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ARNOLD v BRITTON [2015] UKSC 36: Service Charges Not Subject To Any Special Rule Of Interpretation

Summary: There is no general principle that service charge clauses should be construed “restrictively”: service charge clauses are not subject to any special rule of interpretation.  The alarming consequences of an interpretation regarding a lease granted in 1980, where the service charge would be over £2,500 in 2015 and over £550,000 by 2072) was not a convincing argument for departing from the natural meaning of the clause. The lessees’ appeal was dismissed.

ARNOLD v BRITTON [2012] EWHC 3451 (Ch): Landlord Allowed To Make Profit Over And Above Cost Reimbursement

Summary: There is no special principle that a service charge clause in a lease (1) should not be construed (in the absence of clear words) so as to entitle the landlord to a profit over and above reimbursement of his costs incurred in providing the relevant services; or (2) should be construed restrictively.

ARNOLD v BRITTON [2013] EWCA CIV 902: Payment Of Annual Sum Increase Of 10% Per Year

Summary: On their proper interpretation the service charge clauses in the leases of holiday chalets at a leisure park provided for the payment of an annual sum which increased at the rate of 10% per year.

Facts: The appellant lessees appealed against Morgan J’s decision ([2012] EWHC 3451 (Ch) – summarised in the December 2012/January 2013 update) on the interpretation of their leases. The leases were long leases of holiday chalets at a leisure park. The service charge clauses were not in precisely the same terms for each lease, but the essential issue was whether the clauses provided for annual compounded increases, at the rate of 10 per cent, in the charges payable, as the respondent landlord contended (and Morgan J held); or whether the figure given in the clauses was a cap up to which the landlord could recover the actual expenditure on the provision of services.

The tenants’ case was that the effect of compounding was that the service charge was already over £3,000 per annum for the relatively limited services provided for the holiday chalets and, by the last year of the lease, the total would be over £1 million. The tenants argued that this was uncommercial and nonsensical and so required the clause to be regarded and read as a cap. The landlord submitted that there was no evident ambiguity or mistake in the wording; the landlord’s interpretation was not absurd since at the time the leases were made and at times thereafter annual inflation exceeded 10 per cent.

Decision On Appeal (Richards, Davis and Lloyd Jones LJJ): Dismissing the appeal, although the court’s conclusion was not attractive, the lessees’ argument would involve subverting the proper process of construction of the language actually used and would in truth involve the court rewriting the bargain the parties have made. The court cannot properly, under the guise of a process of interpretation, introduce new and other terms to mend a bad bargain: to do so would involve distortion of all correct legal principles.

Comment: Although the issue on the appeal was the construction of specific clauses in various leases, the decision on the principles of construing service charge provisions is of wider significance. The court rejected a submission that service charge clauses are to be construed restrictively and should not be construed, in the absence of clear wording, so as to entitle the landlord to a profit over and above his actual outlay in providing the contracted services. The court approved Morgan J’s statement in para 43 of his judgment ([2012] EWHC 3451 (Ch)) and held that a service charge clause in a lease is not subject to any special principle of construction.

BLACKPOOL BC v CARGIL [2013] UKUT 0377 (LC): Lease Allows ALMO To Recover Service Charges As Management Costs

Summary: The terms of the leases allowed a local authority appointed ALMO to recover services charges described as management costs.  The UT approved the method of assessing such costs on a percentage basis of borough-wide costs (but reduced the percentages allowed as reasonable).

BURR v OM PROPERTY MANAGEMENT LTD [2013] EWCA CIV 479: Court Of Appeal Affirm UT’S Decision On When Costs Are Incurred Under s20b

The Court of Appeal affirmed the Upper Tribunal’s decision ([2012] UKUT 2 (LC)) that costs are “incurred” for the purposes of s.20b when an invoice is served or payment is made. Giving the judgment of the court, the Master of the Rolls (Lord Dyson) held that “a liability must crystallise before it becomes a cost.” Costs are not “incurred” within the meaning of section 18, 19 and 20B on the mere provision of services or supplies to the landlord or management company.

Like the Upper Tribunal, the Court of Appeal did not find it necessary to decide whether costs are incurred on the presentation of an invoice (or other demand for payment) or on payment.

CAIN v LONDON BOROUGH OF ISLINGTON [2015] UKUT 0117 (LC): FTT Have No Jurisdiction To Rule On Meaning Of Lease In Service Charge Dispute

Summary: Where, in proceedings over a disputed service charge which were transferred from the county court to the FTT, the parties reached agreement on the amount of the service charges payable, the FTT did not have jurisdiction to enable it to rule on the meaning of the lease under which the agreed charges are payable.

CAIN v ISLINGTON LBC [2015] UKUT 542 (LC): Payments Made Without Protest Infer Agreement

Summary:  A tribunal could infer from a series of payments made without protest that the tenant had agreed that the amount claimed was the amount properly payable. The longer the period over which payments had been made, the more readily a tribunal would find that the tenant agreed that which had been demanded. The tenant was barred by s.27A(4) from proceeding with the application.

Facts: The appellant acquired the lease of his flat in 2002. In 2014, he issued his application challenging the reasonableness of the service charge under s.27A of the 1985 Act for a period of 12 years from the service charge year 2002/2003 up until 2012/2013. In respect of each year, the lessee paid most if not all of the total service charge claimed without any specific provision or retention or qualification in respect of any sums and continued to make sometimes quite large service charge payments, the last one being for more than £890 paid in respect of the 2012/13 service charge year.

Decision At First Instance: The FTT determined, as a preliminary issue, that the lessee should be prevented from challenging the reasonableness of any service charges for periods more than 6 years ago. It found that the lessee was to be treated as having agreed or admitted each of the elements of the service charge by virtue of s.27A(4) and notwithstanding sub-section (5) , the material sub-sections of which are as follows:
“(4) No application under section (1) or (3) may be made in respect of a matter which –
(a) Has been agreed or admitted by the tenant…
(5) But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment.”

On Appeal: The lessee submitted that there was insufficient evidence to found any agreement or admission, in particular, no specific date or act or failure to act was identified by the FTT so that, on analysis, all that was left was payment which, by virtue of s.27A(5), cannot found an admission or agreement. Further, as a matter of law, an admission or agreement cannot be inferred from a lessee’s conduct under s.27A(5).

Decision: The UT (HHJ Gerald) held, dismissing the appeal, an agreement or admission for the purposes of s.27A(4) may be express, or implied or inferred from the facts and circumstances. An agreement or admission may be inferred by mere inaction on the part of the tenant over a long period of time. The effect of s.27A(5) is that the making of a single payment on its own, or without more, will never be sufficient; there must always be other circumstances from which agreement or admission can be implied or inferred. Those circumstances may be a series of unqualified payments over a period of time which, depending upon the circumstances, could be quite short. It is a question of fact and degree in every case. Accordingly, in the instant case, the FTT was entitled to conclude that the lessee had agreed or admitted the service charge.

Comment: This is yet another missed opportunity (following Parissis v Blair Court (St John’s Wood) Management Ltd [2014] UKUT 503 (LC)) to determine whether or not any limitation periods apply to applications made under s.27A.  It is, however, a very useful case for landlords in circumstances where the tenant seeks, for the first time, to challenge service charges that were paid in full many years ago.

CHOWDHURY v BRAMERTON MANAGEMENT COMPANY LTD [2014] UKUT 260 (LC): Effect Of Late Service Of Interim Service Charge

Summary: This case turns on its facts but at [26] Martin Rodger QC’s obiter comments on the possible consequences of late service of a demand for payment of an interim service charge payable on account are worth noting. In that case, the lease provided that the interim service charge was payable on the usual quarter days. The effect of late service of a demand was either: (i) the arrears might not become due and payable until the next quarter day (by analogy with the reasoning in South Tottenham Land Securities Ltd v R & A Millet (Shops) Ltd [1984] 1WLR 710 (a rent review case); or (ii) the accumulated arrears might not become due until a reasonable time after notification of the sum claimed.

CLACY v SANCHEZ [2015] UKUT 0387(LC): Certification Of Service Charge Not Necessary Or A Pre-Condition

Summary: (1) On the true construction of the lease, the ascertainment and certification of the service charge was not a necessary or essential pre-condition to the ability of the management company to seek payment of the service charge; (2) There had been a course of conduct which constitutes an equitable estoppel by precluding the lessees from seeking to assert that there should now be a certification process in accordance with the terms of the lease, or the lessees had waived any right to resile from the position that had been adopted throughout the period of 19 years or so both by themselves and their predecessors in title.

Facts: Clause 2(2)(ii) of a lease included a covenant on the part of the lessee “To pay to the Management Company without any deduction upon written demand (and in advance if required) an amount equal to the sum of the percentage of the general expense (such sum being here and after called “the service charge”) or any of the general expense and at all times keep the Lessor and the Management Company indemnified in respect of the same.” The provisions regarding the mechanics for preparing and serving a certified service charge account were prefaced by the words “Without prejudice to the covenant contained in clause 2(2)(ii) the following terms and conditions shall apply to the payment of the service charge by the Lessee …” The FTT accepted that there had been a meeting in around 1993 between the landlord and the previous leaseholders at which it had been agreed that certification of the annual service charge was not required.

Issues: (1) was the certification of the service charge accounts a condition precedent to the lessees’ liability to pay the service charge; (2) Was there an agreement giving rise to a common understanding, or assumption, between the parties that certification would not be required and, therefore, had an equitable estoppel arisen in the nature of an estoppel by convention?

Held: The UT (Judge Edward Cousins) held (1) The lease contained a primary obligation on the part of the lessees to pay to the management company upon written demand the service charge. The words “without prejudice” indicated the machinery for the payment of the service charge by the lessees, and the method by which the amount of such charges shall be ascertained and certified annually: the requirement for certification was therefore not an essential pre-requisite to the payment of the service charge by the lessees.  (2) There had been a course of conduct which constitutes an equitable estoppel by precluding the lessees from seeking to assert that there should now be a certification process in accordance with the terms of the lease, or the lessees had waived any right to resile from the position that had been adopted throughout the period of 19 years or so both by themselves and their predecessors in title.

COWLING v WORCESTER COMMUNITY HOUSING LTD [2015] UKUT 496 (LC): FTT Has No Jurisdiction Over Reasonableness Of Service Charge

Held: The First-tier Tribunal had no jurisdiction to determine the reasonableness of a service charge when a money judgment for the full amount of the charge had already been entered by the county court on the basis that the charge was fixed rather than variable. The tribunal’s jurisdiction was excluded by the Landlord and Tenant Act 1985 s.27A(1).

CULLEN v BARNARD LODGE MANAGEMENT LIMITED  [2013] UKUT 0493 (LC): Service Charge Demands Issues; Appellants Cannot Appeal

Summary: It was not open to the appellants to appeal on the grounds that the LVT failed to deal with a contention which was not a live issue before the LVT, nor was it open to the appellants to raise an argument on a point which had been conceded before the LVT

Facts: Two service charge demands, one dated 1 May 2010 and the other dated 15 October 2010, were in issue before the LVT. The hearing before the LVT lasted two days but was adjourned part-heard for several months. At the first hearing in March 2011 the appellants were represented by counsel but, for financial reasons, the appellants represented themselves at the adjourned hearing in September 2011. The appellants’ Statement of Case to the LVT stated “the first notification received by the applicants from the respondent in accordance with these provisions [ section 47 and 48 of the 1987 Act] was the attached application for payment dated 15 October 2010.

The Upper Tribunal granted permission to appeal on the ground that “There is a realistic prospect of success … that the LVT failed to deal with the applicant’s contention that the service charges were not due by reason of failures on the part of the landlord to comply with the provisions of section 47 and 48 of the Landlord and Tenant Act 1987. Permission to appeal limited [to] this issue.”

At the hearing of the appeal the appellants accepted that the validity of the May and October 2010 notices, namely their alleged failure to comply with section 47 and 48 of the 1987 Act was not argued before the LVT by counsel or by themselves.

Decision Appeal: The UT (HHJ Gerald) that the validity was not argued before the LVT because it was not an issue. The appellants had accepted that the second notice was valid. It followed that any defect in the first notice was cured in the sense that it complied with section 47 and 48 of the 1987 Act. The LVT could not be criticised for failing to adjudicate upon an issue they were not asked to adjudicate upon. It was not open to the appellants to appeal against the decision on the grounds that the LVT failed to deal with a contention which in actual fact was not a live issue before the LVT from which it followed that the LVT did not need to make a decision about that matter at all. Furthermore it was not open to the appellants to raise an argument on a point which had been conceded before the LVT.

GARRICK ESTATE v BALCHIN [2014] UKUT 407 (LC): Appellant Landlord Able To Recover Service Charges On Account

A tenant’s covenant to pay “by way of service charge the due proportion as hereafter defined of the expenditure incurred or to be incurred …” (emphasis added) enabled the appellant landlord to recover service charges on account.

JOHNSON v COUNTY BIDEFORD [2012] UKUT 457 (LC): Invalidity Of Service Charge Demand Capable Of Retrospective Correction

Any invalidity in a service charge demand that arises by virtue of a failure to comply with s.47(1) of the LTA 1987 was capable of being corrected with retrospective effect so that the demands were valid demands for the purposes of s.20B(1).

MORSHEAD MANSIONS LTD v MACTRA PROPERTIES LTD [2013] EWHC 224 (CH): Tenant Entitled To An Order For The Furnishing Of Service Charge Accounts

Summary: 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.

Facts: 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.

Held: 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.

Comment: 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 with“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.

PENDRA-LOWETH MANAGEMENT LTD v NORTH [2015] UKUT 91(LC): Service Charge Demands Valid

Summary: Demands for service charges made by a management company were held to be valid notwithstanding the omission of the management company’s name and address: s.47 of the 1987 Act has no application to demands for payments of sums due parties to leases who are not landlords within the meaning of the definition in s.60 of the 1987 Act.

SKELTON v DBS HOMES (KINGS HILL) LIMITED [2015] UKUT 0379 (LC): Service Charges Payable When Copy Estimate Produced

Summary: The service charges demanded on account for the years 2011-12, 2012-13 and 2013-14 became payable when the copy of the Estimate was eventually provided to the lessees in 2014.

TRIPLEROSE LTD v GRANTGLEN LTD [2012] UKUT 204 (LC): Service Charge Demands Fail To Correctly Identify Landlord

Service charge demands failed to correctly identify the landlord as required by s.47 of the LTA 1987. The failure could not be rectified by the provision of the correct name and address of the landlord on the application to the LVT. Consequently, the LVT had erred in finding that the service was payable: Beitov Properties Limited v Elliston Bentley Martin [2012] UKUT 133 (LC) applied.

WINDERMERE MARINA VILLAGE LTD v WILD [2014] UKUT 0163 (LC):  Agreement Of Service Charge Apportionment Rendered Void

Summary:  s27A(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.

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