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Service Charges & Estate Management Update – February 2015

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2nd February 2015

Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC)

A clause in a head lease which provided that the apportionment of expenditure was to be determined by the Landlord or its surveyor was rendered void by s.27A(6) of the 1985 Act.  Accordingly, the residential tenants were entitled to make an application challenging the apportionment under the head lease, notwithstanding the fact that they were not parties to the head lease.

Facts

Telegraph House is the former home of the Sheffield Telegraph and Star newspaper which now houses shops, offices and flats on basement, ground and four upper floors.  The shops on the ground floor were let to three commercial tenants, while the first and second floors were let to a firm of solicitors.  The basement has not been let but the freeholder (“Wellington”) has permitted the solicitor tenants of the first and second floors to use it for the storage of documents.  In 2004 a lease of the third and fourth floors (“the head lease”) was granted to a developer.  The permitted use of the demised premises was as eight residential private dwellings each for the occupation of one family only.

The contribution payable by the tenant under the head lease is “… a due and fair proportion of the Service Cost (such proportion to be determined by the Landlord or its surveyor (in each case acting reasonably) and taking into account the relevant floor areas within the Building or other reasonable factors in making the determination.”

Following the acquisition of the head lease by a company associated with the freeholder (“LCP”) in January 2011, the provision of all of the services in the building has been in the hands of LCP (so far as concerns the third and fourth floors) and Wellington (so far as concerns the remainder of the building, including the structure and the common parts). As members of the same group of companies there has clearly been some co-ordination in the management of service provision between the two, and to some extent this has led to a blurring of roles which the draftsman of the leases assumed would be clearly defined.  Although both the head lease and the apartment sub-leases each provide for an estimate of the service charge for the forthcoming accounting year, and for an annual summary of the service costs, so that both Wellington and LCP should produce such documents for their respective expenditure, in practice a single estimate and a single annual summary have been provided with consolidated figures representing costs of services provided by both Wellington and LCP.

In the annual summary of expenditure the costs which have been incurred are separated into five “schedules”. Schedule A relates to expenditure on the building as a whole to which all tenants contribute; Schedule B relates to expenditure to which both the residential tenants and the solicitors on the first and second floors contribute, but not the retail tenants on the ground floor; Schedule C is expenditure for which only the retail tenants are responsible; Schedule D is expenditure to which only the residential tenants contribute; and finally Schedule E is expenditure to which only the solicitor tenants contribute. The proportions in which the residential tenants contribute to these service cost schedules vary.

Six of the tenants of the flats on the third and fourth floors challenged the reasonableness of the service charge.

Issue

The sole issue considered by the FTT concerned the apportionment of service charges between the various tenants in Telegraph House as a whole.  In particular, the residential tenants challenged the treatment of three areas of the building in the apportionment exercise undertaken by Wellington’s surveyor, namely the basement; two toilets on the first and second floors which are used exclusively by the solicitor tenants although they are located outside the area demised to them in what is nominally the common parts of the building; and store room adjoining the laundry on the third floor of the building.

First Instance

The FTT considered the challenge by the tenants to the apportionment on the basis that its task was to satisfy itself that the apportionment undertaken by Wellington was a reasonable one; it was not to ask itself how it would carry out a reasonable apportionment. Applying this approach, the FTT decided that each of the apportionment decisions made by Wellington’s surveyor had been reasonable and it had no power to substitute a different method.

Decision on Appeal

The UT (Martin Rodger QC, Deputy President) held that, applying Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC) the contractual provision in the head lease which provides for the determination of the apportionment of the service costs under the head lease “by the Landlord or its surveyor (in each case acting reasonably)” was rendered void by s.27A(6) of the 1985 Act.  The effect of Ruddy v Oakfern Properties Ltd [2007] Ch 335 was that for the purpose of ss.18-30 of the 1985 Act LCP was a tenant of a dwelling by virtue of the head lease.  It followed that the question of what sum is payable by LCP to Wellington as a service charge under the head lease may be the subject of an application to the appropriate tribunal under s.27A(1) or (3) of the 1985 Act.  Moreover, such an application may be made by the residential tenants, notwithstanding the fact that they are not parties to the head lease.  Accordingly, s.27A(6) also applied to the relevant contractual provision in the head lease.

Comment

In Windermere the service charge expenditure was incurred by the immediate landlord and the provision for apportionment by the landlord’s surveyor was contained in the leases of the individual boathouses themselves.  This case confirms that tenants are entitled to challenge the apportionment of relevant costs in a head lease notwithstanding the fact that they are not parties to the head lease.

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