected to be carried out in future years. When the Lease in this case ended, those major works had not been carried out but they were begun after the Lease ended and then they were carried out later in the year in which the Lease ended and continued into the following year.

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